Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Medical Properties Trust, Inc. (NYSE:MPW)

Q1 2009 Earnings Call

May 7, 2009 11:00 am ET

Executives

Charles Lambert – Finance Director

Mike Stewart – Executive Vice President, General Counsel

Ed Aldag - Chairman, President and Chief Executive Officer

Steve Hamner – Executive Vice President and Chief Financial Officer

Analysts

Jerry Doctrow - Stifel Nicolaus

Steve Swett - KBW

Mike Lewis - J.P. Morgan

[Austin Washerman] – Keybanc Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2009 Medical Properties Trust Incorporated Earnings Conference Call. My name is Francine, and I will be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today’s call, Mr. Charles Lambert.

Charles Lambert

Welcome to the Medical Properties Trust conference call to discuss our first quarter 2009 financial results. With us today from senior management are Edward K. Aldag Jr., Chairman, President and Chief Executive Officer, and Steven Hamner, Executive Vice President and Chief Financial Officer.

A press release was distributed this morning May 7th and was furnished on Form 8-K with the SEC. If you did not receive a copy, it is available on our website at www.medicalpropertiestrust.com in the Investor Relations section. Additionally, we are hosting a live webcast of today's call which you can access in that same section.

During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and 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 these factors that could cause the company's actual results or future events to differ materially from those expressed in this call. The information we provided today is of this date only, and except as required by the 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'll 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 measure in accordance with Regulation G requirements. You can also refer to our website at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliation.

I'd like to turn the call over now to our Chief Executive Officer, Ed Aldag.

Ed Aldag

Good morning everyone and thank you for your interest in Medical Properties Trust. Before I turn the call over to Steve Hamner, Chief Financial Officer, I would like to walk through some highlights of our first quarter operating performance. Our first quarter performance was solid on all fronts including a year over year revenue increase of approximately 39% and FFO and AFFO increases of 14.3% and 11.4% respectively. Our AFFO was on the high end of our forecasted range at $.0.23 per share.

Before going further, I’d like to address the issue of liquidity which is on everyone’s mind right now for the entire REIT sector. In the early part of January, we made the decision to raise equity during the very short window of opportunity that existed then. We’re one of the very first REITs to begin the so-called recapitalization process. Our offering was very well received and provided us a very good cushion of liquidity, generating net proceeds of $67 million.

Moving forward, we’ll continue to explore measures to preserve capital and to further strengthen our financial position in order to address our 2011 and beyond debt maturities and position the company for future growth opportunities. These measures may include pertinent asset sales as well as secured and unsecured financing alternatives among other options. We are monitoring market conditions daily and are taking all of this into account as we continue to have discussions with our lenders and weigh our options carefully.

Having said that, we’ve already made significant progress and are well positioned to continue to weather the current macroeconomic conditions. Given our discussions and what we’ve already accomplished, we believe we’re in a very good situation with respect to these options that I’ve mentioned.

Turning to our portfolio, as you know our primary focus is on acute care, rehabilitation, and long-term acute care hospitals, and as we predicted more than 4 years ago and have continued to report on quarter to quarter, contrary to some observers’ predictions of a decline due to the worldwide economic recession, our hospital portfolio has continued to perform well in this current economy. In addition, as we now know, many of the country’s largest hospital operators have also surprised analysts by reporting better than predicted operating results—all of this during one of the worst economic climates that this country has seen in years, plus a very light flu season compared with 2008.

Specific to our portfolio, our acute care hospital sector remains strong and essentially unchanged with EBITDAR coverage in the first quarter of 2009 of 5.36 times compared with 5.37 times for the first quarter of 2008. Again, this was despite the fact that we have thus far experienced a very light flu season in 2009 compared with 2008. However, we saw a significant sequential increase in the first quarter 2009 compared with the fourth quarter of 2008, rising from 4.3 times to 5.36 times.

Our LTAC saw a significant improvement from first quarter 2008 to first quarter 2009, going from 1.61 to 2.42 times. This was also true sequentially going from 2.11 in the fourth quarter of 2008 to 2.42 times in the first quarter of 2009. In our rehab hospital sector, we have 6 rehab hospitals. Five of these six are not required to report their quarterly results to us until after our earnings call. The one that we have current information on was flat from the fourth quarter 2008 to first quarter 2009. However, to provide some additional insight, in comparing the third quarter 2008 to the fourth quarter 2008 for the other five rehab hospitals, the EBITDAR coverage went up significantly from 2 times to 3.4 times.

Regarding the overall hospital environment, as some of you now know, CMS issued a press release this past Friday in which they announced proposals for payment rate changes for inpatient stays in acute care and long term acute care hospitals for 2010. The proposals were less than they have been in recent years, reflecting the decline in inflation. In the same press release, CMS issued for comments potential decreases to payments in 2011 and 2012 that may come about to address changes in hospitals’ coding practices in the past. They did not address other potential changes that may negate these proposed decreases, and of course at this time, they’re only broad proposals for comment by the public. However, even though these are just proposals, we wanted to address any concerns and look at what the worst case scenario would be.

So we assumed that our operators made no adjustments to their operating practices and that there were no corresponding offsets to expenses and ran an analysis assuming a full 6.6% decrease to our hospitals’ Medicare reimbursements. Under this scenario, our acute care hospital Tenet’s EBITDAR coverage ratios would decline approximately 80 basis points from the current 5.36 times to 4.56 times.

Further, it’s important to note that our hospital operators are among the best in the business at managing these facilities in order to meet the increasing demand and changes in the healthcare field. An excellent example of this is the transformation Prime Healthcare achieved at our Paradise Valley facility in California. This was recently reported on in the San Diego Union Tribute. If you go to our website, you’ll see a link to that article which discusses the positive steps taken in greater detail, but in a nutshell, Prime was able in just two years to take a hospital that was operating in the red by a non-profit operator and put the facility well into black while regaining compliance with regulatory agencies such as Medicare and MediCal.

Prime did this by reducing operating costs, adding much needed capital and equipment upgrades, while employing strategies aimed at proving efficient patient care. For those of you that attended our property tour during this last year’s annual convention, you were able to see this facility for yourselves. Also just recently, two of our Prime hospitals, Desert Valley Hospital and West Anaheim Medical Center, were named as national award winners in the Thomson-Reuters Top 100 Hospitals for 2008.

Now a brief update on specific assets. You will recall that we’ve not included any revenue in our 2009 guidance from our facility in Bucks County or the two former HPA facilities in Houston. Despite that, we continue to be optimistic about the prospect of either selling or re-leasing these facilities during 2009. We continue to make good progress towards both of these objectives and will continue to update you at the appropriate time.

Also in the early part of the second quarter 2009, we terminated and re-leased one of our former Gulf states facilities to a new tenant and terminated the lease on the other facility where we already have a tenant prepared to take over operations as soon as practical. During this transition, the former tenant continues to operate the hospital. With that, I’ll ask Steve to walk you through the financial results of our first quarter.

Steve Hamner

As is usual for us, I’ll go through the highlights of our financial results for the first quarter 2009, and then we’ll open up the call to your questions. This morning, we reported first quarter normalized funds from operations of approximately $17.5 million, or $0.23 per diluted share. This is an increase of 14.3% compared with the $15.3 million or $0.29 per diluted share for the first quarter of 2008. Adjusted FFO for the first quarter of 2009 was $17.9 million, also $0.23 per diluted share, and an increase of 11.4% compared to last year’s 16.1 million or $0.29 per diluted share.

Normalized FFO and AFFO for the first quarter of 2009 exclude $560,000 in interest expense related to the adoption of a new accounting pronouncement concerning convertible debt and another approximately $333,000 related to the adoption of a new accounting pronouncement concerning participating securities. Adoption of these pronouncements has no effect on the amount of interest or principal payments made to the noteholders or dividends paid related to restricted stock. There is no effect on cash at all. Both of these changes are probably familiar to most of you, so I’ll not go into further detail unless there are questions later. I should point out though that we have as have all companies restated our 2008 results for the same changes.

Per share amounts were also affected by an increased in the weighted average diluted common shares outstanding to 76.4 million for the quarter ended March 31, 2009, from 53 million for the same quarter in 2008. This increase of course is the result of the common share offerings that we completed in March 2008 and January 2009.

Finally, net income for the first quarter of 2009 was approximately $10.7 million, or $0.14 per share, which compares to $10.9 million or $0.21 per share for the year ago period.

Now, let’s turn to our capital structure and liquidity sources. Let me give you a brief balance sheet summary, and then I’ll reiterate our current outlook regarding our future capital strategy. As of March 31, we had approximately $574 million in borrowings. That’s down from about $642 million at year end. This total includes fixed rate debt of $354 million with a weighted average rate of approximately 7.4% and variable rate debt of $220 million with a weighted average rate of approximately 2.6%. At March 31st, we had approximately $11.2 million in cash and approximately $71 million available under our revolving credit facility.

We have no meaningful maturities until November 2010 when a $30 million term loan is due. Upon repayment of that facility which we may prepay at anytime without penalty, approximately $340 million in healthcare real estate will become unencumbered. One of our revolvers is scheduled to mature in 2010 also, but we may extend that through 2011 for nominal fee. That facility currently has a balance of approximately $93 million.

Also in November 2011, our 6% and 8% exchangeable notes become due with a total amount of approximately $138 million. We have unfunded commitments to complete certain expansion and refurbishment projects within our existing portfolio that total about $2.5 million. We have no commitments to acquire or develop any new facilities.

Given the current liquidity that I’ve just described and the unencumbered assets that become available when we pay the $30 million loan that I mentioned, we’re confident that we’ll have attractive alternatives during the next 2-1/2 years to satisfy our debt maturities at that time. Having said that, and to reiterate what Ed just said, we continue to evaluate potential opportunities to selectively dispose of or otherwise refinance selected assets. There is interest from third party investors as well as from operator that may have access to financing such as HUD guaranteed debt. We have no definitive agreements for any such transactions, but we continue to be encouraged that some real estate investors and lenders are becoming more active.

Along those lines and as we communicated last quarter, until there is greater clarity in both the credit markets and with potential property sales in general, it is unlikely that we’ll commit to any significant uses of our available capital.

Turning to future operations and our estimate of what our future existing portfolio and operations are expected to produce, those who are familiar with us know that our practice is to provide estimates of annualized FFO run rates based on our in place portfolio. We last updated this in January with an estimate of a range between $0.88 and $0.92 per share. We are not changing that estimate. Let me reiterate some of the more important assumptions in that estimate.

Our diluted shares outstanding today are approximately 78.5 million. We’re assuming no revenue from the River Oaks campuses in Houston. We’re assuming no revenue from Bucks County in Philadelphia, and we assume no revenue in 2009 from our interest in the Shasta Hospital operations. We also assume no significant changes in our debt balances and a current LIBOR reference of 0.5%. That’s the 30-day rate, and we pay a weighted average of approximately 175 to 200 basis points over that rate on our variable rate debt. Further assumptions include quarterly operating expenses similar to what we incurred in the first quarter.

That concludes our prepared remarks for today, and with that, I’ll turn the call back over to the operator to queue your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Jerry Doctrow - Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

I don’t know if there’s any more color you want to give us on Bucks and River Oaks. That’s really my key focus, and then I’ve got one followup.

Ed Aldag

Jerry, on both of these, you can imagine why we’re going to get into a detailed blow by blow of the negotiations at this point, other than to reiterate what I said in the prepared remarks. We’re very pleased with where we are in the situation with all three of those facilities, and we’ll update at the appropriate time.

Jerry Doctrow - Stifel Nicolaus

Ed, you had talked about re-leasing. Are there still potential sales as well re-leasing options potentially out there?

Ed Aldag

Yes. As we’ve said from the beginning on these facilities, on all of them, it will be a combination of both—some of them will be sales and some of them will be re-leasing.

Jerry Doctrow - Stifel Nicolaus

How are you all or the board really dealing with comp these days? I’m really trying to think about performance comp?

Steve Hamner

Jerry, the exact performance measures were detailed in the proxy statement. I think the important thing to note is that the total compensation for all of the executives, approximately 70% of it, is performance based with only 30% of it being fixed, so it is very dependent on the performance of various metrics including FFO, liquidity, AFFO, tenant concentration, among other things.

Operator

Your next question comes from the line of Steve Swett – KBW.

Steve Swett - KBW

On the two assets that you’re looking at re-leasing or selling, would re-leasing in today’s environment require more capital just given tenant’s own access to capital issues?

Ed Aldag

Yes and no, Steve. Remember these are actually three separate campuses. The facility in Houston is actually two distinct campuses, so it will be three separate transactions, and if it does require any additional capital investment, it will be very minimal.

Steve Swett - KBW

Most of the conversation on other calls about selling focuses on buyers looking at opportunities where sellers are more distressed, so would it be a fair assumption that if you’re looking to sell, it’s only because you can’t find an opportunity to re-lease?

Ed Aldag

No, not at all. With the opportunities that we’ve discussed for the last several quarters about the debt maturities in 2011, some of the sales from our standpoint are very strategic in nature.

Steve Swett - KBW

Steve, you mentioned the unencumbered assets once you pay off that $30 million. I think you said $320 million. In today’s market, what would be market pricing for secured debt on hospitals and what kind of LTVs?

Steve Hamner

I’ll just tell you what our primary facility is, and it’s a borrowing based facility, it is secured, and we get a 50% advance rate on the borrowing base. Today, as I mentioned, we’re paying 175 to 200 over LIBOR on that facility, and we’ve not had any formal discussions with the lending group, although obviously we maintain contact with them and we monitor the market, and based on that, we expect that if we were to resyndicate that facility, everything else being equal, we would probably go from 200 to 300, possibly as much as 400 over in today’s market.

Steve Swett - KBW

Ed, I think this may be the first quarter that you haven’t updated us on the Monroe situation. I imaging that is now fully rent paying, and do you have any comments on that’s doing?

Ed Aldag

It’s doing well. It had a slight decline in the first quarter over the fourth quarter. That was primarily due to the departure of two orthopedic surgeons, but the facility continues to have positive EBITDA rent coverage, very positive EBITDA rent coverage.

Operator

Your next question comes from the line of Mike Lewis - J.P. Morgan.

Mike Lewis - J.P. Morgan

Given the first quarter result and you’re running at the high end of the guidance range that you gave, what are you looking at that can maybe pull you down to the $0.88 versus the $0.92?

Steve Hamner

Generally, Mike, the things that are in the press release and in my prepared statements, interest rates could move against us, unexpected property operating expenses—you’ll note that we have about $900,000 plus in that this quarter, other unexpected expenses, and just the general things that could go wrong. We’re very confident, as Ed has mentioned, with the strength of the portfolio, there are no issues that we’re anticipating, and I’ll point and we’ve done this every quarter that we’re not including in our estimate the cost of legal, we’re still defending the case down in Houston, and there’s obviously no assurance of how that will go, positive or negative.

Mike Lewis - J.P. Morgan

I know you disclosed this lawsuit in the 10K, but can you give us a little more color on the situation and why you think the company is in the right and protect it?

Ed Aldag

We’re probably going to have to limit our comments to what we did disclose in the 10K, and I’m sure you understand that there are reasons of privilege that we need to protect. We believe we have very strong defenses. We continue to believe that if it goes to trial, we will prevail at trial, and we do not see any merit in the claims at all.

Steve Swett - KBW

Lastly, have you considered buying back converts at all?

Ed Aldag

We consider probably everything every day, and clearly, when your converts are trading at a discount, that’s compelling arithmetic. On the other hand, it’s been our position for over 6 months now that our job for the foreseeable future is to protect the asset value of our assets and the strength of the balance sheet, so that continues to be our priority. It’s not to deplete the liquidity we have now for any type of investment.

Operator

Your next question comes from the line of [Austin Washerman] – Keybanc Capital Markets.

Austin Washerman – Keybanc Capital Markets

I believe you guys last stated on the River Oaks facility that you’re receiving interest at or above the total investment that you had made. Are you still seeing that type of pricing for these types of assets?

Ed Aldag

Are you talking about on a potential re-leasing or sales of the facility?

Austin Washerman – Keybanc Capital Markets

On the sale of the facility, yes.

Ed Aldag

Yes, absolutely.

Austin Washerman – Keybanc Capital Markets

Moving to the Monroe and Bucks, would MPW still consider participating interest in those properties?

Ed Aldag

Yes.

Austin Washerman – Keybanc Capital Markets

What order would you place in raising secured financing, asset sales and then potentially revisiting the equity markets?

Ed Aldag

We’re fortunate, we believe, and if not just fortune, it’s due to a great deal of planning that we have all of those alternatives, and unless one could set up all of the different assumptions at what point we could sell stock at what price and what are the terms of any new financing and what are we getting for property sales, we can’t sequence that right now, but all of that kind of goes into the mix and we evaluate that constantly.

Operator

We have no more questions in the queue. I’d like to turn the over to Mr. Ed Aldag.

Ed Aldag

Thank you operator, and thank all of you again for your interest in Medical Properties Trust, and as always please don’t hesitate to call Steve, myself, or Charles Lambert if you have any further questions after the call. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Medical Properties Trust, Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts