Medical Properties Trust Inc (MPW) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter Three 2013 Medical Properties Trust Earnings Conference Call. My name is Matthew and I will be your operator for today.

(Operator Instructions). As a reminder, this call is being recorded for replay purposes.

And now I would like to turn the conference over to Mr. Charles Lambert, Managing Director. Please proceed, sir.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our third-quarter 2013 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 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-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 your for joining us today for the Medical Properties Trust Third Quarter Earnings Call. Once again we are announcing a tremendous quarter for our investors. During this quarter we either announced, definitive documents signed or the actual closing on more than $500 million of high-quality hospitals across the US and in Germany. This amount, when added to what we had previously done, totals approximately $650 million in acquisitions for the year. This is 162% of our original guidance at the beginning of the year.

Our two largest investments during the third quarter were two portfolio transactions- three IASIS hospitals, and 11 RHM facilities in Germany. The three IASIS facilities have solid historical financial performance. They are located in Mesa, Arizona; West Monroe, Louisiana; and Port Arthur, Texas. All three facilities entered into our portfolio with strong EBITDA coverages and very good physical real estate assets.

This portfolio was marketed through a highly competitive process. Our team's in depth knowledge of the hospital market played an important role in our winning this bid. The high degree of interest from others in these hospitals continues to show the unrecognized value in the overall MPT portfolio.

The 11 rehabilitation facilities in Germany are operated by the German operator RHM. RHM is an experienced operator with a long, positive track record. The rehab market in Germany is currently very fragmented with RHM being the eleventh-largest operator. We expect that MPT will be a part of RHM's further growth in Germany.

This particular acquisition helps to diversify the MPT portfolio and further strengthens an already strong portfolio. Like the IASIS transaction, the RHM transaction was heavily marketed and received broad interest. Again, our experience and focus were factors here. RHM wanted a partner that understood healthcare.

On the acquisitions pipeline front, we continued to have good prospects in both the US and in Western Europe. As we've previously announced, we expect that our future acquisitions will be heavily weighted towards the US acute care hospital market. We will provide 2014 guidance either late in the fourth quarter of this year or early in the first quarter of next year.

In addition to the two facilities which started construction this year, Ernest Health acquired an up-and-running hospital in Corpus Christi using MPT financing. To date, three of our First Choice ERs have begun construction and are expected to be operational in 2014.

It is possible that we will have a couple of more acquisition closings this year, but most likely they will be in the first quarter of 2014.

Turning to our existing portfolio, the acute care hospitals continue to perform on a whole very well. The EBITDA release coverage for the trailing 12-month period ending August 31, 2013 compared to the same 12 months last year, increased about 35 basis points to almost 5.5 times. This calculation includes all hospitals that have been in our portfolio for at least 12 months.

Our in-patient rehabilitation hospitals were essentially flat with coverage of almost 3 times. The LTACHs were down slightly to just under 2 times coverage from just over 2 times coverage previously.

At this time I'll ask Steve to go over the specific financial performance of the quarter. Steve?

Thank you, Ed. We filed our press release this morning, describing our operating results so I'm not going to repeat all of that here. But I do want to provide some context as we and our investors consider what our results mean for the longer term.

Our normalized FFO at $0.25 per share was right in line with our expectations and that includes the impact of more than $300 million in debt issuances and equity issuances to fund recent acquisitions in advance of the closing.

This new long-term capital funded the three IASIS hospitals that we acquired for $283 million on September 26. We also raised approximately $270 million that will fund the 11 RHM facilities that we have under contract for approximately $248 million. That dollar value is based on total costs of EUR184 million; and by the way, about $12 million of that total represents German transfer taxes which upon closing will be reflected in accordance with GAAP as an acquisition expense.

Our investments in our tenant operators continued to generate strong results. Year to date through September 30, we have recognized $10.5 million from our Ernest investment. Now that's over and above the $26 million we have recognized in rent and mortgage interest.

Since our acquisition of Ernest almost two years ago, their management team has grown the portfolio from 16 to 19 hospitals and is in the process of opening two additional hospitals. As this growth continues and the new facilities ramp up operations, we expect our earnings from Ernest operations to begin to exceed the contractual 15% return that we have been recognizing since the acquisition. And remember that for each new Ernest hospital, in addition to the very attractive and long-term rental revenues, MPT earns at least 80% of operating income and makes very little, most of the time no incremental investment in order to achieve those earnings.

In addition to income from our Ernest investments, we have reported a little more than $2.5 million from our approximately $10 million in other investments in tenant operations. We think this annualized 30%-plus return is a fair guide for at least the next few quarters.

We are presently considering only one potential property sale that represents less than 1% of total revenue. There are no other lease maturities in 2013 and only one in 2014 that has not been extended. That lessee has the option to repurchase the property, which generates approximately $2 million in annualized rent, but we believe it highly unlikely that the lessee would vacate the property.

We presently have a significant amount of liquidity, due in part to the roughly $270 million in euro-denominated seven-year bond that we closed in early October. The euro-denomination, by the way, is EUR200 million, translating to about $270 million equivalent. Those funds are now in escrow, pending use for the anticipated fourth quarter closing of the RHM transaction in Germany.

Pro forma for that closing, we expect our leverage ratio to be less than 45%, which is measured as net debt to un-depreciated assets.

Our net-debt-to-EBITDA ratio, again pro forma for closing RHM, is expected to approximate 5.2 times. Subsequent to that anticipated closing, we would have total liquidity of about $350 million, including $315 million available under our $400 million revolving credit facility.

So we expect to go into 2014 with a very strong balance sheet, with limited near-term maturities and substantial cash and availability to continue our highly accretive growth while maintaining our prudent leverage and credit policies.

The press release this morning included our estimate of between $0.98 and $1.00 per share for all of 2013. The primary differences in our assumptions between now and last quarter's estimate are the late third-quarter closing of IASIS, the success in completing the agreements to acquire the German assets, and our decision to go ahead and raise euro-denominated bonds in advance of closing RHM.

The market, by the way, in Europe was very receptive to the MPT story and credit profile and that is reflected in the outstanding execution of that offering.

As we look into 2014, we expect the current portfolio, assuming a fourth-quarter closing on RHM, will generate a run rate normalized FFO of $1.07 to $1.11 per diluted share. That's a built-in annual increase of approximately 10% and as a reminder, each acquisition we make generates immediate and significant per-share accretion. So we expect those 2014 results to be even better.

As usual, these estimates do not include the effects, if any, of debt refinancing costs, real estate operating cost, interest rate swaps, write-offs of straight-line rent, property sales, foreign currency gains and losses, 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, or existing leases do not perform in accordance with their terms.

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

Thank you. (Operator Instructions). Tayo Okusanya, Jefferies

Hi. Good morning, everyone. So you guys have had an amazing year just when it comes to acquisitions and the run rate looks great kind of heading into 2014. Steve, you made an interesting commentary that because your deals are accretive, you probably expect 2014 to end up even better than the run rate. But when I look at 2013, we kind of started off with $1.10 guidance-wise, with high strong deals. The number at the end of the year kind of ended up closer towards $1.00. What changes in 2014 that kind of get that earnings trajectory up in 2014 versus some of what happened in 2013 where we systematically had to lower the numbers?

Well, the changes in the estimates going through 2013 as we discussed I think pretty extensively on the last quarter's call, were primarily related, almost exclusively related-- well, there were three things. There was the timing of the acquisitions, which in general, although the acquisition volume has been extremely good for us, the timing has been back-end weighted. Obviously, the very disruptive capital market conditions, particularly starting early in the summer, increased our and everyone's cost of capital. And then we made some property sales and we discontinued accrual of the Monroe rent. So that's-- those will make up 80% or 90% of the changes in estimates going into 2013 versus coming out of 2013.

And certainly there are lots of unforeseen things that can happen in 2014. I've just been through a long laundry list of them that we can't see. But our pipeline is extremely strong. We have several very large potential acquisitions that we're working and so we remain very optimistic about going into 2014 and again, remember, the run rate that we just gave you; that's if we do nothing; that's basically locked in, if we do nothing. We don't need additional capital to generate that run rate. We don't need additional acquisitions to generate that run rate and so we're hopeful that the changes in our estimates going forward would be to recognize acquisitions that we make at very accretive returns.

Got it. That's very helpful. And then from the acquisition perspective, kind of you're moving back towards domestic US general acute care. Could you talk a little bit about cap rates; I mean is that world also getting very aggressive where cap rates are now in the mid 8s for the market; or are we kind of back to a world where you can just kind of do deals at 9%. 9.5%, 10% type cap rates?

Tayo, we're not moving back. We've always been here; is I've said over the last few earnings call, we got out of whack in our portfolio mix, going all the way back to the Ernest transaction and then again with some of this German transaction. But we've always wanted to be heavily weighted toward the acute care, so we haven't lost our focus there and coming back to it; it's just when you look at the pipeline, it is heavily weighted toward the US acute care hospital sector and I'll point that out just because we've made the recent German acquisition.

The cap rates still are a fairly wide spread. They are in the mid 8s all the way up to 11. If you look at an average of what the pipeline is right now, it's in the 9-plus range for general acute care hospitals.

That's very helpful and then just one more if you could please indulge me. Could you just walk us through the economics of the First Choice deals again; how they work? Are you providing the construction financing how you ultimately take them out or-?

Yeah we are in fact doing that, Tayo, it's difficult. Most of the development type transactions we do, we provide the construction financing during which time the lease rate accrues and at completion of construction, that accrued construction period lease rolls into the lease base and then we earn obviously the escalated lease rates, which in the case of First Choice are very strong.

And they are way ahead of where we thought they would be with respect to putting this money to work and if we were to approve all of the properties that we are now looking at with them then we would be depleted in our $100 million commitment to them.

Remember when we entered that commitment, we thought it was about a three and a half year build-out; and if we reassess that today, I'm sure it will be much shorter than that three and a half years.

Got it. Okay, that's very helpful. Thank you so much.

Michael Mueller, JPMorgan

Hi. Two questions here; first of all, do you have any more specific timing on Germany closing?

Mike, it should be fairly eminent as Steve pointed out in his prepared statements earlier. We've potentially closed everything in escrow. We're waiting on regulatory approval. There's basically a seven-step process and most of them are through the six-step process. It could be within the next couple of weeks or it could be within the next 30 days.

Got it; okay. Okay, I mean is the right way to look at-- it looks like your run rate guidance before this quarter was I think $1.06 to $1.10 and now it's $1.07 to $1.11. It looks like the only real large moving part that wasn't in last guidance was Germany. I mean is that the right way to think about that? That this transaction, fully funded on a permanent basis, adds about a penny?

No, that's not the way to look at that at all.

Okay.

I mean obviously three months down the road we've got three months better visibility into 2014 and so we continue to refine and adjust as necessary. There's nothing more to it than that.

Okay. Was there any notable offset to that? Because if Germany is contributing more than a few cents or something; what was-- was there any (multiple speaker) offsets?

Keep in mind, Mike, when we give you our estimates we're not necessarily-- well, we are including what we are highly confident in achieving. And so- yeah.

Okay. And then just one or two other ones here; just in terms of underwriting, I was just curious. Can you kind of walk through kind of how you thought about underwriting this transaction? I mean is it a marquis you looked at for some time and then when the books came out you'd already done the due diligence or the books came out, then you kind of started looking at it? Can you just tell us about the process?

Are you talking about the one in Germany?

Yes.

Yeah, absolutely, Mike. We've been looking at doing something cross border literally since the Company was started 10 years ago. We've had a lot of opportunities, going all the way back many years to opportunities in Australia, some in Latin America and even some in Asia. We've decided on Western Europe for a number of reasons and so literally for the past three-plus years we've been exploring, learning and exploring those particular markets very hard. So even before this particular opportunity came up, we were very excited about the German healthcare market in particular.

This particular opportunity came up to us a little more than a year ago. We spent the better part of the year looking at details into this particular portfolio, this particular market within Germany and then the submarkets within the local communities within market where each of these facilities are located. We reviewed in great detail with our own team and then since we were making a big step across border, we decided to have that confirmed. We hired an outside firm which then spent a couple of months doing their own analysis and came to the same conclusions that we did.

So we spent a lot of time reviewing the markets before this opportunity and we spent a lot of time and detail in reviewing this particular transaction and these particular markets once it became available to us, literally to the tune of right at a year in this particular situation.

Okay. Okay, that was it. Thanks.

Rob Mains, Stifel

Thanks and good morning. One follow-up to that question, since this is a different country than the US; what was the bidding process like? Were there other entities, I assume not REITs because I don't think they have REITs in Germany? Sort of like, who are the interested parties when these sorts of assets become available?

There were other opportunity funds, real estate opportunity-based funds in the US; and there were a large number of sovereign wealth funds located in places like the Middle East; a lot of interest in the properties; no one with healthcare experience like we had and the ability that they felt to grow with the company in their acquisition mode.

Okay, great; that's helpful. And then could you give us an update on the (inaudible) - the emergency room developments; kind of how the economics is shaking out with those?

They are doing outstanding, Rob. They are so far ahead of where we thought they would be. It is truly been a phenomenal investment. As you know, we don't give specifics on individual properties for what the coverages are, but these are way ahead of where we thought they would be.

Okay, great. Thank you very much.

Juan Sanabria, Bank of America

Hey, good morning, guys. Just a couple questions from me; on the coverage levels and I may have missed this, do you have sort of the exact numbers that you've given previously for the sort of the three different buckets?

We do, but we did not-- Juan, there's feedback coming in your line.

Sorry; is that better?

Yeah, that's better. I did not give the specifics but we will get those posted on the website. They are very close to the numbers that I did give, though.

Okay. And on the guidance, the run rate number; it seemed like from your sort of previous answer that you included the German acquisition and then I guess the offsetting finances, given you were highly confident in executing that at the second quarter; is there anything else that you're highly confident on with the revised guidance that was sort of up a penny?

No. The guidance we gave this morning is run rate guidance based on what you see, what we have, what the capital structure is right now without anticipation of any new capital transactions or further acquisition.

Okay. And you mentioned one of the lease maturities in 2014 have an option to sort of repurchase the asset. What's your expectation? Do you think that they'll execute that purchase option on that $2 million in rent on an annualized basis?

Yeah, we probably wouldn't speculate on a call as to what we think is going to happen. The reason I bring that up is again just to confirm that we really-- we don't have any lease maturities coming due. It's possible of course that this operator could elect to repurchase, in which case we'll make a very strong profit on that purchase and redeploy the capital. But to handicap whether they will simply renew or repurchase; that would be hard for us to do.

Great; thanks guys.

Thank you for your questions. I would now like to turn the call over to Mr. Ed Aldag for closing remarks.

Thank you, Matthew. We certainly appreciate all your interest today. As always, if you have any questions, don't hesitate to call myself, Steve or Charles. Thank you very much.

Thank you for joining today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Have a very good day.