Medical Properties Trust Inc (MPW) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2014 Medical Properties Trust earnings conference call. My name is Leann, 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 call over to Charles Lambert. Please go ahead.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our second quarter 2014 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 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 according 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 good morning, everyone, and thank you for listening in on today's earnings call.

Both the quarter ended June 2014 and the month of July have been very productive for MPT. As you will recall, in the early part of this year, we guided to a $500 million acquisition target. To date, we have closed on $320 million, or 64%, of that number. We are right on track to reach our goal of $500 million before the end of the year. Each of the acquisitions of existing hospitals we have closed on and the remaining existing hospital acquisitions we are working on are all expected to be immediately accretive to FFO.

With our acquisition of the Circle facility in Bath, we have continued our diversification strategy through investing in outstanding healthcare markets in Western Europe. Circle is a company that we've been working with for more than a year. They have recently received accolades for their work with the UK's National Health Service to dramatically turn around two of their facilities.

MPT closed on the $49.9 million purchase of CircleBath Hospital's real estate assets in July with a sale-leaseback to Circle as the healthcare operator for an initial 15-year lease term, with an extension option for an additional 15 years.

This hospital was opened in March of 2010 in Bath, UK, which is approximately 100 miles west of London, with a population of 95,000, and includes 28 inpatient beds and 21 day beds across approximately 70,000 square feet. CircleBath is distinguished by its state-of-the-art accommodations and clinical inpatient services. CircleBath has experienced a strong trajectory of growth, reporting 10% and 12% year-over-year growth in 2013 volume and revenue, respectively.

CircleBath was ranked in the top 10 in England for patient improvement in hip and knee operations by the Health and Social Care Information Center, and won a national award for nursing practice of the 2013 Laing & Buisson private healthcare awards.

This transaction represented MPT's first transaction in the UK and its 12th facility in Europe. Circle is on the leading edge of the evolution of the UK's NHS's strategy to integrate its services with both privately-owned hospitals and private insurance reimbursement.

We also closed on our new $150-million development line with Adeptus. Adeptus is the parent company for the facilities doing business as First Choice ER. Eighteen facilities are being developed or are already open for business under the original $100 million commitment. Of the MPT-owned facilities, three opened prior to Q2 2014, six opened in Q2 2014, and three opened in July of 2014. The remaining six facilities are scheduled to open in Q3 or early Q4 2014.

In the aggregate, the facilities are outperforming volume projections. At the end of Q2 2014, Adeptus Health completed its initial public offering at a price of $22 per share. This timing is way ahead of the expectations we had only a year ago, when we started the development of our initial First Choice facility. The shares began trading on the New York Stock Exchange on June the 25th (technical difficulty) yesterday at $25.29 per share.

Net proceeds from the initial public offering were used to repay a portion of Adeptus' outstanding indebtedness, with the remaining proceeds being used for general corporate purposes. The company expects to have 53 free-standing emergency rooms in operation by year end.

Our new $150-million master funding and development agreement with Adeptus is expected to fund, one, the development of additional emergency room facilities, the development of licensed general acute care hospitals, and the acquisition of existing general acute care hospitals. The new master lease is [cross-defaulted] with the original master lease from 2013. The new master lease has a 15-year initial term, with three extension options for five years each and annual rent increases based on CPI.

Now, turning to our existing portfolio, for our acute care hospitals, coverage was slightly up first quarter over second quarter. On a portfolio-wide basis, without regard to investment size, the EBITDAR coverage grew from 4.6 times to 4.73 times. On an investment weighted average basis, it grew from 4.49 times to 4.64 times.

For our LTACHs, coverage also grew slightly first quarter over second quarter. Based on a portfolio-wide basis, again without regard to investment size, the LTACH coverage grew from 1.86 times to 1.9 times. On an investment weighted basis, the coverage grew from 1.75 times to 1.8 times.

For our rehabs, coverage was essentially flat. The portfolio-wide coverage, without regard to investment size, went from 2.6 times to 2.56 times. The weighted investment average went from 2.48 to 2.45.

Our investments in tenant operations continue to perform as expected. During the second quarter, we earned $4.7 million on about $110 million in investments, which equates to approximately 17% on an annualized basis. The $4.7 million is broken out as follows. $3.7 million was earned on our $93.2 million secured loan to Ernest Health, a return that continues to approximate the 15% coupon on the note and is reflected in interest income. And of course, that is in addition to the $10 million we recognize in rent and mortgage interest from the Ernest this quarter.

Another $1 million from investment in another eight separate tenants with an aggregate original investment of approximately $16 million was recorded for the quarter. One of these operating type investments was associated with a facility that was sold in the third quarter. During 2014 we had only recorded about $100,000 related to that property, and in the last two years we had received the maximum participation of about $1 million, so obviously those revenues will no longer occur after the sale date. It's important to note that this $1 million is not included in our run rate FFO estimates.

At the end of the fourth quarter, you will also remember that we made a $20 million mortgage loan secured by a general acute care hospital that provides to us a base return plus an interest in the operations of the hospital -- of the hospital operator. During the first half of the year, we recognized a return reflecting approximately 11%.

Some of you will recall that during the height of the recession in April of 2009, we had one facility close. We were able to re-lease this facility to a new operator in June of that year under very strong terms. As a part of that re-lease, we gave the new tenant a purchase option that allowed them to purchase the facility at their election this summer. They have elected to make that purchase.

Again, this is a very strong indication of the success of our underwriting. Despite having a tenant that was unable to withstand the pressure of the recession, the value of the real estate was proven with an operator's efforts resulted in a highly profitable facility, enabling them to exercise this purchase option. We're delighted with this outcome, and it is another great success story which continues to prove the strength of our underwriting.

We continue to be excited about the future of MPT. With our new, almost $1 billion credit facility we have more than sufficient liquidity to take advantage of the great opportunities we are working on in the US and in Western Europe. We're looking forward to finishing out the second half of 2014 strong and to a very bright 2015.

Steve?

Thanks, Ed. I'll jump right into the numbers, because they are right in line with what I think everyone was expecting, so let me just summarize briefly. Then I'll take a few minutes to address a few abnormal things, then we can reaffirm our outlook and go into questions.

Normalized FFO as reported this morning for the quarter was $0.26 per diluted share. That's 8% year over year for the quarter and also for the six months ended June 30. As Ed just described, we have committed about $320 million to our 2014 acquisition target of $500 million. Today we have almost $200 million in cash on the balance sheet. So we have the capacity to meet our $500 million acquisition target without any external capital.

Ed also pointed out the strength of our pipeline, so we are enthusiastic about the likelihood of being able to invest that cash in the foreseeable future. And, of course, we also have a completely undrawn revolving credit facility of $775 million.

That should provide a little perspective on the pretty dramatic and immediate impact that a relatively modest sequence of acquisitions would be expected to have on our per-share results, dividend payout coverage and resulting dividend growth, and market considerations about our growth rate, FFO multiple, cost of capital and other valuation metrics.

With respect to our capital, first I'll remind you that you can review the details of our capital structure on Page 5 of the supplemental when you have a few minutes, but in summary, and in addition to the revolver availability, we have about $1.4 billion of net debt outstanding, representing 43% of our undepreciated total assets and 5.4 times EBITDA. Both of those metrics are well within our general targets for managing the Company. It's possible that we may occasionally temporarily fall below or exceed those targets, especially to take advantage of opportunities, but our intention would be to revert back to them over time.

On last quarter's call we described the possibility that we may complete a transaction involving our Monroe Hospital. Those negotiations were recently terminated, and we have executed a letter of intent with a new and different unrelated party. We expect the current Monroe tenant to file for bankruptcy protection, and accordingly we have written our investment down to the value that we believe is reflective of the real estate value. Upon emergence from bankruptcy, we expect to enter a new lease agreement that would provide for an initial annual rent of approximately $2.1 million, with customary annual escalators and other terms.

We continue to receive rents from the Florence tenant as it navigates the bankruptcy process. Similarly, Gilbert continues to pay rent and appears to be improving its operations. We remain confident that we will not suffer any material impact from these two properties.

Our investments and tenant operations continue to perform as expected, and as Ed has already addressed these I will not belabor the matter but will be happy to address any questions during the Q&A session.

Last quarter we increased our estimate of our annual normalized FFO run rate to between $1.10 and $1.14 per share. You may remember that that estimate included the assumption that we would complete the $180 million acquisitions of a couple of particular projects. While it has become increasingly challenging to get those projects to the finish line, we did complete the Adeptus and Circle transactions for an aggregate of $200 million.

This is a good demonstration of the strength of our pipeline and acquisition activities in that if the timing of certain projects continue to stretch out or even fail to occur in the foreseeable future, we are continuing to source other projects that will absorb the capital that had been slotted for earlier use. Accordingly, we are maintaining our annualized run rate estimate of between $1.10 and $1.14 per share.

The timing of the opening of the $150 million of new First Choice assets is not yet certain, although, as we noted, the First Choice team will open the 18 facilities that we initially financed almost a year ago over a year ahead of expectations.

It's probably important to point out again, because we add a lot of new investors with every quarterly call, that it is our long-held policy that when we provide future estimates this is not an estimate of normalized FFO for any particular year or quarter. Our estimate of $1.10 to $1.14 is what we expect our existing portfolio of properties and future acquisitions, along with our existing capital structure, would generate if we added no new assets or accessed no additional capital. The actual annual reported FFO per share will be different, because we plan to continue our growth, which will create ever-changing revenue, expenses, cost of capital and share count outstanding, all of which is further complicated by the impracticability of precisely predicting the timing and amount of acquisitions and financing transaction.

Further, and as usual, these estimates do not include the effects, if any, of debt refinancing cost, real estate operating cost, interest rate swaps, write-offs of straight-line rent, property sales, foreign currency gains and losses 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 in 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)

Juan Sanabria, Bank of America.

Just a couple questions, I guess, on -- I guess on the Bucks County first. Could you disclose what the proceeds were or what the cap rate was or the NOI associated with that asset that is now -- that will no longer be there?

Proceeds were approximately $35 million, and, again, not to repeat what Ed said in his comments necessarily, but that was a transaction that we agreed to back in the late spring of 2009, and as part of that deal, again as Ed mentioned, we had the opportunity to earn not only a strong rental rate on that $35 million value but a participation in their operations of up to $1 million a year, and we actually did earn that additional $1 million a year for the last two years, and post closing, which actually happened yesterday, we actually closed the transaction yesterday, post closing we'll settle up with this year's participation, which will amount to almost another $1 million.

And so the way we look at it, although not the way the accounting is, that extra roughly $3 million that we have collected and will collect over the lease term is additional proceeds. So we look at that as being a transaction where during the rental period we got a market rate rent and then we sold it for the $35 million and we had previously collected $3 million in participation.

Okay. So just to clarify, what was included in rents, I guess, part one, and then in participation, part two, in the second quarter figures?

It's about -- well, in the second quarter it was about $2 million in rent --

And the rest annualized, though.

Oh, yes, but -- and then the total participation for the whole year was about $100,000.

Okay. Okay. And then for the guidance or the run rate of $1.10 to $1.14, what's the -- is the assumption that all of First Choice is contributing to the bottom line? And is there any other incremental acquisitions other than the Bath and the First Choice in that run rate?

The answer to your first question is yes. We assume that the $150 million is disbursed and now paying rent. And the answer to your second question is no. There are no other potential acquisitions that's included in that $1.10 to $1.14.

So when I said in my prepared remarks that that run rate includes acquisitions, just to be clear, it's only those acquisitions that we know we're going to complete -- in other words, binding deals that are just waiting to close, or, as in the case of Adeptus, First Choice, development transactions that we know will come online over time.

And what's the run rate been, I guess, on a quarterly basis, if you have that, of how quickly that money to date has been put to work by First Choice or Adeptus?

The first deal, remember, was about this time last year. I think we actually executed that agreement in August of 2013. And the terms of that transaction required them to have everything in place in three years. Well, here we are literally a year later, and, as Ed mentioned in his remarks, they expect to have every project up and running by the end of this year, so well over a year, actually a year and a half or more ahead of their expectations.

Okay. And then with regards to the $180 million of acquisitions that were flagged last quarter, any comment on has that gone away or is that still potentially in the works and just taking a bit longer than you initially anticipated?

Yes, I think it's highly unlikely that those transactions are going to happen in the foreseeable future.

Okay. And just one last quick one while I've got you guys, for the UK Bath, any rent coverage or cap rates that you can provide on that?

Yes, of course, as you know, and I don't blame all of you all for continuing to ask, we don't give cap rates on specific deals. We've said that we're doing transactions in a range between 8% and 11%. In the case of the Bath deal we're right in the middle of that range. And it's an acute-care hospital that we like to underwrite to a normalized run rate of at least three times, and this is a going in -- underwritten going in at 2.3 times after a period of ramping up.

How long is that ramp-up?

Well, the expectation is about 18 to 24 months.

Okay. Thank you.

Juan, let me just mention one thing. It's important that Bath -- I'm sorry, not Bath, Circle is a fairly significant company. It's publicly traded in the UK. It has basically two areas of operations. One is building and running its own hospitals.

The other is what Ed mentioned. They actually manage National Health Service hospitals for the NHS, and they have been phenomenally successful in managing large, very troubled acute-care hospitals for the NHS, and that has become a very important and very profitable part of their business. And the reason I mention that is because, of course, we have the parent guarantee for our lease at Bath.

Okay. Do they have any publicly rated debt or anything that you can point to?

No. No. No, they don't.

Okay. That's it for me. Thank you.

Karin Ford, KeyBanc.

This is Jeff Gaston with Karin Ford here. So first question, can you let us know how much of your freestanding emergency room exposure is hospital affiliated?

You remember that we had -- before the First Choice we had three with Emerus. All three of those are hospital affiliated. And then the First Choice facilities, most of theirs are affiliated in some form or fashion. In the Emerus transaction, there's actually ownership involved. There's not ownership involved in the existing First Choice facilities.

I guess can you provide a little more color on what that affiliation is for the First Choice facilities?

Well, for example, in the Dallas market they have transfer agreements with local hospitals, in particular HCA. And so what that means to a patient coming into a First Choice facility, say, with heart conditions, that patient is stabilized, they do what they need to do, and if it's determined that that patient really needs to be admitted to a hospital, these arrangements with the local acute-care hospitals mean that the ambulance picks the patient up at First Choice, takes that patient directly to its room at the local hospital.

So it's not readmitted through the local hospital emergency room. There's not a lot of additional admission paperwork. It's -- I probably wouldn't call a heart attack seamless in any regard, but this is as seamless as possible and is highly beneficial for not only First Choice but primarily for the local hospital that's taking the transfer.

Okay. So they're not necessarily operating under a specific hospital's license, then, in those cases?

No, not at all.

Okay. Do you have any concern about potential legislation in Colorado that could increase regulations or reduce facility fees?

Yes. From the facility fee standpoint, we've run it both ways, and it is not an issue with our facilities.

Okay. And I guess a quick follow-up question on the emergency rooms, what's the [rent] coverage on the ones that you've completed to date?

Well, the ones we've completed to date, remember, are brand new. First Choice has a number of facilities that they developed before we did. But even the ones we've completed and are operating have coverages in the seven to eight times. And, remember, these have been open for less than six months in most cases. It's a very attractive business when run correctly when, as you point out, you've got the right affiliations with local hospitals and so forth.

Okay. I've got a couple of questions, but I'll hop back in the queue.

Andrew Rosivach, Goldman Sachs.

I just wanted to start on the development pipeline on Slide 10. These Adeptus Health deals, what's the square footage on them? Like what do they typically average? It looks -- go ahead.

Six or seven thousand square feet.

Got it. So these things cost -- I apologize, I kind of knew (inaudible) -- they cost $1,000 a foot to build?

Well, you've got to include the land and the other development cost in that. And these are not what you would refer to as a doc in a box type facilities. They are full, licensed ERs.

Keep in mind also, Andrew, that part of the attraction here, part of the whole business plan is to be in high-traffic, high-demographic retail locations. So they're actually buying land out on the pad sites of highly trafficked shopping centers. So you're generally getting a much higher per-square-foot land cost than you would with a typical hospital.

Are you paying for any of the equipment?

No, we pay for none of the equipment.

Got it. Okay. And then I just wanted to move to your near-term rollover. You've got about 3.5% of your rents rolling between now and the end of 2016. You even still have a maturity in 2014. And what's the outlook for those?

Well, the 2014, the maturity in 2014 is Bucks County, that we just actually sold. We've got two coming due in 2015, which are the two Community hospitals that we've discussed over the last couple of months, and Community has already noticed us that they will be terminating their occupancy, and so we are in the process of re-tenanting those two properties even as we speak.

Do you have any sense of where [in-place] rents are versus market or whether there might be some downtime in the re-tenanting?

No, we expect no downtime, and we have no comment as yet on what market versus the current rental rate is. We're just not there yet on evaluating the market. There has been anecdotally a very high level of interest, not only from potential operators but from community leaders and political leaders in the area.

Got it. Okay. And then just a quick one, just you probably know there's another healthcare REIT that ran into some issues with large tenant purchase options. What dollar amount of purchase options do you have remaining after the Bucks County deal on your (multiple speakers)?

I'm not sure what comparable you're talking about, but in almost every single one of our tenants there are purchase options. Those purchase options are, again, almost exclusively at either the greater of fair value or our original investment. So if we spend $100 million to buy a property and lease it back in year 1, in year 15 certainly we would hope that the value of that property is more than $100 million, but even if it's not, in order to exercise that option the operator has to pay us the $100 million.

Was that the Bucks County structure?

The Bucks County structure was different, because, remember, that was done under stress in the middle of 2009, and that was done to replace a bankrupt tenant, as Ed mentioned, couldn't make it through the recession. And so we brought in a very, very strong operator, a highly respected orthopedic group that was affiliated then with two very highly respected teaching hospitals to take over that facility, pay us a good market rate rent, give us the participation and operations, and then what all -- what went into all of that mix is the purchase option. So that certainly was an exception to the model that we have.

There are no other leases, Andrew, with the -- that have an early purchase option.

Okay, thanks. Just to let you know, I was making a reference to Brookdale Emeritus in HCP. But it sounds like you guys -- this was it that had a structure like that?

Yes.

Thanks, guys.

Karin Ford, KeyBanc.

Jeff Gaston here with Karin again. Can you give us any color on why the sale or JV with the Monroe Hospital was terminated?

We're still under confidentiality agreements. I can say that just from our perspective there were a number of reasons, including an evaluation on what the likelihood of the other party completing all of its obligations was going to be.

Jeff, it was terminated by us.

Yes. Yes.

Okay. And then are you guys looking at the large HCN hospital that's possibly up for sale?

We don't comment on the specific acquisitions that we're looking at.

Okay. And then I guess one last question, what's the expected impact of CMS's IPPS rate cut on the hospitals and coverage?

The one that's just announced this week?

Yes.

Absolutely none. It is right in line with what we all expected a couple of months ago, and we expect that it will have no impact different than what we were saying then.

All right. Thanks a lot, guys.

Juan Sanabria, Bank of America.

Just a quick follow-up. Any update on Florence and how that situation is progressing and kind of what we should be expecting?

Yes, as Steve mentioned earlier, both Florence and Gilbert continue to pay rent, and they continue to have their operations improve, and we don't have any expectations at this point that we won't continue to get our rent.

Okay. Thanks for that. That's it for me.

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

Thank you, LeAnn, and thank all of you for listening today, and, as always, please don't hesitate to call any of us for follow-up questions, and we look forward to talking to you. Thank you.

Thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect, and have a good day.