Medical Properties Trust Inc (MPW) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2017 Medical Properties Trust Earnings Conference Call. (Operator Instructions) As a reminder, this call will be recorded. I would now like to introduce your host for today's conference Mr. Charles Lambert, Managing Director. You may begin.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our second quarter 2017 financial results. With me today are Edward K. Aldag, Jr., Chairman, President and Chief Executive Officer of the company; and Steven Hamner, Executive Vice President and Chief Financial Officer.

Our press release was distributed this morning and furnished on Form 8-K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our Website at www.medicalpropertiestrust.com in the Investor Relations section. Additionally, we're hosting a live Webcast of today's call, which you can access in that same section.

During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed and/or underlying such forward-looking statements. We refer you to the company's 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 security laws, the company does not undertake a duty to update any such information.

In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which would -- which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that, in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our Website at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations.

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

Thank you, Charles. And thank, all of you, for joining us today for our 2017 second quarter earnings call. The first half of the year has been a record for MPT. In the first half of the year, we announced the $1.9 billion of highly accretive acquisitions. With the expected completion of these acquisitions, we are announcing today our 2018 normalized FFO in-place run rate guidance, which only includes acquisitions through the end of 2017. Steve will go through these numbers with you in more detail in just a few moments.

During the second quarter and early third quarter of this year, we entered into binding agreements to acquire 11 more hospitals with Steward and completed the acquisition of 25 hospitals and started construction of one in Birmingham, England. These investments bring our total pro forma gross assets to approximately $9.1 billion, a 35% increase over 12/31/2016 gross assets.

Pro forma, our total portfolio will include 270 properties, representing more than 31,000 licensed beds, making MPT the second largest nongovernmental owner of hospital beds behind HCA. These properties are located in 29 states and in Germany, the U.K., Italy, and Spain. These facilities are operated by 31 different operating companies.

In a continuing attempt to provide the most relevant lease coverage numbers, we're going to present the numbers in two ways this quarter. The first will be our traditional EBITDAR lease coverage, and the second will be one used most often by our peers EBITDARM lease coverage.

I want to be sure to point out that our first quarter coverage numbers for acute care hospitals and thus the total portfolio have been adjusted downward as a result of 2016 audits. Prime represented the biggest drop in lease coverage due to lower-than-expected cash collections primarily at six hospitals. Due the various revenue cycle issues, such as business office restructuring, changes in software and integration issues primarily related to acquisitions of non-MPT-related hospitals, Prime is expected to write off approximately 6% to 7% of their 2016 revenue. This write-off is for 2015 and 2016. But in our numbers, to be the most conservative, we've shown 100% of it in 2016. Prime is working diligently to resolve these issues and believes that most of these will be resolved by 2018. Prime operates 45 hospitals, of which MPT owns 22.

For the first quarter of 2017, using cash collections rather than net revenue, Prime's trailing 12-month EBITDARM coverage for its MPT hospitals was approximately 2.4 times. We're showing the cash collections coverage as a benchmark floor to show the continued strength of our Prime hospitals. Post the Steward-IASIS transaction, Prime will represent approximately 12% of our total portfolio.

Now for the total portfolio, EBITDAR lease coverage was flat quarter-over-quarter at 2.7 times. Year-over-year, it was down 50 basis points. EBITDARM lease coverage was 3.4 times. For our acute care hospitals, EBITDAR lease coverage was flat quarter-over-quarter at 3.3 times. Year-over-year, it was down 50 basis points. EBITDARM lease coverage was 4.2 times. For our LTACHs, EBITDAR lease coverage was flat to just slightly up quarter-over-quarter at 1.3 times. Year-over-year, it was down 50 basis points. EBITDARM lease coverage was 1.8 times. For our [URKs], EBITDAR lease coverage was flat quarter-over-quarter at 1.7 times. Year-over-year, it was down 10 basis times. EBITDARM lease coverage was two times.

Our LTACH portfolio as a whole seems to have stabilized. While the year-over-year was still down, the quarter-on-quarter was slightly up. Only three of the LTACHs have an EBITDARM coverage below one times. All three of these LTACHs are Ernest facilities. We in Ernest believe that we have a solution for the Boise facility and can -- are continuing to push for that resolution. All of the Ernest leases across (inaudible) continue to produce an EBITDARM trailing 12-month coverage in excess of 1.75 times.

While we have all watched in frustration the inability of Congress to bring certainty to healthcare issues, our basic investment thesis at MPT has not changed. There are three things that we're absolutely sure of. Reimbursement will change, and reimbursement in some form will always be here. And hospitals are not going away. As many of you have heard me say many times, you cannot imagine in our lifetime any developed country without hospitals. We are confident that we have some of the world's very best operators. And as the rules of reimbursement change, our operators will change with them.

We underwrite each hospital on a standalone basis. The first group of questions we ask ourselves are: Does the community need this hospital? Would the community suffer if this hospital were to close? If the answer to both of these questions is yes, then you can work through most of any other issues.

Steve will go through our balance sheet in more detail in just a few moments. But I want to reiterate one specific point. As we complete these large acquisitions, we've been able to structure our balance sheet to protect the strong debt metrics, and we will continue to do so. Steve?

Thank you, Ed. This morning, we reported normalized FFO of $0.32 per diluted share for the second quarter of 2017. There are only two items, aggregating about $10 million, to reconcile NAREIT-defined FFO to our normalized FFO. And those are $751,000 in loan fee amortization and about $9 million in real estate transfer taxes related to the German hospitals that we closed during the quarter.

There are a few updates I want to describe before we go into questions, starting with our most recent Steward acquisition. We presently expect this series of transactions to close during the fourth quarter. As we have previously announced, we are party to binding agreements to invest approximately $1.4 billion in real estate assets of IASIS, which will then be leased to or mortgaged by Steward as part of Steward's related agreement to acquire ownership of IASIS. We will also make a $100 million investment in Steward, which will bring us up to ownership of a little less than 10% of Steward's equity.

During the second quarter, partly in anticipation of this transaction, we issued 43 million shares of common stock for total proceeds of about $548 million. Our bank group has committed to fund a term loan of up to $1 billion to complete the acquisition. Alternatively, we are considering other debt solutions ahead of closing, including longer-term unsecured bonds.

Our expectation is that, regardless of whether we close using the term commitment or a bond offering, our total funded debt will approximate 5.7 times our in-place EBITDA following closing of the investment. And we intend to lower this even further through transactions that may include asset sales, joint venture arrangements, earnings retention and, depending on market conditions, other capital transactions.

Almost a year ago, we entered agreements for the EUR216 million acquisition of 20 rehabilitation hospitals to be leased through our German master tenant Median-Kliniken. Those of you who have followed our German investments are familiar with the sometimes lengthy process of clearing the rights of the local governments to preempt our purchase and step into our shoes as purchaser, although that has never happened with almost 75 acquisitions in Germany.

In any case, during and since the second quarter, we closed on the remaining 13 of these facilities, completing the acquisitions we announced last year. We now lease to Median about 70 hospitals with an aggregate dollar value of about $1.3 billion and expected 2018 lease revenue of about $120 million at current exchange rates.

The Adeptus bankruptcy process continues as expected with respect to our investment in Adeptus-operated facilities. There have been no material changes to the plans we have previously described. August rent for 100% of our properties has been paid. All leases will be affirmed and assumed as part of the bankruptcy plan. And approximately 13 facilities will later be severed from the master leases, and MPT will either sell or release them to other operators. We call these the transition properties. We continue to be highly confident that there will be no material loss or impairment concerning these 13 transition properties.

Adeptus is targeting bankruptcy plan confirmation and exit in September or October. Remember that we continue to be paid 100% of our rent while bankruptcy continues. In fact, we will continue to be paid rent even on the transition properties for between 90 days and a full year following confirmation of the bankruptcy plan.

With this morning's earnings announcement, we renewed 2017 guidance estimates and initiated 2018 estimates. You will remember that, in May, when we announced the $1.5 billion IASIS-Steward transaction, we suspended our 2017 estimate until we could have more certainty about the timing and closing along with the timing and cost of permanent financing for the transaction.

Based on our current expectations concerning transaction timing, we believe our full year 2017 normalized FFO per share will fall in a range between $1.29 and $1.31. This compares to our initial estimate from earlier this year of between $1.35 and $1.40. The reduction is due in substantial part to our decision early in the second quarter to pre-equitize the IASIS-Steward transaction with about $550 million in new common equity and our anticipated timing of an assumed $1 billion unsecured notes offering that will likely result in dilutive interest expense for the period between the bond offering and closing of the acquisition.

This temporary dilution, however, is more than recovered starting when we complete the IASIS-Steward transaction and is demonstrated by our estimate of 2018 normalized FFO per share.

Even assuming no additional acquisitions this year or in 2018, we expect normalized FFO in 2018 of between $1.42 and $1.46 per share. That's between 11% and 14% per share growth on top of the double-digit annualized compound growth per share that we have created over the last three calendar years.

To be clear, our 2018 estimate does not include any undisclosed acquisitions, nor does it include possible asset sales, including possible JV-type dispositions that we have previously described. We continue to believe and work toward a meaningful amount of asset capital recycling is appropriate in order to maintain leverage within our long-term 5.0 to 5.5 times target and to reduce our exposure to any single tenant relationship. And we think one or more sale or JV transaction can be completed during 2017.

As we have more certainty about the timing and amount of asset sales and as our acquisition pipeline is further developed, we will, of course, revise our estimates. In any case, based on our observations and participation in market conditions in both the U.S. and Western Europe, we are confident that we will continue to grow and improve our portfolio of high-quality hospital real estate along with FFO per share and dividends well into the future.

And with that, we will be happy to take any questions. Operator?

(Operator Instructions) And our first question comes from Drew Babin with Robert Baird. Your line is open.

Hey, good morning.

Good morning, Drew.

First off, I was hoping to ask about the expected $1 billion for 3Q, what current terms look like in the market, and what kind of duration you're expecting on it.

So based on our observations of the market and bankers' advice to us, we continue to expect a 5.25 to 5.5 plus or minus all-in rate and a 10-year term.

Okay. That's helpful. And then just on the EBITDAR coverage ratio trailing 12 months, besides the Prime write-down, is there anything else to highlight in the rest of your portfolio in terms of specific tenants you have your eye on and/or specific tenants that are exceeding expectations?

Drew, from a negative standpoint, the only other one would be the three facilities which I mentioned of Ernest, the three LTACH facilities that continue to have coverage below one times. But I mentioned in the prepared remarks, we think we have a solution for one of those. And hopefully, by the time we get around to the next earnings call, we'll be able to announce that. Steward continues to perform well. They were right on track with what our original projections were and are. We believe that, as they get the CHS facilities they acquired under their belt, they will be able to continue to report good earnings from them as well. Obviously, some of the IASIS facilities we've already had in our portfolio. We know how well they are performing and think that those will continue to perform well as well. But the only other negative is the three Ernest facilities.

Okay. And then quickly on the Prime write-down, is this something that tends to happen from time to time with tenants in your business, or is this kind of an issue that's unique or something that may ultimately impact 2017 revenues on a lookback basis?

Yes, I think it's somewhat unique. It has to do with Prime's very rapid expansion that they had. Many of the facilities that they had issues with are non-MPT facilities. And it's the integration of those facilities into their systems. They're in the process or have been in the process of regionalizing their billing offices so that all of the acquisitions that they were doing prior to this point, we're still trying to play catchup in getting into the Prime systems. On top of that, they instituted a switchover from their existing account system over to Epic. That created some issues. So it's somewhat of an unusual, not totally unexpected. Just to point out that the roughly 50% of total write-down that we've included all in 2016 related to some of the prior years. They've used this opportunity we think and they have expressed to totally clean up the situation. So hopefully, we won't have this going forward.

All right. That's all very helpful. Thank you.

Thank you. And our next question comes from Chad Vanacore with Stifel. Your line is open.

Good morning.

Good morning, Chad.

Hey, so just for some questions on timing, what's the expect -- the timing on closing of Steward in the fourth quarter. Is it toward the beginning, middle, or end, and then any contribution? Is there any contribution from the transaction assumed in 2017 guidance?

Yes, there is, to answer the second part of that question, because the answer to the first part is we're hopeful, and we think we have good reason to be hopeful that it'll be relatively earlier in the fourth quarter. So there would be contribution in the remainder of the year for the Steward acquisition.

All right, Steve. Does that assume that that -- maybe your debt financing gets done in late in third quarter then?

Generally speaking, yes. We do assume that the debt financing is done ahead of the closing. And that's really what I was pointing out in my prepared remarks when I said there'll be temporary dilution of interest expense because we'll be carrying interest expense, and just to get well into the weeds, extra interest expense up between 4 and 6 weeks that those bond proceeds will be basically debt and dilutive.

Gotcha. And then just thinking about your commentary on JV transactions, what do these look like? And then what are the -- who are the potential partner types? Is it private equity, operators, somebody else?

The targets are private equity, which frankly is probably not going to be the result, but primarily large institutional money managers that, in particular, manage public and private pension funds, sovereign funds. If I had to handicap who's going to be first to the finish line, it would be somebody like that.

All right. And then just thinking about your 2018 growth, looks pretty robust. What's factored in there?

Generally nothing, Chad. We don't have any acquisitions factored in there. And as I pointed out, neither of course do we have the JVs or asset sales, which all things equal would be nominally dilutive. So it's going to be revised up and down. Net, we don't know. And as soon as we have more clarity on things like potential JV arrangement, additional material acquisition, property sales, then we will periodically revise that estimate.

And, Chad, we obviously think we'll do significant acquisitions in 2018. We're obviously working on some of those now. But we don't have any of them in the model.

Gotcha. All right. Thanks. And then just last one from me. You gave some commentary on Adeptus. It seemed like the bankruptcy proceeding may have hit some speedbumps. There anything you could share with us there and any changes from last quarter?

No, I think you're right. And I think the speedbump that has caused some anticipated delay is the fact that there is an equity committee. And the equity committee believes there's more value to Adeptus than actually Adeptus management has presented and Adeptus advisers have presented. And so there's discovery going on that's driven by the equity committee. It has no impact on our deal. And in fact, it can only be positive if Adeptus is even more valuable than management and Deerfield have underwritten.

All right. Thanks for taking the questions.

Thank you. Our next question comes from Michael Carroll with RBC Capital Markets. Your line is open.

Yes, thanks. Ed, can you give us some more color on your Prime commentary? I guess, did these write-downs relate to your properties and non-MPW properties, or did you say primarily related to non-MPW properties?

It does relate to both, but it primarily relates to non-MPT properties.

And then you said these were revenue write-downs. But then I thought I heard that you were talking about integration throughout the system. So if they were revenue write-downs, why does it matter if the systems weren't integrated yet?

Well, it has to do with what the cash collections were on the facilities and changing over from Epic -- changing over from the existing accounting program over to Epic. And so it was just a situation where all of the local CFOs weren't on the same page with Prime and the models that they have and having the success that Prime has normally had in the past.

So they just weren't selling -- sending the bills out on time, so they weren't getting the collections?

Not necessarily not sending the bills out on time as much as not following up on the collections.

Okay. And was this the primary issue that dropped coverage on the general acute care portfolio to 3.3 from the 3.9 that was reported last quarter?

Almost entirely.

Okay. And then these situations, are you comfortable that they've been solved and won't be a problem as you move into 2017?

Well, they certainly have not all been solved. We expect that -- we and they expect that they'll have most of them resolved by the time we get to 2018. Most important from our standpoint is that they recognize the issues, and we have confidence in meeting with them on a regular basis about how they're going about resolving these issues.

Okay. Great. And then I guess last question, Steve, can you comment on the releasing progress on the remaining Adeptus portfolios? I'm sorry if you mentioned this already, but is there a lot of interest in those assets still, and how have they been performing throughout bankruptcy right now?

There is a tremendous amount of interest. And in fact, we've had to keep the foot on the brake pedal because, in order to actually close anything, we have to go through the bankruptcy process. And so as Chad mentioned a little earlier when he referred to speedbumps in that process, that keeps us from actually, for example, selling those properties. And there's probably upwards of 3 or 4 of those 13 properties that we intend to sell. The rest of them we intend to release, and we have releasing targets already identified with agreements in place for those, assuming completion of the bankruptcy.

Okay. Then how have those assets been performing throughout the bankruptcy?

I don't -- I can't answer that specifically. Those 13 assets, I just don't have that either off the top of my head or in front of me.

So most of them, Mike, actually are performing better than they were prior to the bankruptcy. There are a few of them, primarily in the Dallas area, that are not. But even those Dallas facilities, as Steve was pointing out, were it not for the bankruptcy, we would've already either released or sold those facilities. There are people waiting in line for all of them.

Okay. Great. Thank you.

Thank you. And our next question comes from Vincent Chao with Deutsche Bank. Your line is open.

Just on that last topic, earlier, Steven, you had mentioned that you don't expect any losses or impairments to be taken on this. I guess, from a GAAP perspective, would you be required to take an impairment at this point, given that you know you're going to sell these assets, or is the fact that they're not out of bankruptcy yet a limiting factor there?

No, if we had indication that there was an impairment, notwithstanding the bankruptcy, we would have to recognize that. And maybe I should clarify, as always, when we've accrued straight-line rent, it's possible that there will be a write-off of straight-line rent as we transition from one tenant to another. But that doesn't impact our go-forward revenue or doesn't create an impairment issue at all.

Got it. So based on the indications, it sounds like you have interest on all those assets. It doesn't seem like an impairment is coming, though. That's the --

That's right.

Got it. Okay. All right. And then on the LTACH coverage, we talked about the three Ernest assets that are dragging that lower. The last quarter, there was a decline as well and on the [URFs] as well. And I think the conversation was suggesting that the first quarter was significantly better than the fourth quarter in terms of EBITDA generation. And I was just curious. Absent the three Ernest facility issues, I guess, would we have seen a fairly large increase in LTACH coverage, just given the improvement in the first quarter numbers?

Well, even with those in there, we had a very slight increase quarter-over-quarter, very, very slight. Without those three facilities in there, you would have seen a decent increase. It certainly wouldn't have been a great increase.

Right. Okay. And then on the coverage for the acute care hospitals, obviously, Prime is hurting us there this quarter or hurting you guys. Just curious, as you think about the changing same-store pool, how should we be thinking about where this number might sort of bottom before we start to see it tick back up again? And specifically, I guess, are the Capella assets, are they currently in the same-store pool or not? I think they're just outside the two-year window.

I think the Capella facilities are in the same store -- they're not in the same store? No, you're right. They're just outside -- out of them. Let me go back to the first part of your question, and that's a good point that you made about the same store because it is usually changing. We added three additional facilities to the same store this year, two acute care hospitals one [URF]. The acute care hospitals, one of those was a very large facility, which never has had the type of coverage that we've seen in some of our other facilities. So even without the Prime rate down, that would've had a slight negative effect on the overall same-store coverage. From the standpoint of looking at our acute care hospitals, overall, outside of Prime, we actually saw quarter-over-quarter our facilities have a slight increase in their utilization. You look at some of what the other publicly reporting hospital companies have reported in the last couple of weeks, and you saw a softness in some of theirs. We obviously had the same softness year-over-year, but quarter-over-quarter, we saw the slight increase. So hopefully, barring the fact that third quarter's always the worst quarter that at least they're stabilized if not actually on the uptick a little bit.

Got it. I guess the question, though, is since you've been pretty active on the acquisition front on the hospital side, as Capella rolls in and as the first round of Steward rolls in over the next, say, six months or so, how should we expect that 3.3 to evolve?

Yes, it will come down slightly. As you know from the original acquisition of the Steward original nine facilities, those facilities are currently generating about a 2 times coverage. We expect by the end of 2018 that those original nine will be closer to 3 times coverage, just slightly below that number. But then you'll also add -- start adding in some of the other facilities that don't have that type of coverage. So you're right. Just by adding to the same store, you'll see a slight decrease in our existing coverage.

Got it. And just on the Capellas, what are those covering right now?

Yes, they are almost a 3 times coverage right now.

Capella almost 3 times. Okay. All right. Thank you. That's very helpful.

Thank you. And our next question comes from Eric Fleming with SunTrust. Your line is open.

Good morning.

Hey, Eric.

A question on Steward. You give us the pro forma percent of the investment. What -- is the pro forma revenue in line with that investment number?

You talking about on the percent of our total portfolio?

Yes.

Yes, it's very close to that. If you look at all of the properties, that revenue and percent of portfolio are very close to each other.

Okay. And just in terms of disposition activity year-to-date, were there any dispositions in 2Q, or kind of what's your outlook for dispositions for the year, outside of like a big sale like you're talking about in terms of the --

No, there were no dispositions in 2Q. There is a high level of interest, growing interest, from potential buyers for certain of our properties. And we believe we have the opportunity, if we elect to take advantage of it, to selectively sell what would even be some significantly sized individual properties. And that's something we continue to evaluate.

And is there any slant in terms of what type of asset, whether it's the hospital versus LTACH versus [URFs ]?

No, it's acute.

Okay. That's all. Thanks.

Thank you. And our next question comes from Juan Sanabria from Bank of America. Your line is open.

Hi, this is Kevin --

How are you?

Good. How are you?

Fine. Thank you.

I just had a question just going back to the JVs. You have any clarity on or information in regard to what you guys been seeing, I guess, in sense of like cap rates or kind of -- or yields on assets you guys have been, I guess, marketing or comparable assets in the market?

Yes, so we are very satisfied, bordering on enthusiastic, for the interest level that we're getting from potential buyers, not only of individual assets that I just mentioned, but from potential investors in the joint venture arrangements. And while we're not prepared, obviously, to estimate exactly what they may be, they are achieving one of the primary goals that we've had in putting together joint venture assets. And that is to demonstrate the -- what we think is significant value accretion that we've created by owning these properties over the years. And that's reflected in cap rates that are significantly lower than our book basis cap rates.

Okay. All right. It sounds good. Thank you.

Thank you very much.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Ed Aldag for any closing remarks.

Thank you, operator, and thank you, all, for listening in today. And as always, if you have any additional questions, please don't hesitate to call. Thank you.

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