Medical Properties Trust Inc (MPW) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome the Medical Properties Trust Incorporated Q4 2016 earnings conference call.

(Operator Instructions)

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

Thank you Vicki. Good morning everyone. Welcome to the Medical Properties Trust conference call to discuss our fourth-quarter and full-year 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 do 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 our 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 no duty to update any such information. In addition during the course of the conference call 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 the 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 your interest in Medical Properties Trust. As we entered into 2016 our focus was on strength. It was our desire to focus on the continued strength of our balance sheet, our portfolio, and our team.

In 2016, and through the early days of 2017, MPT achieved all of the operational goals we set early in the year. We successfully and profitably repositioned our portfolio by capturing sizable gains from asset sales in the first half and allocated capital to compelling new opportunities in the second half.

The approximate $800 million in asset sells and our solid execution in the capital markets helped us significantly strengthen our balance sheet, reduce our leverage, improve our liquidity, and position the Company for long-term growth. Today, our total assets are $6.7 billion. This is $900 million more than we ended 2015 with, and is despite the fact that we disposed of more than 750 million assets in 2016.

We have improved our concentration levels to the best levels in Company history At the end of 2016, our largest tenant represented only 17.5% of our total portfolio. Prime, once our largest tenant, has been reduced to only 16% of the total portfolio.

And, most importantly to us, the largest investment in our portfolio only represents 3.2% of the total. We've grown more than 30% compound annual growth rate over the last five years.

With this type of growth, we have used varying methods of presenting our portfolio EBITDAR lease coverages to give the best comparison for quarter-over-quarter and year-over-year changes. We will continue to look for ways to improve the view into the specifics about the portfolio.

Let me start by going over our same-store coverages and remember, same-store to us means that the property has been in operation in our portfolio for at least two years. This allows us to have comparison periods.

For the third quarter, our Acute Care hospitals coverage is up 20 basis points year-over-year and is down 20 basis points quarter-over-quarter. This is not unusual [giving] the number of people on vacation during the third quarter. It has historically been the slowest quarter the coverage is a strong 4.2 times. Our IRFs were flat year-over-year, remaining at 2 times coverage. Remember we sold three very strong IRFs last year.

Our LTAC portfolio saw its worst performance of any quarter. The total quarter dropped 30 basis points to 1.6 times. Six of the facilities actually saw increases. Most of the issues remain in the Ernest portfolio. They continue to look at options for improving their LTAC facilities. There is only one of their LTACs with the negative EBITDAR coverage. The Ernest IRF portfolio continues to outperform, providing all overall total earnest portfolio IRFs and LTACs combined an EBITDAR coverage ratio of almost 1.5 times.

If you look at the entire portfolio, excluding only the four that we do not get operating information on, Steward, which was added during the quarter, and the MEDIAN additions that we added at the very end of the year. But this does include the facilities that are still in ramp-up stage. The total EBITDAR lease coverage is almost 3 times.

You will recall from our call in November, when we discussed the Adeptus situation - one of the items we felt gave us strong security is the JV partners with Adeptus in our facilities. We met with those partners over the last 90 plus days and have been reassured that they continue to believe in their properties.

They support the model and very importantly believe these freestanding ERs are an important part of their future. You may have noticed recently that ACA announced that they plan to continue their investments in freestanding ERs. They announced the planed 30% increase over their existing facilities.

You will also recall that we have approximately $446 million committed to Adeptus. Of that, all but $63 million has been funded to date, a total of $54 million remains uncommitted from the original $500 million commitment. The overall coverage for Adeptus MPT facilities is 2.62 times, and in that we have arbitrarily added a 5% management fee on the non-JV deals.

This decline from last quarter is not bad news, as more and more of their facilities become HOPD, their net revenue per patient declines as they begin to take Medicare patients and go under the hospital commercial insurance contracts. The trade-off for the lower net patient revenue per patient is added security. We view this as good news.

For further clarification on the coverages, the coverage from the first tranche is a little more than 3.5 times. Those are obviously the oldest facilities. The second tranche, 1.9 times, and the last tranche 1.8 times.

Much of the panic in the healthcare markets from November presidential election has subsided. I believe everyone now understands that, while it is most likely the ACA will be repealed, it will ultimately be replaced with something. And as I have said many times, hospitals will continue you to be the linchpin for the healthcare delivery system in this country.

It is wonderful to start the year with such a strong balance sheet and so many opportunities.

We are committed to maintaining our conservative debt metrics at 5.1 times net debt to EBITDAR. We are in the lowest range compared to other healthcare REITs. At this time, I'll now ask Steve to over the specifics of our financial metrics. Steve?

Thank you Ed. This morning we reported normalized FFO for 2016's fourth quarter of $0.31 per diluted share, resulting in full year normalized FFO of $1.28, $0.01 higher than our most recent estimate of $1.27. And that is due, among other things, to the fact that we did not complete a 500 million euro bond offering that would have diluted FFO somewhat.

We are maintaining our estimate of 2017 normalized FFO as a range of between $1.35 and $1.40, the same as we introduced last quarter. There are two items that are included in net income but adjusted out of FFO for the quarter. Number one: about $35 million in acquisition cost, of which approximately $25 million are substantially related to previously disclosed taxes on our approximately 700 million euro 2014 purchase of 32 hospitals that were leased to Median clinic, the top private operator of German rehabilitation hospitals.

In 2014, when we first disclosed details of this transaction, these taxes, which have only recently been paid, were considered in the 9.3% GAAP return metrics that we announced. Of the remaining roughly $9.8 million in acquisition cost, about $5 million relates to the $1.25 billion Steward transaction that closed during the quarter and the rest relate primarily to transfer taxes on other German acquisitions.

The second component of normalized FFO adjustments is that we have elected not to include in FFO about $4 million in income tax benefit recognized during the quarter. This credit is the result of some technical accounting subjectivity's that caused us to release prior period tax asset valuation allowances. And we expect this will be nonrecurring and not indicative of operating results going forward.

To be clear, though, we intend to continue presenting income tax benefits and expense from ongoing operations as components of FFO in future results. As Ed mentioned, we presently have $6.7 billion in gross assets, supported in part by net debt that is equivalent to only about 5.1 times our in-place EBITDA. That is one, if not the lowest leverage levels in the entire healthcare REIT sector. As we have made clear many times now, we intend to run the company with prudent levels of debt, which we presently consider to be in a range of 5 times to about 5.5 times EBITDA.

Last quarter we estimated that we would make so-called ordinary course acquisitions in 2017 of between $500 million and $1 billion. Based solely on our current balance sheet, our debt would approximate about 5.5 times EBITDA, if we made acquisitions at the low end of that range. The recent cost of common equity makes it unattractive to fund substantial acquisitions with common equity, so we are exploring further asset sales, earnings retention, joint venture opportunities and other institutional funding as means to lower our cost of capital for larger acquisitions as they may arise.

Just a few comments in addition to Ed's, about Adeptus. First, Adeptus has consistently, both before and after their disclosure last quarter about their cash constraints, prepaid 100% of our rent and other financial obligations at the beginning of each month, and they did so again for February. This demonstrates two things to us. Number one, they have obviously generated sufficient cash for release payments and number two, and more importantly, it reaffirms the power and the position of the master lease structure. Tenants are not able to cherry pick good and bad properties but in order to continue operating must fully pay rent for all facilities under a master lease.

Second, we have on hand irrevocable letters of credit for about four months of in-place rent. We remain confident that Adeptus, its joint venture partners or other possible successors will be able to operate these facilities profitably. But in the event there is an operator transition, this strong cash cushion gives us even greater confidence that there will be no material impact on MPT.

As Ed mentioned, our overall Adeptus coverage for the trailing 12 months, as of the end of last year's third quarter, is a little more than 2.6 times, and it is important to remember, as Ed said, that MPT assumes a 5% reduction in EBITDAR for management fees even though properties may be self managed. So we will just reiterate that we are very bullish on this established and growing delivery mode for increasing volume, marketing reach and quality care.

Ed already mentioned the recent news that HCA continues to expand its industry-leading portfolio of freestanding emergency rooms. And many other systems are doing the same. The facilities we have developed for Adeptus are brand new, state-of-the-art, already generating revenue, in great locations and the majority partnered with the dominant not-for-profit Acute system in their markets.

Adeptus may well be able to continue to operate these facilities but, once again, if it is necessary to transition operations, we remain highly confident that can be done without material impact on MPT. Last week we announced the completion of a new credit facility so I will not belabor the details that were in last week's press release, but feel free to ask questions in just a minute.

The point I will make is simply that we were able to achieve lower pricing, even in an environment of higher rate expectations and obtain an agreement whose terms give us additional flexibility to continue to prudently grow our business. Importantly, those included a EUR200 million term loan, the proceeds of which we will use to prepay a similar amount of callable bond debt.

The call bonds had a 5.75% rate, while the new term loans initial cost will be about 1.5%. That's based on a 1.5% spread over current one-month Euro LIBOR now at 0%. It remains possible that we will issue new euro bonds to fund the recent and pending euro denominated acquisitions in the near term pipeline.

Call premiums and other transaction costs related to these financing activities, which are expected to aggregate about $13 million, will be expensed in the first quarter of 2017. The substantial majority of that is for the call premium and of course we elected to incur that because of the strong net present value it created for us.

It is also possible that we will refinance the $350 million 2022 bonds that become callable this month. Those bonds have a rate of 6.375% and we expect to be able to issue new bonds at a rate that also would provide a positive net present value. The last thing I will point out about our capitalization is that we have no scheduled maturities for three years, until 2020, and that does not include a single small mortgage loan that requires immaterial monthly principal payments.

One last brief point that I want to make before we go to questions is to introduce a planned expansion of the scope of our coverage reporting, and Ed, of course, made a start this morning by disclosing that our overall tenant EBITDAR to lease payment coverage ratio is almost 3 times. That excludes the few properties that Ed mentioned. That is comparable to the same-store measure of 3.4 times EBITDAR.

Finally, there are only two lease arrangements representing less than 1% of the total which have a one time or below coverage after taking into account master lease and cross default enhancements. For each of these two, and they are with different tenants, we hold irrevocable letters of credit in the amounts of two times annual rents. Now, again, these measures are based on tenant reported financial results and have differing measurement periods and sometimes methodologies than what is in our consistently reported same-store reporting.

As we were able to better assure ourselves of the reliability of tenant reporting on our newer properties, and thereby fold them into our own reporting system for a consistent methodology and presentation, we plan to report this information in our supplemental package each quarter. With that we will be happy to take questions. Operator?

(Operator Instructions)

Josh Raskin, Barclays.

Hi, thanks, good morning guys.

Good morning.

First question, just on Adeptus, just sort of doing the math, and it's hard to know on a trailing 12, what the quarter that comes out of the calculation versus the quarter comes in. But the tick-down, sequentially could equate to something close to 1 turn, and put you sort of under 2 times in the current quarter. Is the math right on that, or was coverage kind of coming down through the year, and we're not at 2 times, or anything like that?

Yes, well, as I said earlier in the call, most of the drop in the coverage is due to the facilities becoming part of the HOPDs. As part of the HOPDs, they began taking Medicare patients, and they began collecting commercial revenue under the hospital's commercial payments. So those are obviously lower net patient revenue numbers than the original revenue that they were getting. In addition to that, we've had some hospitals open, so the hospitals are in their ramp-up stage. All that being said, for the specific quarter, the coverage was approximately 2.3 times.

Okay, okay, and my understanding when you're converting to HOPD, is that you have the rates come down, but the margins typically on those facilities, tend to be maybe similar, if not slightly higher. But you're just saying, even with similar margins, that just the dollars of coverage, relative to the rent, your rent is not changing obviously, depending on the structure the facility, is that what you're saying?

No, that is correct. Now, obviously, you hope you get two trade-offs by going to HOPD. The most important one that I referred to, is security. The second one, is that you get more patients, obviously. That's in the beginning stages of that, so you hope to see some of the downtick in coverage actually come back from the increase in volume.

Okay, that makes sense, and then just more -- sort of taking a step back, you guys have put more than $1.5 billion to work over the last couple of years, last three years actually. I know you've guided to somewhere in the $500 million to $1 billion range. But just looking at -- you mentioning the lack of attractiveness of issuing equity, and maybe the operational environment, and juxtaposed that maybe with debt levels, and where rates are going, et cetera. Is it fair to say that 2017 will be more of a digestion year, and you'll continue to grow, but investors should really not be thinking about what the historical levels are, and maybe the pipeline, et cetera?

Well, let me answer that this way. Josh, obviously no one knows what the market is going to do from any given time. So, if you look at what our current balance sheet is, and what our current opportunities are, as Steve and I both mentioned, it is very important to us to maintain a conservative balance sheet, and maintain the leverage ranges that we so proudly have obtained and maintained.

To do that, we could do approximately $500 million to $600 million of additional acquisitions without affecting that at all. So to get up to that higher range of that, you'd have to see some changes in the capital markets -- the different avenues of access to capital that Steve mentioned. So that's why there's so -- a very wide range there.

Okay, but from a pipeline perspective, is that level of investment still feasible? Are you still seeing opportunities?

Oh yes, from a pipeline standpoint, we could do substantially more than that substantially, more than that.

Okay, all right, thanks

Andrew Rosivach, Goldman Sachs.

Hey, good morning guys, and if I forget, thanks for the additional disclosure on non-same-store stuff, I know I've been bothering you for that for a while. I apologize, I got more on Adeptus, it's probably all the incomings that the sales site is getting this morning. I think what a lot of people are doing, is trying to line up their financial statements with your business, and feel free to tell me where it's an apple with an orange. The first is, on the reported coverage, is your coverage cash, or how is their receivables issue dealt with when you report your coverage?

Yes, our coverage is our GAAP numbers that we, obviously, pay attention to. The cash is -- obviously, cash is king. But those numbers get reported to us to in arrears. Now, obviously, since the end of the last quarter, when they reported those numbers, we'd been in daily contact with them, and are doing the best we can to get the best position that we feel that we can, in their collection ability.

They have made vast improvements on that. I think they still got a ways to go, but given where our numbers are, and where we see what they're doing the total overall cash collections, we still feel very good about it. Now actually, I want everyone to know that I feel better today than I did at the end of the last quarter, when we had our last earnings call, and the somewhat surprise announcement by Adeptus.

As I mentioned on my prepared remarks, that we've met with the joint venture partners, and I can't stress enough, the bullish meetings that we had with each and every one of those joint venture partners. So as Steve has harped on the last call, and this call, we think that our model protects us very well. We think that Adeptus is going to come out of this, and continue to be able to be a viable company, going forward. But if we're wrong, and they're not, we believe that we are in even a stronger position today, with these facilities than we were at the end of the third quarter.

I guess, maybe, two follow up pieces to that, is obviously, a piece of this mix is the potential for those partners to contribute to -- that they were always supposed to have cash [dip-ins]. Do you have any sense of whether or not that's more likely to happen? And then second, do you have a sense of when we know how those receivables are going to play out, and whether the GAAP number is lining up to the cash?

Yes, obviously Andrew, we have had various discussions that are non-public information, that we can't comment on at this time.

Understood, and I appreciate that. And then, the last piece of this, is when you give that 5% management fee, if you ever just look at a straight Adeptus income statement, their G&A as a percentage of revenues, is a lot higher than that. Is the reason why you're using 5%, rather than just kind of using a ratio of their G&A to revenues off their income statement?

Right, so Andrew, it's because when we layer on that 5%, and by the way, as I mentioned, it's not just Adeptus, it's every one of our facilities. We're looking to the downside, the worst-case, in which case, we would have to recover our properties, evict the operator, and bring in a third-party manager. And that third-party manager is not going to work for free. So, the additional 5% actually is duplicative, to a great extent, of the G&A, that you mentioned. And so, we're assuming, both that G&A, that you've already mentioned, with an additional 5% on top of that.

Got it, okay, no, that's really helpful. Thanks a lot, guys.

Certainly, Andrew.

Jordan Sadler, KeyBanc Capital.

Thanks, guys. Good morning, bear with me for a second on a couple more of these Adeptus questions. I think that's probably a big source of what's ailed you guys on the equity front. And so, so maybe clearing the air a little bit helps out. And it sounds like, Ed you said a couple of things that kind of piqued my interest.

One of which, that you feel better today, than you did at the last earnings call, which is great news. Is there anything you could share incrementally that made -- that engenders those feelings for you? What is it, specifically, that these guys are doing that is making you a little bit more comfortable, besides the conversations with the partners?

Yes, I think the conversation with the partners, and the incredible commitment that they have to that, and in addition to that, HCA's announcement last week about their commitment to the industry as a whole. Those are the two primary factors that give us an awful lot of comfort. As I said earlier, we are in daily contact with the management team at Adeptus. I can't comment on much of the details here, other than to tell you, that we like what we see, and the changes that they've made, and the efforts that they've made. And that's probably all I can say at this point.

I guess, I would just add a high level generality to that, Jordan, is if you remember the Adeptus announcement over a quarter ago, I think they disclosed that they were going to be looking for a significant level of immediate, emergency capital. And they've made no announcement about that, so I think the observation is, they haven't done that. And yet, here we are, going on 120 days later -- and as I mentioned, they continue to pay the rent, in full, on time. And that, in and of itself, is a positive observation from our viewpoint.

What is your level of commitment, as it relates to incremental capital? I think, maybe on the last call, and it was probably early days, you had said -- it seemed like you were not exactly ready, willing, and able to ante up incremental capital to support their business model. But at this point, given your comfort level, should we expect you to commit incrementally to Adeptus?

Well, that's a very good question, Jordan, and you're absolutely right. On the last call, we said we didn't feel that we needed to, because we were in a very strong position. We feel even better about that today, based on the comments that you've heard from both of us throughout the call today. But having said that, you're absolutely right. We have a good confidence in the company right now. If we were to make an additional investment, and we have absolutely no commitment to do so, but if we did, it would be because we believed it would be a good investment, not just throwing somebody a lifeline.

Okay, and last one on this topic is, are you comfortable with the basis in these assets? Just, so forget about the cash flowing, obviously, the coverages are coming down a little bit as the model is transitioning to a HOPD, but are you comfortable with the basis in these assets, vis-a-vis, what the partners would be willing to support from a valuation perspective, or an alternative investor like an HCA or somebody?

Well, absolutely, and that's another good point, and I appreciate you bringing that up. So not only do we feel very comfortable about the basis for these facilities being operated as freestanding emergency rooms, but as we stated very early on in our original commitments to Adeptus, that unlike some of the hospital assets that are out there, these are actually good real estate assets.

They're primarily located in very strong class A type shopping centers and the outparcels that could be used for any number of things. So you're absolutely right, not only are we very comfortable with the basis as a freestanding emergency room, but we're also -- feel like we have a tremendous amount of security, if we needed to turn any facilities into any other particular use.

Thank you very much. The one other question, in terms of what you're trying to do every day. I saw in the release, the mention of additional or significant acquisition opportunities ahead. And I saw something in there, a nuance that said, into new markets. So these are operators with proven healthcare delivery models, looking to expand into new markets with your assistance. So can you maybe expound on that a little bit, would that be new markets for MPT?

Well, it would be the potential new markets, new cities, new states within the US, and new countries within Western Europe. We continue to be in the -- primarily in the acute care sector, not new product type.

Okay, thank you. I wish you luck getting the Adeptus situation cleaned up in an expeditious manner.

Thank you.

Michael Carroll, RBC Capital Markets.

Thanks, just a couple quick questions on Adeptus. How many of those facilities were transitioned to HOPD during the quarter? I believe you said that was the main reason why coverage dropped about 20 basis points?

Yes, I don't have the exact number in front of me, Mike, but I can get it to you after the call.

Okay, then how long does it typically take for those assets to stabilize, once you transition them into an HOPD?

Well, they were stabilized, generally, before they were transitioned into an HOPD as well, so it typically takes about five months for them to go to a stabilization period

Okay, so then do we -- should we expect that this coverage ratio to decline again next quarter, and then kind of, rebound after that, once you -- once these assets start to stabilize a little bit more?

I don't think so. I think that you may see a slight decline, only because what I told you what the coverage was for this past quarter, but overall, we think that it's probably at a pretty stable point.

Okay, great, and then can you talk a little bit about the LTAC portfolio? I know previously, I think a couple of quarters ago, you were confident that all your LTACs will be able to handle the new patient criteria, and honestly, the Ernest portfolio is not doing as well. I mean, is the [1.6] coverage ratio on the LTACs -- I guess, what is that, excluding the Ernest portfolio?

That's a good question as well, I don't have -- I can't do that arithmetic very quickly, but I will tell you that the, as I said in my prepared remarks, the Ernest portfolio, while none of the LTACs -- two of the LTACs are performing well, the other LTACs are not performing well, but there's only one that is performing extremely poorly, and that's the one I mentioned on the call. So when you take that one out, the coverages are good coverages. And the other LTACs, the non-Ernest LTACs, are performing well.

Okay, is this one -- ?

Some of them extremely well. It's the same facility that I talked about on the last earnings call. And Ernest is in the process of looking at options for this particular facility, and they still continue to include, as I mentioned back in November, that they may convert this facility into something other than an LTAC.

Okay, another healthcare-type property?

Yes.

Okay, and then, I guess, a last question is that [1.6] coverage ratio on the LTAC, is that a low-watermark, or should we expect to see that drift a little bit lower?

Well, I hope it's a low watermark, because it's really brought down by that one facility. If they can do anything with that one facility, we should see that jump up nicely.

Okay, great, thanks, Ed.

Vincent Chao, Deutsche Bank.

Hey, good morning, everyone. Just sticking with the (inaudible) here. In the last quarter we talked about some remediation that you had potentially in place if the coverage did drop to, I think, below 2 times. I just want to make sure -- so the 2.3 that you mentioned in the quarter, is that the same number that -- if that were to fall to 2 times, that's when you have some ability to put some (inaudible) in these assets, or is it a different calculation?

Yes, it's actually different calculation. Remember that Steve and I have been talking about -- we've artificially lowered this number by adding things like the additional management fee on it. So the actual coverage is actually higher than that.

Okay, so you're not -- ?

The contractual coverage is higher than that. As you well know, in most credit facilities, they're lots of carve-outs -- lots of add backs -- for, in particular, ramp-up periods, pre-opening costs -- and all of that is in our contractual coverage, also. What we are reporting is actual coverage, that comes off the GAAP financial statements, and does not include those types of add-backs and carve-outs.

So that's the point that we're trying to make here is that, if on an apples-to-apples basis next quarter, the coverage is below 2, the coverage is significantly higher than that, again on this contractual basis that I'm describing

Okay, so not close to that benchmark, at this point?

Right.

Okay

So Vin, let me give you some more information, because I think -- I don't want to scare people with the number that we have given you. If you look at their facilities, just their facilities that have been operating at least six months or more, their coverage is more than 3 times.

Got it. Got it. Okay. And then, just maybe, [continue] about the line of [credit] -- or the letters of credit that you have outstanding. If something more negative were to happen here with Adeptus, I guess, does that just put you ahead of the unsecured creditors? I guess, where does that put you --?

No, we own that. We possess that cash. Yes, it's ours, and nobody has any right to it. And just for example, if Armageddon happened, and there was a bankruptcy, in any situation, those letters of credits, are like us having cash down in the vault, with nobody else has a claim to them.

Got it. Got it.

So let me just make a couple of more comments, as we've talked so much about Adeptus here. Some of the things that we take for granted, that everyone might know. So for example, these facilities are branded the joint-ventured names. They're not out there as an Adeptus facility on the corner.

So when you ride out to the Texas Health Resource facilities, their name is on the door. If you look at the Colorado Health Systems, their name is on the door. And not only do they benefit from, obviously the profitability of each one of the freestanding ERs, but they greatly benefit, as has been shown, for HCA's investment in these facilities, is the patients that they bring to the mother-ships, if you will. So they are very strong supporters of the overall model for the freestanding emergency rooms and they're joint-ventures in them.

Got it, okay, and then maybe just switching gears here, away from Adeptus. Just in terms of the term loan that was announced and the $200 million portion, I'm thinking of specifically, that's going to be used to pay the 2020 notes, I guess. You also mentioned that you are still considering a potentially unsecured offering in Europe, to potentially fund future acquisitions. I guess, what is the state of the unsecured market in Europe today?

I guess, what caused you to go down the term loan path versus the [500], and presumably the markets are pretty tight right now. And I guess, the second part of that is, if you don't use an unsecured term loan -- sorry, an offering -- down the road, should we just be thinking about the $300 million or so, that was previously earmarked for, I guess, [Median] acquisitions, as coming off the line of credit?

Now we do clearly intend to access, so-called permanent capital, for both the remaining pieces of that Median acquisitions, and for future pipeline. To specifically answer your question, the conditions for issuance in Europe right now, are relatively stable. There were reasons earlier in the year that we elected to go with this term-loan piece, instead of issuing into the existing market. But we do expect -- probably in the foreseeable future, we will be back in Europe to complete what we started there.

Okay, and that is part of the guidance range, is that permanent capital?

Yes, that's in there.

Okay, thank you.

Chad Vanacore, Stifel.

Good morning.

Good morning, Chad.

So, taking off on Vin's question about Europe and the financing market, so what are the acquisition opportunities outside US that are worth exploring? Is it more German hospitals, more Southern European hospitals or something else?

All of the above. There are more German hospitals and more opportunities in each one of the countries that we're currently in, as well as a couple of other countries that we are not currently in.

Good. Sorry, so Ed, you had some commentary about feeling good about the pipeline, and how a changing reimbursement environment might actually open up opportunities for you, can you just elaborate on that?

Are you talking about the repeal of the ACA and the replacement of it?

Yes, right in the press release.

Yes, so what I meant by that was, that I think that when the election happened, and the realization that the ACA was absolutely going to appeal -- I mean be repealed, we were in the same position as a country, that we've been in a number of times before, which is when uncertainty as to what the rules were going to be.

When you have that time period, you generally have people stand on the sidelines, waiting to see what they're going to do. I think that in talking to everyone, reading everything, I think that everyone is certainly of the understanding that the ACA will be repealed, in some form or fashion, probably the most, if not all of it, repealed.

I think everyone is also comfortable that there is going to be some replacement to the ACA. And whatever that replacement is, the hospitals will continue to be the linchpin of the delivery system, and that there will be reimbursement in some form or fashion, in roughly the same type of dollars, obviously shifted around.

With that, you've seen a lot of people -- or we have seen a lot of people, get back into the markets, get back into the M&A activity. We've gotten a lot of calls over the transom of people saying, look, we're ready to look at additional acquisitions, and we just want to put on notice, and hopefully be able to use you for financing in the future. So that's what I was trying to get across in the press release, in my remarks.

Okay, and that's great color. Just one more question. Going back to Adeptus, do you have any insight that you can share on what they're doing to actually improve cash collections over there?

Well, I'm trying to remember what exactly what they've made public. And I can't remember that off the top of my head, so being sure that I don't get in trouble, I just better not comment on that.

All right then, I'll hop off, thanks

Okay, thanks Chad.

Juan Sanabria, Bank of America.

Hi, just a quick follow-up on Adeptus, you talked about, potentially, having alternate uses, in a worst-case scenario for some of the assets. Could you just talk about your basis, on a dollar per square foot basis, on those Adeptus freestanding ER facilities?

Sure, just a second. So the total cost is generally in the $5 million to $6 million range, and on a square foot basis, that's generally in the $375 to $400 range.

Okay, thank you. That's helpful. And then, on the coverage levels for the acute care general hospitals with a master lease that dropped, it looks like, 30 basis points to [3.4] times on a trailing 12 month basis, as of the end of September, is that really largely as a result of Prime? I don't know if you could comment on that? And any update on kind of the Prime situation? Is there any -- been any change in their billing practices, or any update on to the DOJ investigation?

So, answer the first part of that first. The answer is no, there hasn't been any additional real update, other than what you may have seen in the press, as is typical. Prime filed the motion to dismiss, and the judge ruled against that. And so, the case is continuing. But other than that, I don't have anything.

So, no, the difference in the acute care is not from Prime. Prime has actually continued to perform well, and has improved. The primary change is from our very strong performing facility down in Texas, which is continuing to add additional managed care contracts. And again, the managed care contracts add security, but they generally add a lower reimbursement. Now the coverage on that facility has been astronomical, and it continues to remain astronomical -- still a double-digit return, it's just a lower double-digit coverage.

Okay, great. And then just going back to Adeptus, just on the liquidity. So are they paying your rent by borrowing, or they actually able to pay the rent from what they're generating internally, or how are they funding their commitments to you?

Well, I mean, that's not something we have knowledge of, or access into. The only point I made earlier, was we're not aware that they have -- since their announcement back in November, we're not aware that they have -- that they have accessed new capital. Now are you talking about, are they paying us cash, is that the question?

Well, I know they're paying you cash.

Okay, that's what I thought. Yes.

So, you have confidence, but you don't know where the money is coming from -- not to put words in your mouth, but is that what you are saying?

No, no, we know it's coming from Adeptus.

And Juan, keep in mind that we only own roughly 50% of the total Adeptus facilities. So we don't have total insight into the operations of the other facilities. So money is fungible at the corporate level, and they obviously have losses at some of these facilities that we don't own, some of the hospitals that are coming on-stream that we don't own. And so, to sit here and tell you whether it's from that borrowing that they announced, or the additional capital injections that they announced last September, versus our cash flow, is really not something that we can answer, because of the fungibility of the money and us not the owning 100% of their properties.

Okay, that's it for me, thank you.

Omotayo Okusanya, Jefferies.

Yes, good morning, everyone. First of all, let me just echo Andrew's comments, as well I do think the improved disclosure is a huge help, so thank you for that.

Thank you.

A couple of questions from my end. I know you talked about Adeptus a lot. I mean, there's just been some news in the market that they may be closing some facilities as part of their whole restructuring process, I just want to confirm that has zero impact on you guys?

Right, we've seen that also. They continue to pay rent on every one of our facilities.

But you're not hearing anything back from them that they may be closing some of those facilities that you own?

No, we're not aware of any -- well, they haven't told us they've closed any of our facilities. We are aware that the University of Colorado has began using one of the facilities as urgent care. But again, continuing to pay rent.

Got you, okay. So that's the first question, that's helpful. Then the second question, Steve, you made some interesting commentary just about sources of capital going forward -- that you may consider asset sales, that you may consider doing JVs of some assets. When you kind of think about that process, could you just kind of talk about what kind of assets you'd be targeting? Are the sales more of just kind of like non-core assets? Are the JVs more around the higher-quality stuff where you may get the most invested interest? And what kind of investor pool are you generally talking to at this point about potential JVs, if any?

Yes, so let me try to address each of those, and remind me if I forget one. We would, just like this time last year you remember, when we started selling assets to recapitalize the balance sheet. As it ended up, the assets that we first focused on, never got sold, because there were so much interest in other types of facilities.

So point being, from that comment, is we're willing to consider the value in all of our assets, and how do we unlock some of that value for us? And our view is that, obviously, we have a substantial exposure to general acute care in the US. We've got a substantial exposure to post-acute in Germany. We have very attractive assets post-acute in the US. And as Ed mentioned, it's really been surprising, at least personally to me, the level of interest from sophisticated investors in US, in particular healthcare real estate. So we will consider all of that. We think all of that is attractive in one way or another to one type investor or another.

Great, that's helpful. Last one from me, just in the world of post-acute care, is there any kind of insight, at this point of what you think the new Secretary of Health could be thinking about, from a post-acute care perspective? There's been talk he may try to slow down some of the bundling initiatives and things like that. But I'm just curious, with you guys having a pulse on things, what you think about the guy, and what he may or may not do?

I've never met Mr. Price. I look forward to meeting him, but I don't have any insight into him at this time.

Okay, that's helpful, thanks again.

Thanks, Tayo.

Mike Mueller, JPMorgan.

Yes, hi, just a couple questions, one. Hey, good morning. So just a quick one on Adeptus. Just to clarify, the [2.3] that you mentioned for most recent quarter, is that a fair proxy for where you think the run rate for 2017 will be, if you were to take a look forward?

The [2.3], do we think that's going to be like the 2017 is going to be, is that the question?

Yes, because I think that's what people are concerned with, as you look forward over the next year, where does that coverage trend?

Yes, well, two things in answering that question. One is remember, that's an artificially low number from us, and remember that that includes all of the properties, not just the properties that have been in existence for more than six months. So when you look at the properties that been in existence for more than six months, that coverage is substantially higher than that.

When you exclude the hospitals, that coverage is substantially higher than that. So I think on an overall portfolio basis, it's hard to exactly say until we figure out exactly what's going to happen with those few hospitals that they have. But I think overall, on the freestanding emergency rooms, that we would expect them to be higher than that number.

Okay, okay, and then, I guess, second on, the acquisitions, you talked about the guidance, including $500 million to $1 billion, and $75 million of dispositions. I mean, how we think about, I guess, the unidentified acquisitions, given the comments about just JVs and asset sales, and everything? Is the plan to essentially knock out the $500 million, the low end of that, based on the capacity now, then look for alternative capital sources if the markets don't get better? Or do you just kind of sit tight right now, and just really not execute as much, despite what's in guidance?

No, Mike, we are very active on all fronts now, I'm talking about from the capital side. We are absolutely not standing still, hoping that the common equity markets will improve. Frankly, I don't expect that, certainly in the term -- looking out over the few quarters.

So, we are actively exploring what's the best way to be able to recycle some of the tremendous value that we've created. What we did last year was truly just kind of a small part. We took $800 million of assets that demonstrably had grown substantially in value. That's free money to us. And so, we think there's more that -- we know there's more of that, and we're very aggressively exploring those opportunities, so that when and if larger acquisition opportunities present themselves, we'll be prepared.

Okay, so if we're going to the press release, and looking at the guidance, the $75 million of dispositions, it sounds like we should put a heck of a lot less weight on that, and more weight on just the comments you talked about, in terms of looking for asset sales. So we could see a number that's very different, in terms of asset sales, if you are continuing to buy stuff. Is at the right way to look at it?

The $75 million mentioned is a particular asset that we have a relatively high level of confidence will actually sell. No, it's not meant to establish a range of what we may sell. And again, the reason for putting that $75 million in there, is just so you know what's in our assumptions for the guidance going forward.

Got it, okay, thank you.

Thanks, Mike.

Eric Fleming, SunTrust.

Hey guys, on the acquisitions and the capital sources that you are thinking of, I mean, how are you thinking about -- is your preference to do asset sales, or would you be looking more to do something, whether a JV or some other type of access to capital? What would your preference be?

So I think the strong likelihood, relative to other resolutions, is to do joint ventures, where we would take a portion of a particular relationship, and carve that off to a passive joint-venture partner. There are a couple of reasons for that. Number one is, these very substantial institutional investors, whether it be pension funds or sovereign or others, they want us to stick around, they want us to continue to manage, and in some cases, they will want to participate in growth going forward with us. So I think that's why, as we think about -- try to handicap what may happen, that's probably the likelihood.

Okay, and do you think it would be, and could it be something where your actual relationship moves from Europe to the US? Or is it more (inaudible) [Steward], could [Cerberus] come in as a potential, or is it someone even newer [to them]?

I think all of the above.

Okay, good. Thanks a lot guys

All right, thanks, Eric.

Karin Ford, MUFJ Securities

Hi, good morning.

Hi Karin, it's good to hear from you.

Hi, good to hear from you guys too. Just a quick question on cap rates. Have you seen any movement upwards, given the change in base rates recently?

Karin, I think that I've seen more than I can actually really point to. I think that there has been a slight increase, or at least in the mindset anyway, can't really prove that yet.

Fair enough. And then just second question, just on your floating rate debt balance, it stood at 18% at the end of the year. It looks like it's going to up closer to 25%, when you replace the euro notes with the term loan. Are you comfortable at that level? Or are you thinking about doing any hedging on your floating rate debt?

No, I don't think we would do any hedging, because to really answer the substance of your question, we don't intend to play the rate game. The reason we did the euro -- EUR200 million loan is, as I mentioned earlier, the conditions didn't serve us to go ahead and issue the euro bonds. And yet, we were able to call EUR200 million, and it was a highly, highly accretive transaction. So I pointed out, that we're going from 5 3/4% to 1 1/2%, but we won't keep that term loan out, just in order to play that rate game.

Got it, thanks very much.

Thank you, Karin.

I'm showing no further questions at this time. I would now like to turn the call back over to Ed for closing remarks

Thank you operator, and again, thank all of you for listening in today, and thank you for your questions. If you have any additional questions, please don't hesitate to give us a call, and we'll get back you very quickly. Thank you very much

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