Medical Properties Trust, Inc. (MPT) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2018 Medical Properties Trust Earnings Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, 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 year-end 2018 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 securities laws, the company does not undertake a duty to update any such information. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations. I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Thank you, Charles, and thank all of you for listening in today. For 2018, MPT achieved a total shareholder return of more than 25% compared to a negative 4.5% for the MSCI US REIT Index. Our two-year total shareholder return was more than 50% compared to the SNL US REIT Healthcare Index of 6% and less than 0.5% for the MSCI US REIT index. For the 10-year total shareholder return, MPT ranks number one for all health care REITs with a 445% return, which was more than 2.5 times that of the SNL US REIT Healthcare Index. During 2018, MPT had another year of milestones and records. We once again saw the value of our portfolio validated through multiple and exciting transactions, including our highly valued joint venture in Germany with the Primonial Group, the successful buyout of our equity ownership in Ernest Health and several other profitable exits such as the sale of North Cypress Medical Center to HCA. These and other 2018 transactions provided record proceeds of $1.5 billion of which more than $500 million of those proceeds were over and above our original investment. The proceeds were used to reduce debt and to put MPT in prime position for accretive capital deployment in 2019 like that of the transaction in Australia we just announced. We were pleased to kick-off 2019 with our announcement last week of our agreement to acquire 11 Australian hospitals from Healthscope. Since our inception, Australia was a location with which we have targeted for growth. Like other European countries where we have expanded into Australia has a health care system that is similar to the United States. Health care in Australia is among the best in the world and we are delighted to add these quality Healthscope assets to our portfolio. We have been watching and analyzing the Healthscope assets for more than 10 years now. The portfolio of 11 Healthscope hospitals are truly some of the finest hospitals in Australia. Of the 11 facilities 8 are general acute care hospitals representing 86% of our total investment. One is a rehab hospital representing 6% and two are psychiatric facilities representing 7%. They are primarily located along the East Coast concentrated around Sydney and Melbourne and in Perth on the West Coast. We've worked directly with the current management team of Healthscope since late summer of 2018 and have been working with Brookfield since the early part of the summer. We are excited to team-up with Brookfield on this transaction and look forward to growing this portfolio with them. 2018 included continued work on exciting construction developments of over $187 million with Surgery Partners and Circle Health. The latter providing another milestone as the first of its kind private stand-alone inpatient rehabilitation hospital in the United Kingdom. MPT continues to be the leader in acute care real estate and has amassed approximately $10 billion pro forma gross assets with 30 different operators now spanning three continents. Our existing portfolio also continued to perform well. With this quarter's reporting we added 10 properties to our same-store reporting. All of the additions to the same-store reporting were general acute care hospitals. Our same-store total portfolio EBITDARM coverage for the trailing 12-months Q3 2018 is 3.1 times, which represents a 10% increase year-over-year. Same-store acute care EBITDARM coverage is 3.6 times which represents a 12% increase year-over-year. Inpatient rehabilitation EBITDARM coverage increased to 1.9 times, which represents a 2.5 times -- 2.5% year-over-year coverage improvement. U.S. IRFs represent about 4.6% of our total portfolio. LTACH EBITDARM coverage decreased to 1.5 times, which represents a 7.4% year-over-year decline. It's important to note that this coverage decline is driven by one facility whose EBITDARM coverage declined from over 9 times to a still very strong coverage of 5 times. LTACHs represent approximately 3% of our total portfolio. United States represents 77% of the total portfolio. Acute care hospitals continue to make-up the bulk of our investments domestically at 80%, which is right in line with our target range. It is an important reminder that approximately 93.6% of our same-store portfolio is master leased, cross defaulted or includes a parent guarantee. MPT has never been in a stronger position than the present, as we continue to grow in size and reputation as the global leader in hospital real estate and the industry's pre-eminent source of capital. We are actively engaged in billions of dollars of domestic and international acquisitions with more opportunities coming our way. Steve?

Thank you, Ed. On our last quarter's call, we reported that we had completed the capital and portfolio repositioning strategy that we have been focused on for more than a year, resulting in record profitability, liquidity and financial flexibility along with an actionable 2019 acquisition pipeline of $2.0 billion. Since then our acquisition expectations have grown even further. And last week, we demonstrated the strength of that pipeline by announcing agreements to acquire and expand 11 premier hospitals in Australia for as much as $1.2 billion. We'll focus on our outlook for 2019 momentarily, but first I'll review the fourth quarter and full year 2018 results. As expected, this morning we reported normalized FFO of $0.31 per diluted share for the fourth quarter of 2018 and $1.37 for the year. These annual results do not of course include approximately $671 million in gains on the sale of real estate, including a $1.4 million, fourth quarter true-up of the previously completed German joint venture transaction. The only material adjustment from NAREIT FFO to normalized FFO was a fourth quarter $4.4 million tax valuation adjustment caused by the continued profitability of our taxable investments. We have previously noted that our estimates provide for general and administrative expenses to be about 9.5% of total revenue. However, we now report revenue from our joint venture assets through the other income line, making prior periods not comparable. For 2018, this revenue approximated $32 million. Moreover non-cash straight-line rent adjustments during the year, reduced revenue by a further $17.5 million. And finally in 2018, we adopted new accounting policies that reclassified about $6.2 million to G&A. With these movements our 2018 G&A, represents about 8.9% of comparable revenue. Going forward, we remain confident in our estimates of 9% to 9.5% G&A. Before moving on to the update to our 2019 estimates, I will point out that in December and January, and in anticipation of capital needs for our Australian and other likely acquisitions, we activated our $750 million at-the-market equity program and sold approximately 11.9 million shares at an average price of $16.75 or about $200 million in proceeds. Recently as a result, we had cash balances approximating $900 million along with $1.3 billion availability under our revolving credit facility. Given our estimate of in-place EBITDA and outstanding borrowings, our current net debt-to-EBITDA ratio approximates 4.4 times. This morning we reported that we have increased our 2019 acquisitions expectations by about $500 million to $2.5 billion over our estimate from last quarter. Consequently, we now estimate that upon completion of the $2.5 billion in expected 2019 acquisitions, our annualized in-place normalized FFO will be about $1.54 per share. Last quarter our estimate was for approximately $1.50 per share. Built into last quarter's $1.42 to $1.46 calendar 2019 normalized FFO estimate was an assumption of a late December acquisition that is now not included in our 2019 estimates. However, due to the growing pipeline, we are maintaining our $1.42 to $1.46 calendar 2019 normalized FFO estimate. The calendar year estimate is, of course, sensitive to timing, and we intend to periodically update our estimates, as we gain clarity into likelihood of closings. We continue to estimate that the blended GAAP yield of our 2019 acquisitions will fall between 7.5% and 8.5%. To be clear, that is not a range of targeted deal terms, but an average portfolio yield weighted by investment value. We also continue to expect that, nominal capitalization rates will likely be lower in areas outside the United States, where the cost of capital is similarly lower than in the U.S. The Australian opportunity is a good example wherein we invest to achieve yields substantially above our cost of capital. And just to clarify, this investment will be strongly and immediately accretive for our shareholders. Importantly, certain investments can also deliver intangible value that leads directly to even lower cost of capital and higher long-term FFO. These intangibles include diversification from geographic, tenants and credit perspectives, extension of our portfolio average lease terms, improvement of MPT's own credit ratings and borrowing costs, and attraction of other forms of long-term permanent and inexpensive equity-like capital. The best recent example of this last benefit is the creation of $600 million in virtually free capital through our German joint venture. We do not focus solely on the year-one cash capitalization rate when we underwrite a potential acquisition. We will continue to grow Medical Properties Trust as the unchallenged and sustainable, global leader in hospital real estate finance. This requires that rather than simply building a collection of stand-alone leases, we create a portfolio of many assets providing diversity in geographies, operators, and property types that create predictable inflation, protected cash returns for our shareholders. Along with the initial cap rates and immediate accretion, we consider all of these characteristics and their effects on our portfolio taken as a whole. The Healthscope transaction will in addition to creating immediate and long-term accretive returns substantially improve the MPT portfolio considered as a whole. And with that, we will be happy to take any questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Jordan Sadler from KeyBanc Capital Markets. Your line is now open.

Thank you, and thanks for all the color. If you guys could a little bit -- you increased the acquisition guidance a little bit, seems that Healthscope was probably a driver of that as you mentioned. Is the character of the remaining acquisition pipeline the same as it was last quarter as well? Or have there been other some puts and takes in terms of what you're focused on?

No. Jordan, it's probably very similar. The only difference I would make is probably more here in the U.S. than internationally active, post the Healthscope transaction. But, it's all general acute care hospitals.

A little bit more active domestically did you say?

Correct.

Okay. And the size of that aggregate pipeline is still in the $5 billion range, would you say?

That's correct, because that Healthscope was part of that original $5 billion that we talked about in the last call.

Okay. And then, Steve for you on dry powder obviously, you've got quite a bit of liquidity I think you outlined north of $2 billion. But as it relates to your debt to EBITDA target what do you feel is your dry powder right about now before hitting the target?

Well, we're not constrained by a – for example a 5.5 times leverage ratio on a temporary basis. So I'm not quite sure. I'm answering your question. But we can certainly exceed that, because of the alternatives we have with the ATM with other equity offerings with joint venture-type arrangements. So we have upwards of $2 billion available to us that would likely put us at about the 5.5 times range in itself.

Okay. I guess, the way I was looking at it is – I don't know if you view it, similarly, but just based on where you stood at the end of the year, where you stand today because you've obviously been using the ATM, how much you could spend before hitting that threshold. I think that is still your – the upper limit of your threshold. I don't know maybe you've had some temporary flexibility around it, but I think you want a target being around there. I'm just curious how much you would need to – how much you could spend before hitting that in your view based on the returns that you achieved on your investments. Is it probably a $1 billion plus or minus?

It's unlikely that we would get close to that. We're not going to run right up to the edge and then begin thinking about replenishing equity or other types of non-debt capital. So it's just not the way we manage the balance sheet or manage the acquisition pipeline.

Jordan part of the advantage we have is that all of the acquisitions certainly going to come in one big chunk. So we got the ability to manage the capital needs fairly well.

Okay. Is your – last question. You raised that the timing, what is it look like Healthscope plus or minus and the rest of the pipeline how should we be thinking about that timing?

Yeah. The Brookfield and Healthscope people seem pretty confident second quarter. And so we are following their guidance on that. The other major opportunities in the pipeline we are on a weighted average expecting sometime – a little earlier than midyear, but those are very often beyond our control and can accelerate or as you well know sometimes go beyond what we expected.

Okay. Thank you, guys.

Thanks, Jordan.

Thank you. And our next question comes from Drew Babin from Baird. Your line is now open,

Hey, good morning.

Good morning, Drew.

Question again on sources of capital, obviously you hit the ATM in the first quarter or toward the end of last year, I should say. Is the Steward potential JV, the Massachusetts portfolio something that could be kind of reignited potentially now that the properties are all leased? Or has that have been kind of moved on from as a potential source of capital?

No. That is available for the reasons you described.

And I guess, how would you think about the cost of equity on doing something like that relative to where your stock trades right now? Is one – if you had to raise capital today which would you prefer? What do you think for this?

Yeah, on a strictly cost basis the joint venture would be less expensive, but that's not necessarily the sole or the primary focus.

Okay and one more question on Healthscope. The development investments that come along with that would the lease terms on those be the same as the acquisition itself or would the yields potentially be higher on developments?

No. The yields are higher, contractually higher.

Okay. And now one more question just going back to Steward. I guess how much of the Steward portfolio in place right now? What is in the same-store coverage ratios your report? And I guess if you can give us an update on kind of where Steward stands as a whole and/or just by my market as it stands right now?

Yeah. Drew, I don't have that first answer right off top of my head. But from how Steward is doing it's doing exceptionally well. Their coverage is over two times.

Okay. So is any of it in the same-store numbers that are in the supplemental?

Oh! Yes. There are a total of 13 hospitals that are in the same-store.

Okay. It's helpful. Thank you very much. That’s it for me.

Thank you. And our next question comes from Michael Lewis from SunTrust. Your line is now open.

Thank you. Your stock price is obviously now higher than when you, tapped the ATM. Somebody once said to me you shoot the bear when the bear is there, I'm curious if you have thoughts of kind of you don't need to but you could over-equitize the deal? And if you have any specific kind of funding assumptions in your guidance that you could share in terms of equity?

No. The only guidance is again we intend to maintain in the model it's constrained by the 5.5 times leverage. And depending on timing on pricing on the overall pipeline, because we do look at the $2.5 billion fungibly then that leverage could be lower than that.

Okay. In terms of the $350 million of potential redevelopment or expansion opportunities what will determine if those come to fruition or not do you expect all of that to come to fruition? And it sounds like you're not giving specific returns but is it something -- well maybe you won't answer is it 6% plus returns you expect on this?

Most of that development I think will come to fruition. The question is more of a timing standpoint when all the approvals happen. And I think that if you look at the -- where we think the yields will be on that it will be higher than that 6% range.

Okay, great. Thank you.

Thank you. And our next question comes from Derek Johnston from Deutsche Bank. Your line is now open.

Hi. This is Shivani Sood on for Derek Johnston. You didn't mention that the Australian health care system has similarities with the U.S. but can you give us sort of an overview of how you view it versus the U.S. and the EU in terms of a little more detail and the mix between private and public insurance? A – Edward K. Aldag, Jr.: Sure, the similarities are that they actually call some of their government reimbursement Medicare. They have the same three buckets that we have. They have the federal reimbursement. They have the Medicaid similar-type reimbursement and they obviously have the private healthcare insurance reimbursement. The coverage provided by the three different buckets are essentially what they are here in the U.S., about 50% being private insurance and the rest of it being some form of governmental insurance. The biggest difference is, that they do have a universal coverage as opposed to what we have here in the U.S.

Thanks. And then how do you plan to manage or mitigate any sort of foreign exchange risks, as it becomes a bigger factor of the exposure?

So it's upwards of a 100-year lease. So we're not, obviously, trying to hedge out even the initial term which is about 20 years. We do expect that to the extent of any debt that we use it will be denominated in the Australian dollar.

Thanks so much. A – Edward K. Aldag, Jr.: Thank you.

Thank you. Our next question comes from Chad Vanacore from Stifel.

Hi. Good morning. This is Tao Qiu in for Chad Vanacore. A – Edward K. Aldag, Jr.: Good morning.

Good morning. So could you please give the size of the market and the investment opportunities in Australia and New Zealand? A – Edward K. Aldag, Jr.: I'm sorry. Would you repeat the question? The size of the total markets?

Yes. Yes, exactly. A – Edward K. Aldag, Jr.: Yes. It is substantially larger than the roughly $900 million that we've committed to at this particular point. That and Healthscope in particular, they've got 43 hospitals. The transaction that they're doing here, 11 with us and 11 with another healthcare REIT. So there are more opportunities there. There are more greenfield opportunities with them there. And obviously, there are other operators. So we think that we've got good opportunity to grow in Australia. We don't think that we're limited to the roughly $1 billion that we're putting in at this point.

Okay. So what will be the geographic makeup of your portfolio lets say at the end of 2019 or 2020? A – Edward K. Aldag, Jr.: Well, that's a good question. It depends on how successful we are in all the various things that we're working on right now. I think that we probably will be more heavily weighted in the U.S. than I had anticipated at the end of the last quarter. I'd like to see our mix be closer to a 70-30 type range, 70-30, 65-35 something like that. But I think that we're probably much closer to a 75-25 ratio by the end of the year.

So there is a $350 million development opportunities embedded with this transaction. How much would you take on in 2019? And what is the timing of that?

Very little, relatively speaking, would be in 2019, especially considering that at the earliest the transaction closes at mid-year. So most of this will be in the early years of the lease but relatively little in 2019, we expect.

Okay. That's helpful. You also mentioned that the cap rates and the cost of capital are both lower outside the U.S. Could you comment on the spread in this transaction? And how does that compare to some of your U.S. opportunities? A – Edward K. Aldag, Jr.: The spreads are very similar to what we're getting in the U.S. where our spreads range anywhere from our total portfolio from 200 to 350 basis points and we think that we'll continue to get those types of spreads internationally as well as domestically.

And how would the portfolio coverage change with the Healthscope transaction? A – Edward K. Aldag, Jr.: How would the portfolio coverage the EBITDARM coverage, I don't think it will change it at all. I think it will still be in the same range.

Okay. And do you still expect a 7.5% and 8.5% average yield for the acquisitions? Or should we model kind of a higher cap rate for the remainder of the acquisition pipeline this year? A – Edward K. Aldag, Jr.: No I think that's still the right range for -- on a GAAP basis. Q – Tao Qiu: Okay. That’s great. Thank you.

Thank you. Our next question comes from Tayo Okusanya from Jefferies. Your line is now open. Q – Tayo Okusanya: Yes, good morning gentlemen. A – Edward K. Aldag, Jr.: Good morning Tayo. Q – Tayo Okusanya: Congratulations on the transaction. A – Edward K. Aldag, Jr.: Thank you, very much. Q – Tayo Okusanya: Good to see you in another part of the world. Question sir. So I know that Northwest also kind of did a similar transaction with Healthscope 11 properties $1.2 billion as well. But I'm trying to understand if there are any key differences between your transaction and theirs given that on their deal they're quoting a 5% cap rate. A – Edward K. Aldag, Jr.: Tayo, I think the transactions are very similar. Some of the biggest differences I think are our cost of capital is much cheaper than Northwest. But I obviously haven't seen the documentation for theirs, but I would imagine that it was very similar. Q – Tayo Okusanya: If you say it was very similar that means -- is the cap rate similar then versus your transaction? Or I mean you guys have kind of talked about a range of 7.5% to 8.5% and this deal is kind of quoting 5%. So I'm just -- I think the Northwest deal is quoting 5%. A – Steven Hamner: To be clear Tayo, the 7.5% to 8.5% is a blended rate. What we said last quarter when we announced the $1.42 to $1.46 that's based on a pipeline that would on the average yield a GAAP blended rate of 7.5% to 8.5%. So for example, if the first deal we did was a 6.5% depending on how big that deal was, the next deal may be a 7.5% or an 8% and be much bigger that would continue then to yield a blended rate of 7.5% to 8.5%. Q – Tayo Okusanya: Okay. That’s helpful. A – Edward K. Aldag, Jr.: Tayo, it's obviously very important for us in our negotiations with existing and future clients not to get specific about every single transaction because every single transaction is different and you can't just point out one particular part of the transaction and so that's why we're not giving you -- everyone specifics about the cap rate on this transaction or others. Q – Tayo Okusanya: That is perfectly fair. Totally understand that. Okay. So that's number one. And then number two, could you talk a little bit again of why guidance didn't change? It sounded like there was a December deal you dropped out of your guidance range and now you maybe brought this transaction into 2019. Just tell us about the puts -- the pluses and minuses on why guidance overall didn't change for 2019 despite the higher acquisition outlook. A – Edward K. Aldag, Jr.: Well the biggest issue as Steve pointed out in his previous wording was that we had a transaction that we thought was going to close at the end of the year. It would be producing income for us for all of 2019. That didn't happen. So that was the only negative that we had. The other positive that we've had is that we've had reductions in cost of capital and a much quicker Healthscope transaction than we thought we were going to have and a larger amount of acquisitions than we thought we were going to have in 2018 -- I mean 2019. Q – Tayo Okusanya: And then all that kind of net lease. Okay. That is helpful. And then one more. Again I know you're very close to being Superman, but again it's Australia, Germany and EU and Alabama, how do you kind of plan to manage all this given your current staff? A – Edward K. Aldag, Jr.: Well remember Tayo that it's all triple net leased properties, so we don't have to be there on a daily basis. We obviously will be there to review our properties on a regular basis, but it's not something we have to be there on a daily basis. Our team is very well versed in the Australian market. They're very well versed in Healthscope and not just these properties, but all of the Healthscope properties. And we'll get the same type of reporting that we get from our other properties. So we have our -- we now have a staff in Luxembourg that's about 15 people. Obviously we've still got a much larger staff here in the United States, in Birmingham and in New York. And we have the ability to get there, not on a moment's notice it does take a little bit longer, but we do plan on being there on a regular basis.

Sound’s good there. Thank you very much. A – Edward K. Aldag, Jr.: Thanks Tayo.

Our next question is going to come from Karin Ford from MUFG Securities. Your line is now open.

Hi, good morning. Can you tell us where you think, what rate you think you could raise long-term debt today in Australia and in the U.S.? And have you issued anything under the ATM in January?

10-year unsecured bonds in the U.S. Karin, probably in the low to mid-5s, unsecured loans in Australia in the low-3s.

Got it. And should we be modeling in any more ATM?

I'm sorry I didn't answer that part of it. Yes, that half of the raise -- the $200 million raise was in January.

Okay got it. Next question was just also more for modeling than anything else. It looked like the depreciation and amortization add-back for FFO purposes was about $6.5 million higher than the expense line. I assume that's due to the Primonial JV, that's now in other income. I wanted to see if I could reiterate the request that you guys got last quarter for more JV disclosure, just so we can more effectively model out those lines?

Yes you may renew the request and I will commit to next quarter meeting that request?

Okay, great. And am I correct that the reason for the -- is the JV? A – Edward K. Aldag, Jr.: You are correct in your assumption.

Yes.

Okay great. And then just last question. Do you have any update on Waterland sale of the operations for Median? A – Edward K. Aldag, Jr.: No they haven't announced anything and there's just nothing else to report there at this point.

Okay. Thank you. A – Edward K. Aldag, Jr.: Thanks Karin.

Thank you. Our next question comes from Todd Stender from Wells Fargo. Your line is now open.

Hi, good morning. thank you.

Good morning Todd.

I don't know if I missed this. How many master leases and I guess that was the wording are the 11 Healthscope hospitals spread across?

Three; of which the first and primary master lease has about 80% of the portfolio.

Okay got it. And have you guys disclosed the EBITDARM coverage that those are underwritten at?

I think it's out there and it's about 2.25%.

Okay. With expectations that it rises closer to your portfolio average, or generically it's going to be tighter like it is in Europe, I guess in Australia? A – Edward K. Aldag, Jr.: Generically it will be tighter. It won't get up to the 3.6 times we are now.

Okay. Thank you. And then probably for Steve, the cash you're holding on the balance sheet if that's from the German post-acute care hospitals that you sold into the joint venture, if that's held in Europe, can that be deployed into the Australian acquisition? I wasn't sure if there was any tax ramifications or repatriating the cash. Any nuances to that?

Well a portion, frankly a minority portion is held in Europe. Most of it is in U.S. dollars. And we have some flexibility. The fact is we need the euros there. So unlikely that we would take euros and convert to Australian dollars. It's just not necessary. Again, keeping in mind that we look upon this entire $2.5 billion 2019 pipeline fungibly.

So deploying a lot of that cash is fair to say from Q4?

Right, right. Plus the $200 million in U.S. dollars raised in the ATM.

And equity. Okay.

Yes.

Okay, great. Thank you.

Thanks, Todd.

Thank you. And our next question comes from Jason Idoine with RBC Capital Markets. Your line is now open.

Hi, thanks. I was wondering what the main attributes that you guys look for before you enter into an international market are? A – Edward K. Aldag, Jr.: Well the first one is rule of law. The second one is their commitment to health care. And the third one is how the health care is funded historically and how it's done.

And so with Australia, you thought that all of those were relatively similar to the U.S. so it was a natural fit? A – Edward K. Aldag, Jr.: It doesn't necessarily have to be similar to the U.S. Obviously rural law does. They obviously pass that one easily. Their commitment to health care is probably better than what we've seen here in the U.S. And we're very comfortable and have been watching Australia for over 10 years from -- historically and where we think it is going forward.

Okay. And in terms of competition for deals, could you provide some details on the differences between international and domestic markets? A – Edward K. Aldag, Jr.: Internationally, we see a lot more sovereign wealth funds and big insurance companies. They move very slow. We're still much more nimble than they are even at $10 billion in assets, but that's primarily what our competition is.

Got you. Okay. Thank you very much. A – Edward K. Aldag, Jr.: Thank you.

Thank you. Our next question is going to be from Michael Mueller from JPMorgan. Your line is now open.

Thanks. Just a quick one for Steve. From an accounting standpoint, are you straight-lining just the 20-year lease the initial term? Or are you factoring in some option periods as well?

It's only the initial term.

Got it. Okay. That was it. Thank you.

Thanks. A – Edward K. Aldag, Jr.: Thanks, Mike.

Thank you. Our next question comes from Jordan Sadler from KeyBanc Capital Markets. Your line is now open.

Hi. Just wanted to come back to a question on Healthscope. Did you guys have the opportunity or the interest level to look at the entire property portfolio that ended up getting split up? A – Edward K. Aldag, Jr.: Well we certainly had the interest level and continue to think that we'll be able to grow with Brookfield in this particular portfolio. But the only 50% of it is what we were offered.

Okay. And did you say that the -- did you give the number on the escalators? Is it similar to what was disclosed by the other capital providers?

Yes.

I think it was maybe 2.5%.

Yes. I think you can rely on that other press release, yes.

Okay. And -- I think that was all I had for you. Appreciate it. A – Edward K. Aldag, Jr.: Thanks, Jordan.

Thank you. I'm not showing any further questions. I would now like to turn the call over to Ed Aldag for further remarks.

Thank you very much operator and we appreciate all of your interest today and as always, if you have any further questions after the call, don't hesitate to give us a call. Thank you very much.