Medical Properties Trust, Inc.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day ladies and gentlemen. Thank you all for joining and welcome to the second quarter, Medical Properties Trust earnings conference call. My name is Lisa and I’ll be your coordinator for today. Today’s conference is being recorded and at this time all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Mr. Charles Lambert, Managing Director, for opening remarks. Sir, please proceed. Thank you.

[Charles Lambert:]

Thank you. Good morning and welcome to the Medical Properties Trust conference call to discuss our second quarter 2013 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 are 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 in or underlying such forward-looking statements. We refer you to the company’s report 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 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.

[Edward Aldag Jr.:]

Thank you Charles and thank all of you for joining us this morning. Today we are able to announce a number of acquisitions that we’ve been working on. While we are not in a position at this point to provide all of the details, we are announcing more than $400 million of acquisitions thus far in 2013 and with five months remaining for this year, we feel good about the ability to add to this amount. Included in the $400 million are three acute care hospitals from a successful, large national multi-hospital chain. The total investment in these three hospitals will be approximately $280 million. As a result of this additional $400 million in acquisitions, our largest tenant exposures will be Prime at 24% and Ernest at 17%. Our existing hospital portfolio continues to perform well. For our mature operations, meaning they have been in our portfolio for at least 12 months on a trailing 12-month basis ending 5/31/13, our acute care hospitals were 5.6 times EBITDA or lease coverage, our LTACHs were 2.01 times, and our IRFs 2.85 times. Since acquiring the original 16 Ernest hospitals, Ernest has completed two additional hospitals and one addition, all of which have begun operations. They have two more, which are still under construction and have also acquired one up and running facility this year. These were all flooded by MPT and this brings the total of Ernest facilities up to 21. The facilities we have currently under construction are Oakley with NSH, South Ogden with Ernest, Post Falls with Ernest, and Victoria with Post Acute, which is almost complete. We have recently extended one of our leases that was set to expire in 2014. This lease was extended for an additional five years to 2019. We also agreed to extend a lease to 2028 that was set to expire in 2019. This will leave only one $45 million lease that will currently expire in 2014. The tenant has the option to continue to renew that lease on an annual basis. Reimbursement in all three sectors; acute care, rehabilitation and long-term acute continues to be stable and profitable. This has occurred despite sequestration and soft utilization in some markets. Soft utilization has resulted from a minimum flu season and uninsured patients in some areas. However, the MPT portfolio of hospitals has largely been unaffected by the uninsured, due the efficiency of our operators. Health Reform is in the midst of being implemented and to-date our hospitals have performed well under hospital readmission rules and value-based purchasing. The outlook for hospital reimbursement is positive. CMS recently released final reimbursement rules for all three sectors. Acute Care Rehabilitation services received slight increases, while LTACHs are basically unchanged. The outlook for Managed Care in all markets is stable. The full effect of health reform on our hospital reimbursement is uncertain; however, many experts continue to predict an overall positive effect on hospital utilization and payment. Our recent and pending announced acquisitions put our total assets at approximately $2.8 billion. Without any additional acquisitions our FFO payout ratio on a run rate basis would be 74%. With our active acquisitions pipeline, we feel good about further growth of FFO. Steve.

[Steven Hamner:]

Thank you Ed. I would like to briefly go through an operational summary of the quarter and comment on the expected effects on future operations of our recent and expected near-term acquisitions. First a little perspective

[Operator:]

Certainly. Thank you. (Operator Instructions). And your first question is from the line of Mike Carroll of RBC Capital Markets. Please go ahead. Thank you.

[Mike Carroll:]

Good morning guys. Is the typical yield for your investment between 9% and 11% and your average yield year-to-date was 8.6%. What’s different about these assets than your normal investments?

[Steven Hamner:]

The lower weighted average yield on the $400-plus million that we talked about this morning is driven significant by the biggest of those investments. The $283 million portfolio transaction that we announced and while we are unable to go into much detail about that transaction just yet, as Ed mentioned, it is with a very well know, very well capitalized, highly experienced operator of many hospitals across the country. And the quality of the assets themselves, including to a great extent, a relatively new construction, drove the market rate that we were able to negotiate down lower than what our historical average has been.

[Edward Aldag Jr.:]

And Mike, while historically it’s been nine to 11, it’s still the 11 in the top range of what we are looking at right now. So the range of where we are today in our exit pipeline is in the eight plus range to 11. We have bills that we are working on right now that are in the 11 range, but as Steve said, the size of this transaction pushed the overall down right now.

[Steven Hamner:]

And I want to emphasize again, as we talk about weighted average GAAP rate that when there is no fixed escalation, as is the case in some of these acquisitions, then we don’t get the optical benefit anyway of the straight line rent averaging. So again, it just reiterates the point I tried to make in my remarks that as inflation is incurred, which we expect it to be, then this rate will actually be higher than that GAAP rate.

[Mike Carroll:]

Now did you say that you’re willing to go below that 9% and is there other assets out there that you are currently looking at, that you’re willing to go below that 9% range?

[Edward Aldag Jr.:]

Yes, the range today, the assets that we are looking at is eight plus to 11. So it has dropped to nine.

[Mike Carroll:]

So what changed, I guess from going to nine to eight plus?

[Edward Aldag Jr.:]

Well, I think Steve has just mentioned that’s it’s the size and quality of some of the assets that we’ve been able to look at recently. You’ve heard from us over the last few quarters of the portfolios that we’ve been working on without a whole lot of detail, but we haven’t been able to provide that to you at this point. But the quality and size of the portfolios that we are working on had pushed that down.

[Steven Hamner:]

But we are still working on attractive assets in that up to 10% plus range, and in fact the higher end of the range that goes into this weighted average of 9.25% exceeds 10%.

[Mike Carroll:]

Okay. And then Ed, did you give us, and sorry if I missed this, the tenant coverage ratio across the portfolio this time in your prepared remarks?

[Edward Aldag Jr.:]

I did. Would you like that again?

[Mike Carroll:]

No, I can just read the transcript, that’s fine. Did you give us an update on the first choice developments and how many sites are picked out right now and when should we expect you to start making those investments?

[Edward Aldag Jr.:]

Well, very, very soon, any day now. The way the process has worked, once we closed the final documents, which has been a while, they began presenting us with the locations. They presented us with approximately 20-plus locations at this point. We’ve got about five of them that are in the final stages of approval and expect construction to commence any day.

[Mike Carroll:]

Okay, so should we expect in the third quarter that you’ll have some investments on those properties then?

[Edward Aldag Jr.:]

Absolutely.

[Mike Carroll:]

Okay, great. Thanks guys.

[Operator:]

Thank you very much for your questions. Our next question is from the line of (inaudible), Bank of America. Please proceed.

[Unidentified Participant:]

Hi, good morning guys. Just with regards to guidance and the movement between last quarter and this quarter’s numbers, I’m still a little bit confused. The last quarter you knew the timing of the equity raise that had highlighted the dispositions of assets with the leases expiring, and I understand lower cap rates has a bit of an impact on a full-year basis, but it seems like I’m still missing something. Is there a much higher debt cost that you’re assuming and taking out the revolver for fixed rate debt than you previously assumed, and if so can you quantify that? And is that plus the lower cap rate really the difference between your -- in addition to the timing also, the difference between the full year run rate number at the end of the year, the 1.06 to 1.10, to the previous 1.10 guidance?

[Steven Hamner:]

There are a number of small penny here, two penny there specific differences. Basically they all kind of even out, so the real impact comes from the items you’ve mentioned. The lower cap rate than we had anticipated, the timing, which I gave you a couple of examples of those. When we had our first quarter call in late April, we truly were expecting this announcement we made today to be made at literally any time and it got put on the shelf by the seller for a while. And at the same time, if you’ll recall, our common stock was trading significantly higher than it is today, along with the other healthcare REITs, and the cost that we could issue bonds was probably 75 bps lower than it is today. So those three components, timing, cap rate, cost of capital, drive the great majority of the difference, and the difference really…

[Unidentified Participant:]

Sorry. With your reference to the cost of equity, should we assume that you’re going to use equity there? Further equity this year to gear your balance sheet a little bit?

[Steven Hamner:]

Well again, we could use debt, all debt I think under the current acquisition plans or acquisition announcements and still be within the range that we gave earlier; the 45% or lower leverage, the 5.5 times EBITDA and the dividend payout. But as I also mentioned, we’ll be opportunistic; we’ll keep an eye on the market. We have a number of alternatives to permanently finance what’s in the immediate pipeline and what could be a little bit further down the road. So we have no expressed plans as we sit here today.

[Unidentified Participant:]

Okay. So the main difference if I’m hearing you right, is bond cost 70 basis points higher, the timing as it relates to the relative earnings downgrade versus prior expectations.

[Steven Hamner:]

Well, the cap rate.

[Unidentified Participant:]

And the cap rate, sorry. Okay great.

[Steven Hamner:]

It’s not just bonds. Just to clarify again, three months ago we were trading at 17 plus, and so obviously we are not any more. So that has an effect on our cost of equity capital.

[Unidentified Participant:]

Okay. And just one other question, what are your latest thoughts with regards to international opportunities? What should we be thinking in terms of timing of the potential expansion, and what should we be thinking in terms of valuations relative to what you guys are doing in the U.S. from a cap rate perspective, and what sort of geographies are the most appealing?

[Edward Aldag Jr.:]

Well, it’s certainly been something we’ve looked at since the inception of our company 10 years ago and we explored a lot of different areas; we’ve been actively exploring it since the beginning. We pretty much narrowed it down to the Western European countries to do one of our first acquisitions. There are a number of opportunities that we are actively looking at right now. They are all within the same range of the eight to 11 that we gave you just, gave the caller just a few minutes ago. From a timing standpoint, it could be as early as this year. It could roll over into 2014. It’s just when the opportunities present itself, at the right time.

[Unidentified Participant:]

Okay. So your previous comment about equities seems to imply that if you were to want to do something in Europe, you want to shore up your balance sheet ahead, of any potential size of acquisition.

[Edward Aldag Jr.:]

It’s not just Europe. Obviously we don’t intend on not growing any beyond the acquisitions that we’ve announced here. So as we continue to look at managing the company and our growth expectations, we’ve got to take all of that into consideration.

[Unidentified Participant:]

Okay, and one just follow up. What size would make sense as an initial beachhead in a new market for you; just round numbers?

[Edward Aldag Jr.:]

Its hard to give you that number exactly right now, but certainly its somewhere north of $100 million.

[Unidentified Participant:]

Great. Thank you.

[Operator:]

Thank you for your questions. Our next question is from the line of Karin Ford of KeyBanc. Please proceed.

[Karin Ford:]

Hi, good morning. When is the large portfolio expected to close? I think you said third quarter in the release, but can you give us just a little more specific than that?

[Edward Aldag Jr.:]

I don’t know. We really can’t. Third quarter, we are halfway through it already, so...

[Karin Ford:]

Is it possible it slips to 4Q or are you pretty confident that it’s 3Q?

[Edward Aldag Jr.:]

Well, sitting here today there’s no reason to think that it should slip, but in the realm of anything is possible, yes it’s possible, but that’s certainly not our expectation.

[Karin Ford:]

Okay. And did the quality of the operator and the quality of the portfolio cause you to change your underwriting on coverage differently on this acquisition versus others?

[Edward Aldag Jr.:]

The coverage is very strong.

[Karin Ford:]

Okay.

[Operator:]

Thank you for your question. We’ll have to move on to our next question. Our next question is from the line of Tayo Okusanya of Jefferies. Please proceed.

[Tayo Okusanya:]

Yes, good morning everyone. First of all, just congrats on the fairly large deal pipeline out there; that’s good to see. Ed, in the press release, you do make some illusions to additional acquisitions beyond what you’ve announced so far, and you’ve kind of given us some color about the $100 million to go to a new market. But could you just kind of give us an overall sense of just how large the deal pipeline could be, beyond what you’ve announced already?

[Edward Aldag Jr.:]

I can’t, but what I can tell you is how much of that will actually close or happen in 2013 versus 2014. But we are actively, right now working on a number of acquisitions that include a portfolio of properties, as well as individual properties that are in the neighborhood of $600 million to $800 million.

[Tayo Okusanya:]

Okay, that’s helpful. And then just any thoughts on kind of the recent news coming out with all these large hospital M&A transactions; what you kind of think of all that and whether that’s creating any opportunities for you?

[Edward Aldag Jr.:]

Well, it certainly should create opportunities, and I think that were going to continue to see some consolidation. As I said I think in the last call, I think the consolidation is going to primarily be related to the consolidation by full profits if not for profits. Some of the full profit consolidation that we see, going over the market right now, is somewhat of an anomaly based on some specifics with individual companies as we are all aware of, but any time you’ve got those type of acquisitions where you’ve got capital needs, it presents an opportunity for us.

[Tayo Okusanya:]

Okay. Thank you very much.

[Operator:]

Thank you for your question. Our next question is from Kate (inaudible) of Goldman Sachs.

[Unidentified Participant:]

Hi, is your FFO guidance shift impacted at all by your operating view? That is, are there any additional hospitals that are no longer accruing rent?

[Edward Aldag Jr.:]

No, the only one not accruing rent is Monroe. Specifically, Florence continues to pay rent. They’ve remained current on rent through the month of August. So there’s no impact on any operating issues, and we’re not aware of any operating issues other than the ones we’ve previously discussed.

[Unidentified Participant:]

Okay. And then also, what will be the impact if any that you are now lower 2013 FFO guidance will have on compensation?

[Edward Aldag Jr.:]

Well, compensation is a matter for the compensation committee, and we’ve not had recent discussions with them, and that wouldn’t generally happen until toward the end of the year.

[Unidentified Participant:]

Okay, thank you. That’s all.

[Operator:]

Okay. Thank you for your question. Okay, just going back to Karin Ford. Karin if you’d like to finish off your question, I’m very sorry for that. Thank you.

[Karin Ford:]

Thank you. I think you covered it, but just wanted to see if you felt like the strategic activity going on in the broader hospital operator market could provide you with potential opportunities for deals or do you feel like there’s enough. Would you consider something like the Vanguard Health deal, which I know some REITs looked at or is the one off asset pool large enough at that point that you feel like there is enough deals in that space that you don’t need to play in sort of the bigger strategic space?

[Steven Hamner:]

Well, again I think the answer to both questions is, yes. The one-offs is large enough for us to fill out our acquisition pipeline, but there are an awful lot of very good looking opportunities out there with some of the strategic opportunities such as the Vanguard, but some of the others in particular that I mentioned on the previous calls and just a little while ago on this call, of the acquisition of not for profits by the full profit environment, and we’re seeing a number of those that we think are good opportunities for us.

[Karin Ford:]

Some of your parents have noted some increase in competition in other sectors aside from hospitals and other healthcare spaces. Are you guys seeing any increase in competition in your space?

[Steven Hamner:]

Not any more than usual. I guess some of the larger healthcare REITs out there have certainly made some noise and some looks into some of the acute care space, and as I have mentioned when I get asked this question, I think that’s good news for us and good news for the market that we are in. We welcome the competition at this point.

[Karin Ford:]

Thanks very much.

[Edward Aldag Jr.:]

Thanks Karin.

[Operator:]

Thank you very much for your question. Okay, so our next question is from the line of Michael Mueller of J.P. Morgan. Please proceed. Thank you.

[Michael Mueller:]

Great, thanks. I’m just curious, going back to the three-hospital acquisition. I mean what happened in May 1, where it ended up getting shelved or pushed off and considering you’re announcing it now where you didn’t announce it on the 1Q call and it was pretty close. What’s different now?

[Edward Aldag Jr.:]

Well, the first thing was totally internal with the seller of the properties, and it had nothing to do with the selling of these assets, but something else that they were working on. The thing that’s changed is that we have definitive agreement signed at this point.

[Michael Mueller:]

Got it, okay. And two other quick ones; Steve, does the 1.06 to 1.10 have debt and equity or capital markets assumptions in there?

[Steven Hamner:]

Yes, to maintain the metrics that we went through a little earlier.

[Michael Mueller:]

Okay, so it does, okay. And last question, just thinking about the comments on international, I mean why do you think international, doing something overseas makes sense at this point? I mean it seems like the domestic pipeline from what you’re saying is pretty strong, and you’re saying the returns are comparable. So what makes it that much attractive where it’s something you really want to good over and do?

[Edward Aldag Jr.:]

Mike, that’s a good question, and as we’ve said since the beginning when we started looking to the international, it is a way for us to diversify. We obviously are a specialized REIT in the hospital space, that’s what our management team knows very well. We are all people that came out of owning and operating hospitals, whether they be the post-acute or the acute care sector. So when we look at our portfolio and we think of how we diversified, that we certainly didn’t need to diversify within the U.S. into other products that other healthcare REITs do very well. And looking at the international market, it gives us the opportunity to continue to invest in a product that we know and know well, while at the same time being able to diversify outside of the U.S. healthcare system and take away some of the potential risk of having limited payers.

[Michael Mueller:]

Okay, thank you.

[Operator:]

Thank you very much for your question. Our next question is from the line of Daniel Bernstein of Stifel. Please go ahead. Thank you.

[Edward Aldag Jr.:]

Hey Dan.

[Daniel Bernstein:]

Hi. On the international side, due see any development opportunities, as well as acquisition?

[Steven Hamner:]

On the development side in the international, we wouldn’t do any ground-up construction development certainly at this point. If we participated in any development side, it would be as a take-out, as opposed to doing it from the start.

[Daniel Bernstein:]

And I’m not sure if you commented on it before, but in terms of international versus domestic in your portfolio, do you have some kind of target ratio you would like to be or limit to how much international you would want to do?

[Steven Hamner:]

No, we haven’t mentioned that and we don’t have one. It’s more looking at each individual transaction on an individual basis at this point and where we think it fits into our total overall portfolio.

[Daniel Bernstein:]

Okay. Would it be fair to say you’re still more focused on the domestic than international?

[Steven Hamner:]

Absolutely.

[Daniel Bernstein:]

I guess the other question, the healthcare REITs deal or some of the big cap REITs have seen additional competition. Have you seen private equity at all involved in the hospital space? If you could be more focused on MOBs and senior housing, do you think you are finding any additional interest in the hospital space in private equity?

[Edward Aldag Jr.:]

Well, there is on the operating side. The difference between this go-round and which is all pre-2008, in pre-2008 the private equity was willing to use their dollars on the real estate, as well as the operations. Today we get a lot of calls from private equity companies that are looking to invest in the operating side of acute care hospitals and bringing us to the table for the real-estate side.

[Daniel Bernstein:]

Why do you think they are avoiding the real-estate side? I’m sure what the rational is there?

[Edward Aldag Jr.:]

I don’t think they’re avoiding it at all Dan. There is a difference in the returns that they can get from the operating side versus the real-estate side. As you well know, our real state investors require much lower return than operating investors do.

[Daniel Bernstein:]

Okay, it’s just math to them. All right, that’s all I have. Thank you very much.

[Edward Aldag Jr.:]

Thanks Dan.

[Operator:]

Thank you very much for your question. Our next question is from Tayo Okusanya of Jefferies. Please go ahead. Thank you.

[Tayo Okusanya:]

That’s for talking my follow on calls. Just a couple of quick ones. First of all with the development pipeline, kind of getting much more robust now. Could you give us a look at the sense of what expected yields are on a majority of these developments?

[Edward Aldag Jr.:]

Tayo, the pipeline is not as robust as it may appear to be, because of the first choice. Other than that you’re primarily looking at the Earnest transactions. With the Earnest transactions that we’ve done, the cap rates are in line, slightly higher than the up and running facilities that we purchased two years ago, now almost two years ago now. And so on an overall basis, the return for the development deals is higher than it is, but its not – I don’t think its as robust as you may think that it is from the standpoint of the size of the first choice transactions.

[Tayo Okusanya:]

Okay. So is the number closed about 10% or slightly south of 10%?

[Edward Aldag Jr.:]

Well, it varies Tayo, depending on the transaction, but it is higher than what we would do the comparable transaction for on that. And as you know, we don’t give it out on each individual operator.

[Steven Hamner:]

Keep in mind Tayo on Earnest, those properties go into the master lease, so there is significant incremental coverage and credit there. On the Wisconsin property for national surgical hospitals, that’s a replacement hospital. So there’s really no ramp-up risk. There is really no construction risk, because all of that is born by the well-capitalized operator. When that facility is completed, they’ll turn off the lights on the old facility and turn on the lights on the new facility, and it’s truly an up and running, highly profitable hospital. So you don’t have really any of the development risk that you would otherwise think comes with the development. Nonetheless, that’s a very attractive cap rate.

[Tayo Okusanya:]

But you’re not giving out specific numbers at this point to kind of help us out?

[Steven Hamner:]

We haven’t done in that several years.

[Tayo Okusanya:]

Understood. It’s just getting bigger, so I just want to make sure we are capturing your value creation from it correctly, that’s all. And then the last thing, in 2Q as well you did in a couple of hospitals kind of talk about weak admission volumes. I know you kind of alluded to it a little bit in your commentary Ed, but could you kind of give us a sense of, kind of what you think may have caused some of that and why your operators did not go through kind of a similar trend?

[Edward Aldag Jr.:]

Well, as I said, there was some softening, primarily due to the lack of a flu season and some under assured or uninsured in some mark, but it is still not very dramatic compared to some of the more rural areas. If you look at our hospital portfolio, ours are more urban based and metropolitan based as opposed to the pure rural players I think, where you saw some of the bigger disappointments, and primarily in some of the larger operators that own the community based hospitals.

[Tayo Okusanya:]

Got it, okay. That’s very helpful. Thanks again.

[Edward Aldag Jr.:]

All right. Thanks Tayo.

[Operator:]

Thank you for all your questions, ladies and gentlemen. I would now like to hand back the call over to Mr. Ed Aldag for closing remarks. Thank you.

[Edward Aldag Jr.:]

Thank you Lisa. We appreciate it and we appreciate all of your interest, and if you have any questions, please don’t hesitate to call Steve, Charles or myself. Thank you very much.

[Operator:]

Thank you all for joining, ladies and gentlemen. That concludes today’s conference call. You may now disconnect your lines. Have a good day. Thank you.