Medical Properties Trust Inc (MPW) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Medical Properties Trust fourth quarter and year end 2015 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Charles Lambert, Managing Director. Sir, you may begin.

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

The information being provided today is as of this date only and except as required by the Federal Securities Laws the Company does not undertake a duty to update any such information. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations.

I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Thank you, Charles, and thank all of you for listening in on our fourth-quarter 2015 earnings call and for your interest in Medical Properties Trust. Success is defined by Webster's Dictionary as having a favorable or desired outcome. 2015 for Medical Properties Trust would have to be described as a tremendous operational success. Our total revenue increased from $312 million to almost $442 million, an increase of $130 million or 42%. But revenue for growth's sake is not enough, net income increased by 180% to approximately $140 million up from $50 million. Normalized FFO per share increased by almost 25% which allowed us to increase our dividend and still reduce our payout ratio.

For the fourth quarter that just ended, our payout ratio was 63%. On a same-store basis, Q3 2014 trailing 12 month total portfolio EBITDAR coverage was 3.66 times. Q3 2015 trailing 12 month total portfolio EBITDAR coverage grew to 3.75 times. Acute care hospitals were flat at 4.5 times. Our rehab hospitals grew a dramatic 49 basis points from 2.41 times to 2.9 times and our LTACs grew at an impressive 13 basis points from 1.79 times to 1.92 times. I noticed this morning in one of the early reports there is some confusion over our methodology of reporting coverages. Just to remind you, we report same-store on facilities that have been in our portfolio for 24 months. So each quarter the same-store coverages will be updated buckets.

Last quarter we reported acute care hospitals at 4.7 times showing the exact same bucket of acute care hospitals this quarter, we would have also reported a 4.7 times, again flat as we previously said. Because this quarter we had the additional hospitals that have now been in our portfolio for 24 months, the coverage for last quarter was reported at 4.5 times compared to this quarter of 4.5 times, still flat. There has been no operational deterioration in our acute care hospital portfolio. Our hospitals have maintained a very strong coverage quarter over quarter and year over year.

In addition, on a same-store basis, admissions for our general acute care hospitals increased 1.6% year-over-year for the three-month period ending in September. Our rehab hospital admissions increased 5.2% and the LTACs decreased 4.1%. Just like our portfolio, HCA's most quarterly report on its financial performance further demonstrates the hospital sector of the nation's healthcare industry produces financial returns that are growing and sustainable into the foreseeable future.

On a fully funded basis, at 12/31/2014, our largest property represented 2.6% of our total portfolio. Today our largest property represents 1.9% of our total portfolio. At 12/31/2014 our largest tenant represented 19% of our overall portfolio. Today, our largest tenant only represents a little more than 17%.

In the US general acute care hospitals represent 67.5% of our total portfolio. Rehab hospitals 11.1%, LTACs 9.6% and freestanding emergency rooms 7.7%. 80% of our portfolio is within the United States with 17% in Germany and the remaining in Italy, the UK and Spain. Our portfolio is certainly one of the strongest portfolios in the REIT world. Our coverages are at the top of the industry and our properties have a long history of exceeding expectations. We have no near-term significant debt maturities other than the $125 million due later this year. Our fixed charge coverage of 3.5 times is in line with many of our peers and other investment-grade companies.

We currently have approximately $1.1 billion drawn on our revolver which comes due in late 2018. We have always been long-term managers and will continue to be so. As we had planned since late last summer, we will permanently finance a large portion of the borrowings under the revolver and divest some properties and use the proceeds to pay down or off the revolver. Permanent financing may include a $500 million bond issue. Since we announced last fall our desire to use some very selective property sales for this purpose, we have had over $900 million of unsolicited offers for properties in all of our property sectors.

Over the last few months we have hired advisers to work with us to ensure that we maximize the value of any sales. Clearly we do not intend to sell $1 billion of properties but we feel it is important for the market to understand what kind of interest we have had. We expect the revolver to be paid down with permanent financing and property sales during the first half of 2016. Even with the permanent financing and the selective property sales, we expect FFO per share for 2016 to grow from its 2015 level. Steve will go over this in more detail with you in just a few moments.

Again, we want to emphasize the strength of our overall portfolio and the strong position this company is in with regard to its balance sheet. We continue to have tremendous opportunities. We continue to see our existing customers flourish. MPT's portfolio has proven itself since our IPO in 2005 and it continues to outperform the market. We are well positioned for the future and we look forward to the next 10 years. Steve.

Thank you Ed. This morning we reported normalized FFO for the fourth quarter of $0.35 per diluted share, a 25% year-over-year increase. Our year-to-date results of $1.26 per share represent a 19% increase over full-year 2014 results.

We will discuss our future expectations momentarily, but I do want to highlight that our per share FFO growth is expected to continue into 2016 and beyond. Even if we assume only very limited investment in 2016, along with asset sales, we believe calendar year 2016 normalized FFO will increase a further 4% to 5%. I'm not going to read what you have already seen in the earnings release from this morning so let me point out a couple of items that will help you better understand our reported results.

Number one. The only difference between so called white paper FFO and our normalized FFO is the $4.3 million in acquisition cost. The great majority of which is related to transfer taxes and other costs paid as we have closed the sale lease back transactions of the Median acquisition. Included in both measures of FFO is share-based compensation, which has averaged about $0.05 per share annually.

When share awards are granted, even 100% performance-based multi year awards, Generally Accepted Accounting Principles requires us to expense the value of those rewards as expense. Even if the performance hurdles are not achieved and no shares ultimately are awarded, companies are prohibited from reversing that expense in subsequent years. For 2015 because total shareholder return was negative, MPT management permanently forfeited 100% of the value of the three-year award that was granted in 2013. This resulted in a reduction in compensation of more than $6 million that had been recognized over the three years ended December 2015.

Aside from wanting to demonstrate the rigorous and direct pay for performance philosophy behind our compensation plans, it is also important to point out that the GAAP reporting for compensation does not mean that management continues to be rewarded for under performance. It is just the opposite in fact, as it should be and as it is. However, even given the full GAAP amount of share-based compensation, our G&A continues to decline as a percentage of assets and revenue, demonstrated how we have scaled the business with limited incremental overhead. As we continue to grow over the long-term, we will continue to benefit from the scalability.

Since the end of the third quarter, after completing the Capella transactions, we have made limited investments. In the aggregate totaling about $150 million. These investments included a previously announced $35 million hospital for Capella, the $96 million funding of the Italian joint venture with AXA and a $20 million rehabilitation hospital for Median. As of the end of the year, we had limited firm commitments totaling $65 million to complete the development of Adeptus facilities, which will be expended over the next three quarters and approximately $45 million for acquisitions for other tenants which are not certain to occur. Our supplemental package which was posted to our website this morning provides further details on our current portfolio metrics. We will be happy to take questions about the portfolio in just a few minutes.

Our outstanding debt as of December 31 is also scheduled in the supplemental package. As of today our borrowings under the revolving credit facility remain at $1.1 billion. Our near-term plan is to reduce this balance by up to about $500 million with proceeds from long-term permanent financing. And we are monitoring conditions in the credit markets on a daily basis and intend to be in a position to launch such an offering when market conditions are favorable.

As Ed mentioned earlier, we are also have a $900 million plus pool of assets that has already attracted interest from prospective purchasers. The proceeds of any of these sales would also be available to reduce the revolver balance. During the first half of this year we expect to substantially reduce the revolver borrowings with proceeds from permanent financing and with the luxury of having time to maximize sale proceeds, along with limited and selective new investment, we believe we will be able to make substantial further reductions in the revolver balance during 2016.

A very important additional benefit to this will be the improvement of our leverage metrics. Based solely on our targeted property sales, we expect that as of completion of the sales, our net debt will not exceed six times our resulting annual EBITDA with room for further reduction through additional sales or market improvements. We have always managed our investments, our capital and our overall balance sheet for the long-term.

When market conditions, as they inevitably will, become disconnected from underlying fundamentals, we have designed our capital and operating structures to provide us plenty of time to wisely execute long-term strategies that are not destructive to long-term shareholder value. So in today's disconnected global conditions, we have only $125 million of debt maturing in late 2016. Aside from the 2018 maturity of the revolver, we have no major maturities until 2019 and they are very well laddered thereafter.

Our binding investment commitments are limited. We have no capital expenditure obligations for our properties as our tenants are fully responsible for all maintenance, repairs, refurbishments and improvements. Between now and 2022 our average lease maturity as a percentage of rent is less than 1% annually. Our normalized FFO dividend payout ratio is less than 65% and expected to continue to improve based on the built-in annual escalators in our leases. This reflects substantial FFO in excess of dividend requirements which is also available for debt service and repayment. And as we have discussed, we have outstanding assets that sophisticated, well-capitalized, long-term investors are attracted to. All of these conditions which we have consciously designed into our business model in good years and bad, give us the ability to carefully consider and execute the best long-term capital and investment strategies for our shareholders. It is a very good position to be in.

This morning we are implementing a new guidance methodology. We will no longer estimate our operating results based on an annualization of our in place assets and capital structure. Instead, we will estimate a range of normalized FFO per share for the current calendar year based on our present intentions concerning the portfolio and capital and other transactions. For calendar year 2016, we estimate that normalized FFO per share will range between $1.29 and $1.33. In perspective, last quarter we estimated our run rate annualized results to range between $1.28 and $1.32.

The major assumptions underlying our calendar 2016 estimate are as follows: We expect to complete permanent financing for about $500 million and our present estimate is that that will be done during the first quarter. We have limited commitments as we have already discussed to make new investments in hospital real estate. And as Ed and I both have described already, through the remainder of 2016, we expect to sell assets and use the sale proceeds to reduce our revolver balance. We estimate that our results will be on the lower end of the range if we raise permanent debt financing and/or sell assets sooner than our present expectations and of course the opposite is also true. There are other factors that will affect our actual results including interest rates and other capital market conditions, pricing and amount of potential asset sales, tenant operations and other unforeseen conditions.

And with that we will be happy to take questions and I turn the call back to the operator.

(Operator Instructions)

Jordan Sadler with Keybanc Capital Market.

Thank you. Good morning.

Could you give us a sense of the asset sales? I realize there has been some unsolicited interest, and I am curious there relative to the package that you have actually put together to market for sale. Are those two separate tracks or potential areas for sales? Or how would you sort of characterize your efforts to actually sell assets versus this unsolicited interest?

Jordan, it's pretty much all been going on simultaneously. Most of it has been unsolicited offers as opposed to us getting out and marketing specific packages. It is properties within all of our property types, and it is pretty significant gains on most of those -- potential gains on most of those properties.

Obviously it's just like acquisitions, you don't know exactly when all of them will happen. And as I previously said, we don't -- we certainly don't want all of them to happen and so it's hard to give you an exact -- which properties it will actually end up being at this point.

Okay. And can you discuss the nature of the potential investors?

You mean by who are they?

Yes. The folks who have solicited you directly. It says in the press release, real estate and healthcare investors. I'm just curious, is it pension funds? Is it private equity? All of the above? (multiple speakers) or domestic.

It is all of the above, mostly domestic, not that many pension funds, mostly opportunistic private equity funds and real estate funds.

Okay. And then, as it relates to pricing, is it too soon to tell there and/or maybe give us a sense of what is being modeled within the guidance. Because obviously the range is reasonably narrow at this point with the initial guidance that has been put out, so I'm just curious what we kind of layered in there?

Yes. As I said earlier, most of the potential sales are with fairly significant gains. There are some rather new acquisitions that have smaller gains built in. But the number is pretty easy to figure out the arithmetic in our model. We have got roughly $1.1 billion on our revolver. We think we will do roughly $500 million in permanent financing, which leaves somewhere between $500 million and $600 million remaining on property sales, if we were to pay it all off.

Right. And so it's all basically within the model, here assume, a midyear-ish convention in terms of timing?

Yes.

Between the asset sales and the bond issuance?

Well, except that as Steve pointed out we expect the permanent financing to be sometime in the first quarter.

Okay. Thank you.

Tayo Okusanyo, Jefferies LLC

Yes. Good morning everyone. Could you just give us a sense in general what you are expecting from a reimbursement perspective, specifically for long-term acute care hospitals in 2016?

We expect overall, Tayo, that the revenue for our LTACH operators will decline slightly. We don't expect significant decreases. As you saw, we actually had pretty good increases in the last quarter. We do expect that there will be some decline in 2016, but we expect that most of our operators will actually end up doing better than they did in 2015.

Is the decline volume driven? Is it mix driven?

It is mostly mix driven. It is mostly as they all adjust. We expect that 2017 will be back on the incline again. That mostly this is an adjustment year.

Okay. That is helpful. And then just a quick sense in regards to some of your larger investments, if you could just give us a general sense of how things are going -- I know Adeptus is doing well. But a sense of some of the German investments, Ernest, and also Capella?

Tayo, truly our portfolio is performing better today than it ever has. All of our operators are performing exceptionally well. The bigger acute care hospitals here in the US have been essentially flat, which is good considering they are extremely strong coverages. Our German operator actually has increased and they continue to perform very well. They continue to see opportunities in the German market and overall all of the portfolio, even the LTACHs for the last quarter performed very well for us.

Okay. One last one for me. The bond offering that you are expecting to do this year, do you expect that to be more US based or are you going to do something euro denominated or a mix of both?

No. We expect that to be entirely US based.

Okay. Great. Thank you very much.

Juan Sanabria, Bank of America Merrill Lynch.

Thanks. Just sticking with Tayo's last question on the bond offering, what kind of duration are you looking for, and do you have any range of potential costs that you are looking at in your model?

Juan, we want to go as long as we can. I certainly think it will be at least eight years. We would like to see 10 years. I doubt it will be much longer than that. But we certainly want to go as long as we possibly can.

Pricing, Juan, and again as we mentioned we are in daily contact with the bankers and the other advisors. It is volatile as everybody on this call knows. But we would expect around a low six handle rate, again depending -- literally sometimes it depends on the time of day. But that is our expectation.

Okay. That is unsecured?

Yes.

Correct.

Okay. And then on the asset sales, can you give us a sense of the range of cap rates, or like a weighted number, rated average type cap rate that your modeling to come up with guidance?

Are you talking about what we would be selling the properties for?

Correct.

Let me give to you in a slightly different way, because it's a mix of properties. But I think to -- I think that where we are today based on the longer tenured properties that we have got in our portfolio that we have had interest in, that we could have as much as a 20%, 25%, 30% gain.

Let me just point out because it goes back to an earlier question, with respect to guidance, and what we're guiding is normalized FFO per share, and there will be very little impact on that particular metric whether we sell at a 7.5%, or eight 8.5% cap rate. Clearly the proceeds would increase or decrease, which would have an impact on the amount of debt outstanding. But as a $6 billion company with the volume of sales that we expect, whether the cap rate is 100 points more or less than somebody's midpoint is going to have very little impact on the $1.29 to $1.33 calendar year guidance.

Okay. And then for G&A, just curious if you can give us some color on what you are expecting. Any plans to open up a European office, or how should we think about management costs?

Yes. I think they would stay line with where they are. We don't have any expectations at this point for opening up a European office. As I have said previously to that question, I think that actually would probably slightly decrease our overall costs. You wouldn't see it because it wouldn't be that much.

I think the synergies that we get right now from having everybody walk the halls together is much more valuable to us than the small savings that we would have by having the office directly in Europe. It's easy to get to Europe from this side of the United States, so we're very comfortable with where we are, and we don't see any significant increases in personnel at this point.

Thanks.

Michael Carroll, RBC Capital Markets.

Thanks. With regard to the asset sales, can you give us an idea of timing. Should we think about a midyear convention, or are you close to completing any of these transactions in the first quarter.

Mike, I think that the answer is to think about it in a midyear convention. That is certainly the way we have modeled it. It obviously is not all going to happen on the same day. But we expect between now and the middle of the year that most of that will be taken care of.

Okay and then are you focused on the real estate sales, or are you willing to sell some of your investments in the operator loans or the investments in Ernest and Capella.

It is everything. It is all buckets of our portfolio.

Okay. And then Ed are you willing to sell more than $500 million that was highlighted in the press release? Or do you just want to do $500 million right now and then look at it again maybe next year?

Mike, we are certainly opportunistic, but our plan right now is that that $500 million is the right range.

Okay. And Steve, with those $500 million of sales, where do you expect your leverage metrics to trend towards? Are you still going to be well above your long-term targets, and are you okay with that?

No, Mike, if we did only the $500 million in property sales, then we would be slightly below or right at six times EBITDA. Our long-term historical average has been closer to the 5.5 times. Again, taking a long-term view, that's where we want to get back to. We think that's generally the right place to operate the Company. At least under the current market conditions and regulatory and operational issues as we evaluate our risks in our assets. So, we do expect to see that continue to trend down even after the initial priming of the pumps so to speak by selling assets and getting us into that 6.0 times, which by the way puts us very -- right in the middle of where the peer group would be. Notwithstanding, again, our view is to carefully continue to manage it down.

And Mike obviously as we pointed out earlier, that's with very strong coverages.

Okay. And then, how are you looking at the investments markets right now with the volatility in the capital markets in your current leverage position? Are you willing to do relationship deals right now or are you looking at other things? I mean how should we think about that?

If I understand your question are you talking about our potential acquisitions out there?

Exactly.

Right now we are only focused on our existing customers and we're being very selective. We certainly don't want to be in a position where our leverage is increasing. We don't want to be in a position where our leverage is staying the same. As we have pointed out on this call, it is our intent to decrease it, at the same time taking care of our customers as best we can.

Okay. Great. Thank you.

Phil DeFelice, Wells Fargo.

Thank you. Good morning.

Last year's dividend ratings came slightly after the Q4 results were reported. Given where your current yield is and the conservative payout ratio, we were wondering what your target payout ratio is on an FFO and FAP basis, and on how your thinking about the dividend in light of your capital position currently in these expected asset sales?

Phil, it is certainly something that the board discusses at every single meeting. As I pointed out earlier our payout ratio in the fourth quarter was 63%. That's obviously below our historical target. But these are very interesting times.

We certainly see what the stock market has done today as an overall whole, and what it has done since the beginning of the year as an overall. I certainly don't think that the board would think that a raise in a dividend rate today would be beneficial to anyone. I think that where our coverages are today, where our dividend is today is something that you ought to look forward to in the near future.

Sure. That all makes sense. Thank you very much.

Eric Fleming, SunTrust.

Hey, guys. Just a quick question on the divestitures that you're talking about, that $500 million; that's the expected price? So the book value would be 25% below that, or some number below that?

Some number below that, yes.

Okay. Just wanted to sure I had those numbers right. Thanks

Michael Mueller, JPMorgan.

Great. Thanks. Just want to revisit a couple things to make sure I have it down the right way. On the debt side you talked about a rate being in the low 6%s. Is the timing there midyear, as well, or is the timing in the first quarter?

No. We expect that any bond issue that we would do would be the first quarter.

Okay. And dispositions, I know you said model midyear, but you think they are going close before that. So --

Obviously they won't all -- Mike obviously the won't all happen at the same time. I think that it's spread out between the first quarter and midyear would be the right modeling.

Got it. But your guidance assumes midyear.

Correct.

Okay. Got it. And then Steve, not to completely try to back you into a corner here, but when you throw out 7.5% to 8.5% for Cap rate range, is that a reasonable assumption that you folks could throw into models for dispositions?

Yes. I used those numbers consciously.

Got it. Just two more. In terms of capital commitment, you talked about -- when you talked about just remaining capital commitments that's imbedded in guidance, does that include, was it the 65 for Adeptus and 45 for relationship acquisitions? Is that what the numbers were? And is that embedded in guidance?

Yes and yes.

Okay. Got it.

And last question. Steve, I know you talked about no CapEx commitments. Just out of curiosity, in the right DEA structures where you own a stake and an operator like Capella, is it structured so even though you own the operations, that the other partner is on the hook for all of the CapEx? Is that how that works?

That is how it works, and of course on an operating company like that, you expect, you hope, you underwrite so that there won't be additional requirements for operating capital.

But all of the normal -- I mean it is CapEx and everything is on the hook by the other --

Oh, yes, absolutely. That is correct. Yes. (multiple speakers)

Okay. That was it. Thanks.

Tayo Okusanyo, Jefferies LLC.

Yes. Just a quick follow-up. Since you are talking about meaningful gain on some of the asset sales, would you be thinking about a special dividend or not?

Well, Tayo, there are a lot of ways to deal with that, including rolling it into new properties and timing, special dividend. None of which has -- we have made any determination about.

Okay. Fair enough. Thank you.

I am showing no further questions at this time. I would like to turn the conference back over to management for any final remarks.

Thank you operator. Again, thank all of you for your interest. If you have any questions, please don't hesitate to call Tim Berryman, Charles Lambert or Steve or myself. Thank you very much.

Ladies and gentleman, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.