Medical Properties Trust, Inc. (MPT) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Q2 2014 Medical Properties Trust Earnings Conference Call. My name is Leanne, and I’ll be your operator for today. At this time, all participants are in listen-only mode. But we will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Charles Lambert. Please go ahead.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our second quarter 2014 financial results. With me today are Edward K. Aldag, Jr., Chairman, President and Chief Executive Officer of the company; and Steven Hamner, Executive Vice President and Chief Financial Officer. Our press release was distributed this morning and furnished on Form 8-K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our website at www.medicalpropertiestrust.com in the Investor Relations section. Additionally, we are hosting a live webcast of today’s call, which you can access in that same section. During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed in or underlying such forward-looking statements. We refer you to the company’s reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company’s actual results or future events to differ materially from those expressed in this call. The information being provided today is as of this date only and except as required by the Federal Securities laws, the company does not undertake a duty to update any such information. In addition, during the course of the conference call we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations. I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Thank you, Charles and good morning, everyone. And thank you for listening in on today’s earnings call. Both the quarter ended June 2014 and the month of July have been very productive for MPT. As you’ll recall, in the early part of this year, we guided to a $500 million acquisition target. To-date, we have closed on $320 million or 64% of that number. We’re right on track to reach our goal of $500 million before the end of the year. Each of the acquisitions of existing hospitals we have closed on and the remaining existing hospital acquisitions we’re working on are all expected to be immediately accretive to FFO. With our acquisition of the Circle facility in Bath, we have continued our diversification strategy through investing in outstanding healthcare markets in Western Europe. Circle is a company that we’ve been working with for more than a year. They have recently received accolades for their work with the UK’s National Health Service to dramatically turnaround two of their facilities. MPT closed on the $49.9 million purchase of Circle Bath Hospital’s real estate assets in July with the sale leaseback to Circle is to healthcare operator for initial 15 year lease term with an extension option for an additional 15 years. This hospital was opened in March of 2010 in Bath UK which is approximately a 100 miles west of London with the population of 95,000 and includes 28 inpatient beds and 21 day beds across approximately 70,000 square feet. Circle Bath is distinguished by state-of-the-art accommodations and clinical and patient services. Circle Bath has experienced a strong trajectory of growth, reporting 10% and 12% year-over-year growth in 2013 volume and revenue respectively. Circle Bath was ranked in the top 10 in England for patient improvement in hip and knee operations…

Thanks Ed. I'll jump right into the numbers, because they are right in line with what I think everyone was expecting. So, let me just summarize briefly. Then I'll take a few minutes to address a few abnormal things and we can reaffirm our outlook and go into questions. Normalized FFO was reported this morning for the quarter was $0.23 per diluted share that's 8% year-over-year for the quarter and also for the six months ended June 30. As Ed just described, we have committed about $320 million to our 2014 acquisition target of $500 million. Today, we have almost $200 million in cash on the balance sheet. So we have the capacity to meet our $500 million acquisition target without any external capital. Ed also pointed out the strength of our pipeline, so we are enthusiastic about the likelihood of being able to invest that cash in the foreseeable future. And of course we also have a completely undrawn revolving credit facility of $775 million. Let's just provide a little perspective on the pre-dramatic and immediate impact that are relatively modest sequence of acquisitions would be expected to have on our per share results, dividend payout coverage and resulting dividend growth and market considerations about our growth rate, FFO multiple, cost of capital and other valuation metrics. With respect to our capital. First, I'll remind you that you can review the details of our capital structure on page 5 of the supplemental, when you have a few minutes. But in summary and in addition to the revolver availability, we have about $1.4 billion of net debt outstanding, representing 43% of our undepreciated total assets and 5.4 times EBITDA. Both of those metrics are well within our general targets for managing the company. It's possible that we may occasionally, temporarily…

Thank you. (Operator Instructions). And your first question comes from the line of Juan Sanabria from Bank of America. Please go ahead.

Hi, good morning.

Good morning, Juan.

How are you? Just a couple of questions, I guess on the Bucks County first. Could you disclose what the proceeds were or what the cap rate was or the NOI associated with that asset that is now -- that will no longer be there?

Proceeds were approximately $35 million. And again, not to repeat what Ed said in his comments necessarily, but that was a transaction that we agreed to back in the late spring of 2009. And as part of that deal, again as Ed mentioned, we have the opportunity to earn not only a strong rental rate on that $35 million value but a participation in their operations of up to $1 million a year. And we actually did earn that additional $1 million a year for the last two years. And post closing which actually happened yesterday, we actually closed the transaction yesterday, post closing, we'll settle up with this year’s participation, which will amount to almost another $1 million. And so the way we look at it, although not the way the accounting is that extra roughly $3 million that we have collected and will collect over the lease term is additional proceeds. So we look at that as being a transaction where during the rental period, we got to market rate rent and then we sold it for $35 million and we had previously collected $3 million in participation.

Okay. Just to clarify, what was included in rents, I guess part one, and then in participation, part two, in the second quarter figures?

It’s about -- in the second quarter it was about $2 million in rent…

No, no that’s annual rental…

Yes. But, and then the total participation for the whole year was about $100,000.

Okay. And then for the guidance for the run rate 1.10 to 1.14 what is the assumption that all of First Choice is contributing to the bottom line? And is there any other incremental acquisitions other than the Bath and the First Choice in that run rate?

The answer to your first question is yes, we assume that the $150 million is disbursed and now paying rents. And answer to your question is no, there are no other potential acquisitions that’s included in that $1.10 to $1.14. So when I said in my prepared remarks that that run rate includes acquisitions, just to be clear, it’s only those acquisitions that we know we are going to complete; in other words, binding deals that are just waiting to close or as in the case of Adeptus, First Choice development transactions that we know will come on line over time.

And so what's the run rate been, I guess on a quarterly basis, if you have that of how quickly that money to date has been put to work by First Choice or Adeptus?

Yes, the first deal remember was about this time last year, I think we actually executed that agreement in August of 2013. And the terms of that transaction required them to have everything in place in three years. Here we are literally a year later. And as Ed mentioned in his remarks, they expect to have every project up and running by the end of this year. So, well over a year, actually a year and half or more ahead of their expectations.

Okay. And then with regards to the $180 million of acquisitions that were flat last quarter, any comment on has that gone away or is that still potentially in the works and just taken a bit longer than you initially anticipated?

Yes, I think it is highly unlikely that those transactions are going to happen in the foreseeable future.

Okay. And just one last quick one, while I’ve got you guys, for the UK Bath, any rent coverage or cap rates that you can provide on that?

Yes. Of course, as you know and I don’t believe blame them, we're continuing to ask, we don't give cap rates on most specific deals, we’ve said that we're doing transactions in a range between 8% and 11%. In the case of the Bath deal, we're right in the middle of that range. And it’s an acute care hospital that we like to underwrite to a normalized run rate of at least 3 times and this is a going in, underwritten going in at 2.3 times after a period of ramping up.

How long is that ramp up?

Well the expectation is about 18 to 24 months.

Okay. Thank you.

Well, let me just I missed one thing, it’s important that Bath, I am sorry not Bath Circle is a fairly significant company it’s publicly traded in the UK. It has basically two areas of operations, one is building and running its own hospitals. The other is what Ed mentioned they actually manage National Health Service hospitals or the NHS they’ve been phenomenally successful in managing large, very troubled acute care hospitals for the NHS and that has become a very important and very profitable part of their business. And the reason I’ve mentioned that is because of course we have the parent guarantee for our lease it back.

Okay. Do they have any publicly rated debt or anything that you can point?

No, no, no, they don’t.

Okay. That’s it for me. Thank you.

Thanks.

Thank you. And your next question comes from the line of Karin Ford from KeyBanc. Please go ahead.

Hi good morning guys. This is Jeff Gaston with Karin Ford here.

Hi Jeff.

So first question, can you let us know how much of your freestanding emergency room exposure is hospital affiliated?

You remember that we had before the First Choice we had three with Emeris. All three of those are hospital affiliated and then the First Choice facilities most of theirs are affiliated in some former fashion. And the Emeris transaction is actually ownership involved. There is not ownership involved in the existing First Choice facilities.

I guess can you provide little more color on what that affiliation is for the First Choice facilities?

Well, for example, in the Dallas market they have transfer agreements with local hospitals and in particular HCA and so what that means to a patient coming into a First Choice facility say with heart conditions that patient is stabilized. They do what they need to do and if its determined that patient really need to be admitted to a hospital, these arrangements with the local acute care hospitals mean that the ambulance picks the patient up at First Choice, takes that patient directly to its room at the local hospital. So, it's not readmitted through the local hospital emergency room. There is not a lot of additional admission paper work. It's -- I probably wouldn't call a heart attack seamless in any regard but this is as seamless as possible and is highly beneficial for not only First Choice but primarily for the local hospital that's taking the transfer.

Okay. So, there are not operating under hospital license then in those cases?

No, not at all.

Okay. Do you have any concern about potential legislation in Colorado that could increase regulations or reduce facility fees?

Yes, from the facility fee standpoint we run it both ways and it is not an issue with our facilities.

Okay. And I guess quick follow-up question on the emergency rooms. What's the rent coverage on the ones you've completed today?

Well, the ones we've completed today remember our brand new First Choice has a number of facilities that they developed before we did. But even the ones we've completed and are operating have coverage is in the seven to eight times. And remember these have been open for less than six months in most cases. It's a very attractive business when run correctly when as you pointed out, you've got the right affiliations with local hospitals and so forth.

Okay. I've got a couple of more questions, but I'll back in the queue.

Okay. Thanks Jeff.

Thank you.

Thank you. And your next question comes from Andrew Rosivach from Goldman Sachs. Please go ahead.

Good morning, guys. I just wanted to start…

Good morning.

I just wanted to start on the development pipeline on slide 10. Is (inaudible) help deals, what the square footage on them? What they typically average, it looks. Go ahead.

67,000 square feet.

Got it. So these things cost, I'm kind of new, I apologize kind of did they cost $1,000 a foot to build?

Well, you got include the land and the other development cost in that. And these are not what you would refer to as a document box type facilities, they are full licensed ERs.

Keep in mind also Andrew that part of the attraction here, part of the whole business plan is to be in high traffic, high demographic retail locations so they are actually buying land out on the pad sides of highly traffic shopping centers so you are generally getting a much higher per square foot land cost than you would with a typical hospital.

Are you paying for any of the equipment?

No we pay for none of the equipment.

Got it okay. And then I just wanted to move to your near-term rollover, you have got about 3.5% of your rents rolling between now and the end of ‘16, you even still have a maturity in ‘14 and what’s the outlook for those?

Well the maturity ‘14 is Bucks County that we have just actually sold. We’ve got two coming due in ‘15, which are the two community hospitals that we have discussed over the last couple of months and community has already noticed us that they will be terminating their occupancy. And so we are in the process re-tenanting those two properties even as we speak.

Do you have any sense of where your in place rents are versus market or whether their might be some down time in the re-tenanting?

No we expect no down time and we have no comment as yet on what market versus the current rental rate is, we are just not there yet on evaluating the market. There has been anecdotally a very high level of interest, not only from potential operators but from community leaders and political leaders in the area.

Got it. Okay. And then just a quick one, just you probably know there is another healthcare REIT that were into some issues with large tenant purchase options. What dollar amount of purchase options do you have remaining after the Bucks County deal on your asset?

Well, I'm not sure what comparable you are talking about, but in almost every single one of our tenants, there are purchase options. Those purchase options are again almost exclusively at either greater of fair-value or our original investment. So if we spend a $100 million to buy a property and lease it back in year one, in year 15, certainly we would hope that the value of that property is more than a $100 million, but even if it's not, in order to exercise that option, the operator has to pay us the $100 million.

Was that the Bucks County structure?

The Bucks County structure was different because remember that was done under stress in the middle of 2009. And that was done to replace a bankrupt tenant, as Ed mentioned, couldn't make it through the recession. And so we brought in a very, very strong operator, a highly respected orthopedic group that was affiliated then with two very highly respected teaching hospitals to take over that facility, pay us a good market rate rent, give us the participation in operations. And then went into all of that mix is the purchase option. So, that certainly was an exception to the model that we have.

There are no other leases Andrew with the -- they have an early purchase option.

Got it, okay. Thanks. Just so and I was making a reference to Brookdale and Meridius and [HGP], but it sounds like you guys, this was that had a structure like that?

Yes.

Thanks guys.

Thank you.

Thank you. And we have a further question from Karin Ford from KeyBanc. Please go ahead.

Hi Jeff Gaston here with Karin again. Can you give us any color on why the sale or JV with the Monroe Hospital was terminated?

We’re still under confidentiality agreement. I can say that just from our perspective there were a number of reasons including an evaluation on what the likelihood the other party completing all those obligations was going to be.

Jeff it was terminated by the us.

Yes, yes.

Okay. And then are you guys looking at the large HCN hospital that’s possibly out for sale?

We don’t comment on the specific acquisitions that we’re looking at.

Okay. And then I guess one last question, what’s the expected impact of CMS’s IPPS rate cut on the hospitals and coverage?

You know that, they were just announced this week?

Yes.

Absolutely none, it is right in line with what we all expected a couple of months ago and we expected it would have no impact different than what we were saying them.

All right, thanks a lot guys.

Thanks.

Thank you. We have another question from Juan Sanabria from Bank of America. Please go ahead.

Hey guys, just a quick follow up. Any update on for Florence and how that situation is progressing and kind of what we should be expecting?

As Steve mentioned earlier both Florence and Gilbert continue to pay rents and they continue to have their operations improved and we don't have any expectations at this point that we won't continue to get our rent.

Okay. Thanks for that. That's it from me.

Thanks Juan.

Thank you. I would now like to turn the call over to Ed Aldag for closing remarks.

Thank you Leanne, and thank all of you for listening today. And always please don't hesitate to call any of us for follow up questions so we look forward talking to you. Thank you.