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Executives

Gerald Scott – President and Founder, The Wall Street Analyst Forum

Steven Hamner – EVP and CFO

Medical Properties Trust, Inc. (MPW) Wall Street Analyst Forum's 20th Annual Institutional Investor Conference Transcript March 25, 2009 10:30 AM ET

Gerald Scott

Good morning, ladies and gentlemen. Good morning and our ongoing attempt to adhere to the cover schedule for the benefit of the physical attendees and also for the benefit of the webcast attendees. It wasn't that many years ago that in a conference in New York City, we would have – I remember we would always kind of eyeball and see how many we had from Fox and from Fidelity or mass financial services. We used to see an average of two to three from Fidelity and those same people that used to come down in the 6:30 shuttle US Air from Boston and be on the 4:30 shuttle back to Boston. They would get to their office and work for another two hours. Now we are cherry-picking the webcast meetings instead. Although it is interesting to note that even though there is a registration process for the attendees of webcast meetings, it is the policy, as some of you may know, for a lot of the institutional investors do not use their FMR, they are filling as a researcher, whatever your URL is, but to use a Google or a Yahoo e-mail address so that the companies never really know who is attending their webcast. They try to maintain that sort of independence from people knowing who is actually attending the webcast.

So in any case, for the benefit of the Fidelity attendees who are using their Google e-mails, I'll introduce the next company in the program, Medical Properties Trust. Medical Properties Trust bridges the gap between the growing demand for high-quality healthcare and the ability to deliver it cost-effectively, specializing in acute care, community in REIT and rehabilitation hospitals. This healthcare real estate investment trust provides operators access to capital for facility improvements, technology upgrades, staff additions, and new construction crew, long-term net leases or real estate assets by reinvesting non-earning assets into operations. MPT clients are able to participate in the growth of the largest sector of the US economy.

Without any further introduction, I would like to introduce Steven Hamner, Executive Vice President and Chief Financial Officer; and he is accompanied by Charles Lambert, Director of Finance.

Steven Hamner

Well, thank you very much. Thank you for having me here. We welcome the webcast audience as well. I am Steve Hamner, I am the Chief Financial Officer of Medical Properties Trust. With me in the back of the room is Charles Lambert. We are both available to answer any questions and by the way, we have a prepared presentation of course to go through here in the next few minutes. I would be happy to interrupt at any time you want to with questions; we don't have to necessarily comport to the format of letting me finish my remarks and then going into questions. So feel free to raise your hand if I make some comment that you would like me to address in further detail right away.

My presentation is going to – if you go through it very briefly, three in general areas. One, why are we in the hospital business and in the hospital real estate business? Because that is what we do. We are here at a healthcare conference, but we don't, my company, MPT, does not provide healthcare. We provide financing to healthcare companies, in particular hospitals, acute care hospitals, long-term acute care hospitals and rehabilitation hospitals. We provide financing by virtue of sale lease-back transactions that allows a hospital operator to access significant amounts of low-cost capital that that operator may now have locked up in his hospital buildings itself.

A very effective profitable hospital operator in today's market even earns operating margins in the high teens all the way up into the high 20s. We charge most real estate investors demand returns much lower than that and that is obviously because real estate is a much lower volatility, much lower risk investment to make. So a real estate investor demands a lower return than a typical investor in a hospital business. So we take account of that differentiation and monetize or liquefy the real estate value that hospital operators have and turn that into cash that can be invested by the operator into much higher-yielding healthcare operations. Secondly, we will go through the current MPT – Medical Properties Trust profile – who we are, what we own, and what our plans are. And then finally, we will look at our financials and liquidity momentarily. With that of course, you are all professional investors and you understand the Safe Harbor, so let us jump right into who we are.

We are a healthcare real estate investment trust. In today's market, in the US market, there are about a dozen healthcare real estate investment trusts. We are the only one of those that focuses solely on licensed hospitals and we will take a look at a slide in a minute – that shows truly who we are versus our healthcare REIT peers. Today, we own 49 facilities, 49 (inaudible) hospitals. 24 of those are acute care hospitals, 13 long-term acute care hospitals, six rehab hospitals – these are inpatient medical rehabilitation, not chemical dependency rehabilitation hospitals, and then we have six wellness centers, which we acquired in a significant portfolio transaction, where we are not at all focused on wellness centers.

Here is the slide I just mentioned. This shows MPT’s portfolio and you can see we are 100% invested in licensed hospitals. We like to say that to get into our buildings you got to have a doctor's order. Most of the other healthcare REITs, in fact all of them, have a much different profile in that they are heavily invested in medical office buildings, skilled nursing facilities and long-term care centers and assisted living and retirement centers. And they do a much better job of investing in those facilities than we think we would, which is the main reason why when we put our company together five years ago, we elected to focus on licensed hospitals. That and the fact that our management team, with the exception truly of me the CFO, came up through healthcare, developing hospitals, owning hospitals, operating hospitals, providing strategic planning for hospitals. So that is our expertise. And it is truly a requirement we believe and it is what has made us so very successful in our short life of five years is the experience that we have be able in fact is necessary to operate a hospital. That is important because we have to underwrite when we make a decision about investing in a hospital. We are not just deciding on whether that is a good piece of real estate, although we do that. The more important piece to understand is – is that a good place or a hospital to be and can a hospital operate profitably in that particular location and that is what our expertise brings and that in fact is what we believe truly sets us apart and why in fact again we chose to focus on hospitals.

In addition, as in all healthcare, the demographics are tremendous for hospitals. The population today clearly is aging, that is not a secret to anybody. Everybody in this room is older today than we were yesterday and the average of the population is aging very rapidly. If you look at what we have referred to in the past as (inaudible) is kind of making its way through the belly of the snake. The baby boomers are now like me in their 50s and even some older into their 60s. They are already in retirement. And a 65-year-old citizen uses eight times more healthcare than does my 18-year-old son, for example. So that bodes very well for continued growth in the healthcare business, continued use of our facilities, continued need for new facilities and just as important as the new facilities again is the new technology, the new programs, the new services that medicine today is providing. There needs to be a place for those services and surgeries and medicine to be practiced. And we provide that place. So we're very happy, even in today's economy with the long-term outlook for providing healthcare in licensed hospitals.

We mentioned already this last bullet point here our business model is to provide significant amounts of relatively cheap capital to hospital operating companies by virtue of liquefying their very significant investments in real estate. This shows that investment in real estate. We believe that there is a total market, roughly of $260+ billion in owner-occupied real estate. And we could go through this, I won't go through much detail but other types of real estate, publicly-traded real estate investment trusts own up to 10% to 15% of all other types of real estate, office buildings, shopping centers, apartment complexes. The amount that publicly traded real estate investment trusts own of hospital real estate is miniscule and so what this chart is actually supposed to show is that if just achieve what all the other real estate components achieve by virtue of ownership as a security to a REIT, then the market is huge and the market truly is much bigger than Medical Properties Trust can address on its own. And although we are not aware of any competition, direct competition, we actually would welcome competition, because the market is so big and there is an educational process that needs to be gone through with the operators. But this shows the huge market and availability of continuing our business model.

Now, one might ask what the headlines that – yes, ma’am.

Question-and-Answer Session

Unidentified Participant

(inaudible).

Steven Hamner

The question for those on the webcast is, as the municipal bond and other tax-exempt bond markets has truly froze for healthcare operators, particularly the not-for-profits, have we seen and have we been approached by some of these not-for-profit systems that prior to this freeze up would not have come to us? And the answer is, absolutely yes. And I believe, I hope that you can look for an announcement from us in the not-too-distant future that will validate that.

What this chart shows, and again, we won't go through it in detail I promise. But the comment I was about to make was with headlines today and the question that just came identifies that there is a lot of turmoil in the healthcare and the hospital market that gets reflected in big black headlines every day. Medicare is being cut, hospitals are unable to fund their expansion plans as we just had a question about that. Hospitals are losing money. The uninsured is overwhelming hospitals. All of that is true to a certain extent, but not with respect to the hospitals that we elect to do business with.

And again, if you look at this top part of the slide, look at the 50th percentile, what that says is for each of the last five years for which we have records, half of all the hospitals were profitable. And at the 75th percentile, they were significantly profitable, with profit margins – these are not operating margins but profit margins, exceeding 7%. Point being that hospitals, well-run hospitals today, in the past, and we believe in the future will continue to be good businesses. They have good business models, they are able to generate as I mentioned earlier, operating margins in the high teens and all of our hospitals and all of the types of hospitals that we do business with are those in that upper range. What is in the lower part of this chart are the hospitals that you do read about. The ones that are run by the county or that are run by the musicality or that are run by a religious or other not-for-profit order, whose mission is actually almost to lose money by the giving services to those who can't otherwise afford it. You don't have to do business with those and we don't. Over half the hospitals don't operate that way and those are the hospitals that we choose to do business with and there is another question.

Unidentified Participant

You sound very, very positive (inaudible). Can you address your (inaudible)?

Steven Hamner

Yes ma'am. The question again is – as in all businesses, we have our own issues, which you all saw a few minutes ago. We own almost 50 hospitals. Today, we have two of those 50, which are non-accruing for us and if I could come back to that in just a few minutes I will do that and explain where we are with respect to those two particular hospitals; one is in Houston and one is in Philadelphia.

Unidentified Participant

(inaudible) debt that they have and the debt that they have to repay?

Steven Hamner

The question is, is this taking into account –

Unidentified Participant

This is operating margins?

Steven Hamner

These are profit margins on this slide. These are profit margins.

Unidentified Participant

This is operating?

Steven Hamner

No, no. These are net income margins on this slide.

Unidentified Participant

(inaudible) whether they can pay their debt back?

Steven Hamner

Well, if they can – if they are making money, then I'm not sure what you mean if they can pay their debt back.

Unidentified Participant

They may be making $5 million a year and have up to $200 million coming due.

Steven Hamner

Well that is a liquidity issue, like every business in this country has today. Your question again, I am sorry for the web audiences is what about the hospitals liquidity? So they are making money, but if they get a loan coming due in 2009, when there is no way to refinance that loan, what does good profits do for you? That is a question that every company in the country, including ours is asking and developing strategies for right now. Because we are in a liquidity situation that again, in my roughly 30 years in business, I have never seen. And so it is an issue, absolutely. But it is no different than all the other companies’ debt issues that we face.

Let me just go through real quickly, because I am getting off my time. In prior recessions, and we have gone back – I don't know if we have a slide, I guess we don't. But in prior recessions, hospital utilization has continued to rise even during recession. We try to get back to the 1972, 1974 area recession. Last year, 2008, the hospital sector was the only private sector in the US to experience continued job growth. And if we have questions about reimbursement, we will take those but I will not take any more time on it.

Our portfolio and our opportunities, just very briefly, if you look at our current tenant diversification, we have two significant tenants. One is Vibra. Vibra Healthcare is a post acute hospital operator that is inpatient rehabilitation, long-term acute care hospitals. Vibra at one time represented 100% of our portfolio. When we first capitalized the company, we did a $170 million transaction with Vibra and for a while, they were our only tenant. We have worked them down to where they are 15% roughly. Prime Healthcare, which is the ninth largest proprietary hospital operator in the country, is our largest. Prime is focused on Southern California and has recently begun expanding into Northern California, represents 33% of our portfolio. Our goal, our overall informal policy internally is not to have a relationship that represents more than 30% of our overall. Prime, although it represents 33%, that is a dozen hospitals. So we don’t have any single hospital frankly that represents as you can see on this next slide, even as much as 6% of our total portfolio and that is very important to us. This is more important to us than the overall relationship concentration and that is because underwrite every single hospital. We don't underwrite Prime, for example, as a corporate tenant or as a corporate guarantor, although we have that kind of collateral, we underwrite to each hospital on a standalone basis.

Of our portfolio, 67% of our revenue is actually available to be analyzed by analysts, investors and others by virtue of the fact that it comes from either Prime and we file Prime’s financial statements along with ours, because they are a material tenant to us, or other publicly-traded or publicly-reporting companies such as Community Health, HMA, HealthSouth and (inaudible), all of course have their own publicly-reported financial statements. So the credit quality, the operating quality of our tenants is very transparent, very visible into our portfolio.

Let us go back and talk about real briefly the recessionary pressures that are facing the entire country and clearly healthcare, although as usual, healthcare being a little bit more resistant. If you look at 2007 versus 2008 – now this is just our portfolio, same-store portfolio. On all important operating metrics, our tenants improved, that include patient days, outpatient visits, net revenue, and very importantly, bad debt. We saw between 2007 and 2008 actually a 4.4% decrease in bad debt charges at our tenants.

As we continue in economic pressure and recessionary times, it is important to understand what effect that might have on us, Medical Properties Trust and this is the best metric to measure that. Again, if you look at our acute care hospitals, which represents 74% of our total investment, our tenants generate cash earnings, EBITDAR – earnings before everything plus rent, of almost 5 times. That means that there is a big cushion that our tenants can absorb from recessionary pressures, bad debt, uninsured or other, that might increase during recessionary times, before it gets anywhere close to a point where they are unable to pay our rent. (inaudible) hospitals and inpatient rehabilitation hospitals are also very strongly covered, at almost 2 times and more than three times respectively, but that is not nearly as volatile, because (inaudible) and rehab hospitals could generally approximately 80% of their revenue from Medicare. That is because most of those patients are Medicare patients; they are elderly, they are stroke patients, they are multiple fracture patients if there is a fall and that type of thing. So when we underwrite, we typically require a higher coverage level on the acute care hospitals; and that is because of the low volatility and the assurance of Medicare payment.

Let us go through real briefly our current financial liquidity situation and I want to get back to the question about our Houston and Philadelphia properties. And I promise I'm not going to walk you through this, but we are proud of this. We put the company together really five years ago. We capitalized it in the spring of 2004, at which time we didn’t have a property, we didn't have a contract to acquire property, when my partner Ed Aldag, who is our CEO and I went out on the road to raise money and a 144A offering, we realized before we hit the road, we didn't even have a checking account for the company. And from that time till today, you can see that we have over $1.3 billion in assets. Our revenue in 2008 had grown to almost $120 million. We mentioned earlier we have got 49 separate hospital properties and you can see our funds from operations, which for you non-REIT people is the net income measure, it is basically net income plus depreciation of our real estate has grown dramatically and consistently since 2004 when the capitalized the company.

As of now, going into 2009, we have reset our dividend, we have recently raised additional equity to beef up our balance sheet that came in January of this year and as we go into 2009, as we continue into 2009, we are projecting at our current portfolio, if we make no additions or dispositions, a roughly 90% adjusted funds from operations, that is at cash number or close to cash number, $0.90. Our dividend is now set at $0.80 and that is a payout of dividend covered by the profitability of less than 90%. So we are highly confident that we got a very strong, well- covered dividend and at the same time, given where the market has driven our stock price, that generates a very generous yield and is consistent with our peers.

Unidentified Participant

(inaudible).

Steven Hamner

Yes, that is a very good question and one frankly I could get on the soapbox about. The question is we are not going to let the analysts bully us into changing the amount or the character of the dividend and it is our view, we went through some very intense discussions amongst management and with the Board when the adjusted the dividend back in November or December. We set it where we believe it is appropriate. Even after that, we did another equity offering, which added more shares on which we paid the dividend. We are very comfortable with the $0.80 dividend, the $0.20 quarterly dividend paid in cash and nobody would be wise to stand up and pound the table and say, no we are never going to do anything different. But at this point, we believe there is – as a REIT industry, we frankly believe, some of us anyway that payment of dividend in cash is important.

Unidentified Participant

(inaudible) pay that dividend not in cash at times, they will destroy the REIT industry (inaudible).

Steven Hamner

Yes the comment from the floor was if REIT as an industry continued to migrate toward paying dividends in stock and not in cash, then the REIT industry is at risk of not being respected as master class any longer and I think that is a valid comment.

All right, the liquidity and then we'll go into questions. We had made some very difficult, very intense decisions about our liquidity position, including adjusting the dividend; including raising more equity in January of this year, and that puts us in a very enviable position. We have no near term material maturities; in fact, we really have no maturity to speak of until November of 2010, when we have a $30 million term loan that comes due. Our revolver comes due at that time also, but we can’t, at our own option, extend that for another year.

We really don't have any material maturities until November of 2011. And so we could ask a question all the time, but what are you going to do then, two and a half or three years from now and I will tell you frankly we don't know, because a lot is going to happen between now and November 2011. But we have a significant amount of unencumbered properties or properties that we can and will unencumber by paying this $30 million note that is due in November 2010. We have over $340 million of collateral value that that will free up. We have assets that are saleable even today, if we so choose to sell and we are exploring that, that would generate significant amounts of liquidity. And there are other alternatives available to us that are not far enough down the road to discuss, but as we sit here today, with the ability of our properties to generate significant cash flow, with the headroom that we have under all of our debt covenants and the amount of unencumbered assets that are available to us, we are highly confident and when it comes to 2011, if we haven't already addressed some or all of these issues, then we will have alternatives to address.

This is just a summary slide. With that, let me just take a moment to address the question that came up earlier, we have two properties, one in Houston and one in Philadelphia that we are not accruing income on. In fact, they are both not operating now. The property in Houston was part of a three [ph] campus transaction that we did in August of 2007. We discovered less than a year later, actually we didn't discover, the Board of the operator discovered fraud and that led to a bankruptcy at the Houston facility. We also, as part of that transaction, had acquired and leased back a very successful hospital in Redding, California, which served as collateral for our Houston facility.

So as we sit here today we have two campuses in Houston that are dark, that we are marketing for sale and we are very encouraged by the reaction by that we have gotten, given our roughly $33 million investment in those Houston properties, given the $20 million that we believed that we captured excess collateral out of the Redding, California property, because remember those were crossed and the non-binding offers that we have on both of those Houston campuses, we are highly confident that those will be resolved with no further and in fact there will be no impairment, no loss at all to us, in a very painful situation but again, based on our underwriting, based on our crossing those two properties, understanding what is happening in both of those buildings and what the real value was, both in Redding and in Houston, we are confident that we underwrote correctly and that we won’t have any impairment or any loss on that transaction. There is a small hospital in Buck’s County, Pennsylvania, which is a suburb of Philadelphia, that closed earlier this year that again we are marketing that we expect to resolve this year. We are not predicting when, but we do expect that to be resolved this year and again we expect that it will not involve impairment or long-term loss to MPT.

With that, I think my time is about up. I will take maybe one question from the floor.

Unidentified Participant

(inaudible).

Steven Hamner

Yes, it is a great question and that is we have grown assets at a dramatic rate since our inception, what is the environment, what are the opportunities now for continued growth and they are phenomenal. They are better than they have ever been. We could be doing very good deals right now, we continue to evaluate deals. We also continue to acknowledge and recognize and frankly be careful of the conditions that we are in now, given credit and liquidity and global economic conditions. We have, as we sit here today, $75 million of immediately-available liquidity. And it is our intention, at least for the foreseeable future, to retain that liquidity rather than to make new investments, until we see the bottoming of wherever we are. (inaudible) some beginning to bottom some freeing up of affordable credit, there is credit available in some places, but it needs to be so more affordable. So we will likely not be making new investments.

Unidentified Participant

(inaudible).

Steven Hamner

We have liquidity that we are going to keep, notwithstanding the very good opportunities that we see. We intend to move very quickly though, because there are good opportunities and they are created obviously by the liquidity problems and not the (inaudible). So as those liquidity problems ease, we will be prepared to move very quickly and restart the very dramatic growth that you mentioned.

Gerald Scott

Any other questions?

Steven Hamner

Well, thank you very much, I appreciate your time. Please talk to me or Charles in the back, we will be happy to answer any questions. Thank you.

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