Medical Properties Trust, Inc. (MPT) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Third Quarter 2015 Medical Properties Trust Earnings Conference Call. My name is Luanda, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Charles Lambert, Managing Director. Please proceed, sir.

Thank you. Good morning, everyone. Welcome to the Medical Liberties Properties Trust conference call to discuss our third quarter 2015 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 maybe 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 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.medical propertiestrust.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 2015 third quarter earnings call. As you know by now, we’ve generated $0.32 per share of normalized funds from operations for the third quarter, $0.32 represents a 19% increase over the prior year quarter. Year-to-date, our normalized FFO per share is up 15% over last year. We achieved these results by investing in strong properties at strong returns with strong spreads to our cost of capital. This past quarter, we again set a number of records for MPT that we are very proud of. We had the highest revenue for a quarter, we had the lowest G&A as a percent of our revenue, the highest number of properties and the lowest operator and per property concentration levels. During the third quarter, we added significantly to in place FFO by completing the $900 million acquisition of Capella Healthcare’s seven hospital system, eight with the addition of the Kershaw Hospital in South Carolina that was added after the initial transaction. We completed to transactions with Prime Healthcare for a total of $130 million, closed on the previously announced joint venture investment to develop a general acute care hospital in Valencia, Spain for approximately $25 million and commenced collecting rent on an additional six Adeptus facilities. With the above additions, the completion of the development projects currently underway, the pending MEDIAN an Italian acquisitions and the terming out of our revolver in the permanent financing, our current normalized FFO run rate is expected to be between $1.30 and $1.33 per share. And very importantly, these numbers do not include any potential earnings from MPT’s equity investment in Capella. Our portfolio is as strong as it has ever been in the history of our company. We have great diversification from a geographic standpoint and operator standpoint, a property type standpoint and exposure to any one property standpoint. Specifically, geographically, no state represents more than 15% of our portfolio and the next four U.S. states represent about 25% aggregately, 82% of the properties are in the United States with the remaining 18% in three different Western European countries. Our largest operator only represents 17% of the total and most importantly, no one property represents more than 2% of our overall portfolio. As you can read in detail in our supplement regarding same-store coverages, our acute care hospitals continue to generate an EBITDA lease covered ratio of about 4.7 times. The LTACH had an unchanged to 1.9 times and the [URPS] [ph] increased to 2.9 times. All total, our portfolio is showing lease coverage of approximately 3.8 times. You may have read the earnings releases by HCA and CHS that concern some in the market. This topping out of the short-term benefits from the ACA was predicted by us and is not at all surprising or alarming. While the growth of the revenue may have slowed, the strength of the overall acute care hospital market is still there and will continue to be there. Our acute care coverage of 4.5 times is further cushion for any dips in the market. However, we are long-term investors and we remain very bullish on acute care hospitals. As we are fond to saying, you cannot paint a picture where we would not have hospitals in this country. We are also well aware of the pending changes in payment rates and patient classification criteria in the LTACH industry and of course, our tenants, who are the leading operators in the post-acute industry, have been aware of these changes since before they were even announced to the public and are well into the execution of plans to meet these changes. As we have previously said, while we may see a slight decline in coverage from our LTACH hospitals in the pending year, we are not concerned as they currently generate strong coverage and can endure absorb any potential downturn in revenue, as they adjust to the new payment rates and expand their clinical services lines to accommodate side neutral patients. The capital markets in their entirety not just for MPT or REITs remain challenging, despite this we have tremendous opportunities. However, we will be very selective if and when we make additional investments. If we do make additional investments we -- our expectations are that they will be leverage neutral to deleveraging. Clearly, we are not happy with where our stock price is and as we have discussed before, our portfolio is very valuable and we have begun the process of exploring select sales of groups of assets as an alternative source of capital. Until we have something definitive here we won’t be able to discuss these further. MPT is running on all cylinders. Our portfolio is generating the strongest coverage in the industry. Our diversification in every category is the best it has ever been. Clearly, the stock price is not where we would like it to be, but operationally, financially and strategically, MPT is at the top of the market. Steve, if you will now take the time to go through our quarter financial results.

Thank you, Ed. Just to repeat a few things, this morning we reported normalized FFO for the third quarter of $0.32 per diluted share, a 19% year-over-year increase. Our year-to-date result of $0.91 per share represents a 15% increase over last year’s first nine months. The primary adjustment to arrive at normalized FFO is approximately $25 million of acquisition costs, the majority of which, about $18 million is comprised of real estate transfer taxes we incurred as the MEDIAN assets were acquired. Legal and other costs primarily related to Capella transactions that’s $5 million and other costs are directly attributable to successful acquisitions about $2 million. We also sold several properties for gains, which were offset by write-offs unrelated to build that is straight line and other receivables, and we incurred about $4 million in financing costs related to the Capella financing transactions, all of which are reflected in our reconciliation to normalized FFO. During and after the quarter, we continued to finalize the purchase of the various MEDIAN facilities. As of today, 30 facilities have been purchased and re-categorized from loans to real estate, resulting in an aggregate purchase price of €627 million. We expect, although there is no assurance that the final two properties aggregating about €62 million will close over the next nine months. We elected to terminate our rights to three of the initial properties with an aggregate purchase price of only €16 million and in return, we have a right of refusal on up to a total of €750 million on future MEDIAN acquisitions. RHM, the operator of the first 11 hospitals we acquired in Germany and MEDIAN expect to finalize the previously announced merger doing this year’s fourth quarter. At that time, MEDIAN will be the largest privately-owned operator of rehabilitation hospitals in Germany. Subject to Ed’s earlier comments about our pipeline and acquisition pace, over the near and long-term we expect this relationship to generate ongoing and profitable investment opportunities for years to come. We previously announced the closing on October 31st of the Capella transactions and our portfolio today includes the seven hospitals that were included, plus an eighth hospital that Capella acquired late last month for a total investment of $35 million. This once again demonstrates one of the major benefits of our Capella relationship. We expect to continue to have the opportunity to evaluate our investment interest in new facilities that Capella may elect to acquire. In addition to the MEDIAN and Capella acquisitions, we closed on three other properties during and after the third quarter for an aggregate investment of approximately $154 million, at a weighted average expected cap rate approaching 10%. All that $15 million of this was funded and that is expected to be funded during the fourth quarter. Two of the properties aggregating $130 million will be leased to Prime and the third was the Valencia, Spain development venture wherein a very large U.S. state teacher pension fund is our co-investor and AXA Real Estate Investment Manager is the manager. The Prime Investments was structured as mortgage loans initially with our option to purchase and lease back to Prime. We expect to exercise this option in the near-term. Our outstanding debt as of September 30th is scheduled in the supplemental package that we posted to our website this morning. As of today, our borrowings under the revolving credit facility total $1.1 billion. Our current net debt to total assets is under 52% and approximately 50% on a market cap basis. While debt represents about 6.3 times run rate EBITDA and fixed charges are covered 3.6 times, this is on the high end of our historical range and we intend to reduce it in future periods. We continue to watch the long-term debt markets and expect to replace some of our revolver borrowings with fixed rate debt as conditions warrant. As Ed mentioned, our stock price does not reflect our value and we do not expect to use common equity to lower our debt metrics at this time. Nor would we have any necessity to, given the metrics I just described along with having no meaningful lease expirations or debt maturities over the next several years. One reason we normally operate with lower leverage metrics is exactly in order to be able to retain strong liquidity and coverages during volatile periods without pressure to sell assets or equity. As Ed noted, we expect to be able to start lowering the leverage back to our historical target range with potential select asset sales that would capture unrecorded value and further demonstrate the strength of our uniquely positioned portfolio. At our last quarterly conference call, we estimated that upon the completion of the Capella and MEDIAN transactions including permanently financing these acquisitions with long-term debt and equity capital, our run rate normalized FFO would range between $1.28 and $1.32. This morning we increased our expected annualized run rate, normalized FFO to range between $1.30 and $1.33. The increase results from continued strong performance of our in-place properties and other assets, the limited acquisitions other than Capella and MEDIAN during the quarter and higher cost of capital. This estimate does not contemplate earnings if any from our investment in Capella operations and as always, unannounced acquisitions or capital markets transactions. It also does not include the completion and leasing of our most recent commitment to Adeptus of $250 million. So with that, we will be happy to take questions and I will turn it back to the operator.

Thank you. [Operator Instructions] Your first question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed.

Thanks. Ed, can you give us an update on the company’s investment strategy and how you plan on executing those strategies given the current volatility in the capital markets and your high leverage metrics?

Mike, the strategy hasn’t changed from where it has always been. We started the company some 10 years ago. As you know, because you have been covering us for a long time but we have had periods where we have had large amounts of acquisitions. And we have had periods where we have set out the acquisition markets. We will selectively look at our acquisitions now. We have tremendous opportunities. We’ll continue to take advantage of those opportunities where they meet the three metrics that we have -- one metric that we have always said and the other two metrics which I mentioned today. One is that it is accretive and two is that it is either leverage neutral or de-leveraging situation. And three, that it adds the strength to our portfolio. We are still very high on the acute care hospital sector. Right now, the acute care hospital sector represents about 70% of our overall U.S. portfolio. And we’ll continue to focus on that particular market.

And then should we expect your investment activity to slow over the next few quarters because of this?

Well I certainly think so Mike. We’ve been -- if you look at where we’ve been over the last two years with doing over $1 billion in the last two years and $1 billion this past quarter, we certainly do expect that you won’t see that type of investment in the near future.

Okay. And then my last question, can you kind of talk about maybe what type of assets you’d be willing to sell? Would you be willing to turn off your interest in any of the operators or would you be willing to sell some of your, I guess, what your general acute-care hospitals, LTACH service or any other kind of color that you want to give us?

Yeah. Right now, as I’ve mentioned today and on the last call and in numerous meetings that we’ve had. Our portfolio is truly as strong as it has ever been. There is a tremendous amount of value and various properties all across our portfolio in every sector that we are in. We also had the value in our Ernest equity portion and in the Capella portion. We certainly would look at all of those. It’s been part of our strategy from the very beginning that at some point in time, at the right points in time, that we would sell our equity investments and our operators. But obviously we think those have to be at the right particular time. We certainly are not just going to give anything away. We have properties in our portfolio that are generating double-digit lease coverage ratios that are performing exceptionally well that are generating double-digit cap rates. And clearly those properties have a tremendous amount of value that don’t show up anywhere on our balance sheet. So it’s not any one particular property. We don’t have a situation where we are trying to sell non-core assets or we are trying to sell dog assets. We’ve got properties that have a tremendous amount of value in them that I don’t believe is being recognized.

Okay. Great. Thank you.

Your next question comes from the line of Tayo Okusanya with Jefferies. Please proceed. Tayo, your line is open. Your phone maybe muted.

Good morning everyone.

Hey, Tayo.

Hey. Ed, you did brought up a really good point about your equity stakes in some of your operators and how you may not be fully getting value for that. Have you guys done any exercise around just how much those stakes would be worth today? If you were to try to sell them…

Yeah. Tayo, we do that all the time. We do it on a regular basis. Ernest is the one where we have the largest investment obviously. We have a $100 million investment. Remember the original thesis there was that as we added or as Ernest added properties to their portfolio that we wouldn’t have to make any additional operating investment in Ernest, but yet we still retain approximately 80% of the EBITDA on those additional properties. Since we -- from the original 16 properties, they have added approximately five or seven additional hospitals that are generating good EBITDA. We haven’t had to pay any additional equity investment on those. Yet we have the value of the 80% of the EBITDA. If you assume that approximately -- those are generating approximately $2.5 million each in EBITDA and we are getting 80% of that and you use any reasonable multiple, then you see our $100 million investment clearly ought to be worth somewhere in the neighborhood of $200 million.

Okay. Any other -- so apart from Ernest, any of the other equity positions, what kind of valuations do you think you could put on them today versus what you are carrying them at in your book?

Yeah. Well, Tayo, as you know with the exception of Ernest and Capella and Capella is brand new, the other equity investments in our operators are really small investments. I think all total we’ve got about $10 million invested in the additional equity pieces.

Got it. That’s helpful. And then just the updated guidance on the run rate, again if I heard you correctly, there are some assumptions about longer-term financing in those numbers. Ed or Steve, could you talk a little bit about what assumptions you are making about permanent financing that goes into those numbers?

Right. Primarily as I mentioned, we’ve got $1.1 billion on the line. And as we look at markets today and evaluate on an ongoing basis, the best way to perhaps permanentize some of that would be -- with similar long-term unsecured bonds that we have issued recently. We think if you included about $500 million in there at about 5.5% all-in rate, then that gets you a long way toward the guidance range that we’ve announced this morning.

And then the balance of the line, the $600 million you just assume, does that remains on the line for guidance purposes?

For the guidance purposes.

Okay. That’s helpful. Last one for me, again I appreciate your patience. The termination of three of the assets in the MEDIAN deal, could you just talk a little bit about why you decided to do that and go for the first look option instead on future?

Sure. And let me just make clear while the kind of order of magnitude range of a potential offering I just mentioned and the rate of 5.5%. For purposes of the guidance, we’ve adjusted the rate on the revolver 100% of the revolver to 5.5%. So we have got $1.1 billion. We’ve included interest at 5.5% on that revolver whereas we are paying around 2%.

So we basically have assumed a 100% terming out of the revolver.

Okay. Okay. Got it. That’s ok. Yeah. That makes sense.

So on to you next question then, you’ll remember back in April, we actually reduced at that time the size of the MEDIAN transaction. And it was primarily related to these three properties. You will remember we dropped down from about 40 to 35 properties.

Exactly.

Yeah. And so these three, we continue to think we would -- we may do, but as we got more into underwriting these three specific properties and strategies that MEDIAN has, we elected to just terminate our right to acquire these. And, in return, because if you remember, when we announced MEDIAN, we had basically a target of €705 million. And so by reducing -- by terminating these three that came down and we needed to be compensated for that. And in return, we have now the right of first refusal at established investment metrics including the return or up to €750 million. And so we absolutely expect to have the opportunity to exercise those options in the relatively near term. Again all subject to the capital cost and other environments that Ed has mentioned.

Okay. Great. Thank you very much.

Thanks, Tayo.

Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.

Thank you. Good morning.

Good morning.

Morning. Just wanted to touch base on the acute care sector and what you have experienced recently as far as -- if anything, in terms of cost pressures, payor mix issues that have sort of been highlighted by some of the other operators -- public operators.

Jordan, if you may recall, during that time period of the benefits from some of those public operators, we said at that time that we thought it was a short-term benefit and that everything would reduce back to a more normalized basis. And we think that is exactly what happened. And we will also recall that primarily our operators, because they weren’t in primarily Medicaid expansion state, didn’t have the benefit of that short-term benefit that the other publicly companies did. So when you look at our overall portfolio and our acute care operators, we have not had any dips or any surprises that may have been related to the CHS or HCA on that recent announcement.

Okay. That’s helpful. And then in terms of the asset sale discussion, I know you don’t want to give too much away here. But I am curious, conceptually, how you would think about assets sales, either by property type or geography or any other exposure you might want to share.

Jordan, there really isn’t anything in our portfolio that I would necessarily like to sell off. And often I am asked is there anything out there that you wish wasn’t in your portfolio? And for the first time in the history of the company, there really isn’t anything that we would just like to get rid of. So, what we are looking at now is what is the easiest commodity to sell, what is a transaction that we can affect the quickest and more importantly, what is the transaction where we can show to the market just how valuable our overall portfolio is. So that has been more of the two driving factors than the overall particular segments in the overall portfolio.

Okay. Thank you. I look forward to seeing you guys next week. Anything you guys would offer as a preview for your Investor Day?

I think that it will be an outstanding day for all of our investors and analysts that are there. Because not only will you hear updates from MPT, but more importantly, you will get to see and hear directly from various CEOs of some of the very best operators of acute care hospitals, post-acute care hospitals and international operators in our portfolio.

Great. Looking forward to it.

Thanks, Jordan.

Your next question comes from the line of Juan Sanabria with Bank of America. Please proceed, sir.

Hi. Good morning, guys. Thanks for the time.

Good morning, Juan.

To your comments about not necessarily wanting to sell assets, should we read into that that maybe joint ventures are a possibility, and have had you any discussions with AXA about maybe looking at some of your U.S. acute care hospitals?

Yeah. Without getting too specific at this time, Juan, you certainly can’t expect some outright sales and you can expect some situations where we would retain a portion of the ownership.

And is there any dollar figure you have in mind for what you would like to sell to help to delever?

Not at this time, Juan. It will be significant enough to make a difference in two respects. One for the obvious delevering standpoint. But the other one also just as importantly -- to truly let the market understand just how valuable this portfolio is.

And then, I know you said that you feel your U.S. LTACH exposures is well prepared for the changes upcoming. Can you give us a sense of your total LTACH figure that I think is disclosed in your supplemental? What is in the U.S.? And I guess, as a quick follow-up to that, are LTACHs also on the block? Do you want to lighten your exposure there at all?

Well, from the last question first, there is nothing in our portfolio that is not potentially on the block. We certainly -- ideally what I would like to see is some sales in each one of the segments that we are in to show the overall value of all of it. Not just -- are you asking for -- from the LTACHs exactly what our total exposure is? It represents about 8% of our exposure.

The U.S. exposure.

Yes. It represents about 8% of our portfolio.

All of the LTACHs are in the U.S.

Got you. Okay. And then if you could just give a little bit more color on the AXA Spain development. What have you committed to date, how much is the total spend, the timing of when that asset comes online?

Yes. The total commitment is about $24 million, $25 million. The facility is probably a third complete at this point. So the total construction should be completed in the next 12 to 18 months.

And those numbers, Ed just gave are our portion of it, our 50% portion. So, we expect to ultimately invest $24 million, $25 million. We put in about half of that as of now.

Got you. And then to your point about the MEDIAN right of first refusal on the 750, is there a timeframe for that?

It is three years.

Okay. That’s it for me. Thanks, guys.

Thanks, Juan.

Your next question comes from the line of Chad Vanacore with Stifel. Please proceed.

Hey. Good morning.

Good morning, Chad.

Hey. Since we are talking about Europe and the Spanish hospitals, can you give us any update on the Italian JV venture that you have going?

No, we really can’t. Since last quarter, when we announced it and what we said was when we close, we will be able to give some further details. But we are just contractually prohibited from doing that until we do close. Now, we think closing is in the near term, I would almost say eminent. But sometimes the regulatory and bureaucratic processes in Europe are even worse than ours. So, I won’t say eminent, but absent some surprises, we think it is very near.

Okay. And then, what can you tell us about what the financing environment in Europe is like today versus six months ago?

Well, versus six months ago, which puts us back around June there was no environment in Europe. You will remember we were working through -- the world was working through Greece and the long-term debt markets in Europe were virtually shut down. Subsequent to that and in August, in early August we issued €500 million in seven-year bonds at a very attractive 4% rate. Today, if we were to need to, which we have no plans to, of course, issue additional euro-denominated bonds it would probably be in that same neighborhood of between 3.75% and 4%.

All right. Thanks, Steve. That’s really helpful. Now, on your Adeptus developments, you have got $60 million coming online right now. Can you remind us of the yield assumptions and you will be booking that $60 million -- or revenues on that $60 million now that they are developed fully, right?

That’s right. As they come online, obviously, we start charging rent. And those that are now coming online have GAAP yields in excess of 10%.

All right. Thanks. That’s all for me.

Thanks, Chad.

The next question is a follow-up from the line of Juan Sanabria with Bank of America. Please proceed.

Thanks for the extra time, guys. Just a quick question, just given the volatility of in the capital markets and what we have seen with some of the public operators, the hospital guys, any changes in cap rates or valuations that you guys are seeing?

Juan, not much. The bottom end has probably ticked up maybe 50 to 75 basis points. But overall, the spread is still fairly wide. I would say that this time or six months ago, maybe we were at a 7.5% to 11%. Maybe we are now at an 8% plus to 11% still.

Okay. And then just the last question, do you guys have any interest in potentially getting involved in Forest Park in some of the assets that maybe becoming available there?

No.

Any rationale as to why the lack of interest?

Juan, we looked at those before they were bought on the first go around and we still haven’t changed our opinions about them.

Okay. Great. Thank you, guys. Appreciate the time.

Okay. Thank you.

And with no further questions in queue, I would now like to turn the conference over to Ed Aldag for closing remarks.

I want to thank you very much and thank all of you for listening in today. As always, if you have any questions, please don’t hesitate to call myself, Steve Hamner, Charles Lambert, or Tim Berryman. Thank you very much.