Medical Properties Trust Inc (MPW) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2015 Medical Properties Trust Earnings Conference Call. My name is Lisa and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Charles Lambert, Managing Director. Please proceed.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our first quarter 2015 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 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 and/or underlying such forward-looking statements. We refer you to the Company's reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the Company's actual results or future events to differ materially from those expressed in this call.

The information being provided today is as of this date only, and except as required by federal securities laws, the Company does not undertake a duty to update any such information. 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, Edward Aldag.

Thank you, Charles, and good morning, everyone. 2014 was one of the best years for MPT and 2015 is shaping up to be another strong year. Year-to-date, we've closed on approximately $165 million in new properties and today, we announced an increase of $250 million to Adeptus also known as First Choice for additional free standing emergency rooms and general acute care hospitals. This brings our year-to-date acquisition total to about [$415 million], which is ahead of pace for the $600 million to $800 million acquisition target we discussed last quarter.

For the first quarter, our normalized FFO per share was up 8% when compared to the first quarter of 2014. This increase is before we fully realized the benefits of our MEDIAN investment, which should occur by the third quarter. Also if you ignore the FX swings, it is an additional 11.5% increase. And as Steve will remind you, the FX swing currently has no affect on our plans as we intend to reinvest our euros in Europe. Part to the acquisitions last quarter were two acute care hospitals leased to Prime Healthcare. These hospitals were Carondelet Health System, which was part of the Ascension Health; St. Joseph Medical Centers located in Kansas City, Missouri and it has 310 beds; the other St. Mary's Medical Center, a 146-bed hospital located in Blue Springs, about 20 miles east of Kansas City. These hospitals complement Prime's existing facilities to the West and Northeast, creating a well disbursed health system in the Kansas City market. Ascension had previously agreed to sell these facilities HCA. However, that transaction was canceled due to a prolonged review by the FTC.

Another facility which is part of last quarter's acquisitions is in [existing facility acquired] by Ernest Health. This is the second existing facility acquired Ernest. The integration is going well and the average daily census is right on track. We also agreed to increase our funding to Adeptus also known as First Choice ERs. We have increased our [development land then] by $250 million. This amount will bring our total investment in their properties to $500 million. To date, we have 22 freestanding ERs up and operating with 10 freestanding ERs and two acute care hospitals still under construction with them.

We are currently in negotiations for approximately $2 billion of additional property in the US and Western Europe. This amount is fairly evenly divided between the two locations. While we do not expect that 100% of the $2 billion will close, I wanted to give you an idea of the depth of our acquisition pipeline.

So let me now turn to our existing portfolio. There is no new update on our two Arizona properties, other than to say things continue to progress well and the rent is being paid. [IRFs] increased their EBITDAR coverage by 48% to almost 2 times. Gilbert EBITDAR coverage is well over 3 times. McLeod Health has entered into an LOI to lease our two South Carolina facilities and we hope to have this transaction completed by early summer.

The lease coverage for our existing portfolio showed improvement in all three categories for properties in our portfolio for over a year. The general acute care hospitals increased coverage from 4.28 times to 4.34 times, fourth quarter to first quarter. The LTACs increased coverage to 1.91 times from 1.8 times quarter-over-quarter. And the IRFs increased coverage to a little over 2 times from 1.9 times quarter-over-quarter. Only eight of our 25 tenants showed any decrease in EBITDAR coverage and the largest decrease was only 16 basis points.

You may have seen that IASIS filed an 8-K in April announcing a restatement of its financial statements. It is important to note that the error occurred in their managed care division had no impact on their hospitals. Our IASIS hospitals continue to perform above our expectations.

Brown's corporate credit rating was recently upgraded by S&P from B to B+. As I stated before, admissions is only one of many parameters for judging the future operations of hospitals. All three of our major categories saw significant increases. General acute care hospitals increased 5.7%, IRFs increased 9.2% and LTACs 2.4%. All of these figures are year-over-year. MEDIAN RHM is MPT's largest operator representing approximately 22%, Prime is at 19%, Ernest and Adeptus are both at 11%. MPT is right on track. We're delighted with the strength and performance of our existing portfolio and we continue to be enthusiastic about our acquisition pipelines.

Now I'll turn the call over to Steve Hamner, our CFO.

Thank you, ED. This morning, we reported normalized FFO per share for the first quarter of $0.28, an approximate 8% year-over-year increase compared to 2014. Included in this amount is the negative impact of $0.01 per share related to the strengthening of the dollar against the euro and to a much lesser extent, the pound sterling. Absent this accounting adjustment, our normalized FFO would have been $0.29 per share, which is 11.5% increase over last year's first quarter.

Let me give you a brief explanation of why there is no impact on cash of this accounting adjustment. Unless we need or expect to convert our euro or pound denominated income to dollars, we do not realize the depreciation of the local currency value compared to the dollar. We retained the full value of the local currency and we used this cash to pay our euro or pound denominated interest expense, the local G&A and importantly, to make additional investments in Continental Europe and the UK. There is no reason for us to bring home dollars because first, we have plenty of use for euros and pounds in executing our international growth strategy and second, our dollar denominated domestic cash flow is sufficient to pay our dividends. So as long as we do not convert our euro earnings and we productively reinvest them, we believe investors are not impacted by the translation accounting.

For reporting purposes, the only meaningful adjustment we make to FFO to arrive at our normalized and AFFO is for approximately $6.2 million in acquisition costs, of which $4.3 million in the quarter is associated with MEDIAN and RHM.

Let me give you an update on the MEDIAN transaction. Most of you will remember that MEDIAN was acquired in December around which time we invested about EUR425 million and began earning our lease rate on that investment. We recently disclosed that we've now executed the majority of the sale and leaseback agreements that will lead to our acquisition of 100% of the real estate assets for the hospitals that make up the previously disclosed total EUR705 million commitment and we expect to be materially fully invested and earning our lease return before the end of the second quarter.

Getting to this final stage has taken a few more weeks than we initially predicted. The added time resulted from careful legal structuring and completion of the final purchase price allocation. In this process, we recognized that a few properties had significantly more value than we had initially estimated while five others did not meet our underwriting standards and we elected not to acquire them, primarily due to structuring, legal and tax issues. The initial purchase price allocation to these five properties was only EUR17.3 million, which we allocated to the more valuable properties.

With the completion of the MEDIAN transactions, we will have created an asset for our shareholders it is already generating in excess of 8% initial cash return with annual inflation escalations for decades into the future. As Ed just mentioned, we see substantial similar opportunities both in the US and in Western Europe as the market for hospital real estate in both areas of the world continues to expand. At the same time that we continue to make significant acquisitions of high yielding hospital real estate, the capital markets remain extremely attractive. At the time that we agreed to acquire the MEDIAN assets, we retained the option to assume approximately EUR280 million of existing mortgage debt on attractive terms.

Since then, we have issued almost $500 million in common stock, earned an investment-grade rating and seen global interest rates continue to compress especially in the Eurozone. Accordingly, we have elected not to assume the MEDIAN debt but we'll finance our remaining commitment with cash, revolver borrowings and outside capital that may include long-term unsecured bond debt. We have the capacity to complete the MEDIAN investments through our revolver and we'll be opportunistic as to when we may access the capital markets to fund this investment on a longer term basis. As of March 31, we had drawn approximately $300 million under our revolving credit facility, leaving availability of about $725 million. The average interest rate on our outstanding balances approximate to 1.54%.

At 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 $1.21 and $1.27. Due primarily to the recent acquisitions that Ed described earlier, we have modestly adjusted our estimated range to $1.22 to $1.28. As always, this estimate does not contemplate unannounced acquisitions or capital market transactions other than for MEDIAN. As we expect all of our anticipated 2015 acquisitions, those that we have already announced are highly and immediately accretive and we, therefore, expect our results will continue to improve at attractive rates of increase.

With that, I'll be happy to turn the call back over to the operator for any questions.

(Operator Instructions) Michael Carroll, RBC Capital Markets.

Steve, can you give us an update on the MEDIAN transaction. I'm not sure if you mentioned this, but why did you decide not to pursue five of these assets?

Primarily because, Michael, there was minority interest. There were some tax structuring inefficiencies and these were the smallest of the assets and actually to acquire them, we would have brought down our overall master lease coverage.

So there is no change I guess to your overall coverage ratios, because the taxes that you would have to incur to actually acquire those assets?

No, we would not have incurred the taxes, but it would have impacted the ability of the seller to sell them efficiently and then primarily because of that difficulty and the fact that it was at best neutral and more likely it was positive not to acquire these properties, we elected to reallocate the purchase cost as the agreement provided that we could do and can take just the properties that we absolutely wanted.

And then can you give us an update on the timing you expect to issue that long term euro-denominated bond and what's the benefit that you see from actually waiting and not doing that sooner than, I guess, that you have?

Well, the only thing I can say, I guess is, we're going to be opportunistic and that means watching the markets and timing to the extent that is prudent, the issuance of the debt with the actual closing and funding of the fund requirements. And although we don't try to time markets for interest rate by any means, the fact that we have not done it so far has only benefited us as we've seen the rates on euro debt continue to decline and I'll just add, finally, there is no firm commitment to issue debt until we actually announce that.

And then can you give us a timing on when you expect to deploy the $250 million of investment commitments to Adeptus?

Mike, that will be over the next 12 months. It will probably not take that long, but that's our timing.

Keep in mind on that tranche as Adeptus has continued to evolve its strategy. At least a couple of the hospitals that will be developed with those funds are actually general acute care hospitals that have a significantly higher purchase cost than the smaller free-standing ERs.

Chad Vanacore, Stifel.

Could you give us an idea of how large a tenant you think Adeptus can get to eventually and any color around your additional commitment to them?

The only commitment we have right now is the additional $250 million, which brings us up to approximately $500 million total. I think that Adeptus, if you followed them all, they've done an outstanding job. Their actual performance has been above everybody's expectations. It's a very large country. There are lot of places where they continue to do -- really continue to add additional hub-and-spoke ERs and acute care hospitals. We certainly continue to want to do business with them but beyond the additional $250 million, we don't have any plans at this point.

And then originally you had anticipated $600 million to $800 million investments in 2015. You're sitting at around $400 million right now. Anyway we should be thinking about maybe something higher than that?

If you'd take the comments that I made about what we have in active negotiations, we actively have $2 billion of property in both -- combined in Europe and the US that we're working on right now. It is certainly possible that entire $2 billion could close, highly unlikely that they will have the 100% success rate on all of that. Because they're big ticket times, the $600 million to $800 million target range is certainly still the minimal number. But given that that pipeline, it could be significantly higher than that. But again, given that they're large ticket items, it's hard to put to an exact number other than that range right now and I know it's a very wide range.

Did you mention on the MEDIAN transaction, we shouldn't expect a change from the 1.7 times coverage?

That is correct.

Jordan Sadler, KeyBanc Capital Markets.

I wanted to just see if you could kind of comment on the recent acquisition of Ardent by a competitor getting into the space, not necessarily specifically surrounding that transaction but I'm curious as to how that, number one, impacts the lay of the land as it relates to competition for acute care hospitals with a large competitor getting into the business, and how that obviously affects valuations? And separately, maybe talk a little bit about coverage and I know it's significantly lower level relative to what we see in your legacy portfolio and maybe just how you think about the existing coverage in your legacy portfolio versus what may be perceived as market?

Jordan, this is not the first by a competitor to come into the acute care hospital market. We've had good competition from our peers for the last two plus years. As we have said a lot longer than that, we very much welcome the competition because it's a very large market out there and we believe there is room for a lot others out there.

We believe that the positive benefit of Ventas making the Ardent transaction far outweighs any competitive nature in it. It validates our model. If you look at the model that they chose, it is very similar to the models that you've seen us do in the past. The fact that they're in the acute care hospital sector with an operator that we think is a fine operator, we think further validates our model and we think that the further education of the investor world having other competitors or peers in the acute care hospital sector will only help to increase our value -- the value of our portfolio by making the hospital market more of a commodity much like much of the other healthcare real estate portion.

As far as the coverages, as you know they and many of our other peers report coverage on an EBITDAR basis. We've always reported our coverages on an EBITDAR basis. We continue to underwrite our hospital -- general acute care hospitals at a stabilized EBITDAR lease coverage ratio of roughly 3 times with our post-acute sector being in the 1.7 to 2 times coverage. That's a little bit stronger than what you see right now on the -- what was announced on the Ardent transaction. I'm certainly [not preview to] all of the details of their particular structure, but I think that that's a fine portfolio that will board very well for MPT in the long run.

And then as it relates to the pipeline of $2 billion, can you give us a split Europe versus US?

Yes, fairly evenly divided between the two equally, roughly $1 billion each and it is primarily almost predominantly all general acute care hospitals.

The five assets that you are not acquiring -- you've decided not to acquire that have EUR17.3 million valuation should be allocated to other properties. What does that mean exactly?

We underwrote the entire EUR705 million investment based on master lease level that's corporate level EBITDA and the resulting coverage. So again there were 40 properties.

So as is not uncommon in a multi-asset acquisition transaction like this, the final allocation of the agreed purchase price is made sometime after the agreements are executed and that's exactly what we did here. We had agreed to make the investment based on at least a minimum level of EBITDA and by removing these properties, which firstly we [didn't necessarily] think added incrementally to the value of the portfolio and secondly, we're bringing some inefficiencies to the closing process, we felt very confident that the additional value -- significant additional value over and above what we underwrote for the remainder of the portfolio more than made up for the very limited if any contribution of the EBITDA to the portfolio.

So, Jordan, I think that it was Chad a minute ago that asked if our coverages were going to stay in the 1.7 range for the MEDIAN portfolio. Excluding these five properties that actually has increased slightly.

Juan Sanabria, Bank of America.

I was just hoping you could help walk us through the accounting for MEDIAN. I know you've closed a piece in [December, EUR425 million], I think you said at the lease rate. So what were your accounting for that's incorporated in the first quarter results and what would be additive to that on a go-forward basis once the rest of the transaction closes?

The investment we made around the closing of EUR425 million was in the form of a loan that will convert to ownership of the real estate when those transactions finally close. So, since then, we've been earning the lease rate something above 8% on a cash basis in the first quarter. And as we then begin to fund the closing of the real estate transactions that's an additional EUR280 million plus or minus some adjustments and expenses. And as those come online, we will just like any acquisition begin earning again at the lease rate from the time of that funding.

And then just on the new acute care hospitals acquired in the first quarter, just a quick question on the disclosure. The press release says $150 million a couple times, but if I look at the supplemental, Page 12 has different figures. It looks like the acute care hospitals would be $110 million. So, I was just curious as to why the difference, if it was just a typo?

It is simply a typo. The supplemental should show a total of $150 million.

And then on the Community Health, you mentioned that you've got a new tenant maybe in process. So, relative to the first quarter run rate, what should we expect from lost revenue, I guess until that new tenant comes in?

Until we close, Juan, we're not going to announce the details of it, other than to say that all of the proposed transaction is included in guidance.

Should we expect any sort of rent tick down or I guess when -- is there any downtime in between one (multiple speakers)

No. In fact, there is what we think will be an interim tenant in there now. So, the door is never closed, the hospital never stopped operating. We replaced Community with, again what we think will be an interim tenant. But if we're unable to reach final agreement with McLeod, the party we're negotiating with now then the hospital remains open and operating under this interim tenant.

And you received the same rent that you were booking before in the interim?

Yes. We would not expect the interim rent to certainly change significantly, if and when we finalize negotiations with McLeod.

And then, I was just hoping you could speak to, I guess, what you guys expect from a regulatory perspective on some of your non-acute care hospitals, IRFs and the LTACs to happen with the change in regulation that's been announced now for a while now. But any comfort that you have on the seemingly leveling of playing field between those types of assets and skilled nursing and sort of the Affordable Care Act pushed towards site neutral payments and how those assets may fare and how you feel comfortable with the coverage you have currently?

One, the short answer is that we believe long term it will have a neutral effect on the operations of our facilities. Obviously, we've all had time to be studying this for a long time and we've worked very hard with our operators to try to figure out where each one of our facilities are and where we think each one of them will make adjustments. There's a long list of different things I'll be glad to go over with you offline, of the different adjustments that hospital operators can make -- these LTAC operators can make They obviously include things such as payer mix, staffing ratios, those types of things. But to give you the short answer, worst case scenario -- now remember we think that it's neutral, but worst case scenario, we think it's maybe a 10 basis point drop in our coverage.

And just, I wish I guess I'll throw out there. It would be helpful if you guys put in your supplemental the coverage ratios and it seems (multiple speakers) at the time, so it would be helpful to have it in writing?

Yes, we are working on that. The reason that it's not in there now as we're trying to get it all on the same quarter basis. It is our anticipation that it'll be in there next quarter.

There are no additional questions. At this time, I would like to turn the presentation back over to Mr. Ed Aldag for closing remarks.

Lisa, thank you very much, and thank all of you again for calling in and participating. As always, if you have any questions, please don't hesitate to call myself, Steve Hamner, Charles Lambert or Tim Berryman. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.