Medical Properties Trust Inc (MPW) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Medical Properties Trust third 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, today's conference is being recorded.

I would look to introduce your host for today's conference, Mr. Charles Lambert, Managing Director. Sir?

Thank you. Good morning, everyone. Welcome to the Medical Properties Trust conference call to discuss our third quarter 2016 financial results. With me today are Edward Aldag, Junior, 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 risk, uncertainties, and other factors that may cause our financial results and future events to differ materially from those expressed and are 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 call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures, in accordance with the Reg G requirements. You can also refer to our website at www.medicalpropertiestrust.com, for the most directly comparable financial measures and related reconciliations.

I will now turn the call over to our chief executive officer, Ed Aldag.

Thank you, Charles, and thank all of you for joining us today. Acquisition and capital transactions have driven MPT's growth to $7 billion in assets, with a sector-leading balance sheet. On December the 31st, 2015, our total assets were $5.9 billion. Net debt to EBITDA was 6.4 times, and net debt to gross assets was 53%. Today, 10 months later, on a pro-forma basis, our total assets are $7.2 billion, net debt to EBITDA projected at 5.1 times, net debt to gross assets of 44%, and our FFO per share for 2017 is now projected to be between $1.35 and $1.40 per share.

Depending on a lot of factors, including market conditions and our stock price, we are projecting that our acquisitions for 2017 will be between $500 million and $1 billion. In addition, we continue to have more than $1 billion in current liquidity.

Let me turn our attention to the performance of our existing portfolio. By now, most of you have heard about the Adeptus earnings call on Tuesday, in which Adeptus discussed their corporate level liquidity issues, related primarily to their failure to adequately manage their recently hired third party cash collections company. We posted some slides to our website late Tuesday night to provide each of you with some detailed information about our investment in Adeptus-related facilities.

Before I get into the specifics of our particular properties, let me say that we've had discussions with their new CFO, Frank Williams, and we listened intently to the comments made by the new chairman, Gregory Scott. We believe they both understand the mistakes that were made, and both not only have the ability to correct the issues, but they both are committed to doing so.

But notwithstanding that, it is important that the investors in MPT know that we are in a very strong position. First and foremost, we believe in the Adeptus model. We believe that there's a need for these freestanding ERs and that they will continue to be very profitable. We currently own 58 Adeptus facilities; 48 of these are completed and paying rent. The first of these became operational on December the 3rd, 2013. The last facility became operational on October the 14th, 2016. Ten facilities are still under construction. Approximately 65% of the 58 facilities are joint ventured with strong local and regional operators, such as UC Health in Colorado, Dignity Health in Arizona, Texas Health Resources, and others. The joint venturing of these facilities by these entities is further proof of the commitment to the model by some of the country's strongest and most respected acute care operators.

As we pointed out on the slides posted to our website, our Adeptus facilities have been highly financially successful. The average EBITDA coverage for the freestanding ERs as a whole, exclusive of the one Adeptus hospital in operations as part of the HOPD Hub and Spoke Model, is 3.74 times. It is important to note, and as a reminder, we deduct an arbitrary 5% management fee in our coverage calculations to be most conservative. The actual coverage for Adeptus is actually higher on non-joint ventured facilities.

All 58 of our facilities are in several master leases, and all the master leases are cross-defaulted. So, in a worst-case scenario where Adeptus defaulted on any portion of their rental payments to MPT, we have the right to replace Adeptus and lease the facilities to a new operator. Given the financial success of the ERs and the growth of the freestanding ER market nationally by companies such as HCA, which already has 57 freestanding ERs with at least a dozen more in development, we have a high degree of confidence in our ability to do so with no financial loss. Our model was designed to protect us, just in such situations, where the issues are at the parent company. Adeptus facilities represent approximately 6% of MPT's total rental revenue.

On a whole, our portfolio continues to produce overall strong lease coverage. With the total portfolio, we saw second quarter 2016 over second quarter 2015 increase by 27 basis points to 3.48 times. With the general acute care category, the coverage increased 43 basis points to 4.3 times. For the IRFs, we saw a slight decline to 1.94 times. When comparing to the last quarter, please keep in mind that we sold three HealthSouth facilities for a $45-plus million gain. These facilities are no longer included in the previous coverage numbers. For the LTACs, we also saw a slight decline to 1.72 times.

As our LTAC portfolio continues to adjust to the patient criteria rules, I want to point out that Ernest LTACs at this point are not faring as well as the rest of the LTAC operators in our portfolio. We believe that this is primarily due, with the markets that Ernest operates in, where there are usually only one or two acute care hospital systems in the markets, and they are typically smaller, thus resulting in a smaller population base to draw higher-acuity patients. Two of their LTACs, which became subject to the patient criteria rules in the early months of this year, have shown signs of weakness. We have met with the management team, and they are working on solutions to these markets. In the meantime, their IRFs, which are cross-defaulted with the LTACs, continued to outperform exceptionally well. In addition, the IRFs they have developed or acquired since our original Ernest acquisition will add approximately $10 million of additional EBITDA. Today, LTACs only represent 5% of our total portfolio.

Community Health Systems has been in the news recently, and some investors have asked about our exposure with them. We have two CHS facilities. They represent less than 1% of our total rental revenue. For the smaller facility in Texas, we have a $4 million letter of credit, and CHS has guaranteed both leases.

Post the close of the quarter, we closed on an investment with Steward Health Care. Steward has been a relationship we've been building over the almost last two years. Over that time period, we've gotten to know the management of Steward and their equity partner, Cerberus, very well. We believe our investment of $1.25 billion with Steward is just the beginning of this relationship.

Today, we also announced the near-term addition of two more hospitals with RCCH, one in Lewiston, Idaho, and one in Pasco, Washington. We've been underwriting these two facilities since our first underwriting of the Capella transition two years ago. After having spent some time in both of these communities with their management teams, I am delighted to have them as a part of our portfolio.

With these additions, our already strong geographic and property diversifications got even stronger. Post-closing on these transactions, our three largest operators will be Steward, Prime, and Median, at 17%, 16%, and 15% respectively. 79% of our portfolio is in the United States, 19% in Germany, 1% in Italy, 0.5% in the UK, and less than 0.5% in Spain. In the US, 73% of our portfolio is in acute care facilities. In recent weeks, the Community Health Systems has been the major news story in the acute care sector, resulting in some negative press for the hospital industry.

While I'm not commenting on the particulars of the CHS situation, the negative press about the hospital management sector is not warranted, as shown by the quarterly earnings reports of the major for-profit operators, and by the experience of the MPT portfolio of hospitals, which includes some major non-public hospital operators. Over the past few weeks, other acute care hospital operators have announced stable utilization, solid financial performance, driven primarily by revenue growth influenced by pricing gains and some utilization growth. HCA, the industry leader, continues to produce industry-leading quarterly earnings that are consistently strong.

The following examples are results for quarter three 2016 with quarter three 2015. HCA's revenue growth was 4.2%. It's adjusted EBITDA grew 7.8%, with cash flows from operations totaling 1.2 billion. HCA's utilization grew similarly, with the same-hospital inpatient admissions increasing 0.7%, same-hospital equivalent admission volumes growing 1.3%, and emergency room volumes increasing 2.7%.

Universal Health Systems operates both acute care and psychiatric hospitals. Both areas are growing and reflective of the strength of the hospital market. Universal's same-hospital acute care revenue grew 8.2% and was driven by solid volume growth with the same-hospital adjusted admissions increasing 4.6% and same-hospital revenue for adjusted admissions growing 3.2%. Some same-hospital margin swing occurred due to labor cost pressures in some markets, but given that, UHS still expects long-term EBITDA growth in the 7% to 9% range for acute care.

Tenet reported improved performance in its hospital core business. Same-hospital revenue grew 5.3%, driven primarily by an increase of 3.9% in revenue per adjusted admission. Volume also increased slightly, with same-hospital admissions increasing 0.4%, same-hospital adjusted admissions increasing 1.4%, and same-hospital emergency room visits increasing 0.5%. Hospital adjusted EBITDA increased approximately 5%, after normalizing for acquisitions, divestitures, and lower EHR incentives.

As all of you have heard me say on many occasions, hospitals are not going away. You can't describe a scenario where we don't have hospitals in this country. Will reimbursement change? Absolutely. I've been doing this for more than 30 years now, and I've seen tremendous change. But two things I can absolutely guarantee you, regardless of political parties, is that hospitals will always be here, and some form of reimbursement will be here to pay for it. The key for us is to be sure to invest with operators who can adjust to the ever-changing environment. I believe that we have done an excellent job of doing that. Steve?

Thank you, Ed. This morning, we reported normalized FFO for the third quarter of $0.30 per diluted share, consistent with our previously disclosed expectations and street estimates, and allowing us to estimate that full-year normalized FFO for 2016 will be $1.27. That is a $0.02 reduction from our $1.29 estimate from last quarter. And of course, since last quarter's call, we have issued 77 million common shares. Moreover, our new estimate contemplates a EUR 500 million bond issued during the quarter that will include EUR 300 million in proceeds that will not be put to work immediately. Probably more relevant is our introduction this morning of our estimate of 2017 normalized FFO as a range of between $1.35 and $1.40. General assumptions underlying this estimate are described in this morning's press release.

Included in third quarter net income, but of course not in FFO, is a approximately $45 million in gains on the previously reported sale of three rehab hospitals that are leased to HealthSouth. Other net income adjustments to arrive at normalized FFO are acquisition cost of $2.7 million, and debt refinancing cost, including call premiums on a $450 million early redemption, of $22.5 million.

These very important and substantive activities that I will describe have been fully disclosed and obviously very well received by our shareholders. From the end of the second quarter, we have completed the major portion of our disposition and recycling plan, paying down debt, extending maturities, reducing interest rates, and rationalizing certain parts of our portfolio. We executed agreements to acquire more than $1.5 billion in hospital real estate assets at extremely attractive returns, even further solidifying our unchallenged position as a global leader of hospital real estate finance.

Our press release and Ed's remarks have already described our extraordinary growth in highly and immediately accretive new hospital assets, and we achieve this by delivering real, sustainable returns and value, such that our cost of capital became so attractive that we were able to significantly further lower our leverage metrics. We issued an aggregate of 83 million shares of common stock, for proceeds of $1.2 billion, including $150 million in a private placement to affiliates of Cerberus Capital Management.

Going into 2017, we expect to have a net debt to EBITDA ration of about 5 times with an excess of $1 billion in immediately available cash and revolver resources. There is no healthcare REIT that we compete with, and only a couple at all, that have that high quality of a balance sheet position. So, instead of walking you through the truly transformative transactions of the last several months that we have previously detailed, I will leave time for any questions if we need to revisit them or go into further details about those transactions.

To follow up Ed's comments about Adeptus, he described our outstanding position with respect to Adeptus, and we posted on Tuesday evening some detailed and objective measures about that position. So again, I won't repeat all of what you have no doubt already reviewed. We'll be happy to take questions in just a minute. I'll make a couple of comments to reiterate how the Adeptus situation so perfectly describes the strength of our business model, including investing in critical healthcare facilities under master leases with market-leading, experienced, and well capitalized operators.

So just a few comments. Our Adeptus facilities are highly profitable. Even though a significant portion of them are still in ramp-up to normalized operations, the portfolio lease coverage is 2.85 times. The initial tranche of properties that were fully placed in service in 2014 actually generate a coverage ratio of almost 4 times, which we believe will be replicated as the two newer tranches continue to mature. The cash crunch at Adeptus is reported by its management to be primarily the result of inattention to receivables collection and excess pre-opening expenses. It is important to understand that the collections issue is not a result of rejected or inappropriate billing. Remember that most of the Adeptus facilities are now hospital outpatient departments that take Medicare and bill commercial payers in accordance with the JV partners such as UC Health in Colorado, Dignity Health in Arizona, Texas Health Resources in Dallas, and others.

Another way of saying this is that these facilities and their billings are in-network billings and patients. So we believe, with new financial and operational management, and the infusion of $57 million in liquidity, Adeptus will get control of collections and expenses, substantially reduce capital expenditures, and re-establish the outstanding execution that was lost as they grew so rapidly, recently. But if we are wrong and we ultimately need to terminate the leases and bring in new operators, we could not be in a better position. Our leases allow us to start taking remedies if lease coverage or fixed charge coverage falls below 2 times. That means long before there is a payment default, we can bring in new operators.

For 65% of our portfolio, there is already a natural and logical replacement operator. That is the JV partners that we have just mentioned. For those HOPD facilities that do not yet have a JV partner, primarily the Houston market, we are even more confident that one could be identified promptly. Remember, these are up and running and very profitable hospital facilities that would require very little, if any, capital cost for such a operator to simply step into the shoes of a lessee. Finally, we have more than $10 million in irrevocable letters of credit, and that's expected to exceed $12.6 million by year-end.

So I just want to reiterate that we believe Adeptus has the capital and the management depth, now, to right their own ship, and we think it unlikely that a new tenant will become necessary. But it is important that our shareholders understand that we have not left such a situation to chance. Thankfully, after owning more than 260 hospitals over our corporate life, we have had only about half a dozen instances that required us to change a tenant. In only one of those instances over 12 year did we lose money.

Before we go into questions, I'll comment on the very recent volatility of all healthcare REITs around possible fed action. The group is down again this morning. So just a few thoughts and reminders. Any sustained increase in longer-term interest rates is only likely if we return to an inflationary environment. Because virtually all of our leases have annual escalators linked directly to inflation, higher interest rates would be offset by higher revenue. Because we have consistently improved our credit profile, even if there are market interest rate increases, we expect our relative interest costs to decline. For example, in July, we refinanced $500 million in 10-year bonds and took the rate from 6.375% to 5.25%. We expect similar or better improvements if we issue euro bonds in the near term.

Finally, with respect to new business, we would expect market cap rates to move higher as the market-based cost of debt capital similarly moves higher. So we would expect limited, if any, impact on our investment spreads going forward.

And with that, we'll be happy to take questions. Operator?

Thank you. (Operator Instructions). Our first question comes from the line of Jordan Sadler with KeyBanc Capital Market. Your line is open. Please go ahead.

Thank you, and good morning.

Good morning, Jordan.

Thank you. I appreciate you guys addressing the Adeptus issue up front. I have a follow-up there. I think it will be an overhang, to some extent, as you might agree, until it resolves itself either through their improvement in operations or otherwise. How will you attempt to mitigate the effect of that overhang? Is there anything that you can do to assuage shareholders?

Well, so on the Adeptus call on Tuesday, they announced that they will be dialing significantly back on their capital expenditures, including development, in addition to their portfolio. So it's important to understand, and we disclosed this Tuesday night, that our commitments, which total $500 million, are our option. And of that $500 million, $59 million has not been identified with any specific project. And we have the option to fund those, but not the obligation. So we will clearly and publicly continue the transparency about the Adeptus development, the Adeptus commitment, and the Adeptus performance. We will similarly certainly not be entering into any significant major acquisition that would require us to go back to the equity markets at the current price.

And Jordan, I think it's important to note -- and as Steve said, we'll continue to educate the market and continue to be transparent about it. But I think it's important to note, as I said in my prepared remarks, that the emergency room market has done very well, not just our Adeptus portfolio, but I mentioned the HCA portfolio. We have four additional emergency rooms with two different operators. They all four are performing exceptionally well. We do not believe that this is a market or an industry issue. It is a solely specific issue to the issues with Adeptus that we believe that they can get under control very quickly.

That's helpful. Ed, I think the -- any insight you can offer in terms of how we could assess the market value, you know, away from Adeptus, of these standalone emergency departments. So have there been any trades or any other data points that sort of can tell us what these assets typically trade at? I think that your assets yield roughly 9% on cost for you -- correct me if I'm wrong -- and have I think you said north of -- or about a 3 times coverage.

Yes, actually, Jordan, that's a good question, and I appreciate your raising it. If you look at the first tranche, you remember that we did these $500 million commitments in three separate tranches, the first one at $100 million, the second at $150 million, and the third one at $250 million. The initial cap rates on the first tranche are approaching 12% at this point. The second tranche is approaching a little more than 10%, and then the third tranche is in that just north of 9% range.

It's important for everyone to also know that we only have roughly half of the total Adeptus portfolio. They've got a whole 'nother set of hospitals of roughly about 50, as well, that they have financed primarily using local developers, and a lot of those local developers obviously are not long-term holders like we are, like other REITs are. And so, they've sold a large number of those properties, and obviously, I am not aware of any sales post-Tuesday. But prior to that, those properties were selling in the low 6%s to high 6% range cap rates.

That's helpful. Last one for you, if I may. On the acquisition guidance, Steve, you've layered in $500 million to $1 billion I think of, I guess, shall we say speculative acquisitions, in that these have not yet been identified publicly. What's the confidence level there and the expected cap rate?

I think the confidence level in the dollar amount of the acquisitions between $500 million and $1 billion is extremely high. We could do more than that. The real constraints there are what I said in my remarks, which is market conditions and our capital constraints. And so, it's not available property. We have plenty of available property. It just will all depend on whether it's appropriate for us at the particular time to make those additional acquisitions. The cap rates that we've projected using for our guidance are in the 8% to 9% range.

And those are GAAP rates, by the way, which we frankly believe, at least in today's market, they would come in higher than that on a GAAP basis.

So those are cash, the 8% to 9%?

No, those are GAAP.

Oh, got you. Okay. Thank you.

Thanks, Jordan.

Thank you. And our next question comes from the line of Eric Fleming with SunTrust. Your line is open. Please go ahead.

Hey, guys. Just a quick --

Hey, Eric.

What's the current share count as of today?

What's the share count?

Yeah.

About 320 million.

Thanks. And a follow-up on the Adeptus, their Houston market. Is there anything you guys could do to help potentially bring in a JV partner to take that hospital?

Well, there is, if that was necessary. And as I said in my comments, I believe the Houston market would be very easy to find a replacement. Keep in mind; this is a very competitive market. Adeptus has very successfully executed and created a system in Houston with a general acute care hospital and 10 emergency departments planted in a 30-mile radius around that hospital. That particular market is profitable, similar to the rest of the portfolio.

Similar to the Dallas market, they did the exact same thing. They built their own hospital. They planted emergency departments, and then, having demonstrated the breadth and the strength of the system they created, they attracted by far the largest and most dominant hospital operator in the Dallas market, Texas Health Resources. So there are a number of opportunities in Houston to do that, and as I say, if, which we think is extremely unlikely, but if we had to find a replacement tenant, we think Houston would be pretty easy to do.

And, Eric, let me point out that some of the Houston facilities were in our original tranche. Some of them are in this most recent tranche. But let me just say some of the older facilities, as Steve pointed out, they are in the communities in and around Houston, and they are doing exceptionally well. One of the very first ones that we did, I think it was the fourth project that we did with them, is generating coverage in excess of 5 times. So we've got one generating coverage of about 4 times. We've got another one generating coverage of almost 6 times. So some of these facilities in Houston have done exceptionally well without having a third party joint venture right now.

All right. Thanks a lot, guys.

Thanks, Eric.

Thank you. And our next question comes from the line of Vincent Chao with Deutsche Bank. Your line is open. Please go ahead.

Hey, good morning, everyone. Just wanted to go back to the comment around the coverage if it falls below 2 times. I just want to get some clarity there. Is that the overall portfolio coverage going to 2 times, or is it specific to individual leases?

So the coverage measure is 2 times for both fixed charge and for lease coverage. On the fixed charge coverage measure, that's a corporate level. On the lease coverage, it's a portfolio level, so just our facilities.

Okay, and if you do hit that, then is the option then to replace them entirely, or is there more flexibility than that?

There's an escalating range of remedies, and it starts with being able to influence management, whether that's to leave the tenant in place and bring in new management. And then as and if that coverage continues to weaken, then the remedies get ever stronger, including termination. The point being, again, part of our model is to be able to react and take action before things get so bad that the hospital can't even pay its rent. So at a 2 times level, that gives us a significant shock absorber and an opportunity to take action. And don't forget, we will have by the end of the year more than $12.5 in irrevocable letters of credit.

Okay, thanks for that. And then, just in terms of -- I know it's only been a few days, but you sound pretty confident (inaudible) to replace, if and when, or if that ever became a need. Just curious if you've gotten any reverse inquiries at this point from folks circling those assets, if they have their own thoughts on what might happen here?

I mean, if we did, just following our policy of not commenting on sale transactions or investment transactions before they get more mature, we probably wouldn't say anything anyway.

Got it. Okay, that's fair enough. And then I guess just as you think about your relationship with Adeptus and working with the previous management team and things like that, is there anything in hindsight that you can think of today that would have flagged or identified some of the weak operational controls that seem to have been in place here?

Well, Vin, we monitor their financials on a monthly basis; we monitor statistics more often than that. We monitor the DOS end on a quarterly basis. We certainly knew that it had risen from 60 in the first quarter to 80 in the second quarter. We obviously didn't know it had gotten up to 119 until they released it to all of us publicly this week. Certainly, though, when it got up to 80, it was something that was on our radar. But 80 is not an overly alarming number. Obviously, 119 is. It obviously jumped up there much quicker than we had anticipated it to.

I've had my most recent meeting with Tom Hall back in April, where we discussed some of the specifics about his management team, and the things he was doing, strengthening particularly the accounting department. We were very pleased with the changes that he was making. Obviously, some of the bigger changes happened quicker than we had expected over the summer. We think that Frank has a very good handle on the problem. We think that Frank has a very good idea of what needs to be done to meet the solutions. I do not know Greg Scott, the new chairman, but I listened to him on Tuesday. He clearly has a good handle on the healthcare industry. He's got great experience in running healthcare companies, and I look forward to meeting him soon.

Got it, okay. And then, just last question, maybe going back to guidance here. The $500 million to $1 billion, clearly not going to issue equity at today's prices. But if I look at the additional proceeds, I know they're in Europe, but I guess to execute on a, just call it the [750] midpoint, doesn't really seem look you need equity. Am I thinking about this correctly, or is there some use that I'm missing?

Well, the excess 300 in Europe really is identified already with the transactions that we've already announced with Median.

Oh, so does the $500 million to $1 billion, does that include the pending Median, as well as the RCCH?

No, it does not.

It does not include either of those. Okay.

Right.

All right, thanks.

Thanks, Vin.

Thank you, and our next question comes from the line of Michael Carroll with RBC Capital Markets. Your line is open. Please go ahead.

Thanks.

Good morning.

Good morning, Mike.

Good morning. I remember that you guys said that 65% of your assets with Adeptus have high-quality JV partners. Can you give a sense of the operations of the other 35%? I know you already touched on Houston. Where else are those assets, and how are they performing?

So the other assets, there are a few in Houston that are outside the 30-mile radius of the mothership, so there are a few of those. And then, there are maybe half a dozen or a couple more than that in the combination Austin/San Antonio market. None of those -- this is based on Adeptus report -- are expected to go into HOPD. But nonetheless, they are doing very well.

To give you an example, Austin was one of the second projects that we did with them, and it's generating almost 7 times coverage. A facility in San Antonio was with the third party that we did. It's generating a little over 3 times coverage. So they are performing well, as well.

Okay, great, and do they expect to JV with just the Houston assets? They don't expect to JV the other ones?

That's right.

Okay, and do you think it will be more difficult for them to [unventure] some of those properties, given the recent announcements?

I do not.

No, neither do I. these are profitable facilities standing on their own. So in other words, the joint venture on its own is very profitable, and the joint venture partner would be very attracted to that. However, the bigger attraction for the joint venture partner is to plant 10 facilities around this radius, extending their market footprint and capturing very valuable, that is profitable patients, that would otherwise go to competitors.

Okay, great. And then, related to the Ernest LTACs, how can that operator recover for some of the weakness, I guess, that you guys kind of highlighted, if it's just the population pool is a little bit smaller? What can they do to fix some of those issues?

Probably the most likely scenario is converting some of those beds into other types of beds, whether that be IRFs or the micro-hospital concept, and we're looking at those with them.

Okay, what's your --

I was going to say, Mike, and the average length of stay criteria is not as important anymore, so the LTAC can bring in other types of patients. But again, that's somewhat constrained in these little markets, but it's another alternative, especially when, as Ed says, you reduce the inventory of beds.

And what's the coverage difference between the Ernest LTACs and the rest of your portfolio, and where do you see that coverage trending?

The Ernest LTACs, to answer it slightly differently for you, and I'll get to the coverage in just a second. But the Ernest LTACs, those two in particular are, since they've joined the patient criteria rules, are down census-wise approximately 15%, 20%.

The overall Ernest coverage, which includes the very profitable rehab hospitals, is right at 1.5 times, and that's even taking into account the weaker performance of the LTACs.

Great, thank you.

Thank you, and our next question comes from the line of Juan Sanabria with Bank of America. Your line is open. Please go ahead.

Hi, good morning guys.

Good morning, Juan.

Just on the comments about Adeptus sssets trading I guess in the mid-6 cap rates. So what sort of rent covers levels are those being underwritten to by the market?

I'm not sure, Juan. Certainly much less than what our facilities are operating at, because they're being sold by developers shortly after construction completion. So probably very low coverages, probably in the 1 to 1 or 1.25 type ranges, obviously with the expectations that they'll grow from there. But you know, these basically have been sales from local developers, so we don't have a whole lot of information, other than what they're being marketed as.

But that's telling in and of itself, because it implies a relatively high standalone real estate value. And again, that's the way we underwrote this entire business back in 2012 and earlier, even, when we were getting into it. The facilities are in high retail, high value areas on corner paths and outparcels of shopping centers. So I think Ed's point is that even at low coverages, there are alternative uses for these facilities, and the market perception and probably the reality is that they can be converted fairly easily.

Could you just remind us the average size and cost to build on a square-foot basis (inaudible) facility?

Sure, the average size is somewhere in the 6,000 square foot to 7,000 square foot range. And then on the cost per square foot range, it's somewhere in the $400 to $425 a square foot.

Okay, great. And then, just a question. I imagine the coverage levels you're quoting are trailing as of June. Is there any material movement updating those through September, if that is in fact the case?

That is the case. They are June numbers, and there is no downward movement. There actually is some properties that have come online, obviously, since June, so those are going to be lower than what the older ones are, just because they're in the ramp-up stage. But there has been no deterioration in the operations, if that's what you're asking.

Okay, and then just the last question for me, you guys seem to say that you're going to take your foot off the gas, at least temporarily, given where your cost of capital is today. But any thoughts about a buyback, even just having one in place in case the shares don't recover, at least in the near term, or just how you're thinking about a buyback in general, conceptually?

Yes, Juan, it's something that the board discusses often, and obviously it's a part of the entire analysis of what our opportunities are. It's something that we do look at from time to time at the board level, and we'll continue to do so, and we'll make those decisions as appropriate.

Thank you.

Thanks, Juan.

Thank you, and our next question comes from the line of Tayo Okusanya with Jefferies. Your line is open. Please go ahead.

Yes, good morning. Quick question about --

Good morning, Tayo.

-- morning -- RCCH, the acquisition that was done, or the pending acquisition. Could you talk a little bit about the cap rate on that deal and if RCCH is just kind of giving you right of first refusal is a big part of your $500 million to $1 billion in acquisition outlook in 2017?

So first question, Tayo, those rolled into the master lease, the original Capella master lease, and so cap rates consistent with that, which as I think we announced at the time, low 8 cash basis. We have not identified any properties with the $500 million to $1 billion. But we would expect, I mean, based on our rights of refusal, and based on the activity of our tenants, we would expect -- or I'll put it this way. We won't be surprised at all if some of that $500 million to $1 billion comes from RCCH, and some of it comes from Steward. And obviously, some of it, perhaps most of it, comes from other existing tenants. Which is not to say that we're not actively discussing with currently not-existing tenants.

Okay, that's helpful. And then, Ed, just giving your comments earlier on just about the hospital space, again, I think everyone fully agrees that hospitals are here to stay and won't disappear. But how does one end up really thinking about your hospital portfolio relative to, again, some of the noise we hear around the hospital space? You see things like Community and some of these other guys. Can you help us differentiate a little bit behind what you guys target for your portfolio versus, again, some of the other stuff we hear out there that's having "problems?"

As I think everyone that follows the hospital space would agree that the CHS in particular problems are not an industry problem, but a CHS problem. And certainly, we can go into as much detail on that offline as you would like.

From our portfolio, as has always been the case, the vast majority of our properties are some of the largest operators in the country. We think we have seven or eight of the top ten hospital operators in the country as a part of our total portfolio. But where we start with every hospital is, and our underwriting standpoint is we want to be sure that that hospital is needed in that community. If it's needed in that community, then if you've got the wrong operator or they've got a situation at the corporate level from the operator's standpoint, you can replace the operator. But if you're wrong on whether or not that hospital is needed in the community, then you'll never be able to make that up, so we start there.

We think of the hospital as a part of the infrastructure, much like the water system. And you ask yourself these simple questions: If the hospital were to close, does the community hurt? Can the people get their healthcare needs met somewhere else? If the answer is no, the community doesn't hurt, and yes, they can get their healthcare needs met somewhere else, then we move on to another situation. But if the answer is that that hospital is very much needed in that community, then you go to the next step.

The next step is, is it a facility that the physicians want to practice at? If it is a facility that either, based on its current configuration or your expected upgrade to it, a place where physicians want to practice, then you go to the third step.

The third step, you don't get to who the operator is until the third step. Because as I said from the first step, you can replace the operator. You can be wrong there and replace that one fairly quickly. As I said in my closing remarks of my prepared remarks, you absolutely -- listen, I've been doing this for more than 30 years. Healthcare is an ever-changing environment, particularly in the hospital world. I've seen probably five different times we had significant changes in my business lifetime to the reimbursement system, and of course, it changes -- saw small changes every single day, and certainly every single year.

You need to be able to operate with operators that have the ability to move and change within those environments, because as we started this question with, is you're right, hospitals aren't going anywhere. You've just got to be sure that you've got operators that can operate within that environment. I hope that answers your question.

That's actually very helpful. Thank you.

Thanks, Tayo.

Thank you, and our next question is a follow-up question from Eric Fleming with SunTrust. Your line is open. Please go ahead.

I just wanted to follow up on the 2017 guidance again. You said that that $500 million to $1 billion does not include the $300 million Median?

That's correct.

Okay, and I know you said the Median transactions are starting to already close. Does it sound like those will close a little faster in 2017, or are they still expected to be across 2017?

Well, I think generally, they're closing faster than we thought. We got almost immediate Federal Cartel Office clearance, and we've already closed three, I think. And so now, as you'll be familiar with, we're just waiting on the respective municipalities to reject their right of first refusal. So we're hopeful that it's all done in the first half.

Okay. And just one other. With the RCCH properties, is that a 4Q close for those, likely?

Possibly. There's two, and they're in different states with different regulatory regimes. But it possibly could be done 4Q. More likely first or second quarter.

And again, if those go into 2017, that's also not in the $500 million to $1 billion number, right?

That's right. Nothing in the $500 million to $1 billion is identified.

Okay, great. Thanks.

Thank you. And our next question comes from the line of Chad Vanacore with Stifel. Your line is open. Please go ahead.

All right, good morning.

Good morning, Chad.

I want to clarify something. When you state coverages on the Adeptus property, that's trailing 12 months, and it's one quarter in arrears, right?

That's correct.

All right, is it both on fixed charge coverage and for property level?

No, it's not. On fixed charge coverage, again, because that's a corporate level measure, we have the third quarter reports that they filed earlier this week.

All right. And then, Steve, what did you see from 2Q to 3Q on the fixed charge coverage (inaudible)?

I can't answer that off the top of my head.

All right. Well, assuming that they're having liquidity issues and it just popped in the last quarter, can we assume it's something less?

Something less than it was in second quarter?

Yes.

I don't think that's necessarily so. But we'll get back to you on that.

All right. So I'll just move on to the next question. You've got 10 properties undeveloped and $59 million left to deploy. Can we assume that you won't be deploying the uncommitted capital until the liquidity position improves? And then, how much additional deployment do you anticipate on the 10 properties under construction?

That's a good point. Of the $59 million, we have no intentions and no plans to deploy any of that. And so, with that, we have approximately $50 million remaining to deploy on the under construction.

Okay, and most of that comes on line by the third quarter of 2017? Is that right, Ed?

That's correct.

Okay. And then, so if you had to go the route of finding new operators, what are the challenges there, and then what are the alternative uses for the facilities?

I don't think the challenges here would be near the challenges that you would have in replacing an acute care operator. I think that you can move much quicker from these standpoints. Because you've got the joint venture partners in place, they obviously would be the most logical standpoint.

From the standpoint of alternative uses, these are primarily in high visibility locations in class A shopping centers, so you literally could turn these particular facilities, unlike a general acute care hospital, you could turn these into almost anything.

Banks, fast food, small medical --

We're talking non-healthcare properties, right?

Well, no. They obviously would include healthcare as well, but I'm just giving you the gamut. These are high visibility, grade A locations in grade A shopping centers.

All right. And just one more from me. This is only a temporary issue of liquidity at Adeptus. Would you consider loaning additional capital to help bolster that liquidity, near-term?

Yes, we obviously have been asked that question by investors, not by Adeptus. We haven't been asked by Adeptus at all. And our approach right now is that we don't think that we're in a position where we have to do that. We think that we're in a very strong position with the ability to, if they miss a rental payment, to take our properties back and release them to someone else. We don't think we need to make an additional investment in Adeptus.

All right, that's very clear. I appreciate you taking the question.

Thanks, Chad.

Thank you. This concludes today's question-and-answer session, and I would look to turn the call back over to Ed Aldag for closing remarks.

Thank you, operator. And again, we appreciate all of your interest. As always, if you have any questions, please don't hesitate to call, and we'll get right back with you. Thank you.

Ladies and gentlemen, this does conclude today's program, and you may all disconnect. Everyone, have a great day.