Medical Properties Trust Inc (MPW) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2013 Medical Properties Trust earnings conference call. My name is Shaquana, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Charles Lambert, Managing Director. Please proceed, sir.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our first quarter 2013 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 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 the Federal Securities laws, the Company does not undertake a duty to update any such information.

In addition, during the course of the conference call we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.MedicalPropertiesTrust.com for the most directly comparable financial measures and related reconciliations. I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Thank you Charles. And thank all of you for joining us today to review our first quarter 2013 results. Steve will go over with you in detail in a few minutes the financial results for our first quarter. We are right in line with our expectations, and more importantly, the financial results continue to show the health and performance of our portfolio.

I want to take a few moments to go over with you what you cannot see from the financial results. You will recall from our previous earnings call this year, that we told you we expected our acquisitions for 2013 to be made in the second half of the year. During this past quarter we made tremendous progress on these acquisitions. Our active acquisitions pipeline is larger today than it has ever been. I want to be clear I am referring to our active acquisition pipeline, not a shadow pipeline. These are properties that we are actively working towards to close. We certainly recognize that we will most likely not close on each of these, however, the number and dollar amount of properties we are actively working are larger than they have ever been. As has always been the case, we do not comment on ultimate targets that we ultimately pass on.

Our existing portfolio of performance fell right in line with what you have seen nationally over the past few weeks. Essentially our EBITDAR coverage for all three of our major sectors was flat to slightly down quarter-over-quarter. However, for year-over-year they were slightly up to flat. The utilization of our facilities also followed these trends. Due to the number of acquisitions we have made in the past year, where viewing our portfolio coverages can get a little confusing. Let me walk you through a couple of ways to look at it.

As you know on these calls, I give you the EBITDAR lease coverage for mature operations, meaning they have been in our portfolio for at least a year, and I give these to you on a trailing 12-months quarter-over-quarter, and a trailing 12-months year-over-year. So that is where I will start. For our acquisition hospitals, trailing 12-months year-over-year actually rose to almost 5.5 times. Trailing 12-months quarter-over-quarter at almost 5.5 times is a slight decrease from the 5.65 times reported last quarter. I would like to point out that our hospital in Florence, Arizona, which I will discuss in a little more detail in a few minutes, is included in this calculation, as we have owned it for more than a year.

For our LTACHs, they remained essentially flat at almost 2.25 times year-over-year and quarter-over-quarter. For our [ERF]s quarter-over-quarter we saw a very slight decrease in coverage to approximately 2.8 times. This 2.8 times is almost 50 basis points lower than the year-over-year coverage which is somewhat misleading. This anomaly is not due to a decline of the performance of the existing facilities, but rather the additional of 8 facilities that are still in the ramp-up coverage, that are less than our seasoned properties. However, these additional eight properties do have good positive coverage.

Now I want to go over with you the EBITDAR coverages for all of our facilities, including those that have not been in the portfolio for a complete year. For our acute care hospitals the coverage is 5.3 times. For the LTACHs the coverage is 2.21 times, and the ERFs, the coverage is 2.8 times.

Let me spend a few minutes discussing the success of our portfolio since our inception. Over the history of MPT we have acquired or developed 101 properties. Of these 101 properties, 13 were development properties. Of the 101 properties we have acquired over the past nine years, only six have had any issues. This represents about 6% of our total portfolio. Only one of these properties has resulted in any sort of impairment. The dollar amount of that impairment represented less than one-half of 1% percent of our total portfolio investment.

Most of you have heard me say that in the real world, when you make long-term investments as we do there will be bumps in the road. The important thing is to be able to handle these bumps. MPT has had very few bumps in the road, and when we have our management team has proven their ability to address the issue. Even when tenants filed bankruptcy, we have been able to bring in new tenants under stronger lease terms, and in some instances were even able to obtain their participation entrance. The important thing to note is that we have been successful in managing these assets, not just when everything works perfect.

Currently we have two bumps in the road. Florence and Monroe. About two months ago one of our operators in Florence, Arizona filed bankruptcy. We believe the Florence situation is an operator issue, and not a hospital issue. As we always do, we have prepared for these situations with various forms of additional collateral that should provide a number of months cushion should the facility, which is current on its rent at this time stop paying rent. We have had a number of other operators approach us with their interest in this facility, and we are in discussions with them, as well as the current tenant. Florence represents approximately $0.02 of our FFO on an annualized basis, and only 1.2% of our total portfolio. Monroe is still not where we would like for it to be. While there has been no deterioration, the improvement that we would like to see hasn't been there either. To be extra prudent, we will no longer accrue any rent on this facility until rent begins to be paid current.

Let me take a few moments to review some of the portfolio's highlights for the quarter. A number of our facilities continue to receive awards for their patient care. Prime Healthcare was once again recognized by Truven Health as one of the 15 Top Health systems in the country. This is the third time in five years and Prime remains the only for-profit system recognized for this honor. Eight of Prime's hospitals were named as part of the 100 Top Hospitals. All of Ernest Health facilities eligible were recognized in the Top 5% of the 2012 UDS national rankings. North Cypress and CHS Chesterfield General Hospital also were recognized with patient care awards. The Ernest facility in Lafayette, Indiana opened in March. All three of our [Amerage] facilities are open and are exceeding our expectations. The construction commenced on the NHS Oakley facility. Westside Hospital opened in January in 12 Oaks, and again is exceeding our expectations.

We are very excited about the remaining part of 2013 and beyond. We are excited both about acquisition pipeline and the performance of our existing portfolio. We also expect to see continued growth in our FFO. Steve, if you will walk through the details of the financials.

Thank you, Ed. We released our first quarter results earlier this morning, so instead of simply repeating what you have probably already read, I just have a few comments about what those results indicate about our future outlook. Total revenue for the quarter was up almost 42% over 2012's first quarter, reflecting the $400 million acquisition of Ernest in 2012's first quarter, and all of the subsequent 2012 acquisitions. We expect to continue making substantial acquisitions of high return hospital real estate, which should continue to drive double-digit revenue growth.

However, we do remind investors that we cannot predict in any certainty the specific quarters in which we will complete those acquisitions, and we do not manage our investing process with only quarterly results in mind. Normalized FFO per share in the quarter was up by 39% over the 2012 quarter. The fourth consecutive quarter of 30%-plus per share growth. This substantial and immediate accretion that this increase represents is the result of the outstanding returns we earn on our hospital real estate, and the historically low cost of capital that we presently enjoy. During the first quarter we raised about $173 million of equity, and those proceeds along with our undrawn revolver provide almost $500 million of immediately available resources for acquisitions. As Ed mentioned, our active pipeline of high return acquisition possibilities is robust. So the outlook for continued and near term increases in our FFO per share is outstanding.

Included in the results for the quarter are earnings from our RIDEA-type investments of about $4.5 million, or $0.03 per share. Of this amount $1 million is from seven investments with an aggregate original cost of $12.2 million. And $3.5 million is from our Ernest investment. Of the Ernest income $1.6 million is currently paid and payable, that is the 7% rate on our $93 million acquisition note. And $1.9 million, or about $0.01 per share, is accrued in accordance with the terms of the note.

As a reminder, that 7% pay rate increases to 10% in 2014, and Ernest management is highly incentivized to satisfy that accrued interest as soon as practical. The total accrued interest since we closed the transaction in February 2012, was $10.9 million as of March 31, 2013. And, of course, these amounts are incremental to the $7.8 million in quarterly income from our Ernest real estate investments, which are separately accounted for as income from direct financing leases and real estate mortgages.

After the end of the quarter, we sold two facilities whose leases had expired to the lessees for $18.5 million, and we will recognize gains of about $2.1 million in the second quarter. The sale proceeds when combined with rental receipts since we acquired the properties, resulted in an unlevered internal rate of return of about 10.3%. The annualized FFO from these properties aggregated less than $0.02 per share. We presently have no other property sales pending or planned, and there are no other lease maturities in 2013, and only two in 2014.

On last quarter's call we provided an estimate of 2013 normalized FFO of $1.10 per share. Since then we have aggressively worked our acquisition pipeline, and we feel even stronger about the quality and volumes than we did three months ago. On the flip side, we issued new common shares, we sold two small properties and we have elected to discontinue rent accrual at Monroe. We are not adjusting our 2013 outlook for normalized FFO at this time, because of the strength of our active pipeline, and our estimates about the timing of acquisitions.

We continue to believe that we will acquire at least $400 million in new properties this year, but it is self-evident that the earlier in the year we acquire properties, the greater impact those acquisitions will have on the annual results. Again, we manage the Company with a long-term certainly not a quarterly strategy. And regardless of whether we acquire any particular property in any particular quarter we continue to see the following, robust double-digit year-over-year growth in assets and revenue. A very attractive spread between the going in cash returns from the high quality real estate assets that we will acquire and our cost of capital,indicating continued strong and immediate accretion from each acquisition we make. An evolving market, both in the US and other well established healthcare markets that is attracting more sellers who are recognizing and considering the advantages that sale lease back capital brings to many company's capital strategies, and on the other side, a growing recognition from other REITs and competitors that the perceived risk of hospital reimbursement have been historically unfounded and overstated when compared to actual results.

As usual our 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, property sales 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 and tenant operations vary from expectations, the timing of acquisitions varies 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.

Thank you. (Operator Instructions). Your first question comes from the line of Jana Galan representing Bank of America Merrill Lynch.

Thank you, good morning.

Hi, how are you doing?

Very good, thanks. Regarding your RIDEA investments, is the $0.03 of FFO per quarter a good run until 2014, when Ernest may ramp up payments, or through 2013 will it be volatile, or could we see it ramping up through the course of the year?

Couple of points let me make. Even when the Ernest note ramps up from 7% to 10% pay rate, that won't affect the run rate of the income because we are already recognizing that. It would just shift more over to the cash receipts than the accrual. To answer your question overall, we at this time certainly believe that the $0.03 a share which includes Ernest and the other seven deals, smaller deals that we have, is a fair estimate of the quarterly run rate.

Thank you. And then I guess the $0.02 of FFO for the hospital sales, that wasn't in original guidance, was it?

We did not anticipate that when we made the original guidance estimate, no.

I know it is very early, but have you started discussions with the two leases you have expiring in 2014?

We have started discussions with one. And we have got a pretty high level of confidence that will result in a renewal. We have not started discussions with the other.

Thank you.

I will point out, though, on the other in particular, the only other option to renew is to repurchase. That is a hospital they will not walk away from. So they will either repurchase at a price that will reflect a value that results in a gain or certainly no loss, or they will renew.

And let me point out on your question about the sale of the two properties not being included in the original guidance. Just to reiterate what Steve said in his prepared remarks, while that was not included in original guidance given where we are on our acquisitions, we don't believe there is any adjustment to guidance.

And can you just give a little bit of color on the acquisitions or your investments, do you see them trending more trending more towards acquisitions or developments, or is it even?

No, no, it is heavily weighted toward acquisitions as it always has been in our portfolio. The vast majority of what we have done and will do in the future will be acquisitions . Most of the development that you will see will probably be the continuation of the Ernest facilities which we have discussed the last previous number of quarters.

Thank you very much, Ed. Thanks Steve.

Certainly.

Your next question from the line of Karin Ford representing KeyBanc Capital Markets. Please proceed.

Good morning.

Good morning, Karin.

Ed, I was wondering if you could expand a little bit more on your comment on the Florence hospital, that you think it is and not an operator issue and not an asset issue?

Sure. This is very similar to the situation you may recall that we had in a facility in Louisiana several years ago, where the operator in that particular case got overextended on properties that we chose not to finance, and due to some of those issues they were unable to handle their obligations in the, I am drawing a blank of the name of the facility. No, the one in Louisiana.

Covington.

Covington, excuse me. And other than that, Karin that is about all I can say at this time.

Okay. Can you tell us what the current coverage is on that facility, and in your discussions with the operator has there been any talk about giving any rent relief on that asset?

The coverage is negative. That is what I was alluding to when I went through the coverages, that negative coverage is included in the total coverage ratios that I gave you earlier. The coverage in this facility is a negative coverage right now, and we have not had discussions with the tenant about any rent concessions. They are current on the rent, and they have indicated to us that they will continue to pay rent, they expect to continue to pay rent.

Got it. Can you just remind us what type of return premium you guys require on a development versus an acquisition?

Well, it is not quite that simple. It is just giving you an answer. It varies obviously from project to project greatly. If you look purely from an arithmetic standpoint of what has been historically from the beginning of our time through, it is anywhere from 75 basis points to 150 basis points. Part of that answer in there is you remember that none of our facilities are if you will field of dreams developments, where we are hoping to lease them up after we do the development. They are a situation where they are all preleased. Leased to a tenant prior to the construction commencing, so the risk is not a development risk.

The risk is that the operator has the ability to perform or execute on their business plan. In situations where they haven't been for whatever reason, some of the times actually most of the times that we have had an issue, and as you know there have been very few of them, they have been issues that have been totally outside of the operator's specific interest. They weren't specifically related to the operator's performance. Monroe being a perfect example of that. So the risk isn't a typical development lease-up type risk. It is purely operator's performance, and if we had done our underwriting correctly the market has the need for that particular facility, and we can bring in new operators, which as you know we have done in the past.

And does what you have see now you in Florence given the facility is only about a year old, has it changed your underwriting process at all, especially on the development side?

No, it hasn't. We certainly can't control our tenants and what they do outside of our facilities, even when we turn down their financing requests for other facilities. You can't totally control what a potential operator is going to do outside of your particular project.

Okay. And the last question for me is, what is the impact on FFO from the stoppage of the accrual at Monroe?

It is about $0.02 to $0.03 a share.

Annually?

Right.

Yes.

Thank you.

Thanks, Karin.

Your next question comes from the line of Phil DeFelice representing Wells Fargo Securities. Please proceed.

Thanks, it is Phil DeFelice. Good morning.

Hey Phil.

I had a question on the dividend. You have paid a consistent dividend of $0.20 since nowearly 2009, you have done a great job of growing into it from a cash flow standpoint over the past 12 to 18 months. With the payout ratio now sitting at 80% here on a run rate basis, and normalized guidance implying low-70%, it would be great to get your take on the dividend policy here, and how you are thinking about the long-term payout target?

It hasn't changed at all Phil. The same that we have stated which is that the Board's policy is that they would like to see a sustained payout ratio of 80% or better. We obviously as you have just pointed out, we have been there. Our next Board meeting is coming up at the end of May. I am sure that will be a topic of discussion, but it is not anything that is planned at this particular point. It will be something that the Board will decide at that point.

Great. That is helpful. And then the current source for yield and low borrowing costs have certainly put downward pressure on cap rates across most healthcare property types. Are you seeing any increase in competitiveness for your targeted investments, and do you still expect double-digit going in lease yields on average currently?

I think on average that we do continue to see it in the double-digit range. There has been some additional interest, which as we have said all along over the last few years we welcome it. We think the additional interest is very good for our investors from every aspect. It obviously will continue to prove the worth of our total portfolio, and obviously it will help us get to sell the product on the customer side.

We all know that some of the other major healthcare REITs have recently made announcements that they are looking into the hospital space, again we welcome that, we think that is a good thing. As has been the case for the past few years some of the privately traded healthcare REITs out there, have indeed made some hospital investments.

Thanks for the color. Good quarter, guys.

Your next question comes from the line of Daniel Bernstein representing Stifel, please proceed.

Good morning. Just a follow-up on Monroe, if you could talk about why operations there aren't improving, and what you guys can do to help get the operations at Monroe moving a little bit better?

Dan, we still have great expectations for Monroe. We think that it is going to end up being a great project. As you know St. Vincent's took over the management of that facility a while back. St. Vincent's is a very large and successful not-for-profit operator in Indiana. We just generally believe that not-for-profits don't move at the same pace as most for-profits do. I think that our disappointment is that we just haven't seen the improvement as fast as we expected it to be there. We think that it will still be there. But in an abundance of prudence we think that stopping the accrual of rent until they are actually paying it is the right thing to do.

Do you have some expectation of when you may begin accruing rents again on that facility? Do you have kind of a timeline maybe 12 months from now, or 24 months from now?

I certainly hope it is not that long, Dan. The facility is above breakeven. Not paying our rent yet. We certainly don't want to drain them dry, but it has been above breakeven for over two years now, and is good above breakeven right now, but just not at a point where they can pay our rent.

Okay. Going back to Ernest I was looking back at when you first did the Ernest deal in late I guess it was 2011. There was $43 million of EBITDAR that was in place for 2012. What are your expectations for EBITDAR for that portfolio in 2013, and where I am trying to go here, is if you look the minimum cash payments back then, effective lease coverage was like 1.3. Obviously you hope it was ramping up from then. Trying to get a sense of where the lease coverage would be on that portfolio today, and how much cushion you have there, in terms of to ramp up to the full 15% cash return on the operating line?

The lease coverage when we acquired the properties was in the 177 range.

Sorry. Not the lease coverage, but I guess the overall transaction coverage? I am sorry, I didn't mean to say lease. But go ahead.

Let me answer it this way, Dan. If you take the $42 million to $43 million EBITDAR number, and you look at in that they had probably three or four properties that were just coming into their ramp-up stage, so other than that the other properties were running fairly well close to where we would expect their EBITDAR numbers to be on an individual property basis. So without the additional properties that they had under construction, that they have completed and that the newest that are under construction now, then you have a modest amount of growth in the EBITDAR from 2012. If you look at the new properties and where they are performing today, where we expect based on additional time and knowledge that we have, we expect that each new facility will generate an EBITDAR addition of somewhere between $2.5 million and $3.5 million to the bottom line.

And let me just you clarify, Dan, the $42 million in place EBITDAR that we bought the company for basically is sufficient to pay 100% of the 15% rate on the note. The reason that we are not collecting the entire amount, is simply because Ernest is in an aggressive growth stage, and it is better to give them some relief on the cash payments and let then reinvest that into these developments, and remember Ernest has to pay for all of the ramp-up costs and all of the overhead that goes with opening a facility. If we had not encouraged and bought Ernest in fact in order to take advantage of their development, we bought it as a status quo company we would be collecting the 15% in cash right now, it is just the company wouldn't be growing and that was not our strategy.

Right. We calculated that back in 2011 as well that you would more than cover the 15%. I am just trying to understand how much that cushion has increased, or I guess it hasn't quite increased that much until they ramp-up the new development that you are funding? Is that the way to think about it?

That is the point that you have got right, Dan.

Okay.

If we cut off the development and we let all of the development ramp-up, then the term you use cushion would be substantial.

Okay. Okay. And I guess the only other question I have is yesterday Kindred announced that they are selling assets to Vibra, which is obviously a large tenant of yours. I presume you can't comment on that transaction, I don't know if you were involved in it. Have you seen those assets? Do you think those assets I guess are relatively high quality? Would you be interested in them if you were brought into that transaction by Vibra?

Your first comment that we can't comment is probably pretty good.

I was trying to ask in every kind of convoluted way to get an answer. I appreciate that. Okay. That is all I have. Thank you very much.

Thanks, Dan.

Your next question comes from the line of Tayo Okusanya representing Jefferies. Please proceed.

Good morning.

Good morning, Tayo.

On the acquisitions front you guys sound really bullish. Can you give us a sense whether it is kind of like one really large like $400 million transaction you are looking at that is the game changer, or whether it is kind of a bunch of $50 million type of deals?

It is all of the above.

All of the above, okay. That is helpful. And then in regards to Monroe, you were kind enough to give us the rent coverage on Florence. Could you give us a sense of where it is on Monroe, even though they are not paying the rent right now?

They would be able to pay something, but obviously it wouldn't be one to one.

Okay. Are there any other tenants that I know historically you kind of maintain that except for one or two tenants, everybody else is kind of close to your averages in regards to rent coverage? Is that still true?

It is, Tayo. This time I did something a little bit differently, and gave you the coverage for the entire portfolio as well as the mature properties. But if you look at the entire portfolio on the hospitals in particular on including those that are still in the ramp-up stage, then including Florence you have got two of them that are negative, and the rest of them with the exception obviously of Monroe is doing very well.

Okay. That is helpful. And then just last question with LifeCare have they reaffirmed the lease at this point?

Yes, we have a new lease with LifeCare, during their bankruptcythey haven't missed a single payment. And this is typical of when a hospital company goes into bankruptcy, unless it is going into liquidation, it is going to pay for the lease payment, because if it doesn't it doesn't have a business. So LifeCare went into bankruptcy in December. Never missed a lease payment. Never missed any kind of payment. And we executed a new lease with LifeCare a few weeks ago.

Very helpful. Thank you very much.

Thanks, Tayo.

I would now like to turn the call back over to Mr. Ed Aldag for closing remarks.

Thank you very much again for all of your participation today, and as always, don't hesitate to call myself, Steve or Charles if you have any questions. Thank you very much.

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