Medical Properties Trust, Inc. (MPT) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Medical Properties Trust Incorporated Q4 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Charles Lambert, Managing Director. You may begin.

Thank you, Vicky. Good morning, everyone. Welcome to the Medical Properties Trust conference call to discuss our fourth quarter and full year 2016 financial results. With me today are Edward K. Aldag, Jr., Chairman, President and Chief Executive Officer of the company, and Steven Hamner, Executive Vice President and Chief Financial Officer. Our press release was distributed this morning and furnished on Form 8-K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our Web site at www.medicalpropertiestrust.com in the Investor Relations section. Additionally, we're hosting a live webcast of today's call which you can access in that same section. During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed and/or underlying such forward-looking statements. We refer you to the company's reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company's actual results or future events to differ materially from those expressed in this call. The information being provided today is as of this date only and except as required by 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 Web site 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 your interest in Medical Properties Trust. As we entered into 2016, our focus was on strength. It was our desire to focus on the continued strength of our balance sheet, our portfolio and our team. In 2016 and through the early days of 2017, MPT achieved all of the operational goals we set early in the year. We successfully and profitably repositioned our portfolio by capturing sizable gains from asset sales in the first half and allocate capital to compelling new opportunities in the second half. The approximate $800 million in asset sales and our solid execution in the capital markets helped to significantly strengthen our balance sheet, reduce our leverage, improve our liquidity and position the company for long-term growth. Today, our total assets are $6.7 billion. This is $900 million more than we ended 2015 with and is despite the fact that we disposed of more than $750 million assets in 2016. We have improved our concentration levels to the best levels in company history. At the end of 2016, our largest center represented only 17.5% of our total portfolio. Prime, once our largest tenant, has been reduced to only 16% of the total portfolio and most importantly to us the largest investment in our portfolio only represents 3.2% of the total. We have grown more than 30% compound annual growth rate over the last five years. With this type of growth, we have used varying methods presenting our portfolio EBITDAR lease coverages to give the best comparison for quarter-over-quarter and year-over-year changes. We will continue to look for ways to improve the view into the specifics about the portfolio. Let me start by going over our same store coverages and remember, same store to us means that the property has been in operation in our portfolio for at least two years. This allows us to have comparison periods. For the third quarter, our acute care hospitals coverage is up 20 basis points year-over-year and is down 20 basis points quarter-over-quarter. This is not unusual given the number of people on vacation during the third quarter. It has historically been the slowest quarter. The coverage is a strong 4.2 times. Our IRFs were flat year-over-year, remaining at two times coverage. Remember we sold three very strong IRFs last year. Our LTAC portfolio saw is worst performance of any quarter. The total quarter dropped 30 basis points to 1.6 times. Six of the facilities actually saw increases. Most of the issues remain in the Ernest portfolio. They continue to look at options for improving their LTAC facilities. There is only of their LTACs with a negative EBITDAR coverage. The Ernest IRF portfolio continues to outperform providing all total -- overall total Ernest portfolio, IRFs and LTACs combined, an EBITDAR coverage ratio of almost 1.5 times. If you look at the entire portfolio, excluding only the four that we do not get operating information on, Steward, which was added during the quarter and the MEDIAN additions that we added at the very end of the year. But this does include the facilities that are still in ramp up stage. The total EBITDAR lease coverage is almost 3 times. You will recall from our call in November, when we discussed the Adeptus situation, one of the items we felt gave a strong security is the JV partners with Adeptus in our facilities. We have met with those partners over the last 90 plus days and have been reassured that they continue to believe in their properties. They support the model and very importantly believe these freestanding ERs are an important part of their future. You may have noticed recently that ACA announced that they plan to continue their investments in freestanding ERs. They announced they plan 30% increase over their existing facilities. You will also recall that we have approximately $446 million committed to Adeptus. Of that all but $63 million has been funded to date. A total of $54 million remains uncommitted from the original $500 million commitment. The overall coverage for Adeptus MPT facilities is 2.62 times. And in that we have arbitrarily added a 5% management fee on the non-JV deals. This decline from last quarter is not bad news as more and more of their facilities become HOPD, their net revenue per patients declined as they begin to take Medicare patient and go under the hospital commercial insurance contracts. The trade off for the lower net revenue per patient is added security. We view this as good news. For further clarification on the coverages. The coverage from the first tranche is little more than 3.5 times. Those are obviously the oldest facilities. The second tranche, 1.9 times, and the last tranche, 1.8 times. Much of the panic in the healthcare markets from November presidential election had subsided. I believe everyone now understands that while it is most likely the ACA will be repealed, it will ultimately be replaced with something. And as I have said many times, hospitals will continue to be the lynchpin for the healthcare delivery system in this country. It’s wonderful to start the year with such a strong balance sheet and so many opportunities. We are committed to maintaining our conservative debt metrics. At 5.1 times net debt to EBITDAR, we are in the lowest range compared to other healthcare REITs. At this time I will now ask Steve to go over the specifics of our financial metrics. Steve?

Thank you, Ed. This morning we reported normalized FFO for 2016's fourth quarter of $0.31 per diluted share, resulting in full year normalized FFO of $1.28, a penny higher than our most recent estimate of $1.27. And that is due, among other things, to the fact that we did not complete a €500 million bond offering that would have diluted FFO somewhat. We are maintaining our estimate of 2017 normalized FFO as a range of between $1.35 and $1.40. The same as we introduced last quarter. There are two items that are included in net income but adjusted out of FFO for the quarter. Number one, about $35 million in acquisition cost of which approximately $25 million are substantially related to previously disclosed taxes on our approximately €700 million 2014 purchase of 32 hospitals that were leased to MEDIAN Clinic, the top private operator of German rehabilitation hospitals. In 2014, when we first disclosed details of this transaction, these taxes which have only recently been paid were considered in the 9.3% GAAP return metrics that we announced. Of the remaining, roughly $9.8 million in acquisition cost, about $5 million relates to the $1.25 billion Steward transaction that closed during the quarter and the rest related primarily to transfer taxes on other German acquisitions. The second component of normalized FFO adjustments is that we have elected not to include in FFO about $4 million in income tax benefits recognized during the quarter. This credit is the result of some technical accounting subjectivity that caused us to release prior period tax asset valuation allowances. And we expect this will be non-recurring and not indicative of operating results going forward. To be clear though, we intend to continue presenting income tax benefits and expense from ongoing operations as components of FFO in future results. As Ed mentioned, we presently have $6.7 billion in gross assets, supported in part by net debt that is equivalent to only about 5.1 times our in place EBITDA. That is one of, if not the, lowest leverage levels in the entire healthcare REIT sector. As we have made clear many times now, we intend to run the company with prudent levels of debt which we presently consider to be in a range of five times to about 5.5 times EBITDA. Last quarter we estimated that we would make so called ordinary course acquisitions in 2017 between $500 million and $1 billion. Based solely on our current balance sheet, our debt would approximate about 5.5 times EBITDA if we made acquisitions at the low end of that range. The recent cost of common equity makes it unattractive to fund substantial acquisitions with common equity. So we are exploring further asset sales, earnings retention, joint venture opportunities and other institutional funding as means to lower our cost of capital for larger acquisitions as they may arise. Just a few comments in addition to Ed's about Adeptus. First, Adeptus has consistently, both before and after their disclosure last quarter about their cash constraints, prepaid 100% of our rent and other financial obligations at the beginning of each month. And they did so again for February. This demonstrates two things to us. Number one, they have obviously generated sufficient cash for lease payments, and number two and more importantly, it reaffirms the power and the position of the master lease structure. Tenants are not able to cherry pick good and bad properties but in order to continue operating, must fully pay rent for all facilities under a master lease. Second, we have on hand irrevocable letters of credit for about four months of in place rent. We remain confident that Adeptus, it's joint venture partners, or other possible successors will be able to operate these facilities profitably. But in the event there is an operator transition, this strong cash cushion gives us even greater confidence that there will be no material impact on MPT. As Ed mentioned, our overall Adeptus coverage for the trailing 12 months as of the end of last year's third quarter, is a little more than 2.6 times. And it is important to remember, as Ed said, that MPT assumes a 5% reduction in EBITDAR for management fees even though properties maybe self managed. So we will just reiterate that we are very bullish on this established and growing delivery mode for increasing volume, marketing reach and quality care. Ed already mentioned the recent news that HCA continues to expand its industry-leading portfolio of freestanding emergency rents. And many other systems are doing the same. The facilities we have developed for Adeptus are brand new, state of the art, already generating revenue, in great locations, and the majority partner with the dominant not for profit acute system in their markets. Adeptus may well be able to continue to operate these facilities but once again if it is necessary to transition operations, we remain highly confident that can be done without material impact on MPT. Last week we announced the completion of a new credit facility so I will not belabor the details that were in last week's press release but feel free to ask questions in just a minute. The point I will make is simply that we were able to achieve lower pricing even in an environment of higher rate expectations and obtain an agreement whose terms give us additional flexibility to continue to prudently grow our business. Importantly, those included a $200 million euro term loan, the proceeds of which we will use to prepay similar amount of callable bond debt. The called bonds had a 5.75% rate, which the new term loans initial cost will be about 1.5%. That’s based on 1.5% spread over current one month euro LIBOR, now at 0%. It remains possible that we will issue new euro bonds to fund the recent and pending euro denominated acquisitions in the near-term pipeline. Call premiums and other transaction cost related to these financial activities, which are expected to aggregate about $13 million, will be expensed in the first quarter of 2017. The substantial majority of that is for the call premium and of course we elected to incur that because of the strong net present value it created for us. It is also possible that we will refinance the $350 million, 2022 bonds that become callable this month. Those bonds have rate of six and three eights and we expect to be able to issue new bonds at a rate that also would provide a positive net present value. The last thing I will point out about our capitalization is that we have no schedule maturities for three year until 2020. And that does not include the single, small mortgage loan that requires immaterial monthly principal payments. One last brief point that I want to make before we go to questions is to introduce a planned expansion of the scope of our coverage reporting. And Ed of course made a start this morning by disclosing that our overall tenant EBITDAR to lease payment coverage ratio is almost 3.0 times, and that excludes the few properties that Ed mentioned. That’s comparable to the same store measure of 3.4 times EBITDAR. Finally, there are only two lease arrangements representing less than 1% of the total, which have a one time or below coverage after taking into account master lease and cross default enhancements. And for each of these two, and they are with different tenants, we hold irrevocable letters of credit in the amounts of two times annual rent. Now, again these measures are based on tenant reported financial results and have differing measurement periods and sometimes methodologies then what is in our consistently reported same store reporting. As we are able to better assure ourselves of the reliability of tenant reporting on our newer properties and thereby fold them into our own reporting system for a consistent methodology and presentation, we plan to report this information in our supplemental package each quarter. And with, we will be happy to take question. Operator?

[Operator Instructions] Our first question comes from the line of Josh Raskin with Barclays. Your line is now open.

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

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

Okay. Okay. And my understanding when you are converting to HOPD is that you have the rates come down but the margins typically on those facilities tend to be, maybe similar if not certainly higher. But are you just saying even with similar margins, they are just dollars of coverage relative to the rent. Your rent is not changing obviously depending on the structure of the facilities. Is that what you are saying?

That’s correct. Now, obviously, you hope you get two tradeoffs by going to HOPD. The most important one that I referred to is security. The second one is that you get more patients obviously. That’s in the beginning stages of that so you hope to see some of the downtick in coverage actually come back from the increase in volume.

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

Well, let me answer that this way, Josh. Obviously, no one knows what the market is going to do from any given time. So if you look at what our current balance sheet is and what our current opportunities are, as Steve and I both mentioned, it is very important to us to maintain a conservative balance sheet and maintain the leverage ranges that we so proudly have obtained and maintained. To do that, we could do approximately $500 million to $600 million of additional acquisitions without affecting debt at all. So to get up to that higher range of that, you would have to see some changes in the capital markets. The different avenues of access to capital that Steve mentioned. So that’s why they are so very wide ranged there.

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

Yes. From a pipeline standpoint, we could so substantially more than that, substantially more than that.

And our next question comes from the line of Andrew Rosivach with Goldman Sachs. Your line is now open.

If I forget, thanks for the additional disclosure on the non-same store stuff. I know I have been bothering you for that for a while. I apologize, I have more on Adeptus, it's probably all the incoming that the sell side is getting this morning. I think what a lot of people are doing is trying to line out their financial statements with your business, and feel free to tell me where it's an apple with an orange. The first is, on the reported coverage, is your coverage cash or how is their receivables issue dealt with in your partner coverage.

Yes, our coverages are GAAP numbers. We obviously pay attention to the cash, as obviously cash is king, but those numbers get reported as to in arrears. Now obviously since the end of the last quarter when they reported those numbers, we have been in daily contact with them and are doing the best we can to get the best position that we feel that we can in their collectionability. They have made vast improvements on that. I think they still go ways to go but given where our numbers are and where we see what they are doing on their total overall cash collections, we still feel very good about it. Now actually, I want everyone to know that I feel better today than I did at the end of the last quarter when we had our last earnings call and the somewhat surprise announcement by Adeptus. As I mentioned on my prepared remarks, that we have me with the joint venture partners and I can't stress enough the bullish meetings that we had with each and every one of those joint venture partners. So as Steve has harped on the last call and this call, we think that our model protects us very well. We think that Adeptus is going to come out of this and continue to be able to be a viable company going forward but if we are wrong and they are not, we believe that we are in even a stronger position today with these facilities then we were at the end of the third quarter.

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

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

Understood. No, I appreciate that. And then the last piece of this is, when you give that 5% management fee, if you ever just look at a straight Adeptus income statement, their G&A as a percentage of revenues is a lot higher than that. Is there a reason why you are using 5% rather than just kind of using a ratio of their G&A to revenues of their income statement.

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

And our next question comes from the line of Jordan Sadler with KeyBanc Capital. Your line is now open.

Bear with me for a second on a couple of more of these Adeptus questions. I think that’s probably a big source of what's [held] [ph] you guys on the equity front. So maybe clearing the air a little bit helps out. That sounds like, Ed, you said a couple of things that kind of peaked my interest. One of which that you feel better today than you did at the last earnings call, which is great news. Is there anything you could share incrementally that maybe, that engenders those feelings for you? What is it specifically that these guys are doing that is making it a little bit more comfortable besides the conversations with the partners.

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

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

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

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

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

Well, absolutely. And that’s another good point and I appreciate your bringing it up. So not only do we feel very comfortable about the basis for these facilities being operated as freestanding emergency rooms. But as we stated very early on in our original commitments to Adeptus that unlike some of the hospital assets that are out there, these are actually good real estate assets. They are primarily located in very strong class A type shopping centers in the outparcel. They could be used for any number of things. So, you are absolutely right. Not only are we very comfortable with the basis as a freestanding emergency room, but we also feel like we have a tremendous amount of security if we needed to turn any facilities into any other particular use.

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

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

And our next question comes from the line of Michael Carroll with RBC Capital Markets. Your line is now open.

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

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

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

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

Okay. So should we expect that this coverage ratio to decline again next quarter and then kind of rebound after that once these assets start to stabilize a little bit more.

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

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

That’s a good question as well. I don’t have -- I can't do that arithmetic very quickly but I will tell you that, as I side in my prepared remarks, the Ernest portfolio while none of the LTACs, two of the LTACs are performing well, the other LTACs are not performing well. But it's only one that is performing extremely poorly. And that’s the one I have mentioned on the call. So when you take that one out, the coverages are good coverages. And the other LTACs, the non-earnest LTACs, are performing well. Some of them extremely well. It’s the same facility that I talked about on the last earnings call and Ernest is in the process of looking at options for this particular facility and they still continue to include, as I mentioned back in November, that they may convert this facility into something other than an LTAC.

Okay. Another healthcare type property?

Yes.

Okay. And then just last question. Is that [1.6] [ph] coverage ratio on the LTAC, is that a low watermark or should we expect to see that drift a little bit lower.

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

And our next question comes from the line of Vincent Chao with Deutsche Bank. Your line is now open.

Last quarter we talked about some remediation that you had potentially in place if the coverage did drop to, I think, below two times. I just want to make sure, so the 2.3 that you mentioned in the quarter, is that the same number that if that were to fall to two times, that’s when you have some ability to do something over these assets, or is it a different calculation?

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

Okay. So you are not...

... then the contractual coverage is higher than that. As you well know in most credit facilities, there are lots of carve outs, lots of add backs for, in particular, ramp up period pre-opening cost and all of that is in our contractual coverage also. What we are reporting is actual coverage that comes off the GAAP financial statements and does not include those types of add backs and carve outs. So that’s the point that we are trying to make here, is that is on an apples to apples basis, next quarter the coverage is below 2. The coverage is significantly higher than that, again, on this contractual basis that I am describing.

Okay. So not close to that benchmark at this point?

Right.

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

Got it. Okay. And then just maybe in thinking about the letter of credit that’s outstanding. If something more negative to happen here with Adeptus, I guess that just puts you ahead of the unsecured creditors. I guess where does that put you...?

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

Let me just make a couple of more comments. As we have talked so much about Adeptus here. Some of the things that we take for granted that everyone might know. So, for example, these facilities are branded the joint ventured names. They are not out there as an Adeptus facility on the corner. So when you ride out to the Texas Health Resources facility, their name is on the door. If you would look at the Colorado health systems, their name is on the door. And not only do they benefit from obviously the profitability of each one of the freestanding ERs but they greatly benefit, as has been shown, for HCAs investment in these facilities, is the patients that they bring to the mother ships, if you will. So they are very strong supporters of the overall model for the freestanding emergency rooms and their joint ventures in them.

Got it. Okay. And then maybe just switching gears here away from Adeptus. Just in terms of the term loan that was announced and the $200 million portion, I think you have specifically that’s going to be used to pay the 2020 notes, I guess. You also mentioned that you are still considering potentially an unsecured offering in Europe to potentially fund future acquisitions. I guess what is the state of the unsecured market in Europe today. I guess caused you to go down the term loan path versus the $500 million, I mean presumably the markets are pretty tight right now. And I guess the second part of that is, if you don’t use an unsecured offering down the road, should we just be thinking about the $300 million or so that was previously earmarked for, I guess, MEDIAN acquisitions that is coming off the line of credit.

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

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

Yes. That’s in there.

And our next question comes from the line of Chad Vanacore with Stifel. Your line is now open.

So taking off on Vince's question about the Europe and the financing market. So what are the acquisition opportunities outside the U.S. that are worth exploring? Is it more German hospitals, more southern European hospitals or something else?

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

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

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

Yes. Right in the press release.

Yes. So what I meant by that was that I think that when the election happened and the realization that the ACA was absolutely going to be repealed, we were in the same position as a country that we have been in a number of times before which is when uncertainty as to what the rules were go to be. When you have that time period, you generally have people stand on the sidelines waiting to see what they are going to do. I think that, in talking to everyone, reading everything, I think that everyone is certainly of the understanding that the ACA will be repealed in some form or fashion. Probably the most if not all of it repealed. I think everyone is also comfortable that there is going to be some replacement to the ACA. And whatever that replacement is, that hospitals will continue to be the lynchpin of the delivery system and that there will be reimbursement in some form or fashion in roughly the same type of dollars, obviously shifted around. With that, you have seen a lot of people or we have seen a lot of people get back into the markets, get back in to the M&A activity. We have gotten a lot of calls over the [trans] [ph] of people saying, look we are ready to look at additional acquisitions and we just want to put you on notice and hopefully be able to use you for financing in the future. So that’s what I was trying to get across in the press release in my remarks.

Okay. That’s great color. Just one more question. Going back to Adeptus. Do you have insight that you could share into what they are doing to actually improve cash collections over there?

Well, I am trying to remember exactly what they have made public and I can't remember that all off the top of my head. So being sure that I don’t get in trouble, I just better not comment on that.

And our next question comes from the line of Juan Sanabria with Bank of America. Your line is now open.

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

Sure. Just a second. So the total [indiscernible] is generally $5 million to $6 million range and on a square foot basis that’s generally in the $375 to $400 range.

Okay. Thank you. That’s helpful. And on the coverage levels for the general acute care hospitals with a master lease that dropped, it looked like 30 basis points to 3.4 times on a trailing 12 months basis as of the end of September. Is that a [indiscernible] as a result of Prime, if you could comment on that and any update on the Prime situation? Has there been any change in their billing practices or any updates on to the DOJ investigation?

So let me answer the first part of that first. The answer is no. There hasn’t been any additional real update other than what you may have seen in the press that as is typical, Prime filed a motion to dismiss and the judge ruled against that. So the case is continuing but other than that I don’t have anything. So, no, the difference in the acute care is not from Prime. Prime has actually continue to perform well and has improved. The primary change is from our very strong performing facility down in Texas, which is continuing to add additional managed care contracts and, again, the managed care contracts add security but they generally add a lower reimbursement. Now the coverage on that facility has been astronomical and it continues to remain astronomical. Still a double digit return, it's just a lower double digit coverage.

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

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

Well, I know they are paying you cash. I was...

Okay. That’s what I saw. Yes.

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

No. No, it's coming from Adeptus.

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

Our next question comes from the line of Tayo Okusanya with Jefferies. Your line is now open.

Let me just echo Andrew's comments as well. I do think the improved disclosure is a huge help. So thank you for that. A couple of questions from my end. I know we have talked about Adeptus a lot. I mean there has been some news in the market that they maybe closing some facilities as part of their whole restructuring process. I just want to confirm that. Does that have impact on you guys?

Right. We have seen that also. They continue to pay rent on everyone of our facilities.

But you are not having any feedback from them [indiscernible] maybe thinking of closing some of those facilities that you own?

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

Got you. Okay. So that’s the first question. That’s helpful. Then the second question, Steve, you made an interesting comment just about sources of capital going forward. That you may consider asset sales, that you may consider doing JVs of some assets. When you kind of think about that process, could you just kind of talk about what kind of assets would you be targeting as sales. Is this kind of like non-core assets or the JVs is more around your higher quality stuff where you may get the most investor interest. What kind of investor pool are you generally talking to at this point about potential JVs, if any?

Yes. So let me try to address each of those and remind me if I forget one. We would, just like this time last year if you remember, when we started selling assets to recapitalize the balance sheet. As it ended up, the assets that we first focus on, never got sold because they were so much interested in other types of facility. So the point being from that comment is we are willing to consider the value in all of our assets and how do we unlock some of that value for us. And our view is that obviously we have a substantial exposure to general acute care in the U.S. We have got a substantial exposure to post-acute in Germany. We have very attractive assets post-acute in the U.S. and as Ed mentioned, it's really been surprising, at least personally to me, the level of interest from sophisticated investors in U.S., in particular healthcare real estate. So we will consider all of that. We think all of that is attractive in one way or another to one type of investor or another.

Great. Last one from me. Just in the world of post-acute care, any kind of insight at this point of what you think the new secretary of health could be thinking about from a post-acute care perspective? There has been talk he may try to slow down some of the bundling initiatives and things like that, but I am just curious with you guys having [indiscernible] something, what you think about the guy on what he may or may not do?

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

And our next question comes from the line of Mike Mueller with JP Morgan. Your line is now open.

Just two questions. One, just quick one on Adeptus. Just to clarify, the [23] [ph] that you mentioned for the most recent quarter, is that a fair proxy for where you think the run rate for 2017 would be if you were taking a look forward.

The [23] [ph], do we think that that’s going to be what 2017 is going to be, is that the question?

Yes. Yes. Because I think that the people are concerned with what -- as you look forward over the next year, where does that coverage trend?

Well, two things in answering that question. One is remember that’s an artificially low number from us and remember that that includes all of the properties, not just the properties that have been in existence for more than six months. So when you look at the properties that have been in existence for more than six months, that coverage is substantially higher than that. When you exclude the hospitals, that coverage is substantially higher than that. So I think on an overall portfolio basis, it's hard to exactly say until we figure out exactly what's going to happen with those few hospitals that they have. But I think overall on the freestanding emergency room, that we would expect them to be higher than that number.

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

No. Mike, we are very active on all fronts now. I am talking about from the capital side. We are absolutely not standing still, hoping that the common equity markets will improve. Frankly, I don’t expect that certainly in the term looking out of a few quarters. So we are actively exploring what's the best way to be able to recycle some of the tremendous value that we have created. What we did last year was truly just kind of a small part. We took $800 million of assets that demonstrably had grown substantially in value. That’s free money to us. So we think there is more, we know there is more of that and we are very aggressively exploring those opportunities so that when and if larger acquisition opportunities present themselves, we will be prepared.

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

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

And our next question comes from the line of Eric Fleming with SunTrust. Your line is now open.

Following on the acquisition and the capital sources that you are thinking of. I mean how are thinking about, is it your preference to do asset sales or would you be looking more to do something, whether it's a JV or some other type of access to capital. What would your preference be?

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

And do you think it would be-- I mean could be something where your [asset] [ph] relationship moves from Europe to the U.S. or is it, now that you have got Steward, [indiscernible] coming as a potential or is it someone [newer] [ph] on that.

I think all of the above.

And our next question comes from the line of Karin Ford with MUFG Securities. Your line is now open.

Just a quick question on cap rates. Have you seen any movement upwards given the change in base rates recently?

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

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

No. I don’t think we would do any hedging because, to really answer the subset of your question, we don’t intend to play the rate game. The reason we did the €200 million loan is, as I mentioned earlier, the conditions didn’t serve as to go ahead and issue the euro bond, and yet we were able to call €200 million and it was a highly, highly accretive transaction. So I pointed out that we are going from 5.75% to 1.5% but we won't keep that term loan out just in order to play that rate game.

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

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

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