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Medical Properties Trust, Inc. (NYSE:MPW)

Q3 2008 Earnings Call Transcript

November 6, 2008, 11:00 am ET

Executives

Charles Lambert – Director, Finance

Edward Aldag – Chairman, President & CEO

Steven Hamner – EVP & CFO

Analysts

Kevin Ellich – RBC Capital Markets

Omotayo Okusanya – UBS

Michael Mueller – JPMorgan

Austin Worshman [ph] – KeyBanc Capital Markets

Peter Costa – FTN Midwest Securities

Jerry Doctrow – Stifel Nicolaus

Phil DeFelice – Wachovia

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2008 Medical Properties Trust Earnings Conference Call. My name is Lamanulle, and I will be your operator for today. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. Charles Lambert, Director of Finance. Please proceed, sir.

Charles Lambert

Good morning. Thank you for joining the Medical Properties Trust conference call to review the Company's announcement today regarding its results for the third 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 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 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 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 Aldag

Thank you, Charles, and good morning, everyone, and thank you for joining us today for MPT's conference call. Today, Medical Properties Trust announced financial results for the third quarter, and I'm pleased to report that our financial, strategic and operational plans for MPT remain on target.

For the quarter we achieved normalized FFO of approximately $19.7 million and AFFO of $20.9 million, representing gains of 32% and 57% over the prior year respectively. We also realized a 54.5% increase in total revenues year-over-year. We're very pleased with these and other results.

In a few moments, I will turn the call over to our Chief Financial Officer, Steve Hamner, to review our results in greater detail and talk about some of the highlights of our financial and operating performance and the restructuring of certain of our assets such as Shasta.

But first it's important that we describe the improvements that we have accomplished concerning three facilities that have recently had a lot of attention. Let me start by highlighting our achievement at Shasta Regional Medical Center in Redding, California.

As many of you already know, we just announced a new long-term triple net lease agreement for Shasta that also provides MPT and ownership interest in the new operator as part of the lease agreement. The new lease provides for a current yield of approximately 10.1% with a current cash yield of 9.25% based on a purchase price of $63 million. That is the same rate the prior operator had been paying, but gives us additional revenue because the purchase price was increased from $60 million to $63 million.

In addition to the rental revenue off the triple net lease at an amount greater than we were receiving from HPA, we expect this agreement will generate considerable incremental income for the Company of up to $20 million based on the future profitability of the hospital's operations. This incremental revenue comes in the form of additional rent and has a profits interest in the operator itself and is expected to be paid from cash flow from operations. Should the operator elect to exercise its early purchase option, any amounts not yet paid pursuant to these participating features would also have to be paid.

So to emphasize, we're capturing as much as $20 million of additional revenue from our investment over and above the revenue we will receive from our rental revenues.

We are very pleased with this arrangement that we have created at Shasta. Our management team has used its considerable health care expertise to implement this creative transaction structure, capturing substantial future value at a time when capital, credit and other global market conditions have eliminated virtually all potential operators.

Regarding our related investment in the former River Oaks Hospital in Houston, as we discussed last quarter, we have hired Cushman & Wakefield to market the two River Oaks campuses for us.

We continue to pursue various possibilities regarding the sale or releasing of the Houston campuses. Hurricane Ike and the worldwide credit situation have pushed us back further than we had hoped to be at this point. However, we continue to have good interest in both campuses at indicated values above or near our total investment in River Oaks.

Given the potential increased value we have created through the new lease agreement at Shasta, we remain confident that we will recover our entire investment value in all of the former HPA facilities.

We have also made substantial progress with the other two properties that we had previously discussed, Monroe and Bucks County. We expect to be able to announce a strategy for Bucks in the near very near future that will include a return to paying status, including recovery of all past due amounts, additional investment by the operator and an equity interest in the operator for MPT. Importantly, the facility continues to improve its operations.

Monroe also continues to show dramatic improvement in its operations. That has attracted the attention of several potential operators, and we are in various stages of negotiations with them concerning potential lease, purchases and even joint venture structures. There is, of course, no assurance at this point that they will complete any such transactions.

While we have been highly focused on resolving these related issues, we continue to execute our portfolio of strategies. As you may recall, our original goal for this year was to selectively invest $200 million in various health care assets. Year-to-date we have far surpassed this target. In July, we completed the acquisitions of the last two properties in the previously disclosed $357 million portfolio acquisition from HCP. This brought our year-to-date investments to $425 million, more than $200 million above our original budget.

The completion of the HCP portfolio acquisition further diversify our real estate portfolio by facility type, tenant and geography. It has also significantly increased the credit strength of our portfolio, as well as strengthened our dividend quality, the payout ratio of which stood at approximately 80% of AFFO through September 30, 2008.

We currently have 49 health care properties in 21 states, adding two more properties during the quarter. None of the properties represent more than 6% of our total portfolio. In fact, only four properties represent more than 5% each of our total portfolio, and on average, our properties represent 2% of the total portfolio. We continue to strengthen these numbers to lessen the potential impact that any one property could have on our portfolio as a whole.

Increasing tenant diversification remains a priority for us. Presently, our largest tenants are prime at 37% of revenues, including the new lease at Shasta, Vibra at 15%; North Cypress Medical Center at 7%; HealthSouth at 4%, and IASIS, CHS and Post-Acute Medical at 3% each.

The increase at Prime is obviously due to the new lease at Shasta. I know that this is a concern for some, but rest assured we are aware of this and are working towards further diversification.

However, we are also committed to being strategic in our efforts and will do what we believe the best value for all of our shareholders. Given the value that we have created through this transaction and our successful relationship with Prime, we believe this transaction was in the best interest of our shareholders. The new lease agreement, which allows MPT to participate in the cash flow of the operator, has significant upside which our prior lease agreement did not offer us.

Also, given the current environment in the credit markets and considering that Prime is a better capitalized operator than our previous one with an impressive track record for successfully restructuring these types of assets, this transaction was particularly attractive to us. Steve will discuss our liquidity position in more detail later on, but I want to emphasize that we have ample liquidity in the near-term to continue our strategic plans.

There are also other avenues available to us such as the ability to raise capital with debt on individual properties as well as continuing to explore joint venture structures to maximize our capital.

Turning to the portfolio, this continued to perform well during the third quarter. When comparing all of our facilities for the period, including those just acquired in the third quarter, every category demonstrated a year-over-year improvement in coverage. Coverage for acute care hospitals improved 31% year-over-year with LTACHs and rehabs improving 26% and 1% respectively for the same period.

As you know, the third quarter of the year is often the softest time for hospital utilization due to patient and doctor vacation schedules. Despite this normal fact, we have continued to see good results from our hospitals this year. In fact, of the hospitals that were in our portfolio in 2007 and 2008, 42% of those hospitals reported double-digit increases in EBITDA for the third quarter over the same quarter last year. Only six facilities in the portfolio have 2008 year-to-date numbers trailing 2007 year-to-date numbers, and those facilities still have an average lease coverage ratio of 3.2 times.

On a sequential quarter-to-quarter basis, lease coverage was slightly down for both acute care hospitals and LTACHs. This is consistent with the historical performance during the summer months at most healthcare facilities.

At acute care hospitals we saw coverage of 4.51 times compared with 4.74 times during the second quarter. At LTACHs we saw coverage of 1.46 times compared with 1.74 times during the second quarter. The exception to this was rehab hospitals, which showed a slight sequential improvement as opposed to the last quarter where as you may recall they declined slightly. This quarter we saw coverage of approximately 5.23 times versus 4.3 times last quarter.

The previously mentioned numbers for all of our facilities included those that are still in their ramp up stage like Bucks and Monroe. They do not include River Oaks, which announced their closing of operations in late June.

Monroe Hospital continues to show vast improvement. In the third quarter of 2008, earnings exceeded breakeven before rent, a significant increase over the same period last year. As we discussed on our last quarterly conference call, this is partly attributable to the purchase of a substantial primary care practice in the Bloomington area, which added five new primary care physicians to the base.

For the third quarter, Monroe Hospital increased its outpatient visits by 113%. Emergency room volume increased by 16%, and outpatient surgeries increased by 117%, and net collectible revenues have increased by 63% over the same quarter last year. Bucks County continues to show dramatic improvement with the pending restructuring of our investments there. Also, during the third quarter of 2008, the hospital added a high dose radiation service and received regulatory approval for implementation of its linear accelerator. The latter went operational on October 1.

The implementation of both these services will not only provide an improved patient experience at Bucks, they are also critical for the operational and financial reasons. First, they complete the technology needed for the comprehensive and integrated clinical program for breast cancer diagnosis and treatment, allowing patients to have all their breast care needs met at Bucks County hospital.

Second, the linear accelerator and its associated treatments are a very profitable service within the continuing of services provided to Bucks County. Further, we have reached an agreement with Bucks to restructure our lease and ownership there.

In addition to our existing rental revenues, we have obtained a 15% ownership interest in the operations, which should give us significant operating income. We expect to have those documents signed shortly.

So in conclusion, MPT had another strong quarter in terms of both financial and operating performance. Our $1.3 billion portfolio is as strong as it has ever been and benefits from increasing diversification on virtually all fronts.

We have made tremendous progress with our special assets and look forward to reporting even further advances on this front. Also, our credit position continues to get stronger, and we believe we are well-positioned to take advantage of the unique opportunities presented by this market.

Let me also say that we continue to see outstanding opportunities, some of which are a direct result of the current credit market conditions. Rest assured that as in the past, any additional acquisitions or investments we make will be strategic in nature and consistent with efforts to increase our credit quality and diversification efforts as well as accretive to the Company. We're excited about the prospects for the future and look forward to reporting even more progress to you on our next conference call.

With that, I will now turn the call over to our CFO, Steve Hamner, to review our financial results. Steve?

Steven Hamner

Thank you, Ed, and good morning, everyone. I will provide a brief overview of the financial results for the third quarter, and then we will be happy to open up the call to your questions.

This morning we reported third quarter 2008 normalized funds from operations of $0.30 per diluted share and adjusted AFFO of $0.32 per share. For the nine months ended September 30, the normalized FFO and adjusted FFO per diluted share were $0.98 and $1.01 respectively.

Normalized FFO and AFFO for the third quarter of 2008 exclude a non-cash $1.5 million write-off of accrued straight-line rent related to the terminated leases for Shasta Regional Medical Center and River Oaks Hospital. Per share amounts were also affected by an increase in the weighted average diluted common shares outstanding for the quarter to 65.2 million compared to 49.4 million shares in the same period in 2007.

AFFO includes adjustments for backing out current straight-line rent, loan cost amortization and share-based compensation. We believe AFFO was helpful as a measure of the Company's performance as a REIT as it provides investors an increased understanding of the Company's operating performance and profitability. Under any measure, these are strong year-over-year increases, even taking into account that the share count increased substantially from 2007 to 2008.

For the nine-month period, normalized FFO and AFFO excludes, firstly, $11.1 million or $0.18 per share non-cash write-offs of accrued straight-line rent related to the three Vibra properties that were sold during the second quarter and $1.5 million of accrued straight-line rent related to Shasta and River Oaks that I just mentioned.

Secondly, excluded is a $3.2 million second quarter write-off of deferred financing costs that we also explained on last quarter's call. And finally, a $2.1 million write-off of receivables of discontinued operations in the second quarter, and again we discussed this on last quarter's call.

Additionally, normalized FFO includes $7 million or $0.11 per share early lease termination fees received from Vibra Healthcare in the second quarter. Again, this was discussed last quarter.

As we have said previously, we continue to find opportunities to realize unscheduled fees and other revenue as a natural offshoot of our investing activity. And while we are unable to predict the amount and timing of any such fees in the future, we do believe we will periodically generate more of them, making this an appropriate component of FFO.

In fact, we have reached an agreement in principle to sell a rehabilitation hospital for cash proceeds that will include approximately $2 million or $0.03 per share of early lease termination income. Although we cannot be assured that this transaction will close, our expectation is that it will be completed during the fourth quarter of this year.

Net income for the third quarter was approximately $7.5 million or $0.12 per share compared with $11.6 million or $0.24 per share for the year ago period. In the quarter, we accelerated the amortization of the lease intangibles associated with the River Oaks and Shasta Hospitals, resulting in non-cash charges of approximately $1.8 million and $2.7 million respectively.

We reported total revenues of $33.1 million for the three months ended September 30, a gain of 54.5% over 2007s total revenues of $21.4 million. For the nine months period ended September 30, total revenues was $87.6 million, an increase of 52.5% compared to the $57.4 million reported in the nine-month period ended September 30, 2007.

This increase in revenues is mainly attributable to increased rent revenues as we owned 46 rent producing properties at September 30, 2008 versus just 24 rent, a year ago.

At September 30, 2008, the Company had total real estate assets of approximately $1.1 billion, a 34% increase since the end of the nine-month period, September 30, 2007. This portfolio includes 49 health care properties, of which 46 facilities are directly owned by the Company and leased to 14 separate tenants, including 21 general acute care hospitals, 13 long-term acute care hospitals, six in-patient rehabilitation hospitals and six wellness centers. The remaining three assets are in the form of first mortgage loans on general acute care facilities that are leased to two separate operators.

At November 1, 2008, we have 66.3 million shares of common shares outstanding. The weighted average shares outstanding during the third quarter was 65.2 million compared with 49.4 million during the third quarter of 2007. For the nine-month period ended September 30, 2008, these figures were 61.2 million compared with 47.2 million for the first nine months of 2007.

Turning to our debt and liquidity, at September 30, total fixed rate debt was approximately $34.1 million with an average rate of approximately 7.5%. Variable rate debt approximated $264.3 million with the weighted average rate of approximately 4.5%.

In addition to the nominal rates I have just described, we continued to expect to amortize approximately $600,000 of previously paid loan fees and cost on a quarterly basis. None of our credit facilities have a maturity earlier than November 2010 when approximately $158 million matures. However, $127 million of the $158 million maturing in 2010 may be extended until 2011.

As of the end of the quarter, we had approximately $9.6 million in cash and cash equivalents and approximately $27 million available under our existing credit facilities. We have agreed in principle to the terms of a proposed sale of a rehabilitation hospital that if completed is expected to generate approximately $26 million in additional liquidity during the fourth quarter of this year.

As most of our regular listeners know, our practice has been to provide estimates of annualized FFO run rates based on our in-place portfolio. Since we last updated our estimates last quarter, following should be considered as you make assumptions to your models.

We stopped rent accrual on the River Oaks Hospital as of October 1. The GAAP and cash rates during 2008 were approximately 10.4% and 9.3%, and the lease base was $40 million. We have already described the terms of the new Shasta lease. Previously, we accrued rent and GAAP – I'm sorry accrued rent at GAAP and cash rates of 10.4% and 9.3% on a lease base of $60 million compared to the terms we described a moment ago.

In addition to the rental revenue from the new Shasta lease base terms, we expect to earn up to $20 million in additional rent and operating earnings based on the level of profitability of the new operator. We are unable at this time to estimate the timing of our receipt of such potential earnings.

As I have already mentioned, we expect to sell a rehabilitation hospital in the near-term. Presently, we are earning GAAP and cash rents based on 16.1% and 13.2% on a lease base of $22 million for this facility.

As I mentioned a moment ago, we also expect to earn a lease termination fee of $2 million and we expect to write-off $2.6 million of accrued straight-line rent on this facility and recognize a gain on sale of approximately $4.4 million.

We expect to complete a restructuring of our Bucks County agreements in the near-term. We expect that provisions of this agreement will allow us to earn 15% of the operators operating earnings, but we are unable at this time to estimate the timing or amount of our receipt of such operating earnings. As mentioned, our weighted average floating rate interest or floating interest rate as of this week is approximately 4.5%.

So in summary, we have had a lot of activity during the past nine months. We have further diversified the portfolio by facility type, tenant and geography while delivering sound quarterly results. We continue to source and capitalize on growth and income opportunities and are well-positioned to take advantage of such things that continue to arise in this current operating environment.

That concludes my financial review of the quarter and our prepared remarks for today. And with that, we will be happy to open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions). And our first question will come from the line of Kevin Ellich with RBC Capital Markets. Please proceed.

Kevin Ellich – RBC Capital Markets

Ed, I was just wondering if you could provide us an update about the operators at Shasta and Bucks County? Has that actually changed or is Bucks County still being operated by DSI?

Edward Aldag

Yes, you said Shasta and Bucks. At Bucks, both are – well, at Bucks, they are still being operated by DSI. They decided not to sell that facility. They have brought in a new CEO at DSI, a fellow by the name of Leif Murphy. The former CEO has moved up to the Chairman position, and they are operating the Bucks facility. At Shasta, as we have said, Prime took over management of that facility last Saturday.

Kevin Ellich – RBC Capital Markets

Okay. And then I think you also mentioned that in your prepared remarks with Bucks County, you guys are trying to get recovery on all past due amounts. Is that meaningful or have you guys quantified that?

Steven Hamner

Yes, Kevin, it is meaningful. It is roughly $3 million that we have accrued over – well, since February that will be paid in conjunction with our restructured agreement at Bucks.

Kevin Ellich – RBC Capital Markets

Okay. And then do you expect that – will that be in Q4 or will that be a 2009 event?

Steven Hamner

The recovery will be a 2009 event.

Kevin Ellich – RBC Capital Markets

Okay. And then given the credit market, I was just hoping you guys could provide an overview as to what you're seeing in terms of deals and cap rates. Is there any specific property type that looks more attractive to you now as you continue to diversify the portfolio?

Edward Aldag

Kevin, our opportunities continue to look exactly like our current portfolio with the vast majority of them, particularly, in a dollar standpoint being from the acute care hospital sector. The cap rates on the acute care hospital sector that we're looking at range from 10% to 14% depending on the specifics of each one of the opportunities. From the rehabs and the LTACHs, we haven't seen quite as much increase there because there are a little more opportunities for other avenues of capital for them other than just us.

Kevin Ellich – RBC Capital Markets

Okay. Thank you.

Operator

And our next question will come from the line of Omotayo Okusanya with UBS. Please proceed.

Omotayo Okusanya – UBS

Yes. Good morning, gentlemen. Just a couple of quick questions. Just in regards to particularly liquidity in '09, could you give us a sense of how much in unencumbered assets you have that could attempt to put secured financing against? And in regards to the potential for JV financing, we have talked about it for a couple of quarters now. Do you really feel like you made progress versus six months ago? Everything is up in the air I guess you're trying to figure it out as you go along?

Edward Aldag

No, we have made progress, Tayo, and generated what we think is an exciting level of interest. And up until probably, certainly, by the early part of October, we continue to remain optimistic that something could get done relatively quickly. About that time when we really saw just a total implosion in not only the credit, but the stock markets, there has been some pullback. However, we still have a number of properties that we believe will offer substantial and important benefits to joint venture or other lender partners. That leads to your question about what portion of our portfolio is unencumbered. Actually, virtually all of our assets serve as collateral for our two revolvers. And – so as we access capital that we believe we will through joint ventures and others, there will be some mandatory prepayments or portions of any such new capital. But we do believe we've got substantial assets that will be available for that.

Steven Hamner

Tayo, it's important to note that in the previous discussions where we talked about joint ventures, we've been working on concepts putting together programs we are actually now in direct discussions with several joint venture opportunities.

Omotayo Okusanya – UBS

Okay. And then how are you feeling in regards to hospital fundamentals? Definitely, they seem to be taking a turn for the worst right now with most of the public hospitals reporting a decline in admission as well as worse bad debt expense. When you kind of look going forward, how do you think that could potentially impact some of the companies, some of your tenants, especially since quite a few of them might have turnaround strategies they are trying to put in place. Has this started to impact those turnaround strategies at this point or are things still going pretty well, and you're not overly concerned about what we're seeing from a public market perspective?

Edward Aldag

Tayo, as I've stated in my prepared remarks, our portfolio and our hospitals are doing exceptionally well. They have increased greatly as I said, that we've got a large portion that actually increased, 42% of them have increased double digits year-over-year. We actually have seen an overall decrease in the bad debt expenses. We got – we obviously had the same slowdown that everybody always has in the months of July and August. But late September, October have been very strong months for all of our operators as I have said in our prepared remarks. We see all of our facilities doing very well with only a very few of them who had slight declines over the same period last year still generating tremendous coverage ratios for us.

Omotayo Okusanya – UBS

Just last question. Which of the facilities at this point are currently still not paying rent? Is Monroe paying right now?

Edward Aldag

Monroe and Bucks County, as Steve said, we expect to have Bucks County resolved here very shortly.

Omotayo Okusanya – UBS

Okay. Great. And Monroe, I mean now that they have broken – the earnings that are breakeven, when do you expect them to possibly start paying?

Edward Aldag

As we said in the last quarter, we expected it would either be at the very end of this year or early part of '09. That's still on track.

Omotayo Okusanya – UBS

Thank you very much.

Edward Aldag

Thank you, Tayo.

Operator

And our next question will come from the line of Michael Mueller with JPMorgan. Please proceed.

Michael Mueller – JPMorgan

Hi. Going to the Shasta lease, the $20 million of additional income you were talking, how much of that is broken up from participation in operations? Is it – when you were talking about participation, are you talking about participation of revenues there, or are you talking about your equity interest in the operator at this point? Are there two separate components or one?

Steven Hamner

There are two separate technical components, Mike, but the source of the additional rent or operating earnings is the same. And that is a 50% participation in the hospital operations.

Michael Mueller – JPMorgan

So it's a 50% participation?

Steven Hamner

Yes.

Michael Mueller – JPMorgan

In Shasta?

Steven Hamner

That's correct.

Michael Mueller – JPMorgan

Okay. Okay. So how do you envision this hitting the P&L? Just on the surface, it seems like it's a sizable investment. Now you have 50% of the operations that can be flowing through the P&L. Are we going to see your earnings go from $0.30 to $0.26 to $0.35 a quarter just based on the seasonality of this business or can you walk us through what your income statement is going to look like going forward?

Edward Aldag

Let me just clarify it. It's not a sizable investment. It's no incremental investment over what we already have. So this is all over and above the returns that we are already generating and have captured by virtue of underwriting a $60 million real estate investment –

Michael Mueller – JPMorgan

Okay. But to the extent that you own 50% of the hospitals operations and 15% of Bucks operations. Are we going to have a little more volatility in terms of how that flows through to your P&L?

Steven Hamner

With respect to the incremental amount over and above our lease amounts, you're absolutely right. We cannot predict with the same level of certainty hospital operating income as we can rental revenue.

Michael Mueller – JPMorgan

Okay. But in terms of underwriting, you're pretty comfortable that you're not underwriting and heading into a point in time where you are looking for $20 million of upside, and this doesn't turn the corner and head downward based on what you see in terms of financial?

Steven Hamner

I guess I did not quite catch all that. I mean the question or the answer I think is clearly we cannot assure ourselves or anybody about the timing or receipt of any of the operating earnings.

Michael Mueller – JPMorgan

Okay. But you do have exposure to the downside as well, correct? It's not just the participation in the upside.

Edward Aldag

No, that is not true. Just the upside.

Michael Mueller – JPMorgan

It just the upside, not the downside?

Edward Aldag

Right.

Michael Mueller – JPMorgan

Okay. And that is at both at Bucks as well as Shasta?

Edward Aldag

That's correct.

Michael Mueller – JPMorgan

Okay. That's helpful. And then you said the range of proceeds from River Oaks is roughly based on what you are seeing now around what you pay for it. The use of proceeds I'm assuming would be credit line or can you refresh us is there debt on the property?

Steven Hamner

No, there is no mortgage debt on the property. It's simply another borrowing base property. My view and it's simply an opinion based on incomplete information because we just can't know yet, is that a portion – remember there are two campuses there. My expectation is that one of those campuses will be sold where we may or may not be in a position to want to finance part of the sale proceeds, and the other campus will likely be released. But again, there is no assurance of either of those events at this point.

Michael Mueller – JPMorgan

Okay. Great. And last question, you mentioned Monroe, expectation is by year-end or early next year that there will be rent paying again. I just want to confirm you are accruing rent there, number one? And number two, when they start paying rent, is your expectation that they will be close to covering the rent or above that?

Steven Hamner

We think they will be close to covering the rent based in the very near-term.

Michael Mueller – JPMorgan

Okay. Great. Thank you.

Steven Hamner

Alright.

Operator

And our next question will come from the line of Karin Ford with KeyBanc Capital Markets. Please proceed.

Austin Worshman – KeyBanc Capital Markets

Hi, guys, it's Austin Worshman [ph] here with Karin. Just a quick question. How large of an investment would you guys be willing to take in your operating portfolio?

Edward Aldag

Well, we are generally limited to what the new rate is what, 25% to the TRS rules, which is where we will be doing this. But having said that, we're not looking anywhere near $200 million to $250 million of investments right now.

Steven Hamner

And Austin, I think it's important to point out based on Mike's last question. We are not investing any additional dollars in either Bucks or Shasta for our operating ownership.

Austin Worshman – KeyBanc Capital Markets

Great. Thank you. And what are you guys required returns then? I mean since you are not investing any money, do you have any returns but – can you explain that a little bit please?

Edward Aldag

Well, the arithmetic, if we don't have any investment, it drives a pretty high IRR.

Austin Worshman – KeyBanc Capital Markets

So you won't put any other dollars in any of your other hospitals basically either?

Steven Hamner

No, I don't –

Edward Aldag

Yes, we certainly going to have opportunities, and we have opportunities now where we can invest some additional dollars and we will. And in those cases, we're looking at returns that are in the neighborhood of 7 percentage points to 15 percentage points higher than what we would be getting just from a traditional lease transaction. I just wanted to point out on these two particular transactions, we're not taking on any additional risk or making any additional investment for obtaining substantial returns from the operations.

Austin Worshman – KeyBanc Capital Markets

Okay, good. Thanks you. That's all I got.

Steven Hamner

Thanks.

Operator

And our next question will come from the line of Peter Costa with FTN Midwest Securities. Please proceed.

Peter Costa – FTN Midwest Securities

Back on the operating ownership positions, you said you're not taking any downside. Are you limited to the $20 million upside in Shasta, and do you have similar limits in Bucks County or how does that work?

Edward Aldag

We're limited to the $20 million at Shasta. There is no limit on the upside on Bucks.

Peter Costa – FTN Midwest Securities

Okay. Now with the other hospitals in the industry having the issues that they are having, do you expect to see more hospitals coming to you? And should we expect to see more of the agreements going forward structured with the operator ownership going forward? Particularly, now with guys having difficulties, probably good time to get into it, especially we don't have downside?

Edward Aldag

Well, Peter, I know that you are fairly new to our organization, but it's always been a part of our original model to take advantage of our health care expertise to take advantage of these types of transactions. We just didn't have the opportunity to do it under this structure previously. We previously did it through things like percentage rent and other complicated structures that we did with Vibra. We do expect that you will see some more of this going forward. You will not see any large dollar amounts. We're seeing opportunities from hospitals not because hospitals are in operating trouble. As I pointed out earlier, our hospitals are performing very, very well and if you look at the statistics from hospitals in general over the last six years, how they are doing versus some of what we obviously read about in the paper from traditional public type hospitals. But we're seeing obviously more attention from them to us because of the general capital crisis situation. Their access to capital has been restricted as has everybody's.

Peter Costa – FTN Midwest Securities

Great. Thank you.

Operator

And our next question will come from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Jerry Doctrow – Stifel Nicolaus

Hi. Hopefully we're not beating this to death, and I got on just a couple of minutes late. But I'm trying to do I think just to understand two things. One, on the three investments we've all been talking about back and forth, Shasta or River Oaks, we just think about them as one group. Bucks and Monroe, the actual maybe dollar amount actually of just sort of GAAP rent that sort of is being accrued, and cash, which was being received which I think is for those for the quarter has been probably maybe zero on all, and then trying to understand sort of the base cash rents that we will see going forward. So could we just walk through that or is that something better we should just do offline?

Steven Hamner

I think with respect to Bucks and Monroe, it's probably better offline because we don't have anything that we're prepared to announce this morning. With respect to Shasta, we did accrue and collect rent for July and August. They stopped paying rent in September. So one month of the quarter we did not get that rent.

Jerry Doctrow – Stifel Nicolaus

Okay. So on Shasta, what was the rental amount or rental amount per month there?

Steven Hamner

That was about $400,000, $450,000 a month.

Jerry Doctrow – Stifel Nicolaus

Okay.

Steven Hamner

That will go up based on the new lease base at Shasta.

Jerry Doctrow – Stifel Nicolaus

Right. The percentage amount you've given us on the $63 million, that's where the base rent is paid?

Steven Hamner

Right.

Jerry Doctrow – Stifel Nicolaus

Okay. Well, I will come back maybe offline, and we will walk maybe walk us through Steve. But I think, and I don't have a cash flow statement, otherwise it would be clearer, but I think it's just hard – maybe (inaudible) from our perspective to sort out each of these deals what's been selected on GAAP because you are continuing to accrue? What's the real cash and you're not backing out cash on your fat or whatever, but I think the real cash received is important to us on this and then to clarify going forward would be helpful. And then the second thing, which again maybe you touched on before I jumped on, but I was just also wanted to clarify structurally what you're doing with Shasta. Both Shasta and Bucks are going to be sort of RIDEA deals so that you own the facility and the REITs. You got a TRS, and the TRS is then doing a management agreement. Is that kind of the structure we're talking about?

Steven Hamner

Well, not at Shasta, really Shasta is not, frankly, dependent on RIDEA. It's more dependent upon the private letter rulings that came out earlier this year. Shasta, we had the base rent that we just described. Then we get additional rents, but that additional rent comes out of – is calculated based on cash flow of the operator to an extent. And then we get 9.9%. We have a 9.9% profit interest in the operator.

Jerry Doctrow – Stifel Nicolaus

Okay.

Steven Hamner

Now Bucks will be a little bit different in that we will have a higher profit interest. There won't be additional rent. It will all come through the profits interest. And even though I'm on the phone, I can see eyes glazing over now. So I'm happy to walk this through anybody who wants to understand.

Jerry Doctrow – Stifel Nicolaus

And Bucks is going to be sort of a RIDEA structure or –?

Steven Hamner

Bucks is a RIDEA structure, yes.

Jerry Doctrow – Stifel Nicolaus

Okay. And then I will come back to you offline on some of the deed and reps. And then just a handful of kind of practical things if we could. Straight-line rents, you had some charge-offs and stuff. What's that likely to be sort of a run rate going forward? Since you now kind of recalculated Shasta and some other stuff, is the number for the quarter good or is it going to move materially?

Edward Aldag

I think again we will probably just give you an accurate answer rather than ballpark it on this call.

Jerry Doctrow – Stifel Nicolaus

Okay. And the wellness centers, the one coverage that was just not talked about I think when Ed was there. Do you have a sense of where coverage is on those or any additional color on them?

Edward Aldag

Sure. As you know, that's about a $15 million investment for us. They pay rent on time every month. The Company has been around since the late 1970s. Their coverage is just above on those particular facilities with us, but they represent a very small part of their total portfolio, and we have the guarantee of the entire parent company. Their coverage is slightly above one times.

Jerry Doctrow – Stifel Nicolaus

Okay. And who is the tenant again there?

Edward Aldag

Healthtrax.

Jerry Doctrow – Stifel Nicolaus

Healthtrax, okay.

Steven Hamner

Trax with an X.

Jerry Doctrow – Stifel Nicolaus

X, yes, okay. And there is this little bit of Prime litigation where the Attorney General of California or something was suing over some insurance issues or whatever. Just any update on that if you have it?

Edward Aldag

No, there hasn't been, but, let me – as you brought up, I make sure that everybody clearly understands that this has to do with the balance of billing, and Prime has not accrued any of the potential benefit that they would get from any of the balanced billing.

Steven Hamner

In fact, as Prime has sent bills to the patients, those very few patients who have paid the bills, Prime has turned around and sent the money right back. This is not an effort to collect additional revenue on the part of Prime. It's part of a prior lawsuit that was filed against Kaiser. So it – there is no revenue effect at all. Prime does not intend to collect unpaid co-pays and things like that.

Jerry Doctrow – Stifel Nicolaus

Okay. Alright. I think that's all for me. I will come back to you offline for some of the nitty-gritty stuff. Thanks.

Operator

And our next question will come from the line of Chris Haley with Wachovia. Please proceed.

Phil DeFelice – Wachovia

Hey, guys, this is Phil DeFelice for Chris.

Edward Aldag

How are you?

Phil DeFelice – Wachovia

Good. Tayo covered most of our questions. We were wondering if you chose to get acquisitive in this environment. What kind of rate would you expect currently if you went to Fannie Mae for financing?

Edward Aldag

I'm sorry, you were breaking up, the static. You got to ask the question again.

Phil DeFelice – Wachovia

I'm sorry. We were wondering if you got acquisitive the rate that you would expect in the current environment for Fannie Mae financing.

Steven Hamner

Yes, Fannie is just very difficult to get with our facilities. There are a lot of hoops to jump through. And frankly, with the credit environment, we are re-exploring that, but we're not optimistic that the Fannie program – HUD program is going to be a very – not going to give us a lot of benefit.

Phil DeFelice – Wachovia

I understand. I appreciate that. That's all I have.

Operator

And our next question will come from the line of Omotayo Okusanya with UBS. Please proceed.

Omotayo Okusanya – UBS

Actually, Jerry already asked the questions I wanted to ask, so thank you.

Edward Aldag

Thanks, Tayo. Any further questions, operator?

Operator

Yes, and our next question is a follow-up question from Michael Mueller with JPMorgan. Please proceed.

Michael Mueller – JPMorgan

Hi, with respect to River Oaks, the investment is it roughly split between the two campuses? And what's your best guesstimate in terms of timing for either sale or the releasing as you mentioned or any shot at something happening before year-end?

Edward Aldag

Mike, from our standpoint, it's not split between the two investments. We bought them as one and always thought of them as one. From a practicality standpoint, it's probably split pretty close down the middle, 50-50. From a timing standpoint, I think that you will probably see something happening quicker on what we refer to as the South campus. The one that Steve mentioned would probably be a sale. And then something a little bit later on the north campus, which Steve mentioned would probably be a lease transaction. We probably would have already had something take place, truly had it not been for the three week to four week delay that we had from Hurricane Ike. But we do not have any formal proposals at this point. At this point, we've got indications of interest.

Michael Mueller – JPMorgan

Okay. So you are probably into 2009 for the sale?

Edward Aldag

Probably so.

Michael Mueller – JPMorgan

Okay. Thank you.

Edward Aldag

Thanks, Mike.

Operator

And at this time there are no more further questions in queue. I would now like to turn the call back over to Mr. Aldag for closing remarks.

Edward Aldag

Thank you, operator. And again, I want to thank all of you for joining us today. We always appreciate your continued support, and as always, please feel free to contact myself, Steve Hamner or Charles Lambert with any questions you might have. I also want to thank those of you that will be joining us for our upcoming Paradise Valley Hospital Tour in San Diego in a couple of weeks. If you have not registered for the tour and are interested in doing so, please contact Charles Lambert at our Company. Again, thank you all, and have a very good day.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

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Source: Medical Properties Trust, Inc. Q3 2008 Earnings Call Transcript
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