Medical Properties Trust, Inc. (MPT) Q3 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Medical Properties Trust Third Quarter 2016 Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference, Mr. Charles Lambert, Managing Director. Sir, please go ahead.

Good morning everyone. Welcome to the Medical Properties Trust conference call to discuss our third quarter 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 did not receive a copy, it is available on our website at www.medicalpropertiestrust.com in the Investor Relations section. Additionally, we're hosting a live webcast of today's call which you can access in that same section. During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risk, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed and/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 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 thank all of you for joining us today. Acquisition and capital transactions have driven MPT's growth to $7 billion in assets with a sector leading balance sheet. On December 31, 2015, our total assets were $5.9 billion, net debt to EBITDA was 6.4 times and net debt to gross assets was 53%. Today 10 months later on a pro forma basis, our total assets are $7.2 billion, net debt to EBITDA projected a 5.1 times, net debt to gross assets are 44% and our FFO per share for 2017 is now projected to be between $1.35 and $1.40 per share. Depending on a lot of factors, including market conditions and our stock price, we are projecting that our acquisitions for 2017 will be between $500 million and $1 billion. In addition, we continue to have more than $1 billion in current liquidity. Let me turn our attention to the performance of our existing portfolio. By now, most of you have heard about the Adeptus earnings call on Tuesday, in which Adeptus discussed their corporate level liquidity issues related primarily to their failure to adequately manage their recently hired third-party cash collections company. We posted some slides to our website late Tuesday night to provide each of you with some detailed information about our investment in Adeptus related facilities. Before I get into the specifics of our particular properties, let me say that we've discussions with their new CFO, Frank Williams and we listened intently to the comments made by the new Chairman, Gregory Scott. We believe they both understand the mistakes that were made and both not only have the ability to correct the issues, but they both are committed to doing so. But notwithstanding that is important that the investors in MPT know that we are in a very strong position. First and foremost, we believe in the Adeptus model. We believe that there is a need for these freestanding ERs and they will continue to be very profitable. We currently own 58 Adeptus facilities, 48 of these are completed in paying rent, the first of these became operational on December 3, 2013, the last facility became operational on October 14, 2016, 10 facilities are still under construction, approximately 65% of the 58 facilities are joint ventured with strong local and regional operators, such as UCHealth in Colorado, Dignity Health in Arizona, Texas Health Resources and others. The joint venturing of these facilities by these entities has further proved the commitment to the model by some of the country's strongest and most respected acute care operators. As we pointed out on the slides posted on our website, our Adeptus facilities have been highly financially successful. The average EBITDAR coverage for the freestanding ERs as a whole, exclusive of one Adeptus hospital and operations is part of the HOPD, hub and spoke model is 3.74 times. It is important to note and as a reminder, we deducted arbitrary 5% management fee and our coverage calculations to be most conservative. The actual coverage for Adeptus is actually higher on non-joint ventured facilities. All 58 of our facilities are in several master leases and all the master leases across defaulted. So in a worst case scenario where Adeptus defaulted on any portion of their rental payments to MPT, we have the right to replace Adeptus and lease the facilities to a new operator. Given the financial success of the ERs and the growth of the freestanding ER market nationally by companies such as HCA which already has 57 freestanding ERs with at least a dozen more in development, we have a high degree of confidence in our ability to do so with no financial loss. Our model was designed to protect us in just in such situations where the issues are at the parent company. Adeptus facilities represent approximately 6% of MPT's total rental revenue. On a whole, our portfolio continues to produced overall strong lease coverage. For the total portfolio we saw second quarter 2016 over second quarter 2015 increased by 27 basis points to 3.48 times. For the general acute care category, the coverage increased 43 basis points to 4.3 times. For the IRFs we saw a slight decline to 1.94 times when comparing to the last quarter, please keep in mind that we sold three holds out facilities for a $45 million plus gain. These facilities are no longer included in the previous coverage numbers. For the LTACs, we also saw a slight decline to 1.72 times. As our LTAC portfolio continues to adjust to the patient criteria rules, I want to point out that the Ernest LTAC at this point are not fairing as well as the rest of the LTAC operators in our portfolio. We believe that this is primarily due with the market that Ernest operates in, where there are usually only one or two acute care hospital systems in the markets, and they are typically smaller thus resulting in a smaller population base to draw of higher acuity patients. Two of the LTAC which became subject to the patient criteria rules in the early months of this year that shown signs of weakness. We have met with the management team and they're working on solutions to these markets. In the meantime, there are IRFs which across defaulted with LTACs continued to outperform exceptionally well. In addition the IRFs stay a developed or acquired into our original Ernst acquisition will add approximately $10 million of additional EBITDA. Today LTACs only represent 5% of our total portfolio. Community Health Systems has been in the news recently and some investors have asked about our exposure with them. We have two CHS facilities, they represent less than 1% of our total rental revenue. For the smaller facility in Texas we have a $4 million letter of credit and CHS is guaranteed both leases. Post to close of the quarter, we close one investment with Steward Health Care. Steward has been in relationship, we've been building over almost last two years. Over that time period, we've gotten to know the management of Steward and their equity partners served us very well. We believe our investment of $1.25 billion with Steward is just the beginning of this relationship. Today we also announced the near-term – addition of two more hospitals with RCCH, one in Lewiston, Idaho and one in Pasco Washington. We've been underwriting these two facilities into our first underwriting of the Capella transaction two years ago. After having spent some time in both of these communities with their management teams, I am delighted to have them as a part of our portfolio. With these additions, are already strong geographic and property diversifications got even stronger. Post closing on these transactions our three largest operators will be Steward, Prime and MEDIAN as 17%, 16% and 15% respectively. 79% of our portfolio within the United States, 19% in Germany, 1% in Italy, 0.5% in U.K and less than a 0.5% in Spain. In the U.S. 73% of our portfolio is in acute care facilities. In recent weeks, the Community Health Systems has been the major news story in the acute care sector, resulting in some negative press for the hospital industry. Well I am not commenting on the particular to the CHS situation, the negative press about the hospital management sector is not warranted as shown by the quarterly earnings reports of the major four profit hospital operators and by the expansion of the MPT portfolio hospitals, which include some major nonpublic hospital operators. Over the past few weeks, other acute care hospital operators have announced stable utilization and solid financial performance driven primarily by revenue growth influence by pricing gains and utilization growth. ACA the industry leader continues to produce industry leading quarterly earnings that are consistently strong. The following examples are results for quarter three 2016 with quarter three 2015. ACA's revenue growth was 4.2%, it adjusted EBITDA grew 7.8%, with cash flow from operation is totaling $1.2 billion. ACA's utilization grew similar with the same hospital inpatient admission increasing 0.7%, same hospital equivalent admission volumes growing 1.3%, and emergency room volumes increasing 2.7%. Universal Health Systems operates both acute care and psychiatric hospitals, both areas are growing and reflecting the strength of the hospital market. Universal same hospital acute care revenue grew 8.2% and was driven by solid volume growth with the same hospital adjusted admissions increasing 4.6%, and same hospital revenue for adjusted admissions growing 3.2%. Some same hospital markets we incurred due to labor cost pressures in some markets, we given that UHS still expects long-term EBITDA growth in the 7% to 9% range for acute care. Tenant reported improved performance in its hospital core business, same hospital revenue grew 5.3% driven primarily by an increase of 3.9% in revenue for adjusted admission. Volume also increased slightly with same hospital admissions increasing 0.4%, same hospital adjusted admissions increasing 1.4% and same hospital emergency room that's increasing 0.5%. Hospital adjusted EBITDA increased approximately 5% after normalizing for acquisitions, divestitures and lower EHR incentives. As all of you have heard me say on many occasions, hospitals are not going away. We can describe a scenario where we don't have hospitals in this country. We'll reimbursement change, absolutely. I've been doing this for more than 30 years now and I've seen tremendous change. But two things I can absolutely guarantee you regardless of political parties, is that hospitals will always be here and some form of reimbursement will be here to pay forward. The key for us is to be sure to invest with operators who can adjust to the ever changing environment. I believe that we have done an excellent job of doing that. Steve?

Thank you, Ed. This morning we reported normalized FFO for the third quarter of $0.30 per diluted share, consistent with our previously disclosed expectations and street estimates, and allowing us to estimate that full year normalized FFO for 2016 will be $1.27, that is a $0.02 reduction from our $1.29 estimate from last quarter, and of course since last quarter's call, we had issued 77 million common shares. Moreover our new estimate contemplates a EUR500 million bond issue during the quarter that will include EUR300 million in proceeds that will not be put to work immediately. Probably more relevant is our introduction this morning of our estimate of 2017 normalized FFO as a range of between $1.35 and $1.40. General assumptions to underlying this estimate are described in this morning's press release. Included in third quarter net income, but of course not in FFO is approximately $45 million in gains on the previously reported sale of three rehab hospitals that are leased to HealthSouth. Other net income adjustment to arrive at normalized FFO our acquisition cost of $2.7 million and debt refinancing cost, including call premiums on a $450 million early redemption, up $22.5 million. These very important and substantive activities that I will describe have been fully disclosed and obviously very well received by our shareholders. From the end of the second quarter, we have completed the major portion of our disposition and recycling plant, paying down debt, extending maturities, reducing interest rates, and rationalizing certain parts of our portfolio. We executed agreements to acquire more than $1.5 billion in hospital real estate assets at extremely attractive returns, even further solidifying our unchallenged position as global leader of hospital real estate finance. Our press release and Ed's remarks have already described our extraordinary growth in highly and immediately accretive new hospital assets. And we achieved this by delivering real sustainable returns and value such that our cost of capital became so attractive that we were able to significantly further lower our leverage metrics. We issued an aggregate of 83 million shares of common stock for proceeds of $1.2 billion, including $150 million in a private placement to affiliate of Cerberus capital management. Going into 2017, we expect to have a net debt to EBITDA ratio of about five times, with an excess of $1 billion in immediately available cash and revolver resources. There is no healthcare REIT that we compete with and only a couple at all that have that high quality of a balance sheet position. So instead of walking you through the truly transformative transactions of the last several months that we had previously detailed, I will leave time for any questions if we need to revisit them or go into further details about those transactions. To follow-up Ed's comments about Adeptus, he described our outstanding position with respect to Adeptus and posted on Tuesday evenings some detailed and objective measures about that position. So again, I won't repeat all of what you have no doubt already reviewed. We'll be happy to take questions in just a minute. I'll make a couple of comments to reiterate how the Adeptus situation so perfectly describes the strength of our business model, including investing in critical healthcare facilities under master leases with market leading experience in well capitalized operators. So just a few comments, our Adeptus facilities are highly profitable. Even though a significant portion of them are still in ramp up to normalized operations, the portfolio lease coverage is 2.85 times. The initial contract properties that were fully placed in service in 2014 actually generate a coverage ratio of almost 4 times, which we believe will be replicated as the two newer tranches continue to mature. The cash crunch in Adeptus is reported by its management to be primarily the result of inattention to receivables collection and excess preopening expenses. It is important to understand that the collections issue is not a result of rejected or inappropriate billing. Remember that most of the Adeptus facilities are now hospital outpatient departments that take Medicare and bill commercial payers in accordance with the JV partners, such as UCHealth in Colorado, Dignity Health in Arizona, Texas Health Resources in Dallas, and others. Another way of saying this is that these facilities and their billings are in network, billings and patience. So we believe with new financial and operational management and the infusion of $57 million in liquidity, Adeptus will get control of collections and expenses, substantially reduce capital expenditures and reestablish the outstanding execution that was lost as they grew so rapidly recently. But if we are all and we ultimately need to terminate the leases and bring in new operators, we could not be in a better position – our leases allow us to start taking remedies at least coverage or fixed charge coverage falls below two times. That means long before there was a payment default, we can bring in new operators. For 65% of our portfolio, there is already a natural and logical replacement operator. That is the JV partners that we have just mentioned. For those HOPD facilities that do not yet have a JV partner, primarily the Houston market, we're even more confident that one could be identified promptly. Remember these are up and running and very profitable hospital facilities that would require very little if any capital cost for such a operators simply step into the shoes of Alessi [ph]. Finally, we have more than $10 million in irrevocable letters of credit and that's expected to exceed $12.6 million by year end. So I just want to reiterate that we believe Adeptus have the capital and the management debt now to write their own ship and we think it unlikely that a new tenant will become necessary. But it is important that our shareholders understand that we have not left such a situation to chance. Thankfully after owning more than 260 hospitals over our corporate life, we have had only about half a dozen instances that required us to change a tenant, in only one of those instances over 12 years that we lose money. Before we go into questions, I'll comment on the very recent volatility of all healthcare REITs around possible fed action. The group is down again this morning, so just a few thoughts and reminders. Any sustained increase in longer term interest rates is only likely if we return to an inflationary environment, because virtually all of our leases have annual escalators linked directly to inflation, higher interest rates would be offset by higher revenue Because we have consistently improved our credit profile even if there are market interest rates increases, we expect that our relative interest cost to decline. For example, in July we refinanced $500 million in 10 year bonds and took the rate from 6.875% to 5.250%. We expect similar or better improvements if we issue euro bonds in the near-term. Finally, with respect to new business, we would expect market cap rates to move higher as the market-based cost of debt capital similarly moves higher. So we would expect limited if any impact on our investment spreads going forward. And with that, we'll be happy to take questions. Operator?

Thank you. [Operator Instructions] Our first question comes from line of Jordan Sadler with KeyBanc Capital Markets. Your line is open. Please go ahead.

Thank you and good morning.

Good morning, Jordan.

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

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

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

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

Actually, Jordan, that's a good question. I appreciate you're raising it. If you look at the first project, you remember that we did these $500 million commitments in three separate tranches, the first one at $100 million, the second at $150 million and the third one at $250 million. The initial cap rates on the first tranche are approaching 12% at this point, the second tranche is approaching little more than 10%, and then the third tranche is in that just north of 9% range. If you look at it's important that everyone also know that we only have roughly half of the total of Adeptus portfolio. They've got a whole another set of hospitals of roughly about 50 as well that they have financed primarily using local developers and a lot of those local developers obviously are not long term holders like we are, like other REITs are and so they sold a large number of those properties. And obviously they're not aware of any sales post Tuesday, but prior to that those properties were selling in the six to – low sixes to higher six range cap rates.

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

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

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

Are those cash the eight to nine?

No, no.

Those are GAAP.

Those are GAAP. Got you, got you. Okay. Thank you.

Okay. Thanks, Jordan.

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

Hi Guys. Just a quick one, what's the current share count as of today?

What's the share count?

Yeah.

One second, about 320 million.

And a follow-up on the Adeptus in Houston market, is there anything you guys can do to help just to bring in a JV partner to take their hospital?

Well, there is, if that was necessary. And as I said in my comments, I believe that Houston market would be very easy to find a replacement. Keep in mind this is a very competitive market. Adeptus has very successfully executed and created a system in Houston with a general acute care hospital and 10 emergency departments that planted in a 30 mile radius around that hospital, that particular market is profitable similar to the rest of the portfolio. Similar to the Dallas market they did the exact same thing, they built their own hospital, they planted emergency departments. And then having demonstrated the breath and the strength of the system they created, they attracted the by far the largest and most dominant hospital operator in the Dallas market, Texas Health Resources. So there are a number of opportunities in Houston to do that. And as I say if which we think is extremely unlikely, but if we had to find a replacement tenant, we think Houston would be pretty easy to do.

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

Thanks.

Thanks Eric.

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

Hey. Good morning everyone.

Good morning.

Good morning. I'll go back to the comment around the coverage have fall below two times, I just want to get some clarity there. Is that the overall portfolio coverage one or two times or is it specific to the individual leases and those stuffs?

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

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

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

Okay, Ed. Thanks for that. And then just in terms of just – I know it's only been a few days, but you sound pretty confidence everybody to replace if and when or if that ever contain a need. I'm just curious if you have gotten any reverse increase at this point from folks certainly know the assets if they have their own thoughts on what might happen here?

Yeah. I mean if we did, you know it's just following our policy of not commenting on sale transactions or investment transactions before they get more maturity that we probably wouldn't see it anyway.

Got it. That's fair enough. And then I guess just as you think about sort of your relationship with Adeptus and working with their previous management teams and things like that. I mean is there anything in hindsight that you can think of today that would have flagged or indentified some of the weak operational controls that seems that are in place here?

Well, we monitor their financials on a monthly basis. We monitor statistics more often in that. We monitor the DOS on a quarterly basis, so we certainly knew that it had risen from 60 in the first quarter to 80 in the second quarter, and we obviously didn't know whether it gotten up to 119 until they released it to all of us publicly this week. Certainly when it got up to 80 it was something that was on our radar, but 80 is not an only alarming number, obviously 119 is. It obviously jumped up, they're much quicker than we had anticipated into. I've had my most recent meeting with Tom Hall back in April where we discussed some of the specifics about his management team and the things he was doing to strengthening particularly the accounting department and we were very pleased with the changes that he was making. Obviously some of those changes happened – some of the bigger changes happened quicker than we had expected over the summer. We think that Frank has a very good handle on the problem. We think that Frank has a very good idea on what needs to be done to meet the solutions. I do not know Greg Scott, the new Chairman, but I listen to him on Tuesday he clearly has a good handle on the healthcare industry. He has got great experience in running healthcare companies and I look forward to meeting him soon.

Got it. Okay. And then just last question maybe going back to just guidance here, the $500 to $1 billion clearly not going to issue equity at today's prices. But if I look at the additional proceeds another in Europe, but I mean I guess do you execute on 750 midpoint, it doesn't really seem like you need equity, am I asking this correctly or is there some use that I'm missing?

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

So there is $500 million to $1 billion, does that includes the pending MEDIAN as well as the RCCH?

No, it is not.

Did not include. Okay. All right. Thanks.

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

Thanks.

Good morning, Mike.

Hey, good morning. I remember that you guys said that 55% of your assets of Adeptus have high quality JV partners. Can you give a sense of the operations of the other 35%? I know you already touched on Houston, where else are those assets and how they're performing?

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

And to give you an example, Alson one of the second party that we did with them and it's generating almost seven times coverage. A facility in San Antonio was the third-party that we did. It's generating a little over three times covered. So they are performing well as well.

Did they expect the JV which has Houston assets the north like the JV the other one?

That's right.

And do you think you'll be more difficult for the joint ventures some of those properties given their recent announcements?

I do not know, neither do I. These are profitable facilities standing on their own. So in another words, the joint venture on its own is very profitable and the joint venture partner would be very attracted to that. However, the bigger attraction for the joint venture partner is to plant 10 facilities around this radius, extending their market footprint and capturing very valuable that is profitable patients that would otherwise go to competitors.

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

The profit in most likely scenarios converting some of those beds and other types of beds, whether that be IRFs or the macro hospital concept and we're looking at those.

Okay. And then what's your….

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

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

The Ernest LTACs, the answer is slightly different before I get to the coverage in just a second. The Ernest LTACs, those two in particular are since they've joined the patient criteria rule are down [indiscernible] approximately 15% and 20%.

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

Great. Thank you.

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

Hi, Good morning, guys.

Good morning, Juan.

Just on the comments about Adeptus asset is trading I guess in a mid-6 cap rates. To what sort of rent covers are those being underwritten too by the market?

I'm not sure, Juan. It's certainly much less than what our facilities are operating because they're being sold by developer shortly after construction completion. So, probably a very low coverage is probably in the 121 or 125 type ranges, obviously with the expectations that they'll grow from there. But these are basically have been sales from local developers, so we don't a whole lot of information other than where they being marketed as.

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

Could you just remind us the average size of cost to build on a square foot basis if somebody?

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

Okay. Great. And then just a question, I imagine the coverage levels your coding here are as of trailing as of June. Is there any material movement opted in those till September, if that's in fact the case?

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

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

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

Thank you.

Thanks Juan.

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

Good morning.

Good morning, Tayo.

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

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

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

As I think everyone that follow hospital space would agree that the CHS in particular problems are not an industry problem, but a CHS problem, and certainly we could go into as much detail on that offline as you would like. From our portfolio, as we – as has always been the case, the vast majority of our properties are some of the largest operators in the country. We think we have seven or eight or the top 10 hospital operators in the country as a part of our total portfolio. But where we start with every hospital is, and our underwriting standpoint is we want to make sure that that hospital is needed in that community. If it's needed in that community then if you've got the wrong operator, they've got a situation at the corporate level from the operator standpoint, you can replace the operator. But if you are wrong on whether or not that hospital is needed in the community, then you'll never be able to make that out. So, we start there. We think of the hospital as a part of the infrastructure, much like the water system, and you ask yourself the simple question, if the hospital were to close, does the community hurt, can the people get their healthcare needs met somewhere else? If the answer is no, the community doesn't hurt and yes they can get their healthcare needs met somewhere, else then we move on to another situation. But if the answer is, that hospital is very much needed in that community then you go to the next step. Then the next step is, is it a facility that the physicians want to practice at. If it is a facility that either based on its current configuration or your expected upgrade to it, a place where physicians want to practice, then you go to the third, and the third step, you don't get to who the operator is until the third step. Because as I said from the first step, you can replace the operator, you can be wrong there and replace that one fairly quickly. As I said in my closing remarks of my prepared remarks, you absolutely – I've been doing for more than 30 years. Healthcare is an ever changing in the environment, particularly in the hospital world. I've seen probably 5 different sites. We had significant changes in my business life time to the reimbursement system, and of course it changes, so small changes every single day and certainly every single year. You need to be able to operate with operators that had the ability to move and change within those environments, because as we started this question, with, you are right. Hospitals aren't going anywhere. You just got to be sure that you've got operators that can operate within that environment. Hope that answers your question.

And that's actually very helpful. Thank you.

Thanks Tayo.

Thank you. And our next question is a follow-up question from Eric Fleming with SunTrust. You line is open.

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

That's correct.

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

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

And just one another, with the RCCH properties, is that a fort you closed to those likely.

Possibly, there's two and they are in different state with different regulatory regimes, but it possibly could be done 4Q more likely first or second quarter.

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

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

Okay. Great, thanks.

Thank you. And our next question comes from a line Chad Vanacore with Stifel. You line is open. Please go ahead.

Alright. Good morning.

Good morning, Chad.

I just want to clarify something. When you state coverage on the Adeptus properties, that's 12-months and its one quarter in arrears, right?

That's correct.

Is it both on fixed charge coverage and for property level?

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

Steve, what did you see from 2Q to 3Q on the fixed charge coverage that moved?

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

Assuming that they are having liquidity issues and it just popped in the last quarter, do we assume that's something less?

So, if unless it was in second quarter?

Yeah.

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

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

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

Okay. And most of that comes on line by the third quarter of 2017, is that right?

That's correct.

Okay. Then, if you have to go with a route of finding new operators, what are the challenges there and then what are the alternative uses for the facilities.

I don't think that the challenges here would be near the challenges that you would have in replacing an acute care operator. I think that you can move much quicker from these standpoints, because you've got the joint venture partners, employees obviously would be the most logical standpoint. From the standpoint of alternative uses, you got – these are primarily in high visibility locations and class A shopping centers. So, you literally could turn these particular facilities unlike a general acute care hospital, you could turn these into almost anything. Banks, fast food, yeah, small…

We're talking non-healthcare healthcare, right?

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

Alright, then just one more from me. So if this only a temporary issue of liquidity at Adeptus, would you consider loaning additional capital to help bolster that liquidity near term.

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

Alright. That's very clear. I appreciate you taking the question.

Thanks Chad.

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

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

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