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Medical Properties Trust, Inc. (NYSE:MPW)

Q4 2012 Earnings Conference Call

February 7, 2013 11:00 ET

Executives

Charles Lambert - Managing Director

Edward K. Aldag, Jr. - Chairman, President and Chief Executive Officer

Steven Hamner - Executive Vice President and Chief Financial Officer

Analysts

Karin Ford – KeyBanc Capital Markets

Tayo Okusanya - Jefferies

Michael Carroll - RBC Capital Markets

Mike Mueller - JPMorgan

Phil DeFelice - Wells Fargo

Daniel Bernstein - Stifel

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2012 Medical Properties Trust Earnings Conference Call. My name is Clinton and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We’ll conduct a question-and-answer session towards the end of this conference. (Operator Instructions) And as a reminder, this call is being recorded for replay purposes.

And now, I’d like to hand the call over to Charles Lambert, Managing Director. Please proceed sir.

Charles Lambert - Managing Director

Good morning. Welcome to the Medical Properties Trust conference call to discuss our fourth quarter and full year 2012 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 Relation’s 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 maybe 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 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 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 K. Aldag, Jr. - Chairman, President and Chief Executive Officer

Thank you, Charles and thank you all of you for being with us today. In 2012, everything came together for MPT. All of the hard work and precise planning paid off. The capital and balance sheet planning, the personnel planning and development, the acquisitions’ groundwork, it all came together to produce a year of spectacular results. In previous years, we had never acquired more than approximately $425 million in any one year, and in fact, had averaged about $300 million a year. In 2012, our acquisitions and commitments exceeded $800 million.

Our normalized FFO per share for the year increased by 27%. By the fourth quarter, our FFO had increased 32% year-over-year. Our pay-out ratio improved to 80% and is expected to continue to improve in 2013. Both of these metrics are almost a full year ahead of our projections and investors’ expectations. As you know, we take a very disciplined approach to our RIDEA or equity type investments. The non-Ernest or RIDEA investments proved themselves this year generating returns in excess of 40% on an annualized basis for the last three quarters. The Ernest results are right in line with expectations generating an approximately 15% return on our equity type investment.

Some of the highlights of 2012 for MPT are we completed a restructuring of our investment with Prime, whereby all of our leases are now under master leases. In addition to the security that a master lease provides, we also improved the annual rental increases to correspond to CPI without any limits. We completed a management agreement with St. Vincent’s Health which operates 14 hospitals in Indiana and is part of the Ascension Health Group for the management of Monroe Hospital in Bloomington, Indiana. We selectively sold two average assets or 27% more than their original cost validating our investment leases and demonstrating to the market the value of our existing portfolio.

Our portfolio continued to perform well above industry standards. The EBITDAR lease coverage ratio for our mature operations meaning the properties have been in our portfolio for at least a year at approximately 5 times. Nine of our facilities achieved the Top Performer recognition from the Joint Commission. We received an upgrade for Moody’s in our credit rating to Ba1. We executed several capital transactions that maintained conservative leverage levels provided us with stability and financial flexibility and with a record low cost of capital for MPT.

We issued a $100 million in unsecured term loan at 250 basis points over LIBOR. We issued $220 million in equity. We increased the revolver by $70 million now having a total of eight banks participating in the credit facility. We issued $200 million in 10-year unsecured bonds at 50 basis points lower than our most recent issue. MPT’s total return to shareholders for 2012 was approximately 31% and was more than 85% for the last five years placing MPT in the approximately 88 percentile of broad based REIT indices.

Turning to our existing portfolio, we added a number of properties to the mature listing, meaning that they again have been in our portfolio for at least 12 months. These facilities were strong performers and our increases in coverages reflect that. However, you won’t be able to do a direct comparison of the coverages announced on the third quarter call because these properties were not in those coverages and their comparisons today include their ramp up period.

Looking first at our acute care hospital segment, on a trailing 12-month basis, fourth quarter over fourth quarter our acute care EBITDAR coverage increased 12% to approximately 5.84 times. This was also a significant improvement for trailing 12 months fourth quarter over third quarter. Our LTACHs and in-patient rehabilitation hospitals or IRFs also saw similar improvements. For trailing 12 months fourth quarter over fourth quarter, the LTACHs improved to almost 2.5 times or a 6% increase and IRFs improved to almost four times at 3.82 or 15% increase. The improvement over third quarter was not quite as dramatic coming in at an increase of 2% and 6% respectively. So, again in an attempt to present a full picture of how well our properties are doing with an expanding portfolio. Of our 22 operators, only four experienced any declines in EBITDAR coverage and those were not significant and they did not involve our two largest operators. And one of the four was directly affected by Hurricane Sandy.

Regarding utilization trends for our hospitals, our acute care hospitals saw a slight increase year-over-year and were flat quarter-over-quarter. The IRFs were up slightly year-over-year and up about 3% quarter-over-quarter. LTACH utilization was down across the board, 9.6% year-over-year and 7.3% quarter-over-quarter. For the 11th month period from January through November, Ernest EBITDAR is approximately 2.5% ahead of budget. Since acquiring Ernest last February, we have commenced construction on two new IRFs for Ernest and completed the expansion of one of their facilities. One of these commenced operations in February and the others expected in the third quarter of 2013.

River Oaks, now known as Twelve Oaks, completed its renovations for the vast majority of the building and our new lead tenant representing 55% of the building commenced operations on January the 23rd. The construction and improvements turned out better than even we expected and we believe we would not have any problems leasing the remaining approximately 45%.

Of the 10 properties that were under development in 2012, four of them commenced operations in 2012, three are expected to complete construction and commence operations in the first quarter of 2013, two in the third quarter and one in 2014. We were delighted how our existing portfolio is performing and are well positioned for further accretive growth in 2013 and beyond.

At this time, Steve will walk you through the financial results for 2012 and provide guidance for 2013. Steve?

Steven Hamner - Executive Vice President and Chief Financial Officer

Thank you, Ed. As Ed has just emphasized, 2012 was a landmark year for us and met our real estate investment strategies, our idea of investment strategies, our capital strategies and our people strategies, all came together. The effects on our per share of profitability measures, our dividend coverage and our total return to shareholders were dramatic. Total annual revenue was up almost 50% year-over-year. Normalized FFO was up by 53% year-over-year. And on a per share basis, fourth quarter normalized FFO was $0.25 in 2012, 32% higher than 2011’s $0.19. This is the third consecutive quarter of year-over-year per share FFO growth that exceeds 30%. For the year, our per share FFO increased by 27% and our dividend payout ratio correspondingly improved to 80% for the quarter with further improvements expected in 2013.

We think it’s important to point out what maybe obviously and that is because we are continuing to make significant amounts of acquisitions at average cash rates of return between 9% and 11%. And because our cost of capital is substantially lower than that, each dollar we invest in new assets immediately increases our per share results and improves our dividend payout ratio even further. We made a single small RIDEA-type investment in the fourth quarter, our only such investment in 2012, other than the Ernest investment. That brings to eight the number of these investments in operations that we have made including Ernest.

In the fourth quarter, we recorded $3.5 million in earnings from our operating investment in Ernest for an approximate annualized return of 15%, and $2.1 million for the other seven investments for an approximate annualized return of 43%.

As we have previously reported, our objective in making investments in operations under RIDEA or otherwise is to achieve outsized returns for little sometimes no incremental risk or investment, and returns exceeding 40% demonstrates our success. Remember that we separately earn rent and mortgage interest of approximately $52 million annually from these operators. There are two items that reconcile funds from operations to normalized FFO, number one. Costs associated with asset acquisitions are $1.3 million, and number two, the non-cash charge of accrued straight line rent related to facilities that we sold during the quarter of about $4.8 million.

We recognized gains on sale of those facilities exceeding $9 million and those gains of course are excluded from FFO in accordance with common practice. We had previously reported one of these sales, which accounts for $7.2 million of the gain. And as a reminder, the sale proceeds when combined with rental receipts since we acquired the property resulted in an un-levered internal rate of return of 15%. In addition to these property sales, our portfolio transactions during the fourth quarter included the $15 million acquisition of an existing long-term acute care hospital along with the small OpCo investment that gives us rights to a 25% interest in that operator.

Commencement of development of a $33 million replacement surgical hospital, commencement of development of an $18 million rehabilitation hospital for Ernest and our $100 million commitment to fund development and leasing of up to 25 freestanding emergency facilities. The weighted average initial lease rates for our fourth quarter investment exceeded 10%. We financed the fourth quarter investments with cash on hand including proceeds from the property sales I just mentioned and from the sale of approximately 1.1 million shares under our aftermarket share program.

Detailed information about our quarter end capitalization details is included in the supplemental disclosures that were posted to our website earlier this morning. Turning to guidance, this morning we are providing our estimate of 2013 normalized FFO of $1.10 per share. In arriving at this estimate, we took into account our assets and debt as of December 31, placement into service of one Emerus emergency hospital during the first quarter of 2013, placement into service of the Ernest rehab hospital in Lafayette, Indiana during the first quarter and the Ernest rehab hospital in Spartanburg, South Carolina in the fourth quarter and the acquisition during the second half of 2013 of $400 million of new hospital real estate. Because we think the first of the new acquisitions will close beginning in July, the $1.10 annual estimate will likely not be equal quarter-to-quarter.

Our estimate also includes assumptions about our capital raising activities including, we expect to maintain our balance sheet in 2013 such that our total debt to the un-depreciated book assets approximates 30, excuse me, 43% to 45%. We expect pricing in the unsecured debt market will remain in line with recent periods and by way of reference, our two issues of unsecured bonds have traded recently between yields of 4.75% and 5.25%. And our dividend payout ratio will remain around the 75% level. Based on these assumptions, the pro forma estimated normalized FFO run rate as of January 1, 2014 would be approximately $1.16 per share and that is not an estimate for 2014, but simply an extension of pro forma results and does not make any assumptions about acquisitions over and above our $400 million guidance for 2013.

But we have every reason to expect that in 2014, we will continue to be able to execute on our strategy of buying high-yielding hospital real-estate, creating immediate and meaningful per share incremental value. As usual, these estimates do not include the effects if any of debt refinancing cost, real-estate operating cost, interest rate swaps, write-offs of straight line rent, property sales or other non-recurring or unplanned transactions.

In addition, this estimate will change if market interest rates change, debt is refinanced, additional debt is incurred, assets are sold, other operating expenses vary, income from investments in tenant operations vary from expectations, or existing leases do not perform in accordance with their terms.

So, before we go to questions, let me summarize. We have positioned MPT from our inception over nine years ago to take advantage of high real estate returns from hospital real estate, assets which are truly critical necessary assets to the communities they serve, very similar to other infrastructure assets that a population cannot live without and additionally to earn incremental outsized returns from limited, prudent investments in operations. 2012 was the best demonstration so far of our success in executing that business plan. Here in the early months of 2013, we are working a large and attractive pipeline of acquisition opportunities, we have tremendous access to low cost capital and our management team is uniquely experienced to invest that capital in high-yielding hospital real estate. Every dollar we invest in 2013 under those conditions creates immediate accretion for our shareholders.

With that, I will turn the call back to the operator and we will take any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from the line of Karin Ford of KeyBanc Capital Markets. Please proceed.

Karin Ford - KeyBanc Capital Markets

Hi, good morning.

Edward K. Aldag, Jr.

Good morning, Karin.

Karin Ford - KeyBanc Capital Markets

Just first a couple of questions of clarification on the guidance. So, Steve, based on your comments guidance does assume some level of equity issuance in order to tame that leverage level that you mentioned 43% or 45%?

Steven Hamner

Yes. The guidance does include maintaining that low 40s to 45% leverage.

Karin Ford - KeyBanc Capital Markets

And it also does include an unsecured debt deal as well?

Steven Hamner

Well, it doesn’t necessarily identify any specific source of capital. One would expect given conditions in the market that unsecured debt would be part of that.

Karin Ford - KeyBanc Capital Markets

Okay. Okay, that’s fair. Did you guys close yet on any properties under the First Choice facility so far this year?

Steven Hamner

Not yet.

Karin Ford - KeyBanc Capital Markets

Okay. When do you expect to start to deploy that capital?

Steven Hamner

Imminently.

Karin Ford - KeyBanc Capital Markets

Okay. Final question is I think you had three leases expiring at the end of last year, it looked like two of those pushed into this year. Can you talk about the status on those and what the rent spread was on the one that you did take care of?

Edward K. Aldag, Jr.

Two of Cornerstone leases and we are still negotiating with the tenant. The other was a property that we sold in actually in this quarter and the fourth quarter.

Karin Ford - KeyBanc Capital Markets

Okay. And your expectation is that you’ll resign Cornerstone and do you expect the rent to change at all on that on those two leases?

Edward K. Aldag, Jr.

We would not expect any change in the route assuming an extension of those leases.

Karin Ford - KeyBanc Capital Markets

Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Tayo Okusanya of Jefferies. Please proceed.

Tayo Okusanya - Jefferies

Yes, good morning. Just

Edward K. Aldag, Jr.

Hey, Tayo.

Tayo Okusanya - Jefferies

Morning. Along Karin’s line of question about the guidance, just want to make sure I understand what’s in it and what’s not $400 million of new acquisitions, the construction of the rehab hospitals in Spartanburg, but there’s nothing in there from the First Choice commitment and nothing in there from the Altoona, Wisconsin commitment?

Edward K. Aldag, Jr.

There’s nothing in 2013 coming from First Choice and on Altoona there would be probably nothing.

Tayo Okusanya - Jefferies

Okay, all right. That’s helpful. Okay. I mean could you just talk about the $400 million itself, whether it is more of a focus on general acute care hospitals or stuff that’s of post acute care, it’s kind of up in the air depending on the opportunity you get?

Edward K. Aldag, Jr.

Yeah, Tayo, it’s the same answer that we’ve given the last few quarters about that. With the Ernest transaction that we did, we got a little bit out of whack than what our normal mix is for properties. And so, we expect that going forward as it was after post-Ernest and as we expect in 2013 it will be much more weighted toward the acute care.

Tayo Okusanya - Jefferies

That’s great. And then as roughly a year away from the implementation of universal healthcare, what are you kind of carrying from hospital and kind of what are they doing at this point to prepare for that and how will that potentially benefit MPW going forward?

Edward K. Aldag, Jr.

Well, first, I think it will be a surprise for everybody to know that we we’re going to universal healthcare but understanding your question. Tayo, I think – I think there are number of questions on that. I think everybody is still trying to figure out exactly where everybody is going to end up on the healthcare exchanges in the various states with some participating, some not participating and federal government running most of the warrants in the country. Everybody still trying to figure out exactly what ACOs mean, trying to figure out exactly what bundling mean, but I think the bottom line for everyone is a work through the various nuances of the details of ObamaCare that the answer is going to be that there aren’t going to be any great increases but there aren’t going to be any great decreases and rather than much changes in the reimbursements dollars, it’s more going to be just understanding the new system and where the opportunities are.

Tayo Okusanya - Jefferies

Okay, that’s helpful. And then just on the topic of change in reimbursement dollars, now that we’re a month away from the post-sequestration, I mean what’s your take from conversations you’re having either with Washington pundits or whoever you are talking with in regards to whether you think sequestration happens or whether we end up with something totally different?

Edward K. Aldag, Jr.

We’ll, Tayo, I got out of the business a long time ago trying to figure out what Congress was going to do and that was back in time where they actually spoke to each other. So, I certainly have no idea at a time when they won’t even speak to each other across the aisle. But you’ll recall that we went with this in great detail in the third quarter call and let me just reminder you, rather than trying to figure out exactly where we’ll end up whether it’s with sequestration or whether it’s with one of the other various plans to get the budget under control that have been mentioned out there, rather than trying to figure out what that answer is going to be, you’ll recall that we ran a couple of scenarios that assumed two different scenarios and they’re both draconian.

One was that there was an across the board 5% cut in Medicare and that the other one was that there was a 10% across the board cut in Medicare. And you’ll remember that from those my conversation in the third quarter call if you assume that there’s a 5% overall cut to Medicare and that our tenants make absolutely no adjustments in the way they operate, which is obviously a very conservative and ludicrous analysis but under those circumstances. Our portfolio coverage would go down to about 4.25 times. The acute care hospital coverage will see approximately a 700 basis point drop and the LTACHs about a 50 basis point drop and the IRFs about a 40 basis point drop. If you assume a 10% cut across the board to Medicare, then MPT’s total portfolio coverage will see a drop of just more than a 100 basis points. LTACHs would see the biggest decline – would see a decline of about a 100 basis points and the IRFs will see a coverage I mean see a decline of about 80 basis points.

So, in both of those situations we still have good coverage and MPT’s rent wouldn’t be affected at all and obviously I think everybody would agree that those types of cuts are very draconian. But that’s about the best way we can analyze it rather than trying to figure out what congresses is going to do. But I think as you think about this and you go through your analysis of what may be and what might not be, you got to keep in mind that you just can’t paint a picture in this country where we’re not going to continue to have hospitals. And hospitals, particularly acute care hospitals are going to remain at the top of the pyramid structure if you will for the delivery system in this country. So, we feel very good about where we’re positioned for all of the continued budget discussions.

Tayo Okusanya - Jefferies

No, that’s very helpful. Then just one more for the road, there was a press release that came out last night about Prime disclosing a couple of federal investigations. I know it’s hard off to practice but is there anything about those investigations you can tell us?

Edward K. Aldag, Jr.

Yeah, and Tayo it was not a press release, it was another article written by California Watch, which as an arm of the SEIU. And if you read the article closely you’ll see that it’s the exact same allegations that were brought up approximately three years ago. Now, if you remember all the discussions that we’ve had about that, those allegations have been investigated by the State of California HFAP and JCAHO and others, and all of those instances they were cleared. And I think that we and Prime, and obviously we saw the same article you did, but we and prime, I haven’t spoken to Prime, but I can imagine they feel the same way as we do. We actually welcome the Justice Department investigation if in fact there is one, because this is not unlike our court systems where you have the process, where you start with the lower courts and make it all the way up to Supreme Court. Obviously, if there is indeed the same investigation, it will be the final say-so and hopefully finally put all of this to bid.

Tayo Okusanya - Jefferies

Okay, that’s helpful. I mean, it just seems like the press release is saying that Prime actually did disclose this in the process of trying to buy a new hospital?

Edward K. Aldag, Jr.

Yeah. It was an article written by the SEIU, not running by California Watch, not a press release, but what they quoted was that Prime stated it and a filing that they made I believe in Rhode Island where they were trying to acquire an additional property that those same allegations were being investigated by the Justice Department. Now, there is one new additional apparent investigation, it’s kind of a damned if you do, damned if you don’t. You recall that early on three somewhat years ago that the California Watch had a patient and I believe maybe in the Redding, California facility that actually used that patient’s name and used the diagnosis in that patient’s medical records to make these allegations against Prime. Well, that apparently is okay, but when Prime used those same medical records and patient information to refute those allegations, they got charged with violating the HIPAA rules.

Tayo Okusanya - Jefferies

Okay, that’s helpful. Thank you so much.

Edward K. Aldag, Jr.

Okay, Tayo.

Operator

Thank you. The next question comes from the line of Michael Carroll of RBC Capital Markets. Please proceed.

Michael Carroll - RBC Capital Markets

Yeah, sorry about that. And what drove your strong pace of acquisitions in 2012 and why do you expect they will fall back down to $400 million in 2013?

Edward K. Aldag, Jr.

Well, that’s a good question, Mike. 2012 was obviously a fantastic year. The $400 million guidance for 2013 is not an indication that the volume is any less. It’s that all of these processes we have learned over the last 10 years just take a very long time. So, a lot of the things that we are working on in 2012 we began working on in 2011. So, it’s just a matter of all of it falling in place. So, it is possible that we could greatly exceed that $400 million, but that’s a conservative attempt based on where we see the time being able to spend, the timeline that it takes to get these things over the finish line.

Michael Carroll - RBC Capital Markets

Okay. And then do you have the sites picked out for the First Choice development projects yet?

Edward K. Aldag, Jr.

Yeah, I remember that First Choice is actually doing the site development. The way the process will work is that they will pick the sites, bring them to us, we will review them or and approve them or not. And so yes, there are a large number of sites that they have already picked out and we expect to start getting those sent to us very soon.

Michael Carroll - RBC Capital Markets

Okay. And then my last question is related to the documentation and coding adjustments that could occur for the 2014 update for the Medicare rate for hospitals. I believe that’s what they indicate they are going to cut it by 60, 80 basis points to stop overpayments. And then they are going to try to recover about $11 billion of overpayments over the next four years. And I know how you already talked about that how that will hit your coverage ratios, but will that affect your RIDEA investments at all?

Edward K. Aldag, Jr.

Well, it obviously is possible that any of those – now any of those items could affect the RIDEA investments, but remember that it’s an extremely small part of our overall portfolio. The whole investment is 5% of our portfolio, the return substantially less than that. And that a 40% return that we are currently getting that’s substantially higher than what we all thought we would be getting when we originally did these investments.

Michael Carroll - RBC Capital Markets

Okay. So, let’s say if the rates were cut by 5%, do you know how much that would cut the RIDEA rates by?

Edward K. Aldag, Jr.

I don’t have that information right now, Mike.

Michael Carroll - RBC Capital Markets

Okay, great. Thank you.

Operator

Thank you. The next question comes from the line of Mike Mueller of JPMorgan. Please proceed.

Mike Mueller - JPMorgan

Hi, good morning. A few questions.

Edward K. Aldag, Jr.

Good morning Mike.

Mike Mueller - JPMorgan

Hey, I guess going back to Tayo’s question about coverages, I mean, obviously the portfolio not every property have is that of 5 times coverage. Some are significantly higher skewing that. If you are looking at the bottom tier of the portfolio where the coverages are at the lowest, under those scenarios, I mean, would they still fair pretty well in terms of?

Steven Hamner

They really would Mike. That’s what I was trying to show in the analysis that I gave. We don’t give it for each individual property, but showing you how the operators had done in my previous prepared remarks. But of all of our coverage ratios, I believe we have two properties and that’s a little bit of a mis-numbered. Obviously Monroe is the lowest performing property, but there are a couple of other properties that are – if you look at it from a standalone basis one of them doesn’t generate full coverage but the operator generates them as two. And with the two of them combined they’re more than adequate coverage. So, there really isn’t the gap that your question implies.

Mike Mueller - JPMorgan

Okay. If we are looking at the supplemental on page eight where you’re talking about the $800 million of investment activity for the year, I know it’s committed and some of it’s investment. How much of that, obviously the First Choice 100 of the commitment, but how much of the other was that were versus commitment. And when you’re thinking of guidance, it’s safe to assume that $400 million is actual investments, not commitments, correct?

Edward K. Aldag, Jr.

Correct.

Steven Hamner

Yes, that’s correct. And Mike, looking at the $800 million obviously you have the OakLeaf which is a development project, you have the Ernest Spartanburg project which is a development project, but that one is well through the process. You’ve got Ernest Lafayette which is essentially complete and then you’ve got the post-acute which is another development project in Victoria and that one as well is well underway.

Mike Mueller - JPMorgan

Okay. Okay, great. And just I guess from income statement presentation standpoint, the equity and earnings line isn’t there this quarter and understanding maybe in a couple of other lines. So, I was just wondering if you can give us a little more color on kind of what drove that and geographically where it’s showing up?

Edward K. Aldag, Jr.

Sure, Mike. Because of the way we structure our investment in these operating companies, to give us a high degree of security and a preferred return, our instruments are sometimes notes and then sometimes equity interest, all of which we consider earnings from Opco. So, we record a portion for GAAP, we record a portion of that return as interest and a portion as equity in earnings. And that presentation in the condensed financial statements that accompany our press release becomes difficult to follow, particularly when investors are trying to determine what our investment returns are. So, we have combined those lines for interest and other earnings in the press release, but we clearly summarized the RIDEA type returns on a dollar basis in the supplemental and in fact it’s on that same page you just referred to in the supplemental.

Mike Mueller - JPMorgan

Okay.

Steven Hamner

And in our SEC financial statements whether it would be 10-Q or the upcoming 10-K that allows us a little bit more flexibility and room for clear disclosures and reconciliations, so you will see that when we file the SEC statements, which normally you would see at this time. Obviously there is no 10-Q with the fourth quarter.

Mike Mueller - JPMorgan

Got it, okay. And just two other quick ones, Steve when you were talking about before the $400 million of investments, you said I think nothing before July 1. That was just for a guidance that was just a comment about guidance, right?

Steven Hamner

That’s exactly right and I think everyone on this call understands the lumpiness of the acquisition process and it’s certainly not inconceivable that we don’t, that we closed something before July 1.

Mike Mueller - JPMorgan

Okay, is anything imminent that it is likely you could close in Q1 or do you think we’re really looking to Q2 at this point?

Steven Hamner

Yeah, I don’t think anything closes in the next six weeks left in Q1.

Mike Mueller - JPMorgan

Okay. And last question here on I guess Twelve Oaks now. Any – nothing is in guidance for the lease up of that, correct? And when do you think it’s feasible to assume something comes back on line?

Edward K. Aldag, Jr.

Yeah, that’s correct except for the 55% that is already leased in and is already operating. You remember that we made the conscious decision not to lease up the other 45% because we believe and I think we are right after seeing the finished product, they will get much better rental rates with having the leads entered in and having the project completed. Now that that’s done, our people have begun in Ernest to lease up the remaining floors. We just – at this time don’t have guidance on when that, but those numbers that 45% are not included in the guidance.

Mike Mueller - JPMorgan

Okay. Okay, great, thanks.

Operator

Thank you. Your next question comes from the line of Phil DeFelice from Wells Fargo. Please go ahead.

Phil DeFelice - Wells Fargo

Good morning. It’s Phil DeFelice for Todd Stender.

Edward K. Aldag, Jr.

Good morning, Phil.

Phil DeFelice - Wells Fargo

Quick question on your two asset sales in the quarter, would you mind disclosing your exit cap rates?

Steven Hamner

Yeah, I think, Phil, just to be absolutely accurate – you probably can go back to the third quarter disclosures and we gave those numbers in some detail and I frankly don’t have in front of me, point being the exit cap rate was significantly below what we were earning and that’s the point we tried to make in the third quarter and then again in this quarter is – and by the way those were not our best properties by any means and so, we weren’t cherry-picking the very best properties to sell. Their moderate average properties that we generated substantial gain over and above not only our book value, but what we paid for them seven years ago and that’s what resulted in the 15% IRR and again feel free to call me or Charles after this call and we’ll walk you through the third quarter disclosures.

Phil DeFelice - Wells Fargo

Great, thanks, that’s helpful. Do you happen to know off and what percentage of your current mortgage loan balance about $370 million is pre-payable?

Steven Hamner

None of it.

Phil DeFelice - Wells Fargo

None of it, okay, and what’s the current average duration on that investment book?

Steven Hamner

Well, again we can give you an accurate answer later but probably eight or nine years, I would say would probably be the weighted average remaining term.

Phil DeFelice - Wells Fargo

Great, that’s all I had. Thanks a lot. Appreciate it.

Edward K. Aldag, Jr.

Thanks, Phil.

Operator

Thank you. The next question comes from line of Daniel Bernstein of Stifel. Please go ahead.

Daniel Bernstein - Stifel

Hi, good morning.

Edward K. Aldag, Jr.

Good morning, Dan.

Daniel Bernstein - Stifel

Hi. So, on the acquisition pipeline, are you looking at new operators and geographies as well?

Edward K. Aldag, Jr.

Yes, absolutely.

Daniel Bernstein - Stifel

You think you will have your operators come out of that?

Edward K. Aldag, Jr.

Yes.

Daniel Bernstein - Stifel

Twelve Oaks, what is the gross value of that property, just trying to think off my head if you lease up the other 45%, I don’t know, we said 10% yield, what kind of addition to your FFO run rate I can get to, some – what is the gross value of those assets?

Edward K. Aldag, Jr.

Yeah, we’re including all of the additions that we made to that property. It’s about $55 million.

Daniel Bernstein - Stifel

Okay, thank you. And then when I look at Prime Healthcare and I want to beat a dead horse here. They have been in a number of these allegations in the past, but they do seem to be targeted SEIU whoever. Do you see that just the target of Prime as a risk to that tenant, I know that’s good lease coverage, but are you thinking about the risk to Prime itself given that these allegations keep popping up?

Edward K. Aldag, Jr.

Well, Dan, the exact same allegations, they’re not as if they are keeping new allegations, they are the same allegations. All I can tell you is that every federal agency and federal component and state component that have looked at it to-date have all cleared Prime of these allegations. When you go back to the, okay, why this keep coming up, I think it’s very clear that it’s a fight between the SEIU union with Prime. Prime is not the only hospital entity that has a fight with the SEIU in particular in California. There are number of other REITs, some hospitals – some nursing home operators that have had similar type fights with the SEIU. Prime actually very recently entered into a very complementary large agreement with the other union, always get the names confused, but we all know that the SEIU wears the purple shirts and this other union wears red shirts.

Daniel Bernstein - Stifel

Not affiliated with the Baltimore Ravens.

Edward K. Aldag, Jr.

But so it’s not just a fight with the union, it’s particularly just a fight with the SEIU. Other than that – other than just looking at it historically now what’s happened, Dan, I don’t think, what else I can say.

Daniel Bernstein - Stifel

Is the healthcare workers at Prime unionized?

Edward K. Aldag, Jr.

Yes, they are, they are the – I wish I could just answer, is it the NHW or something like that, national healthcare workers union or something like that.

Daniel Bernstein - Stifel

Okay.

Edward K. Aldag, Jr.

See in that.

Daniel Bernstein - Stifel

Okay, I was just trying to understand the motive behind what’s going on there, then in guidance again kind of rehashing it a little bit, but if we took out the $400 million in acquisitions and any additional capital that you might assumed in there. Has the guidance really change from the $108 million last quarter, I mean, is there anything that – that really change otherwise?

Edward K. Aldag, Jr.

No, I think I’m following your question and the answer would be no, I mean you stop right now we will be looking to that $108 million roughly.

Daniel Bernstein - Stifel

Okay. I just wanted to make sure that.

Edward K. Aldag, Jr.

Yeah.

Daniel Bernstein - Stifel

There is nothing else that had changed in there. I think that’s all for me. I appreciate you taking my time.

Edward K. Aldag, Jr.

Thanks, Dan.

Operator

Thank you. We now have no more questions at this time. I’d like to turn the call back over to Ed Aldag. Please go ahead.

Edward K. Aldag, Jr. - Chairman, President and Chief Executive Officer

Thank you, Clinton. And again, we thank all of you for listening and we greatly appreciate your insightful questions and if you have any additional questions don't hesitate to call on Charles, Steve or myself. Thank you very much.

Operator

Thank you for joining today’s conference. This concludes your presentation. You may now disconnect and have a good day.

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