Medical Properties Trust, Inc. (MPT) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2017 Medical Properties Trust Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to, Mr. Charles Lambert. Sir, you may begin.

Thank you. Good morning, everyone. Welcome to the Medical Properties Trust conference call to discuss our fourth quarter and full year 2017 financial results. With me today are Edward K. Aldag, Jr., Chairman, President and Chief Executive Officer of the company; and Steven Hamner, Executive Vice President and Chief Financial Officer. Our press release was distributed this morning and furnished on Form 8-K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our website at www.medicalpropertiestrust.com in the Investor Relations section. Additionally, we're hosting a live webcast of today's call, which you can access in that same section. During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed and/or underlying such forward-looking statements. We refer you to the company's reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company's actual results or future events to differ materially from those expressed in this call. The information being provided today is, as of this date only, and except as required by the federal security laws, the company does not undertake a duty to update any such information. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which 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 listening in for joining us today for our fourth quarter 2017 earnings call. By all measures, 2017 was a monumental year for Medical Properties Trust. We exceeded our original 2017 acquisitions guidance with our largest single year acquisitions of $2.2 billion, bringing our total portfolio to $9.5 billion. Our success and hospital expertise continue to attract preeminent healthcare institutions, one of the many grand achievements we had in 2017 was the addition of two nationally recognized academic not-for-profit health systems to our portfolio of operators. We are delighted to have Ochener Clinic Foundation and UCL in Colorado on our tenant last. As I often say, you cannot paint a picture of a society without hospitals, hospital is not only maintained a community's physical and mental well-being, but they also serve as a vital economic resource. While hospitals will remain central to the U.S. healthcare system, an external and internal pressures will continue to influence hospital margins. We expect our portfolio of hospitals to align with those overall healthcare trends. As they always have, hospitals will adapt to the changing industry norms through innovative strategies, enhanced analytic capabilities and collaborative partnerships in order to maintain and enhance viability. Ultimately hospitals will be the galvanizing force behind the U.S. health systems transformation to value-based care. You will recall that we report EBITDAR and EBITDAR on coverages one quarter behind, therefore we note that the numbers we are reporting today, do not include the increases we are generally saying for this past December and January. The record flu season has produced mixed results, in some hospitals while admissions have been up, surgeries have been down due to lack of available beds. This has affected all 48 of the contiguous U.S. states. There'll be more update on this in the next quarter. Due to the large number of hospital acquisitions, we have made over the last four to five years, our same-store facilities will be changing significantly for the near future. This quarter we added 21 properties in same-store reporting, 13 of these facilities are German rehabilitation facilities, which are generally underwritten at two times coverage. The remaining eight facilities are acute care hospitals, with lower coverages in most of our more seasoned facilities. Notwithstanding this impact, for our total portfolio coverage, EBITDAR coverage quarter-over-quarter remained strong and essentially flat at 2.9 times. Looking at total portfolio EBITDAR coverage, quarter-over-quarter, there was a small decline from 2.3 times to 2.2 times. Turning to the acute care portion alone, EBITDAR coverage declined slightly from 3.7 times to 3.6 times, this decline is primarily driven by several of the prime facilities in our portfolio. Prime continues to implement the revenue cycle initiatives resulting from their 2016 audit. We have launched the Prime portfolio carefully including several on-site visits with the management team. Prime same-store cash EBITDAR coverage is currently over three times, EBITDAR coverage quarter-over-quarter for the acute care portion of the portfolio declined slightly from 2.8 to 2.7 times. In total, including Europe, our IRFs and LTACHs represent 21% and 7% respectively of our portfolio. EBITDAR coverage for both sectors remained relatively flat quarter-over-quarter with IRFs at 1.8 times and coverage in LTACHs at 1.9 times coverage. As a reminder, U.S. IRFs represent less than 6% and U.S. LTACHs actually less than 4% of our total portfolio. As we have previously mentioned, our German facilities continue to perform well, but had been impacted by a countrywide nursing shortage. Strategies that were implemented in 2017 will up alleviate this issue in 2018. We are pleased with the overall portfolio. We believe that on a whole, it is not only positioned to do well in this new environment but to thrive. Steve will go over the financial results for 2017 in detail with you in just a few minutes. But I wanted to be sure to highlight just how well we've done. As previously noted, we acquired an additional $2.2 billion properties in 2017. Moreover, and very importantly, these were strong and instantly accretive acquisitions. As a result, 2017 resulted in an MPT historical record high FFO per share. Our balance sheet remains strong. We have ample amounts of liquidity and we continue to see good opportunities in the marketplace both in the U.S. and abroad. You all know that we've been working this past year on joint venturing two specific portfolios with the intended consequences of lowering our leverage well below our normal operating ranges and to greatly lower our concentration with the Steward Health. After running a process on both of these portfolios, we have selected two different parties to work with one for each portfolio. While we cannot at this point be assured of either closing, we are excited about where we are in the prospects of the successful closing. I know that you'll understand when we get into the Q&A portion of this call we will be very limited about the question that we can answer at this time. Speaking of concentrations. After taking into account, the announcements made this morning and assuming the development transactions are fully funded, Steward remains our largest tenant at approximately 36% after the acquisition of IASIS. MEDIAN follows at 13% and Prime at 11.8%. Our three largest states are Massachusetts, Texas and Utah at 13.7, 13.3 and 10.09 respectively. Domestically acute care hospitals represent a little more than 78% of our overall portfolio. 2018 represents the 15th years since MPT's inception, we're looking forward to the next 15 years. Steve.

Thank you, Ed. This morning, we've reported normalized FFO of $0.37 per diluted share for the fourth quarter of 2017. As Ed mentioned that is record result for MPT and on a nominal basis, represents quarterly normalized FFO of almost $135 million, that $540 million annualized. And that our current quarterly dividend rate of $0.24 per share reflects a sector leading payout ratio of less than 65% and that is based on the foundation of an outstanding balance sheet with limited near-term obligations, moderate leverage and multiple options for liquidity. We are truly in the strongest financial position for the long-term as we have ever been. We'll come back to our outlook in just a few minutes, but first, let me describe a few items that we include in this quarter's normalized FFO. As we have previously disclosed, we will over the next roughly six quarters severed leases on certain adapted facilities and either sale or release them to other operators. Accordingly, we are accelerating the amortization of the straight-line rent accrual that accumulated in the early years of these particular facilities. For the quarter, this amounted to $4.2 million and it is added back to normalized FFO. That will leave a balance of about $6 million in straight line rent related to these facilities and we expect to similarly accelerate the amortization of that balance over the next six quarters. We incurred about $9.1 million in cost directly related to acquisitions. The majority of which was for German Real Estate transfer taxes related to the three hospitals we acquired during the quarter. This treatment is consistent with our history in Europe. And even though GAAP mandates this treatment as an expense, we certainly take into account this tax when we negotiate our lease rate. And going forward, new GAAP rules will be starting in 2018 provide that such taxes be considered as part of the purchase price. For any other old timers listening, this will be back to the way it used to be done for many years. Finally, we redeemed $350 million in unsecured notes that had a coupon of 6.38% with proceeds from an offering of note that had a 5% coupon. The present value of the interest savings far exceeds the $13.8 million early redemption fee that we incurred and added back to normalized FFO. On this call last year, we announced that we expected to complete between $500 million and $1 billion in 2017 acquisitions. We were coming off our most successful year ever with similar to today an outstanding balance sheet and we predicted that if we achieved a $1 billion high-end of that range, we would close 2017 with about 5.5 times leverage. In reality though, we invested $2.2 billion in immediately and strongly accretive hospital real estate greatly exceeding the record prior year results and nonetheless managed our balance sheet such that we have only modestly higher leverage at today's 5.8 times. And while that is well within the range of prudence for our long-term predictable cash flow expectations, we reiterate this morning our plans to reduce leverage, diversify our operator level concentration, access new avenues of affordable capital and demonstrate the inherent values of our assets. We expect to achieve that primarily through the joint venture arrangements that we have previously described. As Ed mentioned earlier, we began exploring this early last year expecting that the process would be the primary focus of our investment efforts in 2017. Of course, that focus shifted as we created the record setting acquisition activity during the year. So, it was only in the last quarter of 2017 that we were able to determine the size and structures of the proposed arrangements and turn our complete attention to this process. As Ed said, we are now far down the road with respect to negotiating definitive documentation with serious well-qualified parties, completing financial tax and physical diligence and arranging secured financing for the respective portfolios. And although, I'll repeat that there are no assurances than any traction will ultimately close, we are optimistic about the likelihood that we will have binding agreements signed during the earlier part of 2018. We expect any such closing will result in proceeds that will be used to reduce debt and accretively reinvest in additional hospital facilities, the opportunities for which remain very attractive, depending on the timing of any such reinvestment there could be temporary dilution of FFO, although we would at the same time benefit from greater diversification, lower leverage, additional liquidity and access to attractively priced new sources of capital. So, we continue to expect normalized FFO in 2018 of between a $1.42 and a $1.46 per share. This is based primarily on our currently stable portfolio and this morning's announced results of $0.37 per share. Also taking into consideration certain new GAAP accounting provisions effective in 2018 along with our expectations about interest rates currency markets and other assumptions. Our estimates of future normalized FFO do not include the impact that will result for many of the possible JV transactions, which as mentioned may include reduction of rental income and changes to interest expense and other capital cost along with possible additional investment income from reinvestment of JV proceeds. And with that, we'll be happy to take questions. Operator?

Yes, sir. [Operator Instructions] And our first question comes from the line of Jordan Sadler from KeyBanc Capital. You may begin.

Thank you. Good morning.

Good morning, Jordan.

Thanks for the update on the progress with the JVs. I guess just one follow up hopefully it's not - I'm not prying too much here, but are the trust substantially consistent with what you've laid out and then in terms of timing for closure would - if we were rough guessing mid-year, would that be fair?

I think that's fair, to answer both parts of your question. The terms will achieve those goals that we've described, a point particularly to proving the value of our portfolio assets and we do expect that we will be closed by mid-year.

Okay. And then, the ATM work, have you guys accessed or utilized the ATM at all yet and what do you anticipate in terms of how you expect to use it?

Well, our practice is to make that disclosure during the quarterly filings, but I will just describe generally that we have no reason to have accessed the ATM recently and even if we had reason it would be painful to do so, given the market value of our shares along with the rest of the market. So, we have plenty of available liquidity absent using equity from many sources at this time.

Well, I guess, is it safe to assume that you would wait to close on the JVs or before buying additional assets or investing additional assets or not necessarily?

That's a generally safe assumption, you are absolutely right.

Okay. And just I guess lastly on coverage, was there - I am interested in the sequential change and you did mention Prime as a factor in the decline - and I was just kind of curious was there, what did you see ex-Prime in the portfolio sequentially, was there any benefit here in acute care hospitals or otherwise related to this season's flu in terms of admissions, I know it's a smaller number, but I feel it has been driving a possible admissions.

Yes, if you remember Jordan that we report one quarter behind, so the flu that is shown up yet, and the flu is going to be mixed, depending on the severity of the flu in various hospitals, obviously just a normal case of the flu taken up a bit is not as profitable as a surgery - taking up a bed - a surgery, a bed being taken up by surgery. So, what we are seeing in December and January thus far has been slightly positive. Mixed results across the nation, but slightly faster. Overall on the general acute care hospital, they really have been relatively flat when you look at the same-store additions, we had five additional Prime properties and you remember that when Prime makes acquisitions, they are usually doing so and buying properties that are under performing. So, the Prime properties are particularly there in any case, but particularly theirs. When they come into the same-store for the first time, they're typically running at a coverage that is slightly less than our more season's properties. Now having said that, if you take out the additional acute care hospitals is still was essentially flat. Now it's very important to note on Prime by listening to my coverages, they've done an outstanding job of repositioning themselves and taking care of their cash collections they actually collected more than 100% of their revenue in cash collections during the last quarter reporting, and obviously the reason being is that they had those large write-offs and they actually have been able to collect some of those amounts. So, they've done an outstanding job and then we feel like 2018 is going to be a good year for them.

All right, thanks. I yield the floor.

Thank you. And our next question comes from the line of Tayo Okusanya from Jefferies, you may begin.

Hi. Good morning, everyone.

Good morning, Tayo.

Morning. Following up on my good friend Jordon's questions, again I know you are still trying to wrap up the JVs, but I don't - do you share any information about how large these two individual JVs will be?

I think we've disclosed in the past that the JV that we are focusing on to Steward would be roughly between 40% and 50% of what we call the legacy Steward portfolio and that's the original $1.2 billion, which covers the Massachusetts properties, we haven't made any discloser about the other portfolio in Safari [ph] size or how much we are selling.

Okay, that's a good start. And then second of all, again just given your same-store pull is going to be changing so much over the course of the year. Could you just talk again about your outlook for same-store just given the potential change in the whole like of the stuff you bringing on going forward, is it going to be pressuring the pull, is it going to helping the pull, could you just kind of give us some clarity on that?

Sure, it's a little bit more confusing when you include international and domestics, so let me focus just on domestic for a moment. If you look at what we proceed - what we think are going to be the changes based on additions to same-store, we think that the same-store that's coming on are going to be good strong properties, so they - we think will be a positive going forward to the overall. As an example, a lot of the same-store are going to be the Steward properties. Steward is doing a fantastic job of the integration of not only the original CHS acquisition or the second CHS acquisition, but also what the IASIS acquisition. And we expect that their growth is going to be somewhere in the 3% to 4% in their EBITDAR this year. So, when we start adding some of those additional properties, we think it's a positive. The biggest negative from a same-store basis would be adding international properties, it's not a negative it's just that generally speaking the international coverages are lower than the U.S. coverages are. For example, the 13 properties that we added and the rehab properties in Germany this most recent quarter, they are considerably lower in coverage than their U.S. counterparts are. The U.S. IRFs for just the U.S. IRFs for this last quarter was roughly 2.5 times EBITDARM coverage. So that just gives you some significance of the difference.

Got you. And the pull kind of - and the pull changes when the assets for year or when is that [indiscernible]?

It's actually 24 months Tayo, when they have been in our portfolio for 24 months.

Got you, okay. And then just one more for me then I yield the floor. The 2018 acquisition outlook again you don't put acquisitions in your guidance, you are talking about probably not a lot deal activity until the JV is closed which makes perfect sense to me, but how do we kind of think about you've been gangbusters the past few years doing over a billion dollars of deals and if the gun is going to go off maybe this year that are you expecting to do the same amount or is it a year of more integration and less acquisitions?

Well, putting the joint ventures aside for a moment, if we were just trying to guess what we thought acquisition would be this year without regard to the joint venturing. I think we'd use the same guidance that we've used in the last couple of years between $500 million to $1 billion in total acquisitions. We have good opportunities both here and abroad, but Steve mentioned earlier we really want to get these joint ventures complete before we start doing any major acquisitions, there'll be some minor acquisitions with our existing customers but nothing on the scale that we did so far in 2017.

Okay. Sounds good, I yield the floor. Thank you.

Thanks, Tayo

Thank you. And our next question comes from the line of Vincent Chao from Deutsche Bank. You may begin.

Good morning, everyone. I just want to - if you could stick with the opportunities that here I know it will be a little bit of a delay just given the timing of JVs, but following tax reforms and the repeal of the individual mandate from ACA, which I know it doesn't going in effect until 2019, I'm just curious if you have seen any change in the market as a result of those two events?

None yet Vincent, and really don't expect any.

Okay. And I guess is there any additional concern about further healthcare reform, it seems like that is still something that is a work in progress, but I guess is there anything else on the horizon that we should be watching out for? And I guess…

No, as you've heard me say before there is always going to be some sort of reform pending just the nature of the beast in the U.S. But there is nothing out there, should they actually agree on something together, there is nothing out there that gives us any polls.

Okay. And then maybe one question just on the 15 leases that are expiring which I think they're all the adaptive leases that we talked about. How was that - what assumptions are embedded into your outlook for those leases, should we sort of expect those to be sold pro rata over the course of the year or is there any assumption about how those leases are being treated?

About half of them Vincent, we expect to transition to another operator. And then almost the remained of the other half we expect will be sold. These truly are our orphans. They really don't fit in any systems. We don't think they fit in any systems network. And then there is a single hospital that we actually are uncertain as to how that will go. My senses will end up releasing it, because it's not standing hospital and we have two years basically, two years of lease remaining on that.

OK. So, we should be modeling this as - half of those 15 get the renewed and then have sold, that's what's embedded in the guidance range?

That's right.

OK. One last question, just on surgery partners project, can you just give a little bit of color about that market, how this new hospital will fit into the competitive landscape and things like that?

Sure. It's an outstanding market for us and has been since we made the original acquisition. There is really one other hospital in the market, it's literally across the street, it's actually supportive of this facility and this expansion. We believe that the coverage is on the new facility, we'll continue to be outstanding, they truly - it is truly one of the best performing hospitals that we have in our portfolio.

OK. Thank you.

Thank you. And our next - and our next question comes from the line of Drew Babin from Robert W. Baird. You may begin.

Hey, good morning.

Good morning Drew.

Quick question on Steward IASIS, when the deal was first announced, simply specific kind of guideline to put out for Steward's coverage ratios who would potentially track that through 2019 and I guess that's equally three times number obviously forecast at the time it was announced. But I guess you have talked earlier about how that portfolio is tracking and I guess as Steward approaches 2018 kind of what are the challenges about how are you seeing and whatever the opportunities to exponentially to take advantage of as they kind of operate through the year?

Sure. I think generally speaking the IASIS acquisition has been as good or better than everyone had expected. We obviously knew that entire portfolio very well. We believe the old management team has done a good job operating those hospitals and they continue to perform at or above the expectations. The CHS hospitals were slower in what we believe to be their turnaround. But we believe that Steward's management has a good handle on that and those are beginning to track where we felt they would track or be it just slightly longer to get there than it did. Overall, we've been extremely pleased with the overall integration of the companies. And we have been very pleased with some additional staff hirings that Ralph and his team have made. And we believe that they're focused on 2018 certainly the first half will be completing those integration processes and we believe they really have done a very good job.

Thanks for the color. And on Europe I guess, it sounds like in the past, there has been open an openness to potentially open Europe is kind of an overall way to the overall portfolio. But it sounds like you know JV with MEDIAN or some type of sale, involving MEDIAN something that's possible, I guess to offset that, where are you seeing the best opportunities and it was something like with surgical health potentially provide some kind of runway for additional growth in Europe?

Well you know. We've got that one hospital that the additional hospital in surgical it's under construction now in Birmingham England. Not sure that particular company in 2018 is going to be a big growth area for us, but we've got a lot of other opportunities, in other European countries that we have been sourcing and working now for a while. So, we think that we have got good opportunities to put, to some of that potential joint venture money back to work in Europe. We think that Europe will be putting it again aside the joint venture our overall investment in Europe will increase. But obviously percentage wise will go down with the joint venture, for a short period of time.

Thank you. And then one last one which is maybe kind of a stepping back kind of conceptual question. It seems like many of the U.S. healthcare REITs are coming towards, I guess I would call maybe more an NAV growth story whether it would be more aggressive about capital recycling portfolio improvement things like that and it's obviously very much coming at the expected cash flow growth. I guess should stock prices remain roughly where they are. Does that reflect the strategy that MPW would consider adapting? And if not, I guess why wouldn't you, what are the reasons why or the reasons who have prevent you from being net aggressive turning the portfolio.

Well, Drew the short answer as we certainly hope this price doesn't stay where it is. Obviously, some of that is completely out of our control with the macro things that are going on in the overall economy. But more importantly as Steve pointed out earlier with some of these joint ventures, we believe that there are going to be some very impressive validations of what we have been saying the value of this portfolio is. And so, we believe that we should see some increase in our multiples from that on our stock price. Obviously as Steve also said earlier, we have no appetite to sale stock into this type of market. We do have other assets for whatever various reasons that maybe advantageous for us to sale. But our intentions on those are all to recycle it or not to just hold it away. So, we hope any effect on cash flow will be very minimum.

Great. Thank you very much. That's all from me.

And our next question comes from the line of Michael Muller from JPMorgan. You may begin.

Thanks. Hi. Couple of questions, I guess when was asked you one a minute ago. You just talked you about the Adeptus leases and what was going to be sold and ask if that was embedded in guidance and you said yes. I was under the impression that guidance didn't have any asset sales in there or those in there or are they not.

It's an immaterial impact on what might be sold.

Got it. Okay. And along that same line, any of the JV stuff has not reflected in that guidance either, correct?

That's correct.

Okay. And then just two follow-ups. Can you put rough dollar range of around those Adeptus assets that could be sold first of all?

So, the eight assets are confident we will actually release, roughly $40 million. The seven or eight-ish assets we think will ultimately be sold less than $35 million. And then the single asset I mentioned the hospital that will take more time and we have more time with given credit for some modern adjustments to our deal with Deerfield Adeptus that will reflect about $30 million investment for us.

Got it, okay. And then the last question, considering deleveraging of goals in addition to diversification you should think about the JVs. Do you think you're likely to be in that seller in 2018? Or do you think that won't happen?

Well, if your question is, do you think will 100% replace what we might sell in the JVs, I think that would be a long shot.

Okay, got it. Okay, that's it. Thank you.

Thanks Mike.

Thank you. And our next question comes from the line of Michael Carroll from RBC Markets. You may begin.

Yeah, thanks. Ed or Steve, can you talk a little bit about your international investment strategy. How many countries do you are you looking at right now and how many are actually viable for you to deploy capital into?

Well, we have four countries over there now. We are a looking a lot more since we opened up our office in Luxembourg this past year. We have opportunities in probably active opportunities in the and probably three or four countries that we're not currently in over there.

And then what are some of the key characteristics of the deals that you're pursuing over today. I mean are there any large portfolios that you're looking at and are these with new or existing relationships.

Yes, they're actually are. A couple of larger portfolios that would go a long way to replacing what we might sale over there. There are also smaller multi-facility portfolios, but we're not saying multi-2 or 3 or 4 in addition to at least one very significant portfolio that we're looking at.

And Mike, most of those are new customers.

Absolutely.

Okay. And then would you buy these assets outright or would you have a joint venture like you did in Spain and Italy?

Well, it could be either because for a couple of reasons. One, they could be very big tickets. And two, we may have opportunities to leverage our capital with the goals of some of these very large institutions that have expressed strong interest in acquiring our types of assets. So, it could be either, but the point would be, we would remain in control of whatever portfolio, however we acquire it either directly or through a joint venture.

Okay. And then just last question, can you give us an update on your thoughts with earnest right now. Where all those coverage ratios, I know you are comfortable with that tenants given the outlook on some of the prostate care facilities?

So, we are in real general terms, there we have coverages have continued to slightly increase, but they are performing very strongly. The LTACH coverages have essentially stabilized there, we hope to have something very soon to announce publicly in Boise. And that's really the only trouble property there.

Okay, great. Thanks, Ed.

Thank you. And our next question comes from the line of Eric Fleming from SunTrust you may begin.

Mike just stole all of my questions, so I am good. Thanks.

All right. And our next question comes from the line of Karin Ford from MUFG Securities, you may begin.

Hey, good morning.

Hey Karin.

Hi, just a quick clarification on the guidance, the guidance does assume that the $830 million bounce in your line phase outstanding for the year, correct?

That's right.

Okay, thanks. Second question is, how is bad debt trending at your facilities and are you expecting to see any impact from increasing restrictions on Medicaid in some states.

Well, the bad debt overall in our facilities has been essentially flat as a percentage, and I am sorry what's the second part of the question.

Managed Medicaid impact.

So that has been an impact not really an impact on dollar amount paid, but in delay in getting paid, it seems that across the nation in all of our facilities, it seems that roughly 40% of every managed-care bill is initially denied but they eventually are getting paid, is just a delay in that process. But it hasn't been a decline in cash collections, just a delay in cash collections.

Great, thanks. And last one for me, have you seen any change in cap rates or is there any change to your required return levels, given the moving rates?

Well, we haven't done anything, significant since the IASIS deal and we haven't seen much movement in the market from our competitors either, so it's hard to answer that. Other than generally we would expect to see cap rates began to move higher as we see everybody's cost of capital move higher. And of course, that's yet to be proved by negotiating a real deal, but just historically remember, cap rates move not directly and not immediately, like they may do with other types of real estate. But again, to generally answer your question, yes, we would expect to see some backing up on cap rates.

Great. Thanks very much.

Thank you. And our next question comes from the line of Juan Sanabria from Bank of America, you may begin.

Thank you. Just following-up on Karin's question. What ranges are you guys looking at or targeting for acute care hospitals in the U.S. and for European opportunities as well as EBITDAR coverage ratios?

First part of the question, are you talking about cap rates or you're talking about percentages of our portfolio?

Cap rates, please.

Yeah, so it continues to be a wide range, I would say they were still probably in the very low of our range in the mid to high 7s going up probably to maybe a 10 or so depending on the specific nuances. On the coverages, we are still looking for acute care hospitals, still liking to look at going in cash coverage of something like a 275, now that is a guidance obviously in some hospitals their turnaround facilities. So, you are not going to see that initially, but if we can see to that point in the very near future that's generally what we're lacking to see, Now you know that's slightly down from where we've been in the past we've been at three times and maybe in the new environment that may come down slightly more but that's where we are at today.

And any sense of what those numbers would be for European opportunities?

So, for acute care coverage in Europe, it's certainly in the two-plus range probably not as high as what we're seeing here in the U.S. and the rehab coverage is still in the 1.5 plus range.

Okay. And cap rates same?

Yes.

Okay. And then just on Adeptus on the portion that you expect to renew. Is there any losses in the current revenue stream that we should be assuming, or we'll assume the leases kind of as is no change in rents through to MPW?

It's the latter Juan, there would be very little if any change in revenue expectations.

Okay. And then just on prime you kind of rip through the numbers there in your intro just hoping you could repeat what you said the coverage were and if that was EBITDAR or EBITDARM and what your expectations are for 2018 for Prime?

Well, I gave it a couple of ways Juan, the most important one is from a cash coverage basis that I gave that in an EBITDARM basis and for a cash collection because that's what we're focusing on the last time. It's over three times and we expect that to continue for 2018.

Okay, that's it for me. Thank you.

Thank you. And our next question comes from the line of Todd Stender from Wells Fargo. You may begin.

Hi, thank you. I guess this goes back to Karin's question, Steve, just a clarification your FFO estimated range that assumes the line balance does not get termed out at some point this year?

That's correct.

Have you guys funded new development? I guess, I assume you used that line to fund your development spend which I would suspect the balance edges higher how do you way the prospects of there being an equity overhang on your stock as your balance gets higher just because it's over $800 million at this point?

Look, Todd don't forget our 65% payout ratio on the dividend so we're generating a pretty high level of retained earnings, cash earnings now. We have a very limited amount of development, the largest being the Idaho facility. So, if there's any increase in the line and frankly that maybe built into the model somewhat, but it will be the impact will be immaterial to our guidance.

Okay. Thank you. And then, I guess turning to the Idaho hospital can you talk about your expected initial lease yield on that maybe the coverage and then just talk about how the lease was structured any escalators that kind of stuff?

Yeah, the lease structured first time with all of our leases with the typical escalators that we have in them. The cap rate going in is a strong cap rate we don't announce exactly what they are. It is lower than what we did on the original hospital but still higher than the bottom range that I quoted a little while earlier. And the covered risk for this facility is well above our normal covered risk.

Is it a credit issue, it's a stronger credit which brings the yield down a little bit?

Well when we originally did the hospital the coverages were nowhere near what they are today, so it is success, the hospital has way outperformed our expectations has generated a tremendous amount of profitability in cash flow so it's a different facility today than it was when we bought it years ago.

Okay. Thank you.

Thank you.

And our next question comes from the line of Chad Vanacore from Stifel. You may begin.

Hey, there just a couple of quick ones to wrap this out. on the acquisitions last call I think you alluded to expecting more European acquisitions so what's the split between foreign and domestic that we should expect and are those opportunities more in acute care or rehab side?

Let me answer that, the end of that that's easier it's more on the acute care side. Again, you have to ignore the joint ventures, but ignoring the joint ventures, we expect that our overall percentage in the European investments would actually increase in 2018.

All right. And just on potential JVs, are you thinking about multiple different partners and then what type of potential partners types are we looking at strategic or purely financial?

It's totally financial, it's advised money, typically coming from larger asset managers, who are advising you know primarily pension fund, public and private sovereign and that type of, of an investor.

Okay.

And it's one with each, it's not multiple investors in each facility, in each arrangement.

Okay. That's it for me. Thanks.

Thanks Chad

And our follow-up question comes from the line of Tayo Okusanya from Jefferies. You may begin.

Hi. Thank you. I just wanted to go back to the question around the line of credit and it's not being termed out this year. I guess I was assuming that some of the proceeds from the JV probably will be used to do that. Am I wrong in that assumption?

No, you are not, you are not wrong in that assumption, but the assumption is in the guidance, it's a snapshot of today's balance sheet.

Got you.

So, we're not we're not assuming, because you are absolutely right, the first thing we'll do with joint venture proceeds just pay down the line. And possibly as other notes come due, we might have an opportunity to prepay some of that but yes, that's the number one goal of these joint ventures is to lower the leverage.

Got you. Excellent. And the second question from my end, I mean there has been a couple of press clippings about Steward expanding outside of the U.S. to kind of smaller countries like Malta. I am just wondering again, is this something that you'd be interested in working with them on or are you guys kind of just being really domestic with your Steward investment, what other JV even kind of end up changing that?

Well Tayo, I think you're referring to their Malta management agreement and that's exactly that it's a management agreement and we're not involved in it at all. We have not had any discussions about doing any specific transactions with them at this point. We certainly want to continue to grow with Steward, but I don't think that any of that would happen any time soon.

Got you. Then last one for me I appreciate you are indulging me, development again you have a decent amount in the pipeline now it's been quite a while since the development pipeline that large. Just curious is this, are you, what kind of yields are you expecting on development to, are you doing more development now because acquisitions are getting tougher or is this just kind of all opportunistic based on the healthcare systems?

Yeah. It's just opportunistic Tayo, if you look at what we have under development the big ones, is the Birmingham project in England has been a project that's been in the works for a very long time but it's kind of like other states here that just take a long time through the process. The earnest facility that's under construction is, it is part of the original business plan. And then this particular facility in Idaho being the largest development project that we have currently. They really were just bursting at the seams and we felt this was a great opportunity. It is much, it is very similar to the project that we did in Wisconsin where we built a replacement facility there. This is more of an expansion type facility here but it's not a, it's not a Greenfield development project.

And expected cap rate or the developing yield curve?

Well on the - so we don't have any additional development projects in the pipeline. So, it's really hard for me to give you a specific answer to that because of the three projects that I have mentioned were all very specific and the cap rates for projects were very dependent on the projects themselves and very different all three of them.

And for bottoming purposes could we get some type of average for those ongoing projects though?

For what Tayo for the, for the dollar amount?

No, the dollar amount I think we have like an unexpected development yield for the three, for the three projects there?

Yeah. I have to get back with you on that Tayo.

Okay. Thank you again.

All right. Thank you.

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

Thank you, operator, and thank you all of you for listening in today and we greatly appreciate your questions. If you have any additional questions after the call, please don't hesitate to let us hear from you. Thank you very much.

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