Medical Properties Trust Inc (MPW) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter four 2014 Medical Properties Trust earnings conference call. My name is Cathy, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions). As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Charles Lambert, Managing Director. Please proceed, sir.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our fourth quarter and full year 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 do 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 you may cause our financial results and future your 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 can 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 the 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 for our fourth quarter and year end 2014 Medical Properties Trust earnings call. 2014 was a fantastic year for MPT. Not only did our current portfolio perform well, which I'll go into more details in a few moments, but we invested or committed to invest almost $1.4 billion in 2014. This increased our total asset base by approximately 45% compared to the prior year end. With this increase in asset base we greatly strengthened our portfolio for the geographics in it, and property type diversification. As you would expect with this type of growth our revenue and FFO grew at 29% and 10% per share respectively during 2014. Steve will give you more details in just a few minutes. We also expect to have further significant FFO growth per share in 2015.

It is important to note that S&P rates are overall credit rating and upgraded our senior notes to investment in grade during the fourth quarter. Shortly after we announced in October the nearly $1 billion acquisition of the MEDIAN Kliniken properties, MPT senior management embarked on a month long series of meetings, visiting with existing investors and new investors to update them on MPT. When we announced the MEDIAN acquisition, our stock price was $13.49 per share. By the time we finished our month long series of meetings, the stock price had risen almost 6%. In early January we completed the largest equity offering in the Company's history, and the operating price at $14.50 per share, a 1.8% premium from the announcement of the offering. This success of this offering is a test to the success we had in 2014, and the strength of the MPT portfolio.

Now I would just like to briefly update you on some of the properties in our portfolio. Good news, Monroe Hospital is paying rent, rent payments commenced on January 1st, 2105, prime lease of the facility under their existing master lease with MPT. We are currently in negotiations with a potential operator for the two South Carolina CHS Hospitals, we hope to provide you further update further in the quarter. Both the Arizona facilities in Florence and Gilbert continue to pay rent. Gilbert continues to perform well. And Florence is making small strides forward.

Turning to our lease coverages, for all of our general acute care hospitals, even those that have been in our portfolio for less than a year, the coverage was 4.32 times on a trailing 12-month basis ending November 2014. This is a slight decrease of about 10 basis points from the previous quarter. When looking at the normal mature operations, again meaning the properties have been in our portfolio at least a year, the coverage is slightly higher on a trailing 12-months at 4.4 times for the fourth quarter. This is about 7 basis points below the third quarter. For the L tax, the coverage for our total portfolio was 1.8 times on a trailing 12-months, versus the 1.84 times for the 12-months ending the third quarter. For our rehab facilities, all of the IRFs the coverage was flat at 1.9 times, including just IRFs we have owned for at least a year, the coverage was slightly higher at 2 times, which again was flat to slightly up. For our freestanding emergency room portion, it is still in the wrap up stage, and even with six of those facilities just coming off of construction completion, our lease coverage was 2.5 times.

One barometer of potential future results is admissions. Obviously this is a potential indication, only a potential indication but the admissions for all of our major categories were up. Our general acute care admissions were up 1.5%, IRFs up 6.2%, LTACs up 2.5%. All of the admission figures are comparisons of the last three months ending December 2014 and December 2013, for facility that have been a part of our portfolio again for at least 12 months. At the end of December 2014, our largest tenants were MEDIAN at 19%, Prime at 17% Ernest at 11%. These figures assumed fully funded commitments. Our portfolio is currently spread over three countries, with 74% in the US, 25% in Germany, and 1% in the UK. We expect our acquisition activity in 2014 to again be robust. While we're not ready to predict that we will able to match the level of nearly $1.5 billion we achieved in 2014, we do believe that our acquisitions will at least be in the range of $600 million to $800 million. I want to thank each of you for the confidence you've shown in us, and it has paid off with the success we have had. Steve.

Thank you Ed. Normalized FFO per share for the fourth quarter was an expected $0.28. A 17% year-over-year increase compared to 2013. For the full year, we increased FFO per share by more than 10% to $1.06. We've not made any acquisitions in 2015, and yet our existing portfolio is set again to deliver strong double-digit growth in per share results for 2015. We will address our outlook in just a few moments. Included in NAREIT defined FFO is an adjustment for gain of about $2.9 million on the sale of our La Palma Community Hospital to Prime Healthcare. As a reminder to you, Prime has the option to repurchase and substitute one hospital each year for purposes of contributing the hospital to its not-for-profit affiliate, Prime Healthcare Foundation. MPT does not presently own any of the facilities operated by the Prime Foundation.

Further adjustments to FFO to result in normalized FFO include the following. Acquisition costs of $18.5 million, including major line items for, first, $3.9 million in real estate transfer taxes, related to the three rehab hospitals we acquired from RHM, along with related legal and other transaction costs. Second, $9.5 million for the early breakage of contracts to hedge $532 million equivalent of our Euro exposure between the time we executed the contracts to acquire the MEDIAN assets and the closing of the transaction. And lastly, approximately $5.1 million in other transaction costs, primarily legal, other professional fees, and diligence costs, mostly for the MEDIAN transaction. Other adjustment to arrive at normalized FFO are $1.4 million in contingent financing fees, legal and other costs related to a $225 million loan commitment from our bank group, that was terminated subsequent to the issue of common shares in January, and finally $1.9 million in the write-off of straight-line rent.

Regarding MEDIAN as I just mentioned and we have previously disclosed the transaction to acquire MEDIAN was closed in mid December, when MPT invested approximately $533 million. We are now in the process or working through the necessary consents and preemption right releases for each of the 40 facilities, and we expect to start closing those sale lease back transactions shortly. Meanwhile, as we have disclosed, we earning interest at the lease rate on substantially all of our $533 million investment.

Turning to financing, as of year end we had drawn $593 million under our revolving credit facility for the purchase of approximately 425 million Euros to close the MEDIAN transaction, and the three new RHM hospitals. The average interest rate on these balances approximates 1.55%. In January we issued 34.5 million shares of common stock for net proceeds of approximately $480 million, and repaid our revolver balances by that same amount.

As we work towards the closing of the MEDIAN sale and lease back transactions, we are also continuing to evaluate the optimum strategies for financing the approximately 280 million Euros, that is about $315 million, plus transaction costs necessary to complete the transactions. As such, we are considering unsecured Euro denominated bonds, and locally financed bank mortgage loans, or a combination of the two. With only $110 million drawn on our revolver as of today, we are confident that our revolver availability will provide sufficient capacity to close other near-term acquisition possibilities.

With respect to our guidance, in our last quarterly conference call we estimated that upon completion of the Median transactions, including permanently financing the acquisitions with long-term debt and equity capital, our run rate normalized FFO would range between $1.19 and $1.26. Due primarily to lower market interest rates and a higher stock price than we initially anticipated for our recent offering, offset somewhat by unfavorable exchange rate movements, we have modestly adjusted our estimated range to $1.21 to $1.27. As always, this estimate does not contemplate unannounced transactions or capital market transactions, other than for Median.

As we have consistently demonstrated we expect that our 2015 acquisitions will be immediately and strongly accretive and therefore expect our results will continue to improve even above this current new estimate. With respect to operators that are in the process of restructuring their businesses, Ed mentioned these briefly, we'll discuss those first that had been operating under Court supervision, and again as Ed noted today should be the last time that we and probably most of you will need to hear about Monroe. As of January 1, we and an affiliate of Prime amended the Prime Master Lease to add Monroe. And just this week, the court approved the overall bankruptcy plan, based on the finally agreed lease base and rate, we will receive $2.5 million annually, with CPI escalations, and in fact, have already received the first two months rent for Monroe.

The Gilbert Hospital in a suburb of Phoenix continues to operate profitably and meet all of its lease obligations. We noted on our last call, we already agreed to new lease terms with Gilbert, that provide higher rent, more security, and a longer term. All of which has now been approved by the Court. We expect to see Gilbert emerge from bankruptcy in the near future, and as we have said since the bankruptcy filing more than a year ago, do not expect any impairment or other material losses. Also last quarter, we announced that the bankruptcy court overseeing the Florence Hospital also near Phoenix, had approved a perspective purchaser conditioned upon that purchaser reaching an agreement with MPT regarding assumption of our lease. We recently executed a nonbinding letter of intent that describes the terms of an unassumed lease. There are no rent reductions or other payment concessions in the LOI, and we would retain our current security, including intangibles, and the $1.2 million letter of credit. Meanwhile, Florence has continued to pay its rent and other obligations. Our wellness centers have continued to struggle, and we recently ceased accrual of rent, and this is reflected in the run rate guidance we just discussed. Although there is no assurance of completion, we are presently negotiating the terms of the sale of the properties to the lessee. Ed already mentioned the South Carolina hospitals, and we hope to be able to transition those facilities to a new operator in the near future. With that, I'll turn the call back to the operator to queue for questions.

(Operator Instructions). Please stand by for your first question. The first question comes from the line of Karin Ford, Keybanc Capital Market.

Good morning.

Good morning, Karin.

First I wanted to get started with the adjustments to the run rate that you mentioned. Can you just quantify the impact of the lower interest rates and the exchange rates, and just talk about what exposure you have to changing exchange rates going forward?

That's two questions. I'll take them in sequence. Everything is fungible. We have adjusted the range by two pennies on the low end, and a penny on the high end, so any single one of the components we mentioned, whether it's exchange rates or interest costs, or cost of the equity that we issued, really we haven't quantified and put them in separate buckets. All of those components are subject to further assumptions about timing and how much. So we haven't quantified, I'm not sure there's relevance to us to quantify how much of the penny adjustment could possibly come from one component versus another.

With respect to exposure to exchange rates, we are certainly exposed to the market. Keep in mind that it is only an economic exposure to the extent that we bring Euros home, convert them to dollars to either pay debt, pay dividends, or whatever. Now from a GAAP perspective, it's not treated that way. But we're in the process now of modeling out just that, how much of our future expected rental income in Euros will be used to pay for Euro denominated debt, to reinvest in Euro denominated assets, and then how much to bring home, reconvert to dollars. That last net amount is what we will then consider placing short term rolling hedges on, to smooth out the exchange rate impact. Remember, these are at least 27-year assets, and there's obviously no way you can hedge out that far. In fact, hedging out 18 to 36 months is generally considered probably the longest term that you can do that efficiently, and that's what we would plan to do, is have a rolling series of hedges of 18 to 36 months.

Okay. Thanks for that. I think you had estimated previously that you thought cost of secured debt would be around 3.5% and unsecured might be around 5%. Do you have updated estimates as to what those might be today?

They have only come down, Karin, particularly the unsecured debt, as Ed mentioned, and you certainly know, our debt has been upgraded to investment grade. That in and of itself has brought in our unsecured rate somewhat, along with the overall interest rate environment, and in particular the Euro denominated interest rate environment. So where as our earlier estimates of unsecured debt costing as much as 5% has probably come in at least 100, and frankly probably more than 100 basis points, so we would expect to issue something between 3% and 4%. On the secured side that depends a lot on other terms, including loan to value, including the level of securitization or collateralization, I should say. But there again, we think that has come in much less, but probably a meaningful 25 basis points.

Thanks for that. Can you just characterize the pipeline, appreciate the $600 million to $800 million number you gave us you're thinking about in 2015, just talk about what the composition of the pipeline that you're looking at in terms of asset class, geography, portfolios or individual deals?

The vast majority of that will continue to be acute care hospitals. Almost all of our pipeline that we're currently working on with the exception of some facilities that we're looking at with our existing customers are all acute care hospitals. From a geographic standpoint, right now with having roughly 75% of it here in the US, like we said on the last couple of calls, we do expect that the amount of properties that are in Europe will go up on a temporary basis, from maybe as much as 35%, but we will typically run in the 70% to 30% range.

Okay. Thanks. And just last question, I know it's still relatively early, but do you have any sense for how the turnarounds are going at the Electo hospitals so far?

Yes, they're all doing well. The one facility in Dallas, we had projected it to be Dallas, it's up in Sherman, north of there, we had projected that it would be slower than the others. And it is on that track, but all of them are right on schedule for what our original projections were.

Great. Thank you.

Thank you. The next question comes from the line of Tayo Okusanya of Jefferies.

George Hoglund on for Tayo. I was wondering also, if you can talk about potential returns or cap rates on the pipeline, I don't know if I caught this or missed this earlier, but would you expect this to be in line with recent transactions, or any recent trends in cap rates that you could comment on?

That's certainly a fair question with interest rates coming down, but everything that we're looking at right now, it's still in that range that we've said over the last few quarters.

Okay. Thanks. And anywhere in Europe sort of besides Germany that you guys are looking at?

They certainly are. As we have always said, we recently went to Europe, it's western Europe, obviously not countries that's we all would recognize as countries that we wouldn't be in, but for real general definition, it's western Europe.

Okay. All right. Thanks, guys.

Thank you. The next question comes from Chad Vanacore of Stifel.

Good morning.

Good morning.

So the Median deal, you had originally thought that you would close by mid first quarter. Is the whole transaction closed now, or are there still a couple of places left?

No, I think we originally said that we were hoping to close the initial phase of the transaction early to mid first quarter, and in fact, we closed that, that's what we closed back on I think it was December 15th. And so from that step, having closed that, then we go into executing sale lease back contracts with each of the 40 operators, 40 subsidiary operators for the facilities that we intend to buy and then lease back. That then triggers the pre-emption right period that the local municipalities have which in general we expect five to six weeks, but they can take longer. So having just given you that brief background, we still hope to close a substantial number of the sale lease back transactions in the first quarter, but it could bleed over into the second quarter. So again, right now, of the total 705 million Euro transaction, we've invested 425 million. There's another 280 million in incremental investment to complete the sale lease back. We're earning on that 425 million now, substantially all of it, and then as we layer on the remainder of the purchase price for each respective facility we'll begin earning on that. And again, just to summarize, we still think most of that gets closed in the first quarter, but at this point there will probably be some bleed over into the second quarter.

All right. That's great color. Thanks. And as far as you have got now a huge chunk of portfolio in Germany. Do you have any boots on the ground there, a team, an office, and then how is that, how should we think about that affecting G&A?

So some of this I addressed on the last call about where we think we ought to be with the G&A, and our investments in Germany, and all of Europe. We don't have any boots on the ground per se. What we do have is that we're using our Birmingham office and our New York office to handle all of that internally. We don't have to manage the properties on a day-to-day basis, so it's not like we need to be there on an everyday basis. We probably have more G&A expense now because of the way we're structuring it, but I think we're getting more benefit right now by having everybody in the same office and being able to communicate and collaborate better. There will come a time that we'll have boots on the ground in Europe, and when we do it will actually reduce our overall G&A.

Appreciate your time today. Thanks.

Thank you. The next question comes from Juan Sanabria of BoA.

Good morning, guys.

Thanks Juan, how you doing?

Good, thank you very much. Hope you guys are well. Wonder if you can get a little more color on the wellness centers, the rental contribution. I know you have some disclosure in the supp, but do you have any expectations we should have on that rent going away, or how we should be thinking about the sale process there?

Juan it's such a small investment you won't see it. Net book value there is $10 million, it has never been a large investment for us. You'll remember that this was a tag along on a portfolio of properties that's we bought. It has contributed very little to the additional rent. The total rent amount is about $1 million.

Okay. And then on the first choice, how are those developments progressing? What's left to be put on track with regards to the CapEx you committed to that agreement, or that venture?

Where we currently have 28 facility that's are open or under construction, we have of the total commitment that we've made, we have approximately, how much do we have left? We have about $70 million left to fund.

Okay. And any sense of how much got placed into service in the fourth quarter?

One property.

Okay. And just going back to the FX question, I think Karin had, I know you kind of said it was early days for your modeling of this, but any sense of what the cash impact to earnings would be for say a 10% swing in the Euro versus the US dollar, any sort of sensitivities you could share?

Well, we haven't modeled that, because again on a GAAP basis, I mean it's pretty easy. As you know what our GAAP earnings are, our GAAP rent is on the German portfolios, from that you would first of all subtract the Euro denominated interest we pay out of those earnings. And of course, that number is undetermined now because we haven't determined how we're going to finance those and what the costs will be. And then basically that net is subject to a GAAP adjustment from quarter-to-quarter, based directly on the exchange rate. So if the exchange rate moved against us by 10%, basically take that 10% move, and apply it to that quarter's income, that quarter's net income that I have just described. So again, for those reasons, we don't know what that would be. And then again that's the GAAP impact. The cash economic impact will be reduced even further substantially, frankly, because we'll keep in Europe the funds that we want to reinvest there. As Ed said, and we made clear, we'll continue to be active in Europe. We don't have any large transactions that are in the pipeline right now, but they will be funded to the extent we can from European cash flows. So those are some of the components that go into if you're trying to predict, they would be pretty big assumptions to make, but that's the process.

So Juan on an economic basis, where we are right now, if you get past the investment side of getting money over there, it's really a relatively small amount of dollar risk, Euro risk right now, because of what Steve just described, of the interest that we're paying and the reinvestments that's we're making in Europe. It's not an issue right now.

Okay. Thanks for the color.

The next question comes from Michael Carroll of RBC.

Can you describe how you would get to the bottom end and the top end of your FFO run rate? Is that mostly FX potential changes?

No, it's not. The FX is kind of built into that. It for the most part is the biggest component by far would be the difference in interest cost of really two components. One, number one, do we use secured or unsecured, okay? And Karin asked and we talked about the spread between those two. And then secondly, is on a long term basis, what our overall capital structure will look like, whether we're using more or less relative equity. And what we had said from the beginning, for many years frankly, and then reiterated as we did this Median transaction, was we will revert to our long-term goals of 40% to 45% total leverage, and 5 to 5.5 times debt to EBITDA. And so that again describes the great majority of the variance in the range of run rate.

Okay. Great. And could you remind us the status of the lease expirations in 2015?

Just a second, Mike.

In 2015, we only had the two properties that's we've been discussing since last year. The two South Carolina properties, which is a total of about $35 million.

Are you negotiating leases or are you planning on selling those assets? Is there any update on those?

The update was we're negotiating with someone right now, and we hope to have further information that we can provide later in this quarter.

And that would be as a new operator, not as a sale of the properties.

Okay. And then my last question is related, can you give us any updated color on the LTAC criteria and how it could impact the portfolio? My sense is that the good assets will win and the bad assets may see some pressure. How does your portfolio stack up against that, and particularly how are the Ernest assets?

The Ernest assets we think will do exceptionally well. We think that overall our portfolio will do well, we have constant conversations with our existing operators about their existing portfolio within our portfolio. All of them believe long-term this will be a good benefit for all of our facilities. And we think you're exactly right, the facilities that generate, that perform well with the better operators, that have the higher acuity patients will do very well under this scenario.

Okay. Great. Thanks.

The next question comes from Karin Ford of KeyBanc Capital Market.

Just wanted to follow-up on that last question from Mike. So Steve are you saying that the bottom end of the guidance would potentially contemplate additional equity, since it looks like you guys are at the top end of your range pro forma following the equity deal?

On a long term basis, that would be part of it. Most of it though, would be on the bottom end, if we would go with the higher cost debt, which at this time still would at least marginally look like to be unsecured.

Okay. And then just last question, can you just give us some help on what a good run rate might be for G&A? Is it the 11.4 you did in the fourth quarter, or something lower than that?

That's a very good question, Karin. In the fourth quarter there were a couple of, I'm not going to call them one-time, but they are periodic increases. Most of the difference between, say, the fourth quarter and the third quarter is in recruiting and compensation. And the other is made up primarily of some of the international costs, especially the early international costs that are related to the Median transaction. On recruiting and compensation, it is about $1.6 million difference between the third and fourth quarters, and that's primarily related to share grants, and sign on payments, relocation benefits, and placement fees, for two new higher level acquisitions people that are now going to be reporting to Frank in New York. And then to a lesser extent to the true-up of our performance measures that our long-term share grants are based on. It doesn't result in any additional compensation, or any additional share grants, it just accelerates the vesting time, because we exceeded those performance levels. So that's just by way of explanation of the higher G&A in the fourth quarter. Going forward, we think it's a pretty good quarterly run rate if you were to assume in the $10.5 million quarterly range.

Thank you very much.

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

Cathy thank you very much. And as always we appreciate your interest in MPT, and listening in on the call. If you have any further questions don't hesitate to call myself, Steve, Charles Lambert, or Tim Berryman. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.