Medical Properties Trust, Inc. Q4 2009 Earnings Call Transcript

| About: Medical Properties (MPW)

Medical Properties Trust, Inc. (NYSE:MPW)

Q4 2009 Earnings Call

January 28, 2010 11:00 am ET


Michael G. Stewart - EVP & General Counsel

Edward K. Aldag Jr. - President, Chairman & CEO

Steven Hamner - EVP & CFO


Jerry Doctrow - Stifel Nicolaus

Karin Ford - KeyBanc


Welcome to the Q4 2009 Medical Properties Trust, Inc. earnings conference call. My name is Saley and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Mike Stewart

Good morning. Welcome to the Medical Properties Trust conference call to discuss our fourth quarter full year 2009 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.

A press release was distributed this morning 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 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'll 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 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 Reg G requirements.

You can also refer to our website at for the most directly comparable financial measures and related reconciliation.

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

Edward Aldag Jr.

Thank you, Mike. Good morning everyone and thank you for joining us on today’s fourth quarter year end 2009 earnings call. I think we all can agree that 2009 was a year of significant challenges as-well-as great change for the entire country. Despite a number of challenges that affected the economy, many businesses and consumers I am very pleased with the results of our company from both in operations and financial perspective and of the tremendous success our tenants continue to have and our operations.

Our business model was proven and sustained within this historic recession as we begin a New Year and a new decade, we are all well positioned for renewed growth. Over the past year we made measurable progress in strengthening our real estate platform through the continued increases and our EBITDA lease covered ratios and through the repositioning of selected assets.

As example, the Shasta Regional Medical Center and Bucks County Hospital we completed tremendous turnarounds during the worst financial crisis this country is seeing since the great depression. By way of background on Shasta in November 2008, we announced a new lease agreement of Shasta with Prime Health Care. Since then this tenant has done an exemplary job of managing the property.

In 2009 Shasta outperformed our expectations. This is quite impressive considering the relative short time that Prime has been managing the facility. From a big picture perspective we said that we expect to realize $20 million or more in profit participation from Shasta. In 2009, we recognized $1.4 million towards that amount. With the progress made there to date, we expect to receive an additional substantive amount in 2010.

Bucks County Hospital is another asset turnaround example and a real success story. After investing approximately $4 million in renovations and new equipment by our new tenant, the medical professionals at this asset began performing surgeries in September. Volume for January is expected to exceed a 100 cases the facility anticipate surgical cases to average 145 per month.

From the outset our business objective has been to invest in selected hospitals where the value of operations is able to help protect the value of the real estate. Shasta and Bucks have proved that this strategy works. Turning to our portfolio at large, we are delighted with the performance of our tenants for 2009. In spite of lingering macroeconomic challenges, the hospitals in our portfolio have continued to deliver increases in utilization, net revenue and most importantly EBITDA which further validate our business model for good and bad economic times.

Let’s take a look at some highlights. Looking at fourth quarter 2009 versus 2008, our acute care hospitals improved from over five times coverage to more than 7.5 times coverage. For the entire year the acute care hospitals improved from about 5.5 times to more than six times. The LTACH were up about 30 basis points to approximately two times in 2009 compared with about 1.7 times in 2008.

Our rehab hospitals were up about 40 basis points to approximately three times in 2009 compared with 2.6 times for 2008. Now let’s look specifically to some of our tenants. Prime Healthcare saw increases in total EBITDA for the first eleven months of 2009 of more than 120% compared to 2008. Prime Healthcare is right about Thomson Reuters as one of the top 10 U.S. health care systems in the country as the only four private systems in the top ten to receive this recognition this year. Two of Prime's hospitals are recognized as part of the top 100 hospitals by solicit Thomson Reuters and one of their hospitals was honored as a top 1% with the premier CareScience Select Practice National Quality award for superior patient outcomes. (Inaudible) which represents about 10.5% of our total portfolio generated an 18% increase in EBITDA lease covered ratio year-over-year.

Other operators Cornerstone, Health South, Monroe Hospital, North Ciphers and Poplar Bluff all saw significant increases in their EBITDA release coverage. Post Acute, Pioneer Valley and Mountain View were all either flat or slightly down in their EBITDAR lease covered ratio year-over-year.

However, the lowest coverage in this group was 3.31 times. Only three operators saw real decreases. CHS, Marina Del Ray and Healthtrax. Our CHS facilities are guaranteed by the parent company who continues to perform well. The other two operators have coverage of approximately three and one times. Although we made no new major acquisitions in 2009, seven of our properties saw significant additions or upgrades to our facilities.

With regard to our other assets, we remain committed to finalizing transactions on the Sharpstown and River Oaks campuses in Houston. At this time we had no new update as to the potential timing of the transaction in either of these locations. However, we remain confident that we will recover our total investment in these two campuses. Please keep in mind that we have not included any revenue and our guidance from either River Oaks or Sharpstown. Turning to other developments, in the fourth quarter we sold for $15 million our interest in Encino Hospital Medical Center facility to Prime Healthcare, the facility’s current operator.

At the same time, we issued a $20 million loan to Prime for the expansion of the Desert Valley Hospital, facility. We consider this to be a very solid investment. Desert Valley Hospital is a signature facility for Prime; the asset sets the standard for integrated care because of its partnership with Desert Valley Medical Group which is the region’s largest multi-specialty medical practice. Amongst smaller hospitals practicing in the U.S., Desert Valley has been named to the Thomson Reuters 100 top hospitals four times since 2003.

The funds will be utilized for 65 bed expansion that will bring the number of license beds to 148. We are very pleased to be a partner in this expansion and given Prime’s (splendid) track record, we expect to achieve a solid return on our investment. I am also pleased to report that in the last quarter we reached an agreement to settle virtually all claims asserted by Stealth L.P. in the litigation involving the termination of leases that Houston town and country and Medical office building in October 2006.

Steve Hamner will discuss details of the settlement a little later in the call. I would just like to add that we thought long and carefully about this and while the decision to pay anything to Stealth was a difficult one we believe we are avoiding a significant defense cost and more importantly the time commitment that we would have incurred during a four months trial was in the best interest of the company and shareholders.

The amount we elected to pay is comparable to our estimated cost to continue to defend the claims through trials. It is beneficial to now have this behind us. To sum up, we are pleased with the overall results of the past year and we are enthusiastic about the company’s prospects. There are several notable macro trends driving this optimism. First, with regard to U.S. Healthcare reform we remain optimistic as we monitor the various reform proposals and the potential for no reform.

We believe that both the Senate and House versions of reform will be slightly positive to neutral for hospitals and given the results of our hospitals have been showing over the past 18 months and in fact the past six years, we expect our hospitals to continue to perform well in the event of no healthcare reform. However, we believe there will be some form of healthcare legislation in the U.S. in the coming years. And we believe that recent events have shown that hospitals will continue to play a significant and profitable role in the U.S. healthcare system. We are seeing continued improvements in the credit markets.

We were well positioned to weather the credit storm of 2008 and 2009 with our well sort out and designed capital structure including being the first REIT to issue new equity in 2009. Our patience and prudence have paid off. We have an attractive pipeline and our projects are strong, while we continue to be conservative due to increased stability in both the overall economy and the credit markets.

The company currently expects to invest at least a $150 million in healthcare real estate assets in 2010. So in summary, the dynamics of our business model remain strong. Our portfolio continues to perform well, and we are excited about the prospects for strong growth in 2010 and beyond. Now our Chief Financial Officer, Steve Hamner will go over our financial performance for the quarter and year end in more detail. Steve?

Steve Hamner

Thanks Ed, good morning everyone. I'll present the highlights of our financial results for the fourth quarter and full year and then we'll open up the call for your questions. For the fourth quarter of 2009 we reported normalized funds from operations or FFO and adjusted FFO of approximately $13.2 million and $13.3 million respectively or $0.17 each per diluted share. Included in these calculations is $0.06 per share of non-routine expenses that we have historically excluded from the FFO estimates that we provide.

So the resulting fourth quarter FFO and AFFO was $0.23 per share absent these expenses was inline with what we have previously estimated that is a range of $0.89 to $0.93 per share FFO on an annualized basis. I'll briefly outline these non-routine expenses. As Ed mentioned in November, we reached an agreement to settle all but one claim asserted by Stealth L.P. related to the termination in October 2006 of leases of the Houston town and country hospital and medical office building.

We paid $2.7 million to settle claims for which Stealth was seeking more than $330 million. At the time, we estimated that legal fees alone to defend the claims in the four month of jury trial would have been at least $2 million and could have well exceeded that figure. Even this and even though we continue to deny any liability or wrongdoing, we believe it was in our interest to agree to the settlement and put this distraction behind us.

In early January, the single remaining claim that Stealth had against us, for which they were seeking more than $20 million was dismissed at no additional cost to us. Six of Stealth’s limited partners continue to press certain claims against the Memorial Hermann Health System in Texas and we are also named as defendant in this action. In fact these claims are presently being tried in State District Court in Houston.

Stealth itself has indemnified us for our cost regarding this claim and we do not expect further material cost related to this litigation. As in most litigation however, there is no assurance that we will not incur additional material cost. With respect to our reported results the litigation cost for the fourth quarter including the settlement payments, aggregated approximately $3.8 million or $0.05 per share. Also during the quarter we incurred property level operating expenses related to our former HPA properties of approximately $1.3 million or an aggregate per share effect of about $0.01.

Net income for the three months ended December 31, 2009 was $7.4 million or $0.09 per diluted share that compares with the net income of $1.4 million or $0.02 per diluted share for the same period one year ago. Per share levels for FFO, AFFO and net income were affected by an increase in the weighted average diluted common shares outstanding for the fourth quarter of 2009 to 78.8 million shares compared to 65.1 million shares for the same period in 2008.

Total revenues for the three months were $33 million compared to $29.5 million last year, an increase of over 11%. For the full year 2009, normalized FFO was $61.5 million or $0.79 per diluted shares. AFFO for the full year was $63.2 million or $0.81 per diluted share. Excluding litigation costs and property expenses annual per share amounts were $0.90 and $0.92 respectively. Net income for the full year ended December 31, 2009 was $36.3 million or $0.45 per share compared with $32.7 million or $0.50 per diluted share for the full year 2008.

Again per share levels were affected by an increase in the weighted average diluted common shares outstanding for the full year 2009 to $78.1 million compared to $62 million for the full year 2008. Total revenues for the full year were $129.8 million up over 11% compared to 2008 $116.8 million. Based on the existing portfolio, we continue to estimate that annualized FFO per share will fall in the range of $0.89 to $0.93 and we will take just a minute to go over some of the more important assumptions in that estimate.

Today our diluted shares outstanding are approximately 78.8 million. We continue to assume no revenue from the River Oaks and Sharpstown campuses in Houston. This estimate also contemplates no significant changes in our debt structure and a current LIBOR reference of about 30 basis points, that’s the 30 day rate and we pay an average rate of approximately $175 to 200 points over that rate on our variable rate debt.

Further assumptions include quarterly G&A expenses similar to what we incurred during 2009 on an annualized basis. This estimate does not include any property level expenses or litigation cost, right off the straight line rent or other non-routine or unplanned transactions. As we stated previously, this estimate will change perhaps materially if market interest rates change, assets are sold or acquired the Sharpstown and River Oaks properties are sold or leased. Other operating expenses vary, existing leases do not perform in accordance with their terms or we materially alter our capital components.

In November, we put an after market program in place and we have the ability to sell up to $50 million of stock under that plan. During the fourth quarter solely in order to test the systems of the three step replacement agents we sold 30000 shares at an average price per share of $10.25. We made no changes to our capital components during the quarter so as of December 31, we had approximately $585 million in borrowings and that is the gross amount before deducting discounts and issuance cost.

That included fixed rate debt of $355 million with a weighted average rate of approximately 7.4% and variable rate debt of $230 million with the weighted average rate today of approximately 2.3%. As of December 31, we had about $15.3 million in cash and approximately $58 million available under our revolving credit facilities. Again similar to the last several quarters we had 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 of this year.

However, we may extend that through November 2011 for a nominal fee at December 31 that facility had a balance of approximately $96 million. We have unfunded commitments to complete certain expansion and refurbishment projects within our existing portfolio that totaled approximately $10.8 million. We have no commitments to acquire or develop any new facilities. Considering all of this and the capital resources and the commitments that we have already described, we believe we have more than enough liquidity for the near term as well given the dramatic improvements we’ve seen in the credit markets during the past six months, we are confident that we have several attractive alternatives to satisfy our debt maturities over the next two years and in addition provide affordable capital to execute our acquisition and investment plans.

That concludes our prepared remarks for the day. I would now turn the call back over to the operator to queue your questions. Operator.

Question-and-Answer Session


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

Jerry Doctrow - Stifel Nicolaus

Just a couple of things maybe with G&A first, Steve. I know you gave some guidance spaces in the same I think in 2010 as '09. You kind of bounced around a bit I mean it was one of the reasons that we recover finance late maybe this quarter just any sense of is there a quarterly fluctuation or anything else that we should be thinking about that moved gone up and down?

Steven Hamner

No, we really think its kind of readable quarterly run rate based on the annualized amount and this quarter’s level. There is really no seasonality or cyclicality to the G&A cost.

Jerry Doctrow - Stifel Nicolaus

And this quarter is really typical?

Steven Hamner

That’s right.

Jerry Doctrow - Stifel Nicolaus

And then you talked about the debt obviously and you clearly got some time November 2010 and then 2011 somewhat more. I was just wondering if we can get any more color I mean if you are out financing today kind of how would you rank your maybe your how various alternatives look you know equity versus debt you know fixed versus floating, secured debt you (optimize) doing them, I am just trying to get a little more color there how you are thinking about?

Steven Hamner

Yeah, the alternatives we have and are actively considering today really include the entire range. Based on market conditions as we sit here right now, we believe we could favorably refinance the revolver and that will clearly involve a step up in the cost we think a 175 over now and we would expect to see that bump up by at least a 100 to 250 points. We also expect we would be able to increase the amount of the revolver, at the same time the convert market and the high yields markets are both wide open right now and especially compared to cost of even six months ago. The pricing that we would expect under those plans are fairly attractive.

Equity again when it comes time to issue equity and there is no thought of that in the near term we are certainly a lot happier at $10 to $10.50 where we’ve recently been before the last couple of days anyway. Then where we were you know six months ago in the $5 or $6 range when there was a lot of pressure to issue equity in the form of the balance sheet and is Ed said, we think our patience and the longer term maturities that we had on our balance sheet that really paid off and so when we do go to refinance we’ve just been a much, much better situation than we would have been had we made that decision six months ago.

Jerry Doctrow - Stifel Nicolaus

Okay and you had talked about your acquisitions at least 150 I think was the number that you were using so in that case is there a need to issue equity it sounds like you don’t really need to do the refinancings but if we see acquisitions then we logically see equity as well?

Steven Hamner

Well, that would be driven obviously by the velocity, the timing and the amount of acquisitions now. We’ve said we expect to do 150 this year and no different than prior years when we were active in the acquisition market you know it's very lumpy. The assets we buy are very expensive on a per asset basis. So it could be significantly more than the 150 and which is logical that in order to maintain the prudent balance sheet that we have at some point we would be required to go back for more equity.

Jerry Doctrow - Stifel Nicolaus

Okay and just last thing Ed I think with the press release just happens to say like $15 million in terms of the sales of Encino and I think the loan to back to Prime and I thought use the $20 million on the call so I was just trying to clarify?

Edward Aldag Jr.

It is a $20 million loan to Prime, 15 of which has been funded to date.

Jerry Doctrow - Stifel Nicolaus

Okay, may be I just missed read it too. Okay and I think we talked about this before. Its just my last question and then I will jump off, you know it sounds like a couple of the your bigger brethren out there are starting to talk a little bit more about sort of acute care, and you know what do you just see the competitive situation sort of being like as we go forward.

Edward Aldag Jr.

Well as you and I have discussed there still aren’t many out there that are also talking about it and those that are there is plenty of room for all of us. It’s a very, very large market. We have yet to run up against each other and we believe that the market is so large that it actually will be beneficial to us to have some additional of our peers out there investing in acute care hospitals to help to have the story to the investor world.


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

Karin Ford - KeyBanc

Just another question on the investment front, what’s your preferred type of asset you would like to acquire today, are you looking to invest with existing clients or new clients, what type of timing and what type of pricing are you looking for on that front?

Edward Aldag Jr.

Karin, the investments will look very similar to what we have now. Our portfolio now is about 75% acute care with the remaining portions split barely evenly between rehabs and (patient) and that will continue to be what we look like going forward. That’s where our pipeline looks like. From an existing versus new most of the pipeline is with new customers. There is some out there with some existing customers but the vast majority of it is with new customers.

The cap rates, the going in cap rates is a pretty wide spread and without getting into the specifics of each individual project, it would be safe to say that the investments are north of 10. Karin, for another question that you asked.

Karin Ford - KeyBanc

No, that’s covered, thank you. Did you mention what your expected yield is going to be on the new Desert Valley investment?

Edward Aldag Jr.

We didn’t but that becomes part of our existence, we have a mortgage owning that facility and it becomes part of that mortgage so it will carry the same rate.

Karin Ford - KeyBanc

Same rate, okay, that’s helpful, is any of your floating rate debt hedged today?

Edward Aldag Jr.


Karin Ford - KeyBanc

No. Okay. And then finally is there any shift or participation assumed in your guidance number?

Edward Aldag Jr.

What's in the guidance is the straight line risk component and that’s about $100,000 a month and again that’s an accounting requirement that we have to follow. We expect to collect more than that during 2010. How much more we haven’t said but the operations that Shasta have as Ed said earlier about our expectations and so we would expect the cash component of our participation to be higher than the accounting component.

Karin Ford - KeyBanc

So, what was the cash component in 4Q '09?

Edward Aldag Jr.

There was no cash collected in 2009.


(Operator Instructions). Your next question comes from the line of Bill (inaudible) with Wells Fargo Securities. Please proceed.

Unidentified Analyst

The sale of the Encino Hospital Medical Center at Prime's did you provide any seller financing with that?

Steven Hamner

No. And let me clarify, Karin asked a question about the rate and what we did on the rate I just spoke, the rate on Encino was a higher rate than we have on Desert Valley and so when we reinvested in Desert Valley we are achieving the same higher Encino rate.

Unidentified Analyst

Okay. Can you comment on the state of lending environment for hospitals like insurance companies anything you hearing on that side?

Steven Hamner

Well, there’s never been a very deep market there at least not in recent history and certainly what appeared to have been developing back in 2007, its no longer developing obviously there’s little (NYSEARCA:CMBS) activity anywhere, there’s little life company you know kind of whole loan activity anywhere on hospitals and so that’s not a big part of our planning when we talk about capital access.

Unidentified Analyst

Great thanks Steve. All of my questions have been covered already.


Your next question comes from the line of (inaudible). Please proceed.

Unidentified Analyst

Hi, thank you actually its Salomon behalf of (inaudible) just two quick questions, one in regard to potential Medicaid cuts in California for example is it safe to assume that coverage ratios are strong enough to withstand any impact on business?

Steven Hamner

Well, two things, Salomon. We have a relatively small exposure to state Medicaid throughout our portfolio. It’s a little bit higher in California than it is overall in the portfolio but it's still a relatively light amount and so the answer is absolutely that we don’t expect the coverage to go down.

Unidentified Analyst

Prefect okay. And secondly, as you kind of began to embark any potential capital raising initiatives and to decide to go down the line of doing some asset recycling can you please shed some more light on what type of assets you would be willing to potentially be sold and if there are any characteristics that would put a specific asset off limit?

Steven Hamner

Well, Salomon. We are not actively marketing any of our properties for recycling so any recycling we do with properties are just going to be opportunistic and it is certainly going to be accretive to the company. We are not going to sell an asset that we believe is performing well and providing us with a good return and then reinvesting it at a lower return. So if we do any property recycling, asset recycling it will be accretive to the company but we are not actively marketing any properties out there right now.


We have a follow up question from Karin Ford with KeyBanc. Please proceed.

Karin Ford - KeyBanc

Hi, thanks just one quick follow-up. I think you had said either on the last call or some time previously that one of the two River Oaks transactions campus transactions would happen in 1Q 2010, is that still your thinking?

Unidentified Company Speaker

Karin, as I said on the last call it could be as early as 1Q or much later. We are still working on that one particular property, it's the south campus that could literally happen this quarter or later, it's just taken a long time.


This concludes the Q&A portion. I'll now hand the call over to Mr. Ed Aldag. Please proceed.

Edward Aldag Jr.

Again, we thank all of you for listening in today and as always if you have any questions please don’t hesitate to call myself, Steve or Charles Lambert. Thank you very much.


Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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