Medical Properties Trust, Inc. (MPT) Q3 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Q3, 2019, Medical Properties Trust Earnings Conference 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 conference call is being recorded.I would now like to turn the conference over to your host, Mr. Charles Lambert, the Managing Director. Please go ahead sir.

Thank you and good morning. Welcome to the Medical Properties Trust conference call to discuss our third quarter 2019 financial results. With me today are Edward K. Aldag Jr., Chairman, President, and Chief Executive Officer of the Company; and Steve 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. Good morning and thanks to all of you for joining us on today's third quarter earnings call. A year ago, we noted that we anticipated 2019 to be another record year for MPT. As we near the close of 2019, we can certainly say that has been a fantastic year and we may not be done yet. Year-to-date, we have closed $3.7 billion of transactions $1.55 billion for Prospect here in the U.S., $906 million for Healthscope in Australia, $423 million for Ramsay in the U.K., $284 million for Swiss Medical Network in Switzerland, $254 million for Fiber in the U.S., $154 million for Saint Luke's in the U.S., $55 million for Halsen and Watsonville in the U.S., $45 million for BMI Harbour Hospital in the U.K., $28 million for development project with Neuropsych in the U.S. and $32 million for additional projects with existing customers.92% of 2019’s investments have been with new relationships. We've expanded our investments in the U.S., Germany and the U.K., while making initial investments in Switzerland and Australia. We continue to see exciting domestic and international opportunities to grow primarily with new operators all across the globe. Our pipeline remains robust with more than $5 billion in potential transactions that we are actively working.Let me walk through some of the more recent transactions, one of which was an expansion of our long standing relationship with Vibra, one of the top post-acute care operators in the country. We were able to acquire three very strong IRFs and Kentucky in California for approximately $200 million.All of Vibra's properties are cross defaulted, but for illustrated purposes, the EBITDARM coverage on these 3 IRFs is 2 times. As a part of this group of properties, we required 7 LTACH's for approximately $54 million. These LTACH's are well priced and have an overall coverage of approximately 5 times. These profitable facilities are located throughout the U.S. and attractive markets with strong referral networks and have already exceeded our expectations for the year-to-date.Another reasonably closed transaction was with Halsen Healthcare, a new operator to MPT for an acute care hospital in Watsonville, California. The Halsen’s executive team is comprised of veteran healthcare executives, with an average of 25 plus years of experience, including within the California market. Several of these executives were executives that previously owned MPT facilities. We are delighted to welcome them back.Additionally, we just closed on a $28 million behavioral health opportunity with neuropsychiatric hospitals for the development of a 92 bed freestanding hospital in the Houston, Texas market. MPH is a behavioral health company focused on providing best-in-class care for patients with acute complex medical and psychiatric conditions and is known as the largest neuropsychiatric care organization in the country. They made an underserved need in treating the more severe co-morbid cases that traditionally psych hospitals are not equipped today. MPH currently operates four facilities with 187 beds in Indiana, and is well positioned for near-term growth into new markets in 2020. Construction is underway with an estimated opening in the third quarter of 2020.During the third quarter, we also close on the previously announced transaction to purchase 8 acute care hospitals operated by Ramsay Healthcare in the U.K. Ramsay is listed among the world's largest hospital operators, and we're excited to develop this new relationship.Finally, we completed the previously announced $1.55 billion transaction for the Prospect Medical Holdings Hospital portfolio. Our Prospect hospitals are performing as expected and tracking in accordance with our underwriting. Prospect continues to benefit from cost reduction strategies, renegotiated payer contracts and greater focus on growth opportunities. With the transactions discussed today as well as the previously announced transactions from the first half of the year. We have already achieved the single largest year of acquisition growth in MPT history, and we still have another quarter to go. While I can't predict with certainly when we will be able to announce and close any of the properties we are working on in our pipeline. We do expect that we will be able to make such announcements over the next couple of quarters.Now, I’ll provide a quick update on our existing portfolio. We added 22 properties to our same-store reporting, including 13 IRFs, 11 facilities in Germany, 1 in Louisiana and 1 in Ohio 8 acute care hospitals, 3 in Florida, 2 in Pennsylvania, 1 in Ohio, 1 in Idaho and 1 in Germany and 1 LTACH in Texas. Same-store acute care EBITDARM coverage is 3.19 times, which represents a slight 16 basis point decrease year-over-year, primarily driven by slight volume declines at a few of our larger general acute hospitals. Just to know to remind you, we report one quarter in arrears, so this is referring to the second quarter of the year.A quick update on Steward, Steward made the decision to discontinue operations at the Saint Luke's facility in Arizona. They made the strategic decision to transfer some of those operations to other Steward facilities and close some services, rather competing with a newly renovated Banner facility 5 minutes to the west, and a planned $1 billion county-owned facility 5 minutes to the east. Steward will continue to pay the full MPT rent as required under their master lease. We expect their decision to close site looks to be a positive for their bottom line and that's an improvement to their already strong coverage. Stewart continues to fine tune its portfolio and expects to see continued improvement during the remainder of 2019 and their coverage ratios. Steward’s concentration is currently 29%.IRF EBITDARM coverage is 1.97 times which is essentially flat compared to 1.98 times year-over-year. It is probably important to note that the U.S. IRFs saw a 9.9% increase in coverage from 2.55 times to 2.81 times. LTACH EBITDARM coverage is 1.5 times, which is essentially flat year-over-year, this does not include the recently acquired Vibra portfolio where the LTACH’s have a combined coverage of approximately 5 times. As a reminder, LTACHs including the Vibra portfolio, we just acquired currently represents 2.6% of our total portfolio. I know that all of you are well aware of the wildfires in California. At this time, none of our facilities have been affected and none have been threatened. However, many of the people working in these hospitals have had their personal homes affected. I would like to take this opportunity to let them all know that our thoughts and prayers go out to them and their families.At this time, I'll let Steve to go over our specifics on the financial performance and health of Medical Properties. Steve.

Thank you, Ed. This morning, we reported normalized FFO of $0.33 per diluted share for the third quarter of 2019. These results again exceeded consensus expectations, but more importantly, and as Ed has just described, MPTs growth is continuing even following the $3.4 billion that we announced last quarter including the addition of $282 million we invested during and after the third quarter. Our year-to-date investments of $3.7 billion represents 40% growth since the beginning of 2019. Just as an aside, that may only be interesting to us here at MPT, it took us 10 years to acquire our first $3.7 billion in assets, the same amount that we have invested in the last nine months alone.In any case, I will point out a couple of items related to our quarterly results and then focus on the remainder of this year and our near-term outlook. First, at various points during the third quarter, we completed acquisitions at the $1.5 billion Prospect investment, 8 hospitals leased to Ramsay in England for about $423 million a $55 million investment in a California hospital, a $200 million portfolio of 3 inpatient rehabilitation hospitals and roughly $54 million acquisition of 5 long term acute facilities. Most recently, we agreed to fund a $28 million development of a Houston acute behavioral facility for long-term lease to a specialty behavioral health operator.Included in our third quarter FFO reconciliation, our adjustments for financing fees related to the Prospect transaction, straight-line rent, other miscellaneous items and the related tax effects that in the aggregate accounts for approximately $0.01 of normalized FFO. In addition, we included in property related expenses is about $2.9 million in certain triple net type expenses that we pay directly, primarily to groundless [source], but then recovered from our tenants and such recovery is included in the interest and other income. Accordingly, there is no impact on FFO.G&A expenses were approximately $23.3 million in the third quarter at the low end of our previous estimates of between $23 million and $25 million per quarter. This morning, we reaffirmed our current state annualized run rate of between $1.56 and $1.58 per share. This estimate retains our assumptions regarding leverage in the 5.5 times range, and the expected refinancing of our $451 million revolver balance with long-term funding.Our press release and Ed comments have already made clear that we are very bullish on our near-term pipeline of actionable acquisition opportunities. We believe that MPT in particular among healthcare REITs has created a commanding position in the early stages of a rapidly expanding market for acute hospital real estate in the economically developed areas of the world where we operate.This market expansion is being driven by a growing recognition and acceptance of the benefits of long-term lease financing of core hospital real estate on the part of hospital operators, sponsors, investors and other market participants. Because only a small percentage of acute hospitals are leased, we have a high level of confidence that as this market continues to expand MPT will continue to grow at immediately accretive pricing for the foreseeable future. While we are not prepared today to make any specific announcements, we believe it is not unreasonable to expect meaningful acquisition volume in the near-term. As we underwrite and plan permanent financing for these target acquisitions, we expect capitalization rates and an investment spreads similar to our year-to-date transactions, and we intend to remain modestly levered in accordance with our long standing strategies.And with that, we will be happy to take questions. Operator?

[Operator Instructions]. The first question comes from line of Mr. Chad Vanacore from Stifel. Your line is open sir.

Hey, good morning this is Seth Canetto on for Chad. First question, just in terms of the strong acquisition pipeline is that you know, focused on acute care hospitals IRFs or LTACs? Can you kind of break up like the mix of those opportunities? And then are you seeing, opportunities in your existing international markets or looking to expand into new markets?

Seth, it is almost exclusively, if not exclusively, acute care hospitals, and it is in our previously invested in and previously announced markets not any new markets at this time.

Okay, great. Thanks. And then just looking at the, the same-store pool and the impact on coverage that you mentioned in your opening remarks. How should we think about that? I know you said that some of the hospitals saw a slight decrease in volume. And that's a trailing indicator. What does the recent trends look like? And how should we think about those new assets that are in the same-store pool?

Yes, it will -- if you remember that, the second quarter HCAs announcements on their operations showed the same slight decrease in volumes and there was a lot of panic in the markets. But then you saw HCA is reporting this week and it was a very nice strong rebound. We obviously don't have reporting numbers for all of our operators yet, since they are just finishing their internal numbers for the past quarter. But what we've seen to-date follows what HCA has reported

Okay, thanks. And then you mentioned the Steward concentration at 29%. Where do you see that concentration going down once you've completed, some of these deals that are in your pipeline?

Well, obviously it'll continue to go down because the pipeline does not include any meaningful additional Steward properties. As we expect – in the not too distant future, that number to be down in the mid 20s.

All right, great. That's it for me. Thanks for taking my questions.

Our next question comes from the line of Michael Carroll from RBC Capital Markets. Your line is open.

Hey, good morning, guys. This is Jason on for Mike.

Good morning.

Around the LTACHs that you guys bought, just trying to get some color around what the negotiations were like for those assets, and how the team is able to achieve such good coverage.

Jason they were tagalongs basically for the IRFs that we wanted. And we think we got good pricing for the IRFs and we think we got great pricing for the LTACHs. The majority of those LTACHs have been through or just start or in the initial stages of their final impatient criteria numbers, we're comfortable with where all of those are. And the coverage is on some of these LTACHs are double-digits. So, we feel very good about what we got them for on a price per bed basis. And obviously with the coverage, there's a tremendous amount of room therefore is in flexibility.

Got it, okay. And just touching on the behavioral health opportunities that you guys are seeing in the market, is this an asset class that you guys would be interested in developing more off, and then also you could touch on what the underwriting is like, and what type of coverage you look for?

Yes, it is something that we would like to see more off. We've been looking at it for a long time, but we've never had enough scale for it to make any sense to us. We think that this operator that we've just closed the transaction on that they won't be the last deal we do with them. So, it gives us scale with that operator and the reason why we did a $28 million transaction. From an underwriting standpoint, it's very similar to what we're seeing on an IRF coverage, it’s 2.5 to 3 times type coverage.

Got it, okay. And then last one, for me. Any updates on the Prospects of expanding that relationship with Infracore in Switzerland?

Certainly from a standpoint our ownership in Infracore, we certainly expect that that over the medium-term that will increase, but even beyond that, even at the ownership that we have now we expect that the size of Infracore will continue to grow, so, that our ownership or investments in Switzerland will continue to grow, even if our ownership doesn't immediately increase.

Got it, okay. Thank you guys.

Our next question comes from the line of Jordan Sadler from KeyBanc Capital Markets. Your line is open.

Hey guys, good morning. This is Kathleen for Jordan. Thinking about 4Q and look at run rate was everything with all the acquisitions in place by 930 such that the $1.56 to $1.58 a share run rate could be achieved in 4Q, ‘19?

Not necessarily Katie, it should be fairly close but there's still some developments that that will come online that are built into the $1.56 on a pro forma basis that has an impact, as I mentioned, capital has some impact. So, and as we’ve -- I hope made clear this morning already, the ongoing acquisition activity could possibly have a meaningful impact also.

Okay, that makes sense. And then I think you just kind of touched on this in like one of your previous answers, but that the LTACHs are kind of tagalongs for the IRFs. Can you guys just kind of touch upon your appetite for incremental exposures to LTACH?

Yes, right now we're at 2.6 of the total portfolio. We don't expect that to increase. We don't -- we don't have any additional LTACHs that we're looking at. If we get an opportunity that has some tagalongs will certainly look at that. But that's, that's the appetite that exists there.

Okay, thank you guys.

Our next question comes from the line of Derek Johnston from Deutsche Bank. Your line is open.

Hi everybody, how you doing?

Fine Derek.

Alright. So, I look here in general acute EBITDARM coverage declined in the quarter and when you think about a cover are comfortable EBITDARM coverage range for general acute care. So, first, what would you say that is? And then secondly, the new acquisitions not included in the same-store, how will they impact the current coverage ratios?

Yes, if you think about it as a whole, Derek, every time we make it acquisition, the coverage is going to naturally come down. Our underwriting coverage for general acute care hospitals is in the 2.5 times and above range. But obviously, when we're acquiring new hospitals at that rate, and we've been running hospitals that we've owned for 10 plus years, with coverages in the 3.5 to 4 times, it brings down the total average. So, with that – we’ve stated on numerous earnings calls, it's a little bit confusing because we've been in a such a rapid growth mode on the coverage.So, when you see the coverage just go down, it's not always because of just a softening, we added 22 total properties to the same-store this year. So, those being new properties, remember, same-store means they've been in our portfolio for 24 months. So, they haven't had the same seasoning that some of the older properties they have had. So there's a natural decline there, but there was some softening in the volumes in the second quarter that we saw along with the rest of the nation.

Okay, great. Can we touch on the dividend and the path to growing or possibly accelerating the dividend growth rate? I mean, given the extent of the already accretive acquisitions and we're modeling and MPW to show sub sector leading FAD and dividend growth, so I just wanted to get your thoughts and maybe when you talk to the Board what their thoughts are on the dividend trajectory.

So very good question and one that gets a lot of attention, especially in periods where we're growing at 40% per year, our Board has been in my personal view, particularly careful and conservative to grow the dividend as the cash grows, not necessarily as our pro forma outlook grows. So, for example, under current dividend policy right now the run rate guidance is about in the 80% of AFFO cash FFO run rate. And we believe that that's probably the right number. We have a fairly healthy component of straight-line rent. And so we really do look at AFFO much more focused than we do just FFO keeping that 80% payout ratio on an AFFO basis, gives us room as these properties continue to be acquired and generate results for four quarters. And then as we continue to execute on what we've described as a $5 billion pipeline, your perception that we should be able to grow it fairly rapidly. We agree with that. I'll just reiterate that will wait until we actually not only announced acquisitions, but actually closing them and integrate full quarter receipt of the NOI.

Excellent, thank you.

Our next question comes from the line Steven Valiquette from Barclays. Your line is open.

Great, thanks. Good morning.

Good morning Steve.

Thanks for taking the question. I guess I was kind of curious that comment you made about the roughly 9%, 10% improvement in the U.S. IRF coverage. I was curious to hear more about whether you think that’s related to operators specific initiatives or are there maybe some industry wide tailwinds for the IRFs sector that you think is driving more of that better performance in 2019? Thank you.

Yes, that's industry wide. That's across the Board on all of our IRF operators. Ernest has been doing very well in their IRF portfolio for a long time. Encompass is, as you saw in their recent announcements, they've been performing very well. So, it's been all across the Board.

Okay. The other quick one is just around the $5 billion pipeline if there's been some a little bit of discussion around whether additional deals could still be announced, maybe in calendar ‘19 or might more than happen in the calendar ‘20, I'm just curious if you have any additional updated thoughts around the timing your near-term of any potential [indiscernible] $5 billion pipeline. Thanks.

Yes. After doing this for 30 plus years, I've learned never to count my chickens before they hatch. But we're very optimistic about the pipeline that we're working on.

Okay, great. Appreciate it. Thanks.

Our next question comes from the line of Tayo Okusanya from Mizuho. Your line is open.

Hi, good morning, everyone.

Good morning Tayo.

Welcome back, Tayo.

Thank you. I appreciate that. It's good to be back. I just want to talk about two particular things. The first one is the Vibra transaction. I appreciate the color on the LTACH piece of it. I'm just curious if you could talk a little about one the cap rate on the transaction specifically if they deliver a kind of think about it of cap rate on the IRFs versus cap rate on the LTACH. And then on top of that, I just wondering and Vibra was a very large tenant of your years ago, they kind of moved away because they kind of thought they could get better cost of capital and I kind of interesting that they're working with you again. So, I'm just going to try to understand whether what kind of change whether it's their cost of capital, whether it's you guys is now offering more competitive cost of capital versus alternative, just kind of curious what's kind of happening there?

Tayo you remember that Brad Hollinger and I have been working together since 1986. So, we have a very, very long and healthy relationship. You'll remember that Brad was offered, no we were offered from one of our competitors to acquire most of his portfolio from us at very nice gains for us. It was at a time that we were trying to have some examples to the market of just how valuable our properties were. So, it was literally just opportunistic for both of us, for us and for Brad. We have maintained our relationship as he and one equity, both the operations for the Ernest transaction. So, we've been working with Brad continuously, literally since the start of the MPT. It's just fluctuated in the total amount that we've had with him. I think that our cap rates have been on par with everybody else's cap rates at different times. Obviously, when we did those original transactions with Brad, they were in the early days when interest rates were much higher than they were. And so when interest rates came down, and he had the opportunity to re-price it with our competitor and we had the opportunity to take some gains, it just made sense.From the standpoint of what the cap rates are, on this particular portfolio, it's all under a masterly so it's kind of hard to look at it on an individual basis. But from our underwriting standpoint, we underwrote the IRFs at good market rate -- cap rates. We think we got above market cap rates for the small LTACH portion of it. We think that these particular LTACHs are performing exceptionally well and are well positioned in the new payment, require I mean patient pay payment requirements, and think that we're well protected for them.

Got you, okay. That’s helpful. And then just second of all the, the $5 billion pipeline in front of you, again, whether it's $2 billion you put in the bag $4 billion, what have you, and I just kind of thinking how you kind of think about funding that on a going forward basis in regards to, trying to get, nice spreads versus again, the idea of staying leverage neutral okay and going up a little bit higher and the leverage back just kind of curious how you're thinking about that?

Yes, so we don't really see a need to plan to go up on our leverage now obviously with again, 40% type growth in these big numbers there will be temporary spikes up and spikes down. But we absolutely feel confident being able to continue to, manage the balance sheet the way we've been doing. So far, we've been very successful with accessing capital in the traditional forms. You saw the great success we had with the equity offering back in July after we announced the Prospect and other transactions, record setting low rates on long-term U.S. dollar debt. Subsequent to that, we issued another $250 million under the ATM at even better pricing than we got on the underwritten offering. So, not that it is without -- not without challenge when you're growing so rapidly, but we don't see an issue with continuing to fund in our traditional ways and maintain the leverage discipline that we demonstrated.

Got you. Great, thank you.

Thanks Tayo.

Our next question comes from the line of Drew Babin from Baird. Your line is open.

Hey, good morning.

Good morning Drew.

I was hoping to ask about the neuropsychiatric development that you announced. If you could talk about maybe the economics on that as far as the cap rate – as well as you know, whether this sort of, subtype within behavioral health might be a growth opportunity or whether this is sort of a segment that we can expect to kind of grow within the context of U.S. healthcare going forward?

So the last part of that question first Drew, I'm not sure how big it'll be, I think there's a real opportunity for it. There aren't that many operators that do this specific type of care in the behavioral section. This is, for the severe psychiatric patients, a lot of criminally insane patients, and obviously needs a specialized operator to handle that that type of activity. From a cap rate standpoint, it's probably in the upper range of our market cap rates. It's a product line that we think is well received in the market. It's needed from a standpoint that acute care hospitals generally aren't able to handle this type of patient. So they're very supportive. The court systems are very supportive, and the payers have been very supportive of it. So, we'll see how big it gets. This is a very small, more small investment at this point, but we have high hopes for this particular operator and some other operators that we're looking at.

Thanks for the color there. And then knowing how the master leases work, and how the economics sort of protect MPW at the end of the day, it wasn't a surprise the Steward is closing this hospital in Arizona and might we see kind of more of these announcements going forward about individual facilities.

So it wasn't a total surprise for us. We knew that with some banners additional newly built tower and renovated ER and. and some other issues, I mean some other additions that they've done at that particular hospital that there was going to be added competition. What we want prepared for was the $1 billion new hospital that the County is planning for. As you know, Steward has other hospitals in the area. It just made a lot more strategic sense for them to take the services that they were providing there at Saint Luke's and move them out to some of their other facilities. And the cost savings there will be really dramatic for them. You may recall that there was at least one other hospital that when they made their original acquisitions from CHS that they had planned on selling, that so particular sell fell through. They haven't made strategic decisions about what they're going to do with that particular hospital long-term. I don't think you'll see a large number of these but I think that things like that particular hospital that we had expected from the very beginning that they would sell, you may see something like that. But overall, the Steward Hospitals are doing very well. We're very happy with where they are from a total coverage standpoint, and very happy with where – and where the company is on a total integration of all the new hospitals.

Great and just one more for me looking at the slight drop in coverage ratio on general acute measure leases in the quarter which you mentioned the kind of the seasonal weakness that HCA talked about and same-store pool composition changes, things like that. I guess, in a more general sense, does MPW receive enough transparency from the operators to go in and really kind of make their own calculations and adjustments to kind of get to an EBITDARM number that you're very comfortable with, as far as calculating these coverages or it's sort of an opportunity sometimes for tenants that to make adjustments based on one-time items or things that you know, may be won't be, from their perspective from one year to another? Just kind of a general question about transparency and how comfortable you feel?

Yes, Drew we get a tremendous amount of transparency. Not only do we get statistical operation or information on a daily, weekly, monthly basis, but obviously we get financial information on a monthly and quarterly basis. So, I think that our insight into our operators is, makes us probably have one of the best databases for hospital operators in the world. Obviously, HCA and other big operators have a tremendous database, but they only have their own data to analyze. We have 8 of the top 10 hospital operators in the United States. So, we have data from a big diverse group of hospitals in a real diverse geographic and an operator standpoint. So, I think the transparency that we have is exceptionally strong.We all know that the generally speaking the third quarter is the weakest quarter for hospital operations and volumes. So, the decline in the second quarter and then the positive rebound in the third quarter for HCA and even Community Health Systems announcement did last couple of weeks has really been a little bit surprising. So, we'll see when I -- when we when we get the full transparency in the next couple of weeks from our operators on the third quarter, but the initial trends are as I said earlier are essentially the same thing that we saw more in line with the community volumes maybe not necessarily with the HCA volumes.

Drew I would just very briefly add that you know, with respect to an operators ability to kind of lack of a better term, gain the system. Our definition of EBITDAR is contractual in the lease and it is highly detailed and highly constrained as to what can go in and come out of net income in calculating that EBITDAR amount. So, I don't think generally that that has been or could be an issue for us either.

Our next question comes from a line of Connor Siversky from Berenberg. Your line is open.

Thank you for taking my question. You mentioned that a lot of your investments this year involves some new relationships. Do you see this trend continuing as you address your acquisition pipeline? And then is there a level of tenant diversification that you'd be comfortable with in the long run?

We do expect that you're going to see even you -- many new operators in this next tranche of the pipeline that we're working on. We do think that that the trend will continue, which obviously is a purposeful trend on our part, because it is the way that we reduce Steward’s exposure. We have always said that on a go forward basis, if we could have a fixed point in time that we were comfortable with an operator representing roughly 25% of our overall portfolio but let me back up just a second and remind everyone that right now our largest property represents less than 3% of our total portfolio and we underwrite on an individual property basis. So, even though Steward at this particular point represents 29% of our total overall portfolio, we still look at it on an individual property basis.And as I said, I believe this time last year, I talked about Steward in particular and how you divide Steward up into really 7 different regions. And it's if something were to ever happen to the parent company, you would have many different operators looking at those individual regions. So, yes, we understand the concern that people get with an exposure of any one tenant being a large number, we think that the comfort zone there should be in the mid 20s. But, we also think that everyone should get covered on our individual property underwriting basis, and the diverse geographic standpoint of somebody like Steward.

Edward thanks for that. And then one small from me as well. Do you see any significant cap rate movement for your target assets in any of your current markets or then you see any new budding competition and maybe Europe or the U.S.?

So I think in the U.S., the cap rates have been fairly stable for the last 12 months, maybe a slight tick upward, but that would only be slight. In Europe, I think that there's been a fairly significant tick upward. I think that the people have realized while there's a lot of -- lot more money chasing properties in Europe than there is here in the U.S. that nobody can move as fast as we can. And the sovereign wealth fund to some of the other pension funds that are chasing the same properties that we are literally can take up to a year to finish their underwriting. So, while they may have a cheaper cost of capital, the opportunity cost do away with any of that, that potential economic benefit.

Great. That’s all from me. Thank you.

I’m showing no further questions at this time. I would now like to turn the conference over back to the CEO Ed Aldag.

Jason, thank you very much. And as always, thank all of you for your interest and your time today. If you have any additional questions that develop after the call, please don't hesitate to reach out to us. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.