Medical Properties Trust Inc (MPW) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Medical Properties Trust first-quarter 2016 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. Sir, you may begin.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our first-quarter 2016 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 and/or underlying such forward-looking statements.

We refer you to the Company's report filed with the Securities and Exchange Commission for discussion of the factors that could cause the Company's actual results or future events to differ materially from those expressed in this call. The information being provided today is as of this date only; and, except as required by federal security laws, the Company does not undertake a duty 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 today's first-quarter 2016 earnings call. Operationally, 2015 was one of the best years in the history of Medical Properties Trust. We broke all sorts of records on growth in almost every category. But even more importantly than that, the strategic decisions we made in 2014 and 2015 were absolutely perfect to position MPT as the pre-eminent provider of hospital real estate asset-based financing.

As we have said since the inception of this Company, we will always manage this Company for the long-term benefit of our shareholders. The results of our first quarter for 2016 were truly tremendous.

Our normalized FFO per share was $0.35, up 25% compared to the first quarter of 2015. Our revenue was up more than 41% year over year for the same period. With our recent dispositions and subsequent debt pay-down, we are in a position of enviable strength, with an abundance of liquidity to take advantage of accretive acquisitions.

Almost immediately after our Capella acquisition at the end of last summer, we fielded numerous inbound calls from operators and private investors who wanted to either purchase or invest with us in the Capella operating piece.

After strategic discussions with the Capella management team and the MPT executive team, we began having in-depth conversations with the Apollo-led RegionalCare. Those conversations led to the merger of Capella operations into RegionalCare last week. This transaction should give investors, analysts, and the credit-rating agencies all comfort in the value and quality of the underwriting conducted by the MPT staff. In less than a few months, we had entities that were willing to pay more than we did for the same Capella assets.

We are delighted about the new chapter of the Capella relationship. We have a much stronger and better-capitalized tenant. We retained our real estate investments, and we have a vehicle with which we can continue to grow.

And just as importantly, we were able to reduce our debt by some $500 million and put our balance sheet back in the top 30% of all REITs. Our leverage ratios, coverage ratios, and abundant liquidity gives us the ability to make strategic, opportunistic acquisitions.

At almost $6 billion in assets, our portfolio strength continues to be the hallmark of MPT. Remember when we report our property EBITDAR coverages, we do so on a same-store basis to provide the clearest understanding about our properties. We also use the more conservative approach of EBITDAR, not EBITDARM.

We add properties to same store when they have been operational in our portfolio for 24 months. When newer properties are added to the group, it will have an effect on prior quarters because they get added 24 months back.

Because our seasoned properties have such high coverages, the movement for these prior quarters are often downward. This quarter, we had 11 of our German rehab facilities, two US rehab facilities, and two acute-care facilities, for a total of 15 new properties added to the same-store comparisons.

Our overall portfolio continues to perform exceptionally well. All three of our major areas -- acute care, LTACH, and IRFs -- were essentially flat year over year.

For the acute-care sector, we added two new hospitals to our same-store set, with no change to prior quarters. The fourth-quarter coverage dropped approximately 10 basis points to 4.4 times year over year. For the LTACHs, there were no new facilities added to the same-store set. The LTACHs remained flat at 1.9 times coverage year over year. For the IRFs, we added the 13 facilities to the same-store grouping, 11 of which were the original German facilities.

Obviously, with the newer facilities not being as seasoned as the older facilities, they have artificially reduced the previous quarter's coverage from 2.9 times to an updated third-quarter coverage of 2.4 times, this new same-store group reporting the same coverage of 2.4 times for the fourth quarter.

Adjusting for the 15 new properties added to the total portfolio same store, the total portfolio EBITDAR coverage dropped 10 basis points from 3.6 times to 3.5 times. After the closing of the disposition of the Capella operational piece this past Friday, Prime and MEDIAN each represent approximately 19% of our portfolio, followed by Ernest at 10% and Capella at 9%. And most importantly to us from a diversification standpoint, the largest single investment in any one property represents only 2% of our total portfolio.

In the US, our investments are represented by acute care at 69%, IRFs at 12%, LTACHs at 10.5%, and freestanding ERs at 8.5%. We have 78.5% invested in the US, 19% in Germany, 1.5% in Italy, and 0.5% each in Spain and the UK.

We are delighted to be able to present our shareholders with today's report, and we're excited about the position we are in and the opportunities that exist. At this time, I'll ask Steve to go over the specifics of this past quarter's financials.

Thank you, Ed. This morning, we reported normalized FFO for the first quarter of 0.35% per diluted share, an outstanding 25% increase compared to 2015's first quarter. We also reaffirmed that we expect full-year normalized FFO will range between $1.29 and $1.33.

As you can see from the press release, the only significant difference between [NAREIT] FFO and our normalized FFO is $4.3 million in acquisitions cost, the great majority of which are related to transfer taxes and other costs incurred for the closing of the Italian joint venture with Axa. We account for this investment by the equity method on a one-quarter-lag basis, and future results will be separately reflected in the income statement.

Late last week, we completed our previously announced transactions among Capella, Apollo Global Management, and RegionalCare Hospital Partners. Those transactions netted us $551 million in cash, which we used primarily to repay revolver borrowings. In February, we issued $500 million of 8-year senior notes that we also used to repay debt. So as of today, we have about $1.1 billion available under our revolver.

These transactions, plus our record-setting cash flows in excess of our dividend payments, have improved our leverage profile such that our net debt, at about 5.6 times EBITDA, places us in the top third of both the healthcare sector and the entire REIT universe.

This is the level that we have traditionally operated in. Only six months ago, during a period in which almost all REITs were suffering from increasing cost of capital, we set this lower leverage level as a target that we hoped to achieve by the end of June. The fact that we accomplished this aggressive goal way ahead of expectations makes several important statements.

First and foremost, our entire team at MPT is made up of hospital people, who understand better than anyone the values inherent in well-underwritten hospital real estate. Even though we made the decision to sell our Capella interest during a steep downturn in hospital valuations and instability in the global financial markets, we achieved outstanding pricings from Apollo and RegionalCare.

Importantly, we continue to receive strong interest in our assets by investors who are eager to take advantage of the low-risk, high-return portfolio of hospital real estate that we have created.

Second, there is a vibrant market for these assets. Participants include the most sophisticated and largest private-equity investors, public and private REITs, pension-fund advisors, sovereign wealth funds, global financial institutions, and local investors. All of these investors are recognizing more and more that well-placed, expertly operated hospitals generate the highest returns with the lowest risk among other healthcare real estate.

Third, our industry-leading strategy of establishing long-term relationships with the best hospital operators, through multiple acquisition methods, has created a valuable portfolio with outstanding diversify among geography, patient acuity, reimbursement strength, and the best operators in the business.

We can and expect to continue to develop and grow this portfolio through traditional sale-leasebacks, development commitments, combination real estate opco acquisitions, joint ventures, and other leading-edge, creative transaction structures. We have positioned MPT today as well as at any time in our history to make highly and immediately accretive long-term investments in hospital real estate.

As of today, we have modest leverage, consistent with the best REITs. Our liquidity sources include cash and available credit facilities of over $1.3 billion, and only $125 million of 2016 debt maturities. We pay a very attractive dividend that represents less than 70% of our expected 2016 normalized FFO. And we are acknowledged by the best hospital operators as the leader in hospital real estate.

Before I turn the call over for questions, we want to reiterate that for calendar year 2016, we reaffirm our previous estimate that normalized FFO per share will range between $1.29 and $1.33. Major assumptions underlying this estimate include limited to no additional asset dispositions, long-term borrowings, or other capital issuances, and limited expectations that we will make meaningful new investments in hospital real estate. There are other factors that will affect our actual results, including interest rates and other capital-market conditions, tenant operations, and other unforeseen conditions.

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

(Operator Instructions) Jordan Sadler, KeyBanc Capital Markets.

Thank you. Good morning.

Good morning, Jordan.

Regarding Capella, I think in your prepared remarks, you mentioned that either there were offers that were more than the valuation, or you sold it at more than the valuation. Can you just clarify that for me? I kind of felt after I looked at the disclosure that the valuation was pretty similar to what you had paid for it, just to clarify the relative value versus your cost basis [on sell]. And then separately, I have a followup on hospital valuations. Thanks.

Sure. Jordan, on Capella, we received net basically what we paid for it. But in order to get to that point, they had to pay more than that because of the split with the management team at Capella.

Okay. And then separately, I think (inaudible) remarks there, we had a discussion about a steep downturn in global hospital valuations. Where are you seeing valuations today? Have we normalized somewhat, or are you continuing to see downward pressure?

Well, when we closed Capella back in August, the initial close, we were right in the middle of the hospital companies reporting their second-, and later, third-quarter operations. And that's the environment that we mentioned when we say we decided to sell Capella, when there was a high level of concern about admissions, about utilization, about so-called tailwind of the Affordable Care Act. All of that resulted in significant declines in hospital equity valuations. And some of that has been recovered since then.

On the other hand, you've got a couple of major operators. It is no secret, so we can name -- you know, Community has some struggles. And so to some extent, it's -- at least my personal, nonprofessional view that that continues to weigh somewhat on the market.

Our operators, however, continue to do very, very well. We're not seeing significant declines in admissions or utilization, and certainly EBITDA. Ed may have something to add.

Jordan, last fall when we commented on this during the time when it happened, there was a lot of skies falling from analysts, concerned that the perceived benefits of the ACA were over and things were going to turn the other direction.

Our remarks at that particular time were for people not to panic. This was exactly what we had projected, that the short-term benefits of the ACA were certainly -- were exactly that, and that the long-term prospects with hospitals would continue to grow, but at a much slower pace than some of the immediate benefits that you saw from states with the expansion in the Medicaid areas.

You've seen that happen now, even with the two hospital companies that Steve reported on just a second ago. They had not had operational issues. They've had some other internal issues, primarily relating to some of their expense controls and some of their merger issues, and some related to other issues. But if you look at all of the hospitals as a whole, they continue to perform very well on the same-store admissions. And that's the same case with ours. And with that, you've seen the re-energization from private-equity firms and other investors in the hospital space in 2016.

Okay. And then separately on guidance, you've reaffirmed [here for 16 normalized]. Can you walk us through a couple of the assumptions, particularly as it relates to the transaction side? Are there any additional asset sales in there?

No. The reaffirmation this morning assumes no additional dispositions or meaningful acquisitions, other than what we state is in the pipeline, primarily completion of development commitments.

Okay. I'll yield the [floor]. Thank you.

Chad Vanacore, Stifel.

Good morning, all.

Morning, Chad.

So you've done quite a bit of de-levering up to this point. Would you expect to stay at this level for the near term, maybe through 2016? Or would we expect more de-levering from here or growth from here?

Chad, I think the answer to all of that is yes, to all of that. You'll see some more de-levering. You'll see some more growing. Nothing ever stays exactly the same. If it does, you're probably dying.

We will have some periods where our leverage will go down from here. We'll have periods where our leverage will go up from here. But we want to continue to operate as we always have, with only small periods of exceptions to that, within the range that we always have.

What is that range, historically?

Net debt to EBITDA levels -- it's in the 5 to 5.5 times.

Okay. And then just [a thing] about your [debt] developments. How do the five new ERs coming on line impact results in the second quarter?

They're built into the guidance.

You don't want to put any other color around that?

I'm not sure what the question is. I mean, when we reaffirm guidance of $1.29 to $1.33, it takes into account the timing of those coming on line and beginning to pay rent. If I missed the question, I'm sorry.

I was thinking about how much quarterly rent we're talking about. I'm guessing annual rent is probably somewhere around $2.3 million, or so?

On just those that (multiple speakers)?

Just those coming on line at the end of the second -- or the end of (inaudible) quarter.

That's correct.

Okay. And then just one last one from me -- how do you think the changes in LTACH reimbursement are going to affect your LTACH coverage on the total portfolio by the end of 2016?

Chad, as we've said, since the inception of those changes, we thought that the overall impact on our LTACHs would be a decrease in our coverage of approximately 10 basis points.

I'm not sure that it's going to be that anymore. I think that our operators have performed much better and quicker than we thought they would in adjusting to the changes, and the performance we've seen thus far has been very strong. As you saw in today's report, our LTACH coverage has remained flat, but officially we're still looking at a very slight decrease in the overall coverage.

All right. So they should hold up pretty well, then. All right, that's it for me for now. Thank you so much.

Tayo Okusanya, Jefferies.

Good morning, everyone. Congratulations on another solid quarter. The question I have is -- just when I think out 18 to 24 months and I look at your portfolio, you don't really have a lot of debt maturing anytime soon. You don't really have a lot of lease maturities, either. So everything feels very stable. I guess that backdrop -- how should we think about a sustainable earnings growth rate, where -- is the idea going forward -- you kind of have 2%, 3% growth just from the [annual rent bond], and then we should just be focused on external growth? I'm just curious about whether you could help us think through that, about a sustainable growth rate for you guys.

Tayo, as you know, we've had dramatic growth over the last three, four years. We have almost doubled in size, from approximately three years ago, our compound annual growth rate exceeding 35%, and the growth that we had this past quarter year over year being in the 25% range.

We have purposely not given a target for what we think our acquisitions will be this year. We certainly want to focus on maintaining a very strong balance sheet and taking advantage of very strong accretive and opportunistic acquisitions.

We certainly will grow better than just the pure organic growth, but we don't have a number for you on that specific projection for 2016, beyond what the guidance that we gave this morning was.

Okay. That's helpful. Along that same theme, the $190 million of funding commitment you have for different projects -- what kind of incremental earnings growth do you expect that to deliver to you?

Well, those are still in the range that we've always described, in this case, between a [going-in] cash rate of 8[%] on the low end and in those particular assets, around a 10[%] on the higher end. And again, those are cash rates. You could probably add 150 BPs to that range for GAAP [straight-line rent].

Sounds good. I get it. Appreciate it. Thank you.

Michael Carroll, RBC Capital Markets.

Thanks. Ed, or Steve, can you guys give us an update on the remaining assets that you have on the market for sale? Are you still pursuing those sales, or did you take those off?

Mike, we have not taken anything off at this particular point. We will see if we have compelling reasons to make any of those dispositions, but we don't have any specific plans at this point.

And would compelling reasons mean just the valuations that the buyer puts on those assets, or just additional investments that you're tracking in the market?

It would be both of those, with a lot of emphasis on the valuation. We think it's important, as we did with the Capella transaction, to prove to the market just how valuable our portfolio is. So from a valuation standpoint, that will be key, and also what particular uses we have for that money.

Okay. And then can you talk a little bit about the IRF coverage ratios? It looks like it dropped this quarter compared to what you reported last quarter. I'm assuming you just added, I guess, new assets to that bucket. But can you talk a little bit about those assets that you added to the bucket and why coverage was lower than the seasoned portfolio that you mentioned earlier in the call?

We added 13 additional rehab facilities, two here in the US and 11 in Europe -- they were the 11 original German facilities. And those facilities, not being as seasoned as the other ones, have a lower coverage ratio than the properties that have been in our portfolio for some time.

When we add the properties to our same-store portfolio, we do it retroactively. And so when you add those back for the past 24 months, it obviously lowers the coverage because their coverages were lower than the seasoned property. But if you look at the portfolios and compare those 11 properties, compared to how they were doing 24 months ago, everything continues to perform very well.

Our German properties will probably never have the types of coverage that we have here in the US. Our rehab hospitals have been in the 3-times coverage. Our German facilities, we don't expect to be in that type of range, but they continue to perform exceptionally well.

Okay, great. Thank you.

Michael Mueller, J.P. Morgan.

Just thinking a little bit more about acquisitions. I know you're not sticking anything in guidance, and Ed, you said you didn't want to throw a number out, but -- how are you thinking about the world when it comes to acquisitions -- the cost of capital (inaudible) the stocks rebounded some. I mean, are you of the mindset where -- you know, before you would have a target of maybe $400 million a year. You thought you'd have a pretty good pipeline to go out and stay consistently active on that front. But is that the mindset you have, even though you're not saying it, or are you kind of backing off of that, and it's really going to be lower volume, more selective? Just [how to take] on acquisitions for the balance of this year and next year?

Sure. Mike, as I said, the last three years, when we've had such tremendous growth, that I didn't expect us to be able to continue to have that growth year in and year out. The world is in a constant state of change. As Steve said, we have tremendous opportunities.

We're in a wonderful position to be able to pick and choose which opportunities we want to take advantage of. You're right, our stock price has rebounded dramatically, some 40%. But it's still not where we think it ought to be. That being said, our acquisitions that we make will be very strategic in nature, and they will all be from an accretive standpoint.

We have not put a number on that on purpose because we're more tied to what it means to the overall company from a strategic and valuation standpoint than happen to have a specific target and amount of acquisitions that we have to achieve.

We certainly do not expect that we will make no acquisitions. That's certainly not the case at all. We expect to continue to be very active, but it will be very selective.

Okay. Thank you.

Eric Fleming, SunTrust.

Hi, guys. I just wanted to go back to my question on the additional dispositions that you guys had mentioned before. So previously, you guys said you had interest upwards of $900 million. If you look at Capella and just say, rough numbers -- call it $600 million -- are you still looking at $300 million, or has there been even more interest in terms of further dispositions for you guys?

Eric, you remember when we said the $900 million number, we said we had no intention of selling $900 million worth of property. We were in a very nice position that we had inbound calls on roughly $900 million worth of property. We still won't meet that number. With the Capella transaction, we don't have to do any more to meet the goals that we originally set.

So if we do any more, it will merely be because the valuation is so compelling that it makes best strategic sense for the Company. But we do not have an additional target for any additional dispositions just because we think we need to make any.

I understood that. Obviously, I think -- like you said, the Capella deal did what you guys said you wanted to do. I was just more wondering if -- had there been further interest in the portfolio kind of giving you more (multiple speakers) --?

No, absolutely. We continue to receive inbound calls, and as Steve said in his prepared remarks, there at tremendous valuations.

Okay. And just one small question on Capella -- you guys $143 million in two new loans with them. Can you just give more detail on what that is?

It actually -- I hate to get -- wade into the weeds, but $93 million of that $143 million was actually money we had parked with Capella in the original transaction, waiting to get approval from the State of Washington to actually acquire the real estate in what's called the capital hospital campus. We still are awaiting that, so that's really nothing new. That will be converted into a sale-leaseback upon final approval of this certificate-of-need board.

The other $50 million is the acquisition -- I think we made this clear in the press releases earlier -- that we acquired $50 million of unsecured debt alongside Apollo, as basically the final tranche in the financing stack to get the acquisition done. So that's $50 million. We have a very, very attractive coupon on that. We are shoulder-to-shoulder with Apollo, so if they happen to get out, we get out. But in the meanwhile, frankly, we're very satisfied with that.

Okay, thanks. Appreciate it.

Juan Sanabria, Bank of America.

Good morning. Thanks for the time.

Good morning, Juan.

Just hoping you could speak a little bit about the capital structure or the leverage at the now merged Capella-RegionalCare opco.

Sure. What we can disclose is public information. It's been put out in the [offering] memorandum that resulted in the financing.

But whereas prior to the merger with the Apollo company, MPT was basically the capital, in the form of our loan. With the merger, Apollo has actually put in, if I recall, about $120-something million of equity. RegionalCare ported over its equity. So we now have a tenant in what I think they're calling RegionalCare Capella hospitals, at least temporarily, that's twice the size of our former Capella operator, has substantially more equity, and is supported by one of the largest, if not the largest, most sophisticated, well-funded private-equity fund in the world.

Okay. And then just on the leverage target -- so you previously talked about, I think, 40% to 45% debt-to-gross assets. It seems like that's now shifted to be focused more on net debt to EBITDA of 5 to 6. Is that correct, or -- if you could just clarify that?

Frankly, Juan, what we've found -- and I think this is probably the right way to look at it -- most investors, most analysts, most credit people are more focused on that EBITDA measure, rather than just a total-leverage measure.

It doesn't change the way we look at how we want to have our debt and credit profile, but that's really it. We're just focusing on disclosure of the one measure rather than two, but it has no -- that's not driven by any change in our views.

So the new (inaudible) target is 5 to 6 times? That's how we should think about managing your balance sheet?

No. I think Ed just said, 5 to 5.5.

Sorry. Apologies for that. And just last question, on the acquisition pipeline and the opportunity set -- Can you break down or help us think about overseas opportunities and how that makes up what you're looking at?

Juan, we still have targeted in a long-term basis in the 70%/30% range -- 70% US, 30% in Europe. That will obviously fluctuate from time to time because all the acquisitions don't happen on the same day, but that's the same target level that we're looking at.

Okay. Thank you very much.

Todd Stender, Wells Fargo.

Good morning. Thank you.

Morning, Todd.

Steve, just to start with you, I think your debt -- your next debt maturity is scheduled for October. I just want to see when you can call that in without penalties or restrictions and how you're looking at refinancing that -- is it as long as you can -- is getting the term out as long as you can? Or do you want to just --?

Just to clarify, we've got $125 million of term notes due this year. The first tranche -- and it's about 50/50 -- the first tranche is July, and then the second one is October, as you point out.

We've got those hedged and have had them hedged for a number of years. So we won't try to break that match for what would probably cost us money. We'll just go ahead and pay those off.

We have two bond issues maturing in [2024] that become eligible for call over the next coming months. And you're right that we absolutely are looking at that. We'll continue to look at that, as to whether it's beneficial to go ahead and refinance those, call them in. And under market conditions now, if we could draw a circle around today, it looks like it would be somewhat advantageous for us to do that. Although we've made no commitments to do any refinancing, it's certainly something that, as you would expect, we're considering.

It's fair to say that your liquidity and financial position is much improved from when you floated your February bond, which was eight years, 6-3/8, I want to say?

Six and three-eighths, that's right. And you're absolutely right -- not only is our liquidity improved, but the overall market conditions are substantially improved. And as we all know, that could change by this afternoon. But your point is absolutely correct.

Okay. Thanks, Steve. And then just to look at the initial yields on your rehab hospital in Ohio. And then if you can go through the yields on the freestanding ER facilities, more of a reminder. And then if there are any differences in yields amongst the Texas locations, and then Colorado.

With respect to the ERs -- and all of those are Adeptus -- there is no geographic differentiation. Those yields range between -- pretty much our overall range in this case, between 9% and 10% plus, depending on when we committed under -- we've got three tranches, a total of $0.5 billion. And so as those come on line, depending on which tranche they were in, it falls into those. And again, those are cash yields.

On the rehab hospital for Ernest -- and again, we have never given specific cap rates -- but this goes into the Ernest master lease. And once again, if you take our range that we have given of between 8% and 10%, this one falls right in the middle of that.

That's helpful. And then just going forward, how about either the properties that are under construction or those that are in the planning stages -- are those yields locked in, or do they move --?

Yes, they are locked in. Once again, depending on which of the three Adeptus tranches, they are locked in.

Okay, thank you. And then just finally your updated thoughts on underwriting -- whether it's new acquisitions, new development, specifically how you're viewing rent escalators -- and just balancing between raising them too much and maybe not enough.

Todd, from a development-acquisition standpoint, we will continue to do the vast, vast majority of our new investments from an acquisition standpoint versus a development standpoint.

From the standpoint of what we like to see on the rental increases, as you know, all of it is a part of the negotiation, so that when you push here, you have to push somewhere else or give somewhere else. From our general feeling, we like to see the rental increases tied at some inflation number. We'd like to get that as unlimited as possible, but roughly half the portfolio ends up having some type of collar on that.

Great. Thank you, Ed.

Bill Carpenter, Goldman Sachs.

Morning, gentleman. Two questions. First, on the ratings-agency side -- have you any thoughts on your goal, perhaps, for investment grade? And maybe you can give us a sense of what you think that might be -- how that might impact your cost of capital. And secondly, I know you spent a bit of time talking about valuations and how they declined last summer, and then you've had a lot of incoming calls in the last few months. I'm just curious of the asset values -- have they sort of come back to the levels that you had seen last year? Or are they below? And is that why the activity has increased?

Bill, let me address those -- the last part of that question and make sure I understood it correctly. So if I don't answer it the way you asked it, please correct me.

But the valuations today are every bit as strong as they were last year in the beginning of the summer. There was a very short time period, beginning at the end of summer and running through probably last fall, where it seemed that the entire world was kind of on a wait-and-see situation with what was going to happen with the Fed and interest rates and the economy as a whole. That certainly seems to have subsided some, and we're very comfortable with where the valuations are.

From our standpoint, certainly from a disposition standpoint, we have always thought that our portfolio was much more valuable than the market had given us credit for, and we're very happy to be able to show some of that and prove some of that with some of this disposition activity that we have.

From the standpoint of the rating agencies and getting to be investment grade -- that certainly is valuable, but it's not as valuable as it used to be in the old days, with interest rates being as low as they are. There isn't that much difference these days.

We certainly would very much like to be at investment grade. But as I have always said, we won't run this Company with just the goal of trying to meet the various aspects or trying to get to investment grade.

There are obviously some of the items in what the rating agencies would like to see that are the same goals as ours. One of those was increasing in our size, which therefore improves our diversification overall.

As I've said, we've grown; we've almost doubled in size in the last three years. And very, very importantly to us, and I think to the credit-rating agencies, is that by doing that, we've pushed down our exposure to our properties so that our largest property only represents 2% of our portfolio. That's outstanding diversification from that standpoint.

One of the headwinds that we will always face is just the hospital healthcare market in general. When you look at the overall outlook of the credit-rating agencies on hospitals as a whole -- which include all the government-run hospitals, which certainly are not our market -- it's a negative outlook. But then when you look at the specific tenants that they cover that are ours, which represent about 60%, 65% of our total revenue, the vast majority of those outlooks are from a positive standpoint.

So I think our continued performance, the continued incredible performance of our existing portfolio and their EBITDAR coverages -- I think that the opportunity for us to get moved up to investment-grade rating by all the agencies is certainly one that's a reasonable expectation.

Thank you very much.

Tayo Okusanya, Jefferies.

Yes, thanks for that. Just a quick followup question. Some of your peers -- again, totally different healthcare sectors, but -- are starting to look a little bit more at deals where they're doing more debt investments -- again, higher end of the capital structure, but they're getting very decent returns on some of these debt investments. Is that something that as you look into the horizon you could see yourselves doing more of, or do you really want to stick more to the fee-simple [and actually own the] assets?

Tayo, we will continue, certainly as far out as I can see, as being primarily fee-simple owners and straight real estate investors. Obviously, part of our original model, and it continues to be, that we will make selective investments, like we did with Capella, like we did with Ernest. But I think you're referring to a different type of instrument that some of our other, particularly larger healthcare peers, have done. And that is not our target market.

Okay. Good to know. Thank you.

Jordan Sadler KeyBanc Capital Markets.

Thanks. Regarding the LTACH and IRF exposure. Can you talk about what you see as, if any, the risk to those assets or properties vis-a-vis site-neutral payment? CMS is focused there now, where they seem to be at least attempting to basically implement the same site-neutral payment opportunities for some of the procedures that are being performed in those facilities.

Jordan, let me start with the LTACHs, and let me remind all of us that the patient criteria [bill], which pretty much started all of this whole discussion, was supported and very much encouraged by the industry. So there actually is a definition of what constitutes an LTACH patient.

We support that. We think that -- I have always said -- as you may recall, I got my start in the physical-rehabilitation business. What we did back in the early 1980s versus what they do today is very different. We always have supported pushing things out to the lowest-cost provider. As technology continues to improve, you'll see that continue to evolve.

We have always said as a part of that, that we pick the very best operators that are able to adjust with the times and adjust with the changes. And as I stated just a little while ago, in response to someone's question about the LTACH reimbursement, we have been extremely pleased with how well our operators have made adjustments.

We think they're all way ahead of schedule with where we thought they would be with making those adjustments. We don't have any plans to make any additional LTACH investments at this point. We, like the rest of the market, are kind of in a wait-and-see from the overall standpoint.

We believe, as does the American Hospital Association, and as does CMS, that the LTACHs actually provide a good service and a good benefit for society as a whole. But I think that we probably have another 12 to 18 months for all of us to see exactly where this shakes out. But we're very positive on where it's going at this particular point.

From the rehab standpoint, we continue to be very bullish on the rehab market, as I think most people do. And again, we very much support pushing patients out to the lowest-cost provider and not having them in a place of higher cost, and therefore higher reimbursement, if they don't need to be. Again, our operators have been very good at making those adjustments and moving with the times. And we continue to be very bullish on the whole (inaudible) sector.

Would you continue to be an incremental investor in rehab -- I know you say you wouldn't in LTACH right now, but in rehab beyond your current commitments of existing relationships?

Yes, but just to clarify -- we don't see any additional growth from people that we're not already doing business with. It doesn't mean that we may get an opportunity that we think is a really good one. But we think that the opportunities we have with our existing rehab providers is enough to keep us comfortable in that particular market.

Okay. And then just on the ATM -- was there any utilization of the ATM during the quarter or afterward, and any thoughts there?

We announce ATM activities with the filing of the appropriate 10-Q.

We'll wait for it. Thank you. (laughter)

Thanks, Jordan.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call over the Mr. Edward Aldag for closing remarks.

Thank you, operator. And again, thank all of you for listening today and for your interest. And I greatly appreciate all of the questions. If you have any additional questions throughout the day or throughout the week, please don't hesitate to call any of us here at MPT. Thank you very much.

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