Medical Properties Trust, Inc.
Q1 2008 Earnings Call Transcript

Published: 8 May 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Medical Properties Trust Inc. earnings conference call. My name is Tania and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. Now, I would like to turn the conference over to Mr. Mike Stewart, Executive Vice President and General Counsel. Please proceed.

[Mike Stewart:]

Good morning. Thank you for joining the Medical Properties Trust conference call to review the company's announcement today regarding its results for the first quarter of 2008. With me today are Edward K. Aldag, Jr., Chairman, President and CEO of the company and Steven Hamner, our Executive Vice President and Chief Financial Officer. 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 federal securities laws. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results and future event to differ materially from those expressed in 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 disclaims any obligation 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 refer to our web site at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliation. I will now turn the call over to our Chief Executive Officer, Ed Aldag.

[Edward K. Aldag:]

Thank you, Mike, and thank all of you for joining us for our first quarter 2008 earnings call. Last quarter was one of the most exciting quarters in the history of Medical Properties Trust. During the quarter, we reached an agreement to acquire approximately $350 million diversified hospital portfolio which greatly increases our diversification, strength and size. To date, we have closed on all but three of the additional 20 properties we agreed to acquire during the first quarter. It took an all-out effort by the entire team of MPT to complete the due diligence and legal documents in record time. It again demonstrated our staff's ability to perform in remarkable fashion for the benefit of our shareholders. The addition of these 20 new properties add seven new tenants in 14 states, 12 of which are new to MPT. Over half of the new properties are owned by publicly reporting companies. While our existing portfolio has performed well over the years, all of our existing tenants are private companies, so information on their operations to the public has been limited. The addition of these publicly reporting companies to our portfolio should give investors even more comfort on our overall portfolio. In addition to the $350 million plus acquisition agreement, we also agreed to sell three of our Vibra Rehabilitation Hospitals, Marlton, New Jersey; Bowling Green, Kentucky; and San Joaquin, California. Back to Vibra, whereupon they would sell them to a third party. This transaction while temporarily dilutive is extremely important for two reasons. One, Vibra sold the properties to a third party for a significant premium and a cap rate significantly lower than the cap rate we currently have on our Vibra leases. This demonstrates the value of the Vibra properties and in fact, our entire portfolio is much higher than some in the absence of comparable transactions have indicated. Vibra sold these properties for approximately 117% premium over what we paid for them four years ago, which indicates a higher NAV calculation for MPT. And two, the sale further decrease the Vibra concentration, which at one time represented 100% of our portfolio. When the last of these 20 acquisitions are completed, which is expected shortly and after the Vibra sale which occurred this week, our two largest tenants, Prime and Vibra, will have their representations in our portfolio decrease to 29% and 10% from 38% and 24% respectively at the end of 2007, and no one hospital will represent more than 6% of our total portfolio. The performance of our existing portfolio was good in the first quarter. When looking at all the properties, including those still in their ramp up stage, our hospitals increased their EBITDAR lease coverage ratio over the same period last year by 2% to 3.76 times. The LTACHs increased 18% to 1.54 times and the rehabilitation hospitals increased 19% to 2.21 times. And when comparing same-store sales to the same period last year, the hospitals increased 17% to 5.59 times, the LTACHs decreased 5% to 1.54 times, and the rehabilitation hospitals increased 19% to 2.21 times. One property River Oaks in Houston, a facility operated by Healthcare Partners of America is yet to meet our or HPA's expectations. While we both at this point are disappointed with the performance, the strength of the parent company and their other hospitals and thus our guarantee, will give HPA the time they need to get this hospital back on projections. We still have two properties on our internal watch list, Monroe, Bucks County. First Monroe. The operator there has done a very good job of laying the ground work for the success of these hospitals. Surgeries are expected to exceed 250 this month. The new primary care physicians have begun to build a good base of business and from our standpoint, we have hope they would be further along financially than they are. They're still not yet cash flowing although they are doing better than they were at this time last year. Having laid the groundwork for the success, the operator has begun marketing the facility to other operations. To date, the interest from prospective purchasers has been very encouraging. Bucks County, the operator there has been in discussions with several large and credit worthy operators about acquiring the facility and expect to have something worked out by midsummer. In the meantime, the operations there are doing much better than we had expected. Overall, the company is stronger today than it was a year ago. We will continue to work to that goal each year and every year. We will continue to manage this company for the long-term benefit of our shareholders. We have done a good job over the last year, in the first quarter of this year, continuing to diversify and strengthen the portfolio and to grow and protect the dividend. We continue to have plenty of opportunities and we use our capital wisely in our growth efforts. For the past four years, we have successfully implemented our strategy and provided our investors with strong and dependable returns. Our dividend yield is still one of the highest in the healthcare REIT segment and we believe that as we keep diversifying our tenant base with good strong tenants, demonstrating the strength of our core portfolio with strong dividend, with decreasing payout ratios, which by the way improved this quarter to 90% of AFFO, with sales such as the Vibra transaction that prove our portfolio's value, our stock multiple will continue to improve. Now, Steve will go over the first quarter financial results and update our status quo normal year run rate post announced acquisitions and Vibra transactions. Steve?

[Steven Hamner:]

Thank you, Ed. I have got some very brief remarks and then we will go right to questions. This morning, we reported funds from operations of $0.29 per diluted share and adjusted FFO of $0.30 per share. Because some parts of several transactions will straddle both the first and second quarter reporting periods, I want to start out by pointing out a couple of things about the FFO calculation and expectations about next quarter's results. I will then briefly, as Ed described, go through some key measures concerning our existing portfolio and expected operations through the remainder of 2008. And then we will wrap up with questions. Funds from operations

[Operator:]

Yes, sir. (Operator instructions) Your first question will come from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

[Jerry Doctrow:]

Good morning.

[Edward K. Aldag:]

Good morning, Jerry.

[Jerry Doctrow:]

I just had a couple of things. I just want to clarify. I think, Ed, you were saying that in terms of Bucks and Monroe that both were likely being marketed for sale. So, I guess I just want to understand that that is kind of the most likely outcome and do you assume that those sales in your guidance with this run rate number or not?

[Edward K. Aldag:]

Well, it is not necessarily a sale from our standpoint, Jerry. It is a sale from the operator's standpoint. Our assumptions and belief is that we will continue to be the lessor in those situations.

[Jerry Doctrow:]

Okay. And you give this approval on whoever the new operator is?

[Edward K. Aldag:]

Absolutely.

[Jerry Doctrow:]

Okay. And in Monroe, do you have sort of an interest in the operating entity as well. I couldn't remember how exactly was that transaction structured?

[Edward K. Aldag:]

No, we do not. The operating entity is still a joint venture, between the local physicians and now Vibra – I say 'now Vibra' – they came in about this time last year.

[Jerry Doctrow:]

Okay. That's helpful. And then, I guess what I'd like to do is talk a little bit more just about acquisition environment. I mean, it sounded like you are finding attractive sort of opportunities out there. If I could categorize sort of the two kinds of major things you have done to date, one was kind of start-up operators, venture financing with Vibra and to some degree Prime, and now this purchase with HCP which is more traditional REIT sort of stuff, if you will. So, go forward, in terms of either property types or types of operators and stuff, where do you see your niche and maybe where you see returns?

[Edward K. Aldag:]

It will be very similar to our now existing portfolio, which is a mix of all of the above. It is a mix of strong operators that everybody has heard of and the operators similar to the one that have been in our portfolio in the past. The opportunities that we have out there are literally very, very strong. We have the ability – we have the opportunities to invest in a very short order at least $1 billion in additional properties. Obviously, addressing the issue of capital there and the capital markets is more of a driving factor there than the available properties. The additional deals will be accretive to the portfolio. They will be in the cap rate ranges of 9 plus to 11 plus. As I said, they will certainly be accretive going forward. Same property types.

[Jerry Doctrow:]

Okay. I am basically focused on acute care sort of range of hospitals.

[Edward K. Aldag:]

That's correct.

[Jerry Doctrow:]

Okay. And then just last thing and I will jump off. So how are you thinking about sort of the use of capital, if you can maybe just, Steve, maybe touch on sort of what's available to you in terms of dry powder here and when you might have to return to capital markets?

[Steven Hamner:]

Presently, as we sit here today, we have about $150 million of availability. That's under our revolving lines. We have $51 million that needs be used to complete the transaction with the single seller and another $12 million for the committed Vibra transaction, which leaves us about $90 million available, again, under the lines. So far, as going back to increase that with additional, just traditional common equity, that's not in the near term future we think for us at, with today's capital markets environment. But we do have roughly $90 million available.

[Jerry Doctrow:]

And then on top of that, you get cash in from the Vibra sale, is that –

[Steven Hamner:]

That's included in there because we have cashed that sale.

[Jerry Doctrow:]

Right. Okay. Thanks a lot.

[Edward K. Aldag:]

Thanks, Jerry.

[Operator:]

Your next question will be from the line of Tayo Okusanya with UBS. Please proceed.

[Tayo Okusanya:]

Good morning. Just a couple of quick questions. The assets on the watch list, could you tell us what the coverage ratios on those two assets are at this point?

[Edward K. Aldag:]

The coverage ratio on Monroe is still negative, but less negative than it was this time last year. It is about 1 times negative right now. And on the Bucks facility, it is about 0.2 times coverage right now.

[Tayo Okusanya:]

Okay.

[Edward K. Aldag:]

That's through February.

[Tayo Okusanya:]

Got it. Okay. The second question, the last earnings call, the guidance that you gave was $1.21 ex any acquisitions, you announced a slew of acquisitions, but guidance still stayed at $1.21. I am trying to understand – I was under the impression quite a few of your recent deals would be slightly accretive and you reiterated that on the call, but still it is like the guidance numbers don't seem to reflect that.

[Edward K. Aldag:]

I think we did probably when we had that call in January, clearly, we did expect, although we had not announced at that time, we did expect $357 million to be nominally accretive. We thought at that time, I think the consensus was that we absolutely had seen the worst of the credit environment. And of course, we found out going into February and then March that we had not seen the worst of the credit environment. And when we launched the road show for the offerings that we did to financial the acquisitions, I think we launched that on the same day that Bear Stearns fiasco became public. So we clearly had at the end of that transaction, a higher cost of capital and in both regards, debt and equity, than we had expected. Still believing though, that the transaction is probably nominally dilutive and we elected to go forward because of the intangible benefits of the transaction overnight. We traded a share of stock that for another for the same share of stock with a company that's substantially bigger, better capitalized, better able to face and take advantage of growth opportunities, greatly more diversified with tenants that provide a visibility into the operations that we previously didn't have. So we absolutely recognized by that time that the acquisition, the HCP acquisition, was not going to provide immediate in any case, FFO accretiveness. Now, going forward, we end up trading out of the Vibra properties, the three properties have had substantial cash flow to us, keeping in mind that we had a GAAP rate on those properties probably exceeding 14% and cash rate just above 13%. But nonetheless, we elected to trade out of those properties. We will reinvest that but not at 13% cash rates. And again, we think the intangible benefits from making that trade clearly outweigh the dilution by making the company stronger, lessening the dependence on Vibra and giving us opportunities for investing into other operators.

[Tayo Okusanya:]

Got it. Last question, we started to hear incrementally negative news from a Medicaid perspective. A lot of states are having budget deficits, states like Florida and California beginning to attempt to cut or revise down Medicaid reimbursements in the next fiscal year. How do you guys kind of think about that and the potential impact it could have to your portfolio or to your tenant's?

[Edward K. Aldag:]

As we've said, since we started this company, we expected that there would always be cuts to Medicaid, which is why we have little exposure to Medicaid. We have to no real exposure to Florida. We have the one brand new property there and the Medicaid numbers there are extremely small. But let's take California where we have the largest exposure in properties and the largest exposure to Medicaid or Medical, with the proposed reductions that the governor actually signed and that is being litigated right now, we expect that our hospitals out there may see as much as a 2% decrease in their total revenue, a very nominal to no effect on our coverage ratios.

[Tayo Okusanya:]

Okay. That's helpful. Thank you.

[Edward K. Aldag:]

Thank you, Tayo.

[Operator:]

Your next question is from the line of Karin Ford with KeyBanc Capital Markets. Please proceed.

[Karin Ford:]

Hi, good morning. Just a couple of questions, clarification on the new guidance. On an apples-to-apples basis, from how you gave us guidance last quarter, you are down $0.05, correct?

[Edward K. Aldag:]

I don't think so. Are you talking about the $1.16 we put in there?

[Karin Ford:]

Right.

[Edward K. Aldag:]

Yes, but see that's before we reinvest the Vibra proceeds.

[Karin Ford:]

Okay.

[Edward K. Aldag:]

And so, we expect to do it. In fact, we will close the next deal, the $12 million deal that we announced shortly. There are two other Vibra deals that would total another $35 million to $40 million that we are not committed to yet. One reason we are not committed to those is because there are so many other opportunities that we are evaluating, with what to do with the capital we do have. So assuming that we have totally reinvested the Vibra proceeds, we are apples-to-apples flat from last quarter's guidance.

[Karin Ford:]

And that's $80 million total of additional proceeds to invest, is that right?

[Steven Hamner:]

No, $90 million.

[Edward K. Aldag:]

We have about $80 million to $90 million available now.

[Karin Ford:]

Okay. And is that equal to the availability on the line or are you getting additional cash in from Vibra that will boost the availability?

[Edward K. Aldag:]

No, the availability on the line is after receipt of the Vibra proceeds. We closed Vibra on Tuesday of this week, paid down the line, so that now we have available $150 million, all available under the line.

[Karin Ford:]

Okay. Fair enough. Last quarter, you guys had mentioned you were in negotiations on a few of your '09 expirations. Just wanted an update on the status of that.

[Steven Hamner:]

We are still in negotiations with them on that.

[Edward K. Aldag:]

I don't think that came from the quarterly call because those are properties that we just acquired.

[Karin Ford:]

Okay. That's on HCP right?

[Steven Hamner:]

Yes.

[Karin Ford:]

Okay. G&A, I guess, last time, last quarter, you were expecting sort of a $4.2 million quarter run rate. It looks like it is up a little bit to $4.4 million this quarter and that's going to be a good run rate going forward. Can you just talk about why the increase?

[Steven Hamner:]

It's primarily, I think last quarter, we were at $1.75 million roughly on the share-based compensation. That has climbed a little bit and then, frankly, I couldn't tell you where another $100,000 came from right now.

[Karin Ford:]

Okay. And then finally, the Vibra percentage rent, because they paid their loan, you will not be receiving that in 2Q, correct?

[Steven Hamner:]

That's correct.

[Karin Ford:]

Okay.

[Steven Hamner:]

We have collected part of it – we have collected through closing, but after that –

[Karin Ford:]

It will be basically going away, going forward?

[Steven Hamner:]

It will be basically going away, right.

[Karin Ford:]

Okay. Fair enough. Thank you.

[Edward K. Aldag:]

We had very small (inaudible).

[Karin Ford:]

Thanks.

[Steven Hamner:]

Sure. Thank you, Karin.

[Operator:]

Your next question is from the line of Joseph Dazio with JPMorgan. Please proceed.

[Joseph Dazio:]

Hey, good morning, guys.

[Edward K. Aldag:]

Hey, Joe.

[Joseph Dazio:]

Just one guidance clarification again. Sorry to beat a dead horse, but does the $1.16 assume that the $90 million of Vibra properties are sold?

[Steven Hamner:]

Yes.

[Joseph Dazio:]

Okay. So that doesn't include any acquisitions though, just the sale occurring.

[Steven Hamner:]

The $1.16 includes the Vibra acquisition that we are committed to, which is very small, it is $12 million. It doesn't assume any other acquisitions.

[Joseph Dazio:]

Okay. And then when you guys originally announced that sale, I think the press release noted that you had something like $55 million of properties in non-binding agreement, but then I think the press release noted something like between $12 million and $50 million. Is there anything you can explain there?

[Steven Hamner:]

The $50 million and $5 million are equal. We said $55 million, I think, earlier as we were first getting into looking at the transaction. It is actually $50 million. The $12 million, we will do $12 million. We are committed to $12 million. We will close on that I think probably within days. We don't know if we will close on the remainder of the $50 million. So, that's why I mentioned earlier there's another roughly $35 million to $40 million of properties that we have not signed a binding commitment on for Vibra but that may be available to us.

[Edward K. Aldag:]

Let me be sure we clarify that. Vibra is committed to selling to us. We haven't committed to buying from Vibra yet.

[Joseph Dazio:]

Okay. Just last question, in the last 12 to 15 months, I guess the dividend growth kind of leveled off as you guys got to the 90% payout. Now that you are there, do you think the dividend growth in the future will kind of approximate earnings growth and (inaudible) a little bit more?

[Edward K. Aldag:]

I think that, as we have always said, once we got it down to this point, it would probably lag just slightly behind the FFO growth.

[Joseph Dazio:]

Okay. Thanks a lot, guys.

[Edward K. Aldag:]

Thanks, Joe.

[Operator:]

At this time, there are no more questions in the queue. I would now like the turn the presentation back over to Mr. Ed Aldag for any closing remarks.

[Edward K. Aldag:]

Again, thank all of you for joining today's call. And as always, if you have any questions, don't hesitate to call on Steve Hamner, Charles Lambert or myself. Thank you very much. Bye-bye.

[Operator:]

Ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a great day.