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Medical Properties Trust, Inc. (NYSE:MPW)

Q2 2009 Earnings Call

August 06, 2009 11:00 AM ET

Executives

Michael G. Stewart - Executive Vice President and General Counsel

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

R. Steven Hamner - Executive Vice President and Chief Financial Officer

Analysts

Jerry Doctrow - Stifel Nicolaus

Michael Mueller - JPMorgan

Kevin Ellich - RBC Capital Markets

Karin Ford - KeyBanc

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2009 Medical Properties Trust Incorporated Earnings Conference Call. My name is Teresa and I'll be your coordinator for today.

At this time all participants are in a listen-only mode. We will conduct a question and answer session toward the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Mr. Mike Stewart, Executive Vice President and General Counsel. Please proceed.

Michael G. Stewart

Good morning. Welcome to the Medical Properties Trust conference call to discuss our second quarter 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, August 6, 2009 and will be 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 maybe considered forward-looking statements within the meeting 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 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 will describe certain non-GAAP financial measures, which should be considered in relation to and not in lieu of comparable GAAP financial measures. Please not that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly reconciled, most directly comparable GAAP measures, in accordance with Reg G requirements. You can also refer to our website for the most directly comparable financial measures and related reconciliation.

I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Edward K. Aldag, Jr.

Thank you, Mike. And thank you all for your interest in Medical Properties Trust and we welcome you to our second quarter earnings call. Our financial results are for the second quarter and for the six months of the year, are right in-line with our previously announced guidance.

Operationally and maybe more importantly during this time period, positioning for future growth, the second quarter was a very good quarter for us. We spilt the vast majority of our efforts over the past 90 days working to reposition several non-performing assets and adding some key healthcare employees to put the company in the best possible stance to take advantage of the numerous opportunities available.

We're very pleased to announce the releasing of the Bucks County Hospital to a joint venture between a national hospital operator, Nueterra Holdings and a preeminent Philadelphia-area physician group, the Rothman Institute. The lease has initial five year term with renewal options for an additional 15 years.

Upon the expiration of the initial term and thereafter the lease has an option to purchase the lease real estate at specific terms that are expected to result in no impairments. The lessee venture expects to invest as much as 8 million during the initial five year lease term and admit a large Philadelphia-area not for profit hospital system as a co-partner.

Not only should the lease increase our annual revenue by as much as 2 to $3 million, that was not included in our prior estimates, but it also relieves us of approximately $1 million in annual property expenses that will now be paid by the tenant. We continue to work towards the transaction on the Sharpstown and River Oaks campuses in Houston. We continue to be dismayed at the time it is taking working with the insurance companies to resolve the Hurricane Ike damage issues on both campuses. We are negotiating with a respected purchaser on the Sharpstown campus and are very close to all the terms pending resolution of the hurricane restoration issue.

We're also negotiating with two entities for the best majority of the space in the River Oaks campus and are very close on the major deal points. But as always the devil is in the details. We are encouraged by the various terms that we've signed at these facilities. As we have stated in the past the of results of the Bucks releasing and the current negotiations on the two campuses in Houston in these very difficult economic times for the entire country is a very positive indication, not only of the value of our entire portfolio, but the special expertise our management has to be able to protect and even increase the values of our hospital assets.

There certainly is no assurance that we will close on either of these Houston transactions but keep in mind that we currently have no revenue included in our guidance from either River Oaks or Sharpstown. Overall, our current properties have continued to perform well. Almost all of the properties have continued to see increase in their operational performance and those select few that saw decreases have not been significant.

On a consolidated basis, our overall EBITDA release coverage for the second quarter 2009 was up about 45 basis points to 4.77 times compared with 4.32 times for the first quarter 2009.

Broken up by type of facilities. Our acute care hospitals increased about 30 basis points over the first quarter with EBITDA release coverage ratio of 5.34 times. The LTACHs were down about 50 basis points to approximately 2.25 times. However, this was still up about 50 basis points over the same period last year and the rehab hospitals were up significantly from 3.07 times in the first quarter to over 5.5 times in the second quarter.

Given that the summer months are always the slowest months with doctor and patient holidays dominating this period, we are very pleased with these results. As you know CMS came out with their payment schedules for 2010 resulting in good increases of 2 to 2.5%, for each of our property types.

Let me go through the specific results of some of our larger tenants. Prime, which presents approximately 38% of our total portfolio had an increase of almost 50 basis points from the first quarter resulting in EBITDA release coverage of almost 5.25 quarter times. Vibra, which represents about 11% of our total portfolio saw our 50 basis points decrease from the first quarter, but only a five basis point decrease from the same period last summer.

Eight out of our 21 acute-care hospitals have EBITDA coverage in excess of 10 times. 14 out of 21 of our acute-care hospitals have EBITDA coverage in excess of three times.

Monroe Hospital saw a decline in their operations from the loss of two surgeons but the operator there has replaced a significant portion of those lost procedures and hopes to have more than the remaining ops procedures in place by this fall. The biggest disappointment in Monroe has been the affect of the economic condition it had on the interest of the potential not-for-profit suitors to acquire this facility.

We are still in discussions with several asset systems but the speed of these discussions has just slowed dramatically.

Several of our properties are undergoing current expansion projects. Prime is currently investing $35 million of their own funds in the expansion at Desert Valley's facility. North Cypres s has just opened an additional 48 bed that they financed with their own funds. Mountain View in Idaho is about 50% complete with a $10 million expansion, being financed 50% by the tenants and 50% by MPT II.

As I previously mentioned the new tenant at Bucks is doing an approximately $8 million expansion with their own funds. Our facility in Marina Del Ray is planning an approximately $4 million expansion of their facility.

Total bad debt for operators decreased from the first quarter 2009 and was flat from the same period last year. Recently HCA tenant; CHS, HealthSouth, Cambridge, IASIS and HMA, four of which are tenants of MPT, all reported positive top and bottom line growth for the second quarter from continuing operations despite the challenges associated with the economy. This is a testament to the strength of the industry as a whole as well its ability to prosper in tight economic conditions.

As we all know, the country is currently debating an overhaul of the healthcare system in this country. While no one knows at this point what the plan will ultimately prevail we believe that MPT will continue to do well under all of the currently proposed or mentioned plans. Obviously if more details emerge about an actual plan we will comment further.

At this point we are hopeful that the capital markets will allow us to resume our acquisition plan in 2010. We're monitoring the situation closely and planning appropriately. As we've said numerous times there is no shortage of good deals for us to do.

At this time I will turn to Steve to go over the specific financial report for second quarter. Steve?

R. Steven Hamner

Thanks, Ed. Good morning everyone. I will review the highlights of our financial results for the second quarter and then we will operation up the call for questions.

For the second quarter of 2009, we reported normalized funds from operations or FFO of approximately $15.3 million or $0.19 per diluted share, and adjusted FFO of $16.3 million or $0.21 per share. There are a few items to point out that affected second quarter results. A few items, most of them expected and previously discussed on prior calls that we expressly included from our previous estimates of $0.88 to $0.92 per share in normalized FFO affected this quarter's earnings.

First, we went off and reserved approximately $1.1 million or little more than a $0.01 per share of previously approved straight line ramp related to our termination of leases of two El props (ph) in Louisiana. We immediately re-tenanted one of the two properties while the operator of the other property filed for bankruptcy protection, during which we continued to receive 100% of our rent.

Because our lease termination is being considered by the Bankruptcy Court, we are uncertain as to whether the existing operator will retain possession and continue operating the property. Or we will release the property to a new operator. But in any case the facility is profitable, and there are number of alternative operators, who have expressed strong interest in taking over operations. We do not expect any material loss or impairment.

Second, reported FFO includes non cash interest expense of approximately $536,000, related to the adoption in early 2009 of new accounting for convertible debt. And another roughly $380,000 in reduction of earnings related to yet another required change in accounting. The combined effect of these changes, which again we have previously discussed and quantified is to reduce quarterly per share FFO, by a little more than $0.01. These changes have no effect on net earnings or cash flow.

Third, we incurred property level operating expenses related to our non income producing properties of approximately $1 million. Again, about $0.01 per share quarterly. These are expenses that as a net lease lessor we do not typically pay, as that properties are sold or released the new operators will resume responsibility for these costs.

Included in the second quarter expenses of about a million dollars, is approximately $231,000 related to Bucks County. Those are expenses that are no longer our responsibility. Finally we expensed approximately $595,000 of costs, slightly less than a $0.01 per share related to Houston, Camden Property litigation, which is included in results of discontinued operations.

Five of these claims which are described in our recent annual and quarterly SEC filings have been set to begin in mid-September. We are highly confident in our legal and casual positions and expect to prevail at trial.

Let me reiterate our regarding few operations that they have been provided this year expressively excluding the effect of the items that I have just discussed. So aside from those expenses that impacted FFO and AFFO per share by about $0.03, we were right in line as Ed said with our quarterly expectations, based on our previous annual guidance of $0.88 to $0.92 per share.

This morning we are revising upward our estimate of annual FFO by $0.01 to reflect the net affect of improved results that we expect from releasing Bucks County, offset by the non-cash accounting changes that we just discussed.

Based on the existing portfolio, we expect that, commencing August 1, 2009 we will generate annualized FFO of between $0.89 and $0.93 per share. Let me reiterate some of the more important assumptions in that estimate.

Today our diluted shares outstanding are approximately 78.6 million. We continue to assume no revenue from River Oaks and Sharpstown campuses in Houston. We also assume no significant changes in our debt balance and a current LIBOR reference of 0.3%. That's the 30 day rate and we pay weighted average of approximately 175 to 200 points over that rate on our variable rate debt.

Further assumptions include quarterly D&A expenses similar to what we incurred in the first and second quarters of this year. The estimate also does not include any property level expenses or litigation costs, write-offs of straight line rent or rather non-recurring or unplanned transactions. In addition this estimate will change perhaps materially if market interest rates change, assets are sold or acquired, The Sharpstown or River Oaks properties are sold or leased, other operating expenses vary or existing leases do not perform in accordance with their turns.

Turning to liquidity, as of June 30, we had approximately $573 million in borrowings that included fixed rate debt of $353 million with a weighted average rate of approximately 7.4% and variable rate debt of $220 million with a weighted average rate today of approximately 2.4%. At June 30, we had about $8 million in cash and approximately $71 million available under our revolving credit facilities.

As we communicated on our last call, we have no meaningful maturities until November, 2010 at which time a $30 million term loan is due. Also one of our revolvers is scheduled to mature in November 2010 but we may extend that to 2011 for a nominal fee. That facility currently has balance of approximately $93 million. We have unfunded commitments to complete certain expansion and refurbishment projects within our existing portfolio that total about $7 million. We have no commitment to acquire or develop any new facilities.

As most of you know, over the past year, we've been squarely focused on ensuring a strong liquidity position, with the capital resources and commitments that I just described we believe, we have more than enough liquidity for the near term.

Additionally with the plans that we have previously outlined on our earlier calls, including the $340 million in unencumbered assets that become available by November 2010, when we repay the $30 million loan, we are confident that we will have attractive alternatives during the next two and half years to satisfy our debt maturities prior to that term.

Having said that, we continue to evaluate viable opportunities to selectively dispose of or refinance selected assets. We also continue to receive interest from third party investors as well as from operators that may have access to financing such as high guaranteed debt. We have no definitive agreements for any such transactions at this time, however we are encouraged that some real estate investors and lenders seem to be becoming more active.

Also along those lines, we continue to have proactive discussions with our lenders. As we've stated previously while we are encouraged by the recent trends we are seeing with property sales and credit facilities, until there is greater clarity in both the property and credit markets, it is unlikely that we will commit to any significant uses of our available capital in the short term.

That concludes our prepared remarks for this morning. I'll now turn the call back over to the operator to queue your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Jerry Doctrow - Stifel Nicolaus

Hi, good morning.

Edward Aldag, Jr.

Hi, Jerry.

Jerry Doctrow - Stifel Nicolaus

Couple, I guess different things. I just wanted to go back and maybe get a little clarity on the Bucks lease. So date did that start and what are some of the variables in terms of the range of income and also whether any of it's straight line?

Edward Aldag, Jr.

Yeah, the lease starts effective immediately, payment starts in January. So there is approximately a six month deferral until payment starts. So there is a straight line that disproportionately affects the next two quarters. When they start paying in January you will see the straight line get back down to what we are more used to. The base minimum rent is $2 million. We are eligible to earn up to an additional $1 million based on certain operating parameters and we are hopeful based on the level of those parameters and the strength of this operator that we will be in the money with that relatively quickly.

I think I had mentioned there is a purchase option that is based on a formula referenced to EBITDAR generated by the facility with minimum and maximum prices in that formula.

Jerry Doctrow - Stifel Nicolaus

And you said you expect not a material loss but is there potential from upside on the sales.

R. Steven Hamner

Yes there is potential for upside on the sale and again that will be driven by the operating results at the time the option is exercised.

Edward Aldag, Jr.

Okay. So it Steven from a accounting standpoint on GAAP, basically you will start off basically $2 million run rate essentially August 1 and it's all going to be straight line until we get to January 1 and at that point you pick up any of the stuff that is being deferred or it just continues make a mark obviously on your performance but then where you getting paid basically for cash or is there a

R. Steven Hamner

Yeah, getting paid for cash at that point. And of course the other thing that mentioned that we alluded in the remarks is that we will immediately be relieved of about $700,000 in property expenses as the tenant takes over responsibility for those.

Jerry Doctrow - Stifel Nicolaus

Okay. And that was sort of the same at that 231 was the quarter end and

R. Steven Hamner

Correct.

Jerry Doctrow - Stifel Nicolaus

Okay. And are there escalator or anything like that in that lease or not.

R. Steven Hamner

2% annual escalator.

Jerry Doctrow - Stifel Nicolaus

Okay. Great. Was there anything else in the property expenses I guess, some of that I think you touched on this, there's some that I guess with the Houston stuff as well and to that will just continue to run. I guess I am just trying to decide what's the right run rate for property expenses, say in third quarter or fourth quarter.

R. Steven Hamner

Well, you are right. It's hard to predict. Most of, almost all of the remainder of that $1 million is Houston, River Oaks and Sharpstown. I think for purposes of your estimate I think the $800,000 that we've incurred in the last couple of quarter is a good quarterly run rate.

Jerry Doctrow - Stifel Nicolaus

Okay, and in terms of these properties, obviously you are hopeful to get it done soon, but we don't know for sure. One gets I think you will turn our selling one and whereas the other the game plan as to leases or this size, I assume.

Edward Aldag, Jr.

That's where we are right now, Jerry.

Jerry Doctrow - Stifel Nicolaus

Okay. I look forward to having news on those.

Edward Aldag, Jr.

As do we.

Jerry Doctrow - Stifel Nicolaus

Okay. There is a decrease in interest income from one Q, was that's just the LIBOR rates or was there anything else going on?

R. Steven Hamner

No it's just varying balances between the holding cash balances or paying down the debt and there's very little variability in LIBOR, rates (ph).

Jerry Doctrow - Stifel Nicolaus

Okay. And then my last question I'll jump of. We're obviously starting to see people issue equity with kind if the snap back in REIT prices. I guess I took some of your comments, Steve to suggest that you're kind of comfortable where you are now in terms of liquidity. Is that sort of the right inference or given the stock prices, equities start looking more interesting.

R. Steven Hamner

No, we are, comfortable Jerry and we also continue to believe that there are less diluted alternatives that we have, given our liquidity position now and the time we have to address any maturity issues, they are much less dilutive alternatives that we haven't completing exploring before we go to something as expensive as equity.

Jerry Doctrow - Stifel Nicolaus

Okay great. Thanks a lot.

Edward Aldag, Jr.

Thanks Jerry.

Operator

Your next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Michael Mueller - JPMorgan

Yeah, hi good morning.

Edward Aldag, Jr.

Good morning.

Michael Mueller - JPMorgan

Hey, I wanted to clarify, double check something, the 800,000 of the ongoing operating expenses, that is not in the guidance correct? If it's one that occurs that's not the 89 to 93, correct?

R. Steven Hamner

That is correct.

Michael Mueller - JPMorgan

Okay and it seems like that will occur until properties or leased out or sold.

R. Steven Hamner

That's right, but again I want to point out that that is hardly variable number. And it amounted to something less than $800,000 this quarter and actually less than $600,000 last quarter. So in the interest of not having bad surprises I told Jerry that you might want to model on the higher end.

Michael Mueller - JPMorgan

Okay got it. As you were talking about acquisitions and you mentioned I think there, you are seeing a number of opportunities out there and pick and choose obviously when the right kind for capital work. Listing the other calls, other property types, people have talked cap rates obviously being notably higher in terms of what they are looking at compared to a year and so ago. Can you put in that in that context of what you are seeing, looking at the deal from a year or so ago, what the pricing would have been. Talk about the -- may be types of deals and where are the pricing is standing right now?

Edward Aldag, Jr.

I think the biggest difference is a year ago there was a wide between the seller and purchaser expectations. That gap has narrowed tremendously, now at the same time the gap -- different types of deals has got wider. Where a year ago, I think that the -- little more than a year ago, probably 18 months ago, you are looking from our standpoint anywhere from nine to 11. Today that's our cap rates will be closed from 11 to 14 depending on the transaction.

Michael Mueller - JPMorgan

Okay,

R. Steven Hamner

And I think that's probably not a very strong data point. We mention the Mountain View in Idaho that we're sharing the capital expense on. We're doing at 12, that's a very strong property. It's got very good coverage, very good future and our capital is going in to that with a 12% return.

Michael Mueller - JPMorgan

Okay, and going back to the Bucks lease again, $2 million. Can you talk about how the pricing at that lease was come up, was it a looking at it on per bed or was it something else and just maybe a little more color on how $2 million was the right number.

Edward Aldag, Jr.

Well, it was obviously, a number of things, Mike. It was the timing of how quickly this transaction would occur. We have had other people that were interested in it as well. But this is a very strong venture. It's a well established -- we have great confidence in their ability to operate the facility. Leasing it quickly to stop the bleeding that we were having on the property from our stand point from the property expenses and the $3 million of ultimate rent that we can collect there before the escalator is where we thought the target ought to be. The tenant wanted to have some hurdles in there, but -- so from an operational standpoint and were comfortable with that, given what we know about the market and their ability.

Michael Mueller - JPMorgan

Okay, and last question. Is this going to be a new location for the business or is it kind of just basically picking it up from another building and just moving operations to this or starting from scratch.

Edward Aldag, Jr.

A little of both, but mostly a new location.

Michael Mueller - JPMorgan

Just a new.

Edward Aldag, Jr.

With a very long and profitable history of operations again because of the physician group, that's coming.

Michael Mueller - JPMorgan

Okay,

R. Steven Hamner

And I think we also mentioned that we do expect, or we've been told to expect a very large Philadelphia area not-for-profit to become a partner in the future.

Michael Mueller - JPMorgan

Okay, great. Thank you.

Edward Aldag, Jr.

Thanks Mike.

Operator

Your next question comes from the line of Kevin Ellich with RBC Capital Markets. Please proceed.

Kevin Ellich - RBC Capital Markets

Good morning guys. Just a couple of questions. Steve, I kind of missed some of the details you've provided on the straight line. I was wondering if you could go over that again, and is that what caused the sequential decline.

R. Steven Hamner

No, what caused the sequential quarter decline was taking the $1.1 million write-off, against straight line revenue.

Kevin Ellich - RBC Capital Markets

Got it.

R. Steven Hamner

So that's why it's got variability in the second quarter. In the third and fourth quarters, because of the Bucks straight line, we'll expect that to higher than what it's been, something in excess of $2 million. But that will drop back in the first quarter of '10 to a more normalized rate of around a $1.5 million a quarter.

Kevin Ellich - RBC Capital Markets

Got it. That's helpful, thanks. And then, Ed going back to your comments about the publicly traded hospital operator, you mentioned that bad debt came down, could you give us an idea as to what type of bad debt they are running at.

Edward Aldag, Jr.

Well that was actually bad debt for all of our hospital operators, not just the publicly traded, but that was our portfolio.

Kevin Ellich - RBC Capital Markets

Right, is it around 10%, or do you have any idea.

Edward Aldag, Jr.

Yeah it's a little bit higher than 10%.

Kevin Ellich - RBC Capital Markets

Okay. And then you kind of touch on health care and what's going on I guess, big picture not sort of things, kind of unsure if what's going to get done, but obviously the way the hospital operators have been performing, your expectation is something if a bill gets passed this will be a good thing for you guys?

Edward Aldag, Jr.

I think it's a neutral thing for us, Kevin. It's hard to comment on Bills that aren't out there yet. So we are commenting on a very global aspect of being the landlords with very large coverages, EBITDAR lease coverage ratios, and the rent's still going to get paid from anyone of these scenarios that you go through. If you look at the short run and the Bills that have been announced immediately, it's very positive because it adds tremendously to the paying -- number of paying patients out there. But we think overall and the short medium to -- I mean the medium to short and long term it's neutral to us.

Kevin Ellich - RBC Capital Markets

Got it. That's all I have. Thanks guys.

Edward Aldag, Jr.

Thanks Kevin.

Operator

Your next question comes from the line of Karin Ford with KeyBanc. Please proceed.

Karin Ford - KeyBanc

Hi, good morning.

Edward Aldag, Jr.

Hi Karin.

Karin Ford - KeyBanc

Can you just remind us, how does the $2 million of the new Bucks rent on the new lease compare to what the previous tenant was paying?

Edward Aldag, Jr.

Well, it's -- the previous tenant was paying probably about twice that.

Karin Ford - KeyBanc

And are you guys I know you said the tenant's going to be investing new capitals. Are you guys investing any have to invest any capitals as far the lease?

Edward Aldag, Jr.

No, no.

Karin Ford - KeyBanc

Okay. Regarding, Monroe can you tell us how much rent you got on Monroe in 2Q and what your expectations are for Monroe rent after this year.

Edward Aldag, Jr.

Not off the top of my head, Karin. We recorded rent at the contractual rates, the property is cash flowing to the rent line but I can get that detail back to you, I just don't know exactly what we collected on reported on Monroe.

Karin Ford - KeyBanc

So no expectations of rent decline there in the second half of the year.

Edward Aldag, Jr.

No.

Karin Ford - KeyBanc

Okay comfortable. Just final question is on G&A. I think you mentioned in beginning part of the call that you have brought on some additional employees and I know you said in your remarks that G&A was probably going to be remain constant. I know a lot of companies in this environment are looking to try that reduce those types of costs to help boost results when things have been tough. Can you just talk about your thoughts on the infrastructure of the company and adding additional employees and what you except sort of a little longer term to be happening on the G&A line.

R. Steven Hamner

Well, the main effect here and there's been very low addition to the employees. What we have done is, plan for the future. We are certainly wanted, -- we believe that the economy and capital markets are all being come out of this and with the opportunities we want to be in a position that when it does we can act immediately. So what we did was eliminate some positions, and some departments that we can outsource at a cheaper price. They are basically dead time right know.

We pick them up through outsourcing when we need them and we greatly increase the amount of healthcare related expertise with adding some additional employees here. So from a net effect standpoint of G&A, it was almost neutral.

Karin Ford - KeyBanc

Do you think there is any cost efficiency you guys can do on that line going forward or do you think at this point here you are set?

Edward Aldag, Jr.

Karin, we are planning to grow and so from that standpoint we think we are set. If we felt that this was it, we weren't going to grow anymore or even decline, then the answer is yes. We absolutely can shrink the company. But our plan is to continue to grow.

Karin Ford - KeyBanc

Okay, thanks very much.

Operator

Your next question comes from of the line of Brendan Maiorana with Wells Fargo Securities. Please proceed.

Unidentified Analyst

Hi, yes. Good morning, thank you. This is actually Juan Crusoe (ph) for Brendan. Going back to a couple of questions on Bucks County, could you start with the initial still a chance with the initial lease yield on the asset just franchised?

Edward Aldag, Jr.

I am sorry, the what?

Unidentified Analyst

Initial yield?

Edward Aldag, Jr.

Initial lease yield.

Unidentified Analyst

So, for example that $2 million on revenue, how does that compared to say, your cost base on the asset?

Edward Aldag, Jr.

It's about a-- on the minimum it's about a 6%.

Unidentified Analyst

And that, just a clarification that $8 million from CapEx, were you guys be financing that for them as well?

Edward Aldag, Jr.

No.

R. Steven Hamner

No.

Unidentified Analyst

Okay. And one last question regarding financing. In terms of equity raise versus dividend kind of argument, you guys are paying out of about $6 million in annual dividend. How do you guys feel about that versus a potential equity rate? How would you rank one versus the other?

Edward Aldag, Jr.

We are not considering either for any immediate decision right now, but it's clearly with all things equal, the philosophical view, I guess would be in my view anyway, is if you are going to raise equity you clearly have to address the dividend. You don't want to raise equity if you are not going to put it to use and then all you are going to do is turn around and payout a high dividend from those equity proceeds, but as I say that's not something that we're considering at this time.

Unidentified Analyst

Got it, great. Thank you.

Operator

Your next question is a follow-up from the line if Jerry Doctrow with Stifel Nicolaus. Please proceed.

Jerry Doctrow - Stifel Nicolaus

Hi, guys can we get a little color on I think it was at those corners (ph), the one that you kind of picked up in the Houston deal and then I guess released to Prime, that has some variables aspects to it. I was just wondering kind of what's that is, whether we see the upside potential there.

Edward Aldag, Jr.

Jerry, I think you talking about Shasta.

Jerry Doctrow - Stifel Nicolaus

I am sorry, sorry.

Edward Aldag, Jr.

Shasta is doing very well. We continue to expect it to be cash flow positive this year and to begin participating either late this year or early next year.

Jerry Doctrow - Stifel Nicolaus

Okay, but nothing material in terms of the next couple quarters, we need to think about in terms of earnings?

Edward Aldag, Jr.

Well, the plan continues to surprise us and amaze us, it's how well they do. But it's not in our planning.

Jerry Doctrow - Stifel Nicolaus

Okay, thanks a lot. I am sorry, I think Cornerstone (ph) is an ECP hospital.

Edward Aldag, Jr.

That's right.

Jerry Doctrow - Stifel Nicolaus

See you.

Operator

And there are no questions in queue. I would like to turn call over to Ed Aldag for closing remarks.

Edward Aldag, Jr.

Again, we certainly thank all of you for your interest and your patience today. If you have any questions, please continue to call Charles, Steve or myself. Thank you very much.

Operator

Ladies and gentlemen. Thank you all for your participation in today's conference call. This concludes the presentation and you may now disconnect.

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