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Medical Properties Trust, Inc. (NYSE:MPW)

Q4 2013 Earnings Conference Call

February 6, 2014 11:00 ET

Executives

Charles Lambert - Managing Director

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

Steven Hamner - Executive Vice President and Chief Financial Officer

Analysts

Tayo Okusanya - Jefferies

Karin Ford - KeyBanc Capital Markets

Daniel Bernstein - Stifel

Caitlin Burrows - Goldman Sachs

Michael Mueller - JPMorgan

Michael Carroll - RBC Capital Markets

Juan Sanabria - Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 Medical Properties Trust Earnings Conference Call. My name is Bryon and I will be your operator for today. At this time, all participants are in 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. Charles Lambert, Managing Director. Please proceed.

Charles Lambert - Managing Director

Thank you. Good morning and welcome to the Medical Properties Trust conference call to discuss our fourth quarter and year end 2013 financial results. With me today are Edward K. Aldag, Jr., Chairman, President and Chief Executive Officer of the company and Steven Hamner, Executive Vice President and Chief Financial Officer.

Our press release was distributed this morning and furnished on Form 8-K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our website at www.medicalpropertiestrust.com in the Investor 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 meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed in or underlying such forward-looking statements. We refer you to the company’s reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company’s actual results or future events to differ materially from those expressed in this call. The information being provided today is as of this date only and except as required by Federal Securities laws, the company does not undertake a duty to update any such information.

In addition, during the course of the conference call we will describe certain non-GAAP financial measures, which should be considered in addition to and not in the lieu of comparable GAAP financial measures. Please note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations.

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

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

Thank you, Charles and thank all of you for joining us today for our fourth quarter year end 2013 Medical Properties Trust earnings call. For 2011, our normalized FFO was $0.71 per share. For 2012, it was $0.90 per share. And for 2013, our normalized FFO per share was $0.96 that is a 35% increase in normalized FFO per share over a two-year period. And more importantly, we ended 2013 with an FFO run rate for 2014 of $1.10 per share using the midpoint of our range. This amount represents a 55% increase over two years.

Remember that we do not have to do any new acquisitions to achieve the $1.10 FFO per share for 2014. The $1.10 is based on all the acquisitions in place at 12/31/13 and produces a run rate FFO payout of 76%. And remember, the $1.10 FFO run rate that we announced this morning is not guidance for 2014. This $1.10 is what we said it was a 12/31/13 in place FFO run rate. This does not include any acquisition activity for 2014, which we have guided this morning to be $500 million for 2014. We expect every acquisition we make in 2014 to be immediately accretive.

We achieved this remarkable growth through a steady and strategically accomplished acquisitions plan over the past two years, which allowed us to increase our revenue by 79% since 2011. During the same period, our total shareholder return for MPT shareholders was 43%. In 2012, we made $800 million in investments. In 2013, we made approximately $700 million in investments. Prior to 2011, our average annual investments had been $280 million per year. We feel very good about our growth prospects for 2014. Over the last few years we have consistently said that we expect to make at least $400 million in annual investments. The past two years we have greatly exceeded that amount.

Given our recent history and what we are currently working on in our acquisitions pipeline, we are going to increase our minimum target this year to $500 million in investments. The vast majority of these investments should be in general acute care hospitals with the majority being with tenants new to MPT. In fact while there is no assurance that we can complete any particular acquisition, some of our pipeline opportunities are of a size and nature and are at a negotiating stage that it is possible that we could complete agreements for a significant portion of our estimate in the relatively near-term. We expect to continue to lead the industry in acute care hospital investments, our management team has vast experience in hospital operations gives us an edge in underwriting relationships with hospital operators.

Our existing portfolio including only properties we have owned for at least 12 months ended the fourth quarter on generally strong results after a slight softening in the first half of the third quarter. Our acute care sector and rehab sectors saw essentially flat coverages year-over-year and quarter-over-quarter of approximately 5.8 times and 2.9 time respectively. Our LTACH saw a year-over-year 18 basis point drop in coverage to about 1.87 times. In addition all three sectors saw an uptick in overall admissions year-over-year, quarter-over-quarter admissions for the acute care portion of our portfolio were essentially flat, while both the LTACH and rehabs were up. As you are aware LTACH legislation was recently passed that defined LTACH admissions criteria and new patient provision for LTACH. Our operators have performed a review by individual hospital and believe that this legislation should generally be positive for them.

We have previously noted that the operator of the Florence facility and their affiliate at the Gilbert Hospital has not performed as we have expected. While the Florence facility continues to pay rent, we have issued a notice of default and termination for the Gilbert Hospital. The operator at Gilbert is contesting the termination. We continue to receive interest from other operators hoping to get an opportunity to become our tenant at both of these locations. We are currently in detailed negotiations with several potential operators for the Monroe facility. We hope to have something further to report here in the near future. In the meantime Monroe continues to hold steady at an operational level well below its recognized potential.

Our various portfolio concentrations continued to improve. The most important concentration to us is what percent anyone property represents of the whole portfolio. As of 12/31/13 no one property represents more than 3.7% of our total portfolio. When looking at the concentration on a state basis, three largest concentrations are Texas with 24% of the portfolio, California with 17% and Arizona with 6%. Looking at concentration from an operator standpoint, Prime Hospital represents 22.67%, RS facility is 15% and IASIS hospitals 11%. General acute care hospitals represent 53% of our total portfolio with rehab hospitals making up 22.3% and LTACH 14.71% and the remaining in other assets. And all total MPT owns 8102 hospital beds in the country, making us the fourth largest owner compared to other four profit owners.

Not only does MPT hold a leadership positions in terms of beds owned, our average investment for acute care bed is $297,000 per bed, while the average cost build to replacement facility is approximately $1 million per bed. These numbers illustrate a barrier to entry which helps to provide protection for our portfolio. And it also is an indication of the unrecognized value in our portfolio. Our ideal type investments totaling approximately $110 million continued to perform well. The Ernest investment returned about 15%, while the non-Ernest or ideal type investments returned 44% for the year. We are delighted with our 2013 results and off to a good start in 2014.

At this time Steve will go over the details of the financial results before we open it up to questions. Steve?

Steven Hamner - Executive Vice President and Chief Financial Officer

Thank you, Ed. We filed our press release this morning with details about our reported results and I will be happy to take questions about those momentarily. First, though I want to provide some explanatory information about a couple of matters. Normalized FFO for the year and quarter reflect $0.02 per share of reductions related simply to certain timing differences. The first is related to the issuance of €200 million in unsecured debt in early October for the acquisition of the German rehab portfolio that did not close until December 1. When combined with our prior expectation of November 1 closing, the overall effect on FFO aggregated about $2.6 million. The second matter was a $900,000 non-cash adjustment to performance-based share compensation expense to reflect achievement of the performance hurdles established in prior years earlier than previously assumed. The measure by the way was total return to shareholders that exceeded 43% for the three years ended December 31, 2013. This had a zero effect on aggregate expense or shares awarded for the prior year programs. Without the impact of these items, our normalized FFO would be the $0.26 per share consensus expectation.

The press release also describes the treatment as we have previously announced of the German transfer taxes that were part of the €184 million consideration paid for the RHM portfolio. On a dollar equivalent basis, these taxes were about $12 million and in accordance with accounting requirements were treated as acquisition expense. The tax amount was nonetheless treated in our agreements as part of the purchase price and our rent is calculated based on the total €184 million. Our investment in tenant operations continued to perform as expected as Ed just mentioned.

During 2013, we are $19.4 million on about $110 million in investments. $14 million was earned on our $93.2 million secured loan to Ernest Health, a return approximating the 15% coupon. And as a reminder, that is in addition to the $35 million that we recognized in rent and mortgage interest on the Ernest portfolio. Secondly, we earned $5.4 million from investments in another seven separate tenants with an aggregate investment of approximately $16 million. Since our acquisition of Ernest two years ago, their management team has grown the portfolio from 16 to 20 up in running hospitals and is in the process of opening one more and evaluating several additional opportunities. Remember that for each new Ernest hospital, in addition to the very attractive and long-term rental revenues, MPT earns at least 80% of operating income and makes little incremental investment in order to achieve those earnings.

At the end of the fourth quarter, we made a $20 million mortgage loan secured by a general acute care hospital that provides to us a return based on an interest in the operations of the hospital in addition to the interest on the loan. Of course, no income was recognized on this investment in 2013. We sold one property in the fourth quarter that had paid approximately $1.4 million in annualized rent. We realized a cash sales price that’s similar to other recent property sales demonstrated that MPT brings significant value to hospital real estate that it acquires. This 7-year-old property was paying rents based on our capitalization rate of 12.5% and we sold it at an implied rate of 9.7%, resulting in a 29% gain on our original un-depreciated cost and a 14.1% un-levered internal rate of return. Only one lease term expires in 2014 and that lessee has the option to repurchase the property, which generates approximately $2.1 million in annualized rent, but we believe it highly unlikely that the lessee will vacate.

Ed described a few minutes ago our full pipeline. And I will reiterate that we believe the acquisition and development of at least $500 million in new hospital real estate is a good expectation for 2014 and moreover, that a meaningful amount of that could be achieved in the relatively near term. And so far as funding near-term acquisitions, we have a number of alternatives, from which we will select depending on market conditions at the appropriate time, but we have immediately available about $300 million in cash and under our revolver. For permanent funding of our acquisitions, we have long stated our balance sheet and capital principals. As most of you may remember our leverage target is the 40% to 45% range of net debt to gross assets, which generally equates to the 5 to 5.5 times debt-to-EBITDA range. We’re well in that range at the end of 2013 and in fact we would be comfortable going above that temporarily in the current low interest environment. But the long-term target will remain the 40% to 45% range.

We will be opportunistic in the capital market as we have a menu of options including common stock, preferred stock, limited asset sales and we’re currently exploring joint venture type financing. In addition in the last six months we have completed two very successful unsecured bond financings and we’re also seasoned issuers in the bank and convertible bond markets. So as we continue to successfully make accretive acquisitions we will evaluate all the options that are available to us and make the decision at the appropriate time to maximize the accretion while maintaining a prudent balance sheet.

The press release this morning included our normalized FFO run rate estimate of between $1.08 and $1.12 per share for all of 2014. And to remind everyone that estimate is as if we make no new investments in 2014. We’re confident that our 2014 investments remember our target is at least $500 million will continue to be immediately accretive which of course would result in additional per share FFO. As usual these estimates do not include the effects if any of debt refinancing cost, real estate operating cost, interest rate swaps, write-offs of straight line rent, property sales, foreign currency gains and losses or other non-recurring or unplanned transactions.

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

We have recently added a new Director of Investor Relations to our team and we expect to get around soon introduce to investors and to analysts, Tim (Berryman) over the next few months, Charles Lambert will transition many of his Investor Relations responsibilities to Tim. Charles will stay focused on his ever-growing responsibilities as Managing Director of Capital Markets. So you will continue to see him in our offices, your offices and at conference.

With that we’ll take any questions and I’ll turn the call back to the operator.

Question-And-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Tayo Okusanya with Jefferies.

Tayo Okusanya - Jefferies

Hi, yes, good afternoon everyone. Good acquisition pipeline, it’s good to hear that lot of these deals could happen pretty quickly. Could you just talk a little bit about what the mix could be, is it more general acute care hospitals, is it more post acute care stuff?

Edward Aldag, Jr.

Hey Tayo, how are you this morning?

Tayo Okusanya - Jefferies

I’m terrific.

Edward Aldag, Jr.

As I stated earlier in the call we do expect that the vast majority of the acquisitions in 2014 to be general acute care hospitals.

Tayo Okusanya - Jefferies

Okay. Could you give a sense of – kind of – it’s going to end up kind of like a target cap rate range of 9 to 10 or do you think it could kind of come in a little bit lower like some other recent transactions?

Edward Aldag, Jr.

Tayo, it will continue to be as it was in 2013, it will be in the mid eight so all the way up to a 12.

Tayo Okusanya - Jefferies

Okay. That’s great. And then second question on Ernest, that portfolio is growing pretty quickly. Could you give us a sense of what the EBITDA Ernest at this point versus when you initially underwrote the deal?

Steven Hamner

Well we underwrote the deal Tayo EBITDA and about $15 million if I recall going back two years. And since then that portfolio of the 16 original hospitals has grown modestly. There were some hospitals that were in ramp up at that time. So there has been some modest growth there and of course we’ve added or Ernest has added as of now four additional up and running hospitals. So they continue to ramp up. So the long answer is we don’t have to disclose today an EBITDA number. If we did it would not be very helpful because of the four hospitals and one more that they’re about to open, that are in the early ramp up phases. So I’ll leave it at that.

Tayo Okusanya - Jefferies

The four new hospitals these are just recently opened so you really haven’t kind of put a EBITDA and just those assets yet?

Edward Aldag, Jr.

That’s correct.

Steven Hamner

Yes, but I think what we have said in the past is typically if you look at the Ernest model they got a template they have because their hospitals are generally similar from market-to-market. EBITDAR is projected at between $4 million and $5 million for (coffee).

Tayo Okusanya - Jefferies

Yes.

Steven Hamner

And then the rent just to make things easy comes off the top of that at about $1.5 million. So it leaves between $2.5 million and $3.5 ish million of EBITDA keeping in mind then that MPT gets 80% of that for no incremental investment.

Tayo Okusanya - Jefferies

Yes.

Steven Hamner

That’s among other things, one of the real attractions from the beginning with the Ernest acquisition.

Tayo Okusanya - Jefferies

Got it. So you’re pretty comfortable with this step up in the – for the loan from 7% to 10%?

Steven Hamner

Absolutely.

Tayo Okusanya - Jefferies

Okay.

Steven Hamner

Yes, absolutely. There is a good point to make that beginning in January it did step up to the 10%.

Tayo Okusanya - Jefferies

Okay. And then just last one from me before I get off. I kind of missed the full commentary on Gilbert and the lease termination there. Could you just go over that again one more time?

Edward Aldag, Jr.

Sure, Tayo. There is not a whole lot to say at this point. This is the same group of two hospitals that we have with this operator that we’ve talked about for the last few earning calls. And we terminated, we noticed the termination of the lease for Gilbert very recently, the operator there has contested that and that’s kind of where we are at this point.

Tayo Okusanya - Jefferies

And do you have an operator kind of lined up good to go once you could kind of get them out?

Edward Aldag, Jr.

Well I’ll say what we’ve said historically and what I said again this morning is that we have a number of people that would like to be the operator there.

Tayo Okusanya - Jefferies

Fair enough. Alright. Thank you very much.

Edward Aldag, Jr.

Thank you, Tayo.

Operator

Your next question comes from the line of Karin Ford with KeyBanc Capital Markets.

Karin Ford - KeyBanc Capital Markets

Hi, good morning.

Steven Hamner

Good morning, Karin.

Karin Ford - KeyBanc Capital Markets

Just following up on Tayo’s last question. What’s the rent on the Gilbert Hospital and do you expect to have any impact on your rental payments from either Florence or Gilbert in 2014?

Steven Hamner

No, we, Karin we do not, to answer the second part of your question we do not expect at this time to impact earnings. First of all your question is we have not in a number of years given specific property-by-property cap rates or revenue.

Karin Ford - KeyBanc Capital Markets

Okay. So your current expectation is that Gilbert it continues to pay rent through the process and then there will be no interruption between them leaving in a new operator potentially?

Steven Hamner

Well I think to be a little bit more specific which is important when there was issues like this involve. We expect no impact certainly no material impact on future earnings based on the Gilbert and Florence situation.

Karin Ford - KeyBanc Capital Markets

Okay. Next question is how much RIDEA income do you expect in 2014, what’s baked into the run rate number that you gave us?

Steven Hamner

The same as 2013. We’re still –the biggest part obviously is Ernest and the $93 million loan that has a coupon of 15, Tayo just pointed out that, that pay rate increases to 10% as of January. So that is expected to remain about the same. And then the remainder which although is $5 million which is not a big number in the scheme of things. We’re not anticipating in our guidance this morning, any material increase or decrease in that number.

Karin Ford - KeyBanc Capital Markets

Great, thanks. And then last question, could you just tell us what the interest rate is on the new Alecto mortgage as well as what the lease yields, lease yield was on the three developments that you opened in the fourth quarter?

Steven Hamner

The Alecto relationship is again it’s a RIDEA structure and there is a floor on the interest rate and there is no ceiling but it’s based on a percentage of Alecto’s earnings. And the interest rate is we again – we don’t give specific cap rates or interest rates on particular properties.

Edward Aldag, Jr.

Karin, it is…

Karin Ford - KeyBanc Capital Markets

(indiscernible).

Edward Aldag, Jr.

Pardon me.

Karin Ford - KeyBanc Capital Markets

Just looking for some help as we’re just trying to model that investment and how it’s going to contribute to FFO next year?

Edward Aldag, Jr.

Yes, Karin, it is in the range that I mentioned just a few minutes ago in answering Tayo’s question and it is at the upper end of that range.

Karin Ford - KeyBanc Capital Markets

Okay. That’s helpful. And just the lease yield that you ended up getting on the three development completions?

Edward Aldag, Jr.

That is in line with what you’ve seen for those types of developments over the last few years.

Karin Ford - KeyBanc Capital Markets

Okay. Thanks.

Operator

Your next question comes from the line of Daniel Bernstein with Stifel.

Daniel Bernstein - Stifel

Good morning.

Edward Aldag, Jr.

Good morning, Dan.

Daniel Bernstein - Stifel

Hi, I guess one of the questions I had is in terms of the acquisition environment. Are you seeing – as you see some increased acquisition volume, are you seeing some net increased competition as well and is that affecting cap rates. So it just seems like there is not a lot of people still not a lot of people operating in your space in terms of investing. And just trying to understand if you’re seeing any more competition out there, what (REITs) or private equity?

Edward Aldag, Jr.

Dan, it’s not really private equity. The private equity is continues to be what has been for the last couple of years since the credit crunch which is that they see us as a great complement to their funds which is not the same and that you saw before the credit crunch. So from that aspect it has worked very well. From increased competition we have seen some, there certainly has been some other public statements made by some of our peers that have shown interest in acute care hospital sector, we think that, that’s been very good overall, but we have not had to greatly compress our cap rates especially – particularly recently because of that competition, there obviously was some in the – some of the acquisitions that we made last year.

Daniel Bernstein - Stifel

Okay. Do you think there is any incentive upon hospital systems given the changes in the healthcare reform maybe to – for them to try to consolidate the industry hospital systems to get larger? Have you seen any of that at all or is that just not maybe the true word about other items to go worry about buying another hospital. But just trying to understand if hospital themselves offer any competition for you?

Edward Aldag, Jr.

Not competition, the consolidation it works very well for us. And the consolidation continues to be what we’ve show than it has been over – at least the last 12 to 18 months, which was primarily the four profit sector acquiring not for profit hospitals in making the conversion. Obviously you got the transactions like CHS and HMA, but that’s not the norm. The norm is more not – four profits acquiring hospitals from entities such as dignity and others.

Daniel Bernstein - Stifel

Okay, okay. In terms of the $500 million investment outlook, is that mainly going to be acquisitions or you think there are some opportunities to provide some lines in there as well which you historically done?

Edward Aldag, Jr.

Well primarily the acquisitions, but let me just clarify to make sure we’re talking about the same thing. We will continue from time-to-time due to loans that are structured as a loan, but from our standpoint we view them as the same type of investments is our leases as they are done and a loan structure is primarily done for tax reasons not for economic reasons, for economic they look identical to each other. So from our standpoint it’s the same type of investment that you’ve been seeing from us in the past.

Daniel Bernstein - Stifel

Okay. And then one last question on G&A I don’t know if I heard you. Did you give a G&A forecast for next year. I was just – it seems like the fourth quarter G&A even taking out the performance awards seems a little bit elevated at least to what we had modeled. So just trying to understand what’s moving in G&A there for 2014?

Steven Hamner

No, we didn’t break out the guidance into G&A. It’s obviously is baked into that $8 to $12.

Daniel Bernstein - Stifel

Okay. On a dollar number do you think it will be higher than 2013. I was just trying to understand if it – if I should model that run rate closer to 4Q minus the performance award?

Edward Aldag, Jr.

I would suggest not, there are a few items that in the aggregate, even in the aggregate are not material. But I think that’s what you are seeing maybe a little bit of increase and we don’t expect those to repeat.

Daniel Bernstein - Stifel

Okay, okay, that’s good enough for me. That’s all I have. Thanks.

Edward Aldag, Jr.

Thanks, Dan.

Operator

Your next question comes from the line of Andrew Rosivach with Goldman Sachs.

Caitlin Burrows - Goldman Sachs

Hi. This is actually Caitlin. Wondering if you could just tell us what the average cap rate you are expecting is for your acquisition pipeline?

Edward Aldag, Jr.

Actually, we don’t give the specifics and we haven’t in quite some time now. What we do give is what I gave earlier is that our range continues to be very close to what it was for 2013, which is a very wide range and it runs from the mid ‘08 all the way up to ‘12.

Caitlin Burrows - Goldman Sachs

Okay. And then is that on a GAAP or cash basis?

Edward Aldag, Jr.

That’s a going in cash basis.

Caitlin Burrows - Goldman Sachs

Could you say anything about the GAAP basis?

Steven Hamner

Well, on the GAAP basis, typically you will see our escalators are CPI-based with a significant amount of them having a floor. The floor is generally around that 2%. So if you build in a 2% guaranteed increase over 15 years, you are probably looking at another roughly 150 bps to a GAAP increment to add to the cash.

Caitlin Burrows - Goldman Sachs

Okay, thank you.

Operator

And your next question comes from Michael Mueller with JPMorgan.

Michael Mueller - JPMorgan

Thanks, hi.

Edward Aldag, Jr.

Hi Mike.

Michael Mueller - JPMorgan

Hello. I guess first Florence and Gilbert, so just to kind of rundown everything you can here, so the lease was terminated at Gilbert. Is there a lease in place still at Florence?

Edward Aldag, Jr.

Yes.

Michael Mueller - JPMorgan

Okay.

Edward Aldag, Jr.

Okay.

Michael Mueller - JPMorgan

And are you getting rent payments of both or not?

Edward Aldag, Jr.

Well, at Florence, yes, and Gilbert, yes but we just announced the termination or just noticed the termination, which they contested. So we haven’t gone far enough to see what’s going to happen next.

Michael Mueller - JPMorgan

But you were getting a rent payment up until then.

Steven Hamner

Yes, I think we’ll just leave it at what Ed said Mike and I would reiterate though that we expect no impact in 2014 from either the Gilbert or Florence Hospital.

Michael Mueller - JPMorgan

Got it. Okay and then just two other questions on this one, not to beat a dead horse, but so it seems like you are still booking FFO on each of those, I think that’s the case, but what specifically happened to Gilbert as to why now, why terminate now considering it seems like most of the discussion has been around Florence up until then?

Edward Aldag, Jr.

Yes. Again, Mike, it is subject to litigation and we just really can’t go into details and really again given the context that we expect no, certainly no material impact from either of the facilities during 2014.

Michael Mueller - JPMorgan

Okay. So the acquisition guidance of about $500 million, should we assume that’s all domestic or is a chunk of that overseas as well?

Edward Aldag, Jr.

The vast majority of that is domestic.

Michael Mueller - JPMorgan

Okay.

Edward Aldag, Jr.

I didn’t mean to imply that there will absolutely be any international.

Michael Mueller - JPMorgan

Okay, got it. And then last question, I know you talked about purchase options and any purchase option for 2014 that you said probably wouldn’t be exercised, but what’s the dollar?

Steven Hamner

Mike, that’s not what he said. What he said was that we that their options are to purchase, renew release or vacate, and that we don’t have any expectations of them vacating. They may do one or the other.

Michael Mueller - JPMorgan

Got it. And how big is the dollar amount if it’s a purchased option is exercised, excuse me?

Edward Aldag, Jr.

It’s a $2.1 million rental annualized rent.

Michael Mueller - JPMorgan

Got it. Okay, and last one if we are looking out to ‘15 is there anything substantial that could hit in 2015 as well?

Edward Aldag, Jr.

We have got two leases maturing and off the top of my head, well I am being given a note here, yes, we have got two leases maturing that we expect will renew. That of course was not assured, but we expect they will maintain the lease and maintain occupancy.

Michael Mueller - JPMorgan

Got it. Okay, that was it. Thank you.

Operator

Your next question comes from the line of Michael Carroll with RBC Capital Markets.

Michael Carroll - RBC Capital Markets

Thanks. Ed, can you give us some additional color on the LTACH patient criteria and how it will positively impact your tenants?

Edward Aldag, Jr.

Well, Mike, some of it is you remember that I gotten off start in the medical field in the rehab hospital business and it’s not much different from the time that when I started that in the early 80s and the vast majority of our patients there were orthopedic. And now the vast majority of them are neurological. It’s very similar situation that we have here in the LTACH now that everyone knows what the patient criteria is. It will be easier for them to operate. And what it essentially does is it forces the operators to go to a much higher acuity patient. And we believe with all of our discussions with them prior to the announcement and then post the announcement that all of them will make the adjustments well and that they will continue to be able to operate in basically a status quo type situation.

Michael Carroll - RBC Capital Markets

I know it’s not going to be effective for some time now, but when it does become effective, do you believe that coverage ratios will drop at all or how is that going to impact it?

Edward Aldag, Jr.

Yes, I don’t think and our operators don’t think that it will drop as it relates to the patient criteria. Now, there is a lot that can happen between now and 2015 with all of the other aspects that could go either way. But our operators are not expecting to see their coverages drop as it relates to this patient criteria that goes into effect in roughly two years.

Michael Carroll - RBC Capital Markets

Okay. How much of the RIDEA income that you generated from the LTACH business?

Edward Aldag, Jr.

Not much. I remember the entire portion of the RIDEA transaction as our overall portfolio is extremely small and a portion of the RIDEA that comes from just the LTACH portion, I don’t have the exact percentage, but it’s not a large dollar amount.

Michael Carroll - RBC Capital Markets

Okay. Is it mostly general acute care hospitals?

Edward Aldag, Jr.

No. It’s LTACHs, rehabs and two acute cares.

Steven Hamner

Now, that second bucket that we talked about, the $5.4 million, of course Ernest again makes up the significant amount of the total $19 million, but aside from that, there is a very little income that to tie directly to LTACHs.

Michael Carroll - RBC Capital Markets

Okay. And then with the Ernest RIDEA income, is there any, I guess are you recognizing any of that income outside of that 15% loan that you gave them?

Steven Hamner

We have not.

Michael Carroll - RBC Capital Markets

Okay. And then my last question relates to I guess your outlook that includes the developments, but not future acquisitions, right?

Steven Hamner

It does. To the extent that developments are scheduled to come online in 2014, it takes that into account.

Edward Aldag, Jr.

The development is already underway.

Michael Carroll - RBC Capital Markets

Okay, great. Thanks guys.

Operator

Your next question comes from the line of Juan Sanabria with Bank of America Merrill Lynch.

Juan Sanabria - Bank of America Merrill Lynch

Hi, good morning. Just hoping you could give a little more color on the straight line rent write-off benefit of $0.01 in the fourth quarter and if that was related to Gilbert?

Edward Aldag, Jr.

It’s not. First of all, it’s not a benefit I mean just for background that’s related to the property that we sold. So, of course when you got a lease with fixed steps you have to accrue that, I mean that’s what straight line renewal. So, when that lease terminates for any reason then the lessee is not obligate to make those payments any more. So, it’s a non-cash accrual to begin with. If the lease statement placed for its term it turns around naturally if the lease terminates prior to its natural term then it goes away. So we sold the property that we mentioned and we had about $900,000 or something like that in straight line rent that was removed. But there is no benefit to it.

Juan Sanabria - Bank of America Merrill Lynch

Okay, great. And could you just talk a little bit about how you think of your cost of capital particularly on the equity side as we sort of think about financing acquisitions going forward? How do – sorry….

Edward Aldag, Jr.

Yes. As we mentioned when we put together a capital plan depending on the type of capital there is just straight common equity that’s the component of that plan or a funding. Then we look at different views on equity cost of capital. I mean, we are not big delivers in the black box type models for a lot of smaller stocks, but all-in-all, we look at the cost of equity depending on different inputs of between 7.5 and 8.5 probably.

Juan Sanabria - Bank of America Merrill Lynch

Okay, great. And what should we be thinking in terms of any refinancings for 2014? Do you have anything sort of penciled in, in terms of terming out any of the line or should that kind of happen as you do acquisitions and what are you thinking in terms of long-term cost of debt?

Steven Hamner

Yes. We just don’t have much outstanding on the line. And as you point out, it will just kind of be a natural conversion as we add more properties and we continue to manage the balance sheet to those metrics we talked about earlier. With respect to cost of debt now the most recent deal we did again was the euro deal in September and that was at a 5.75. Couple of weeks earlier, we have done the U.S. deal at 6. If you talk to the bankers today, they will tell you that we would come in inside of those amounts, all things equal. If you are talking about revolver type or bank financing, then obviously it’s a lot lower than that.

Juan Sanabria - Bank of America Merrill Lynch

Okay. And just lastly on the – you started out the conversation talking about the significant growth to FFO over the last few years and kind of referenced the payout ratio, what should we be thinking about the dividend?

Steven Hamner

Yes. What we have said for actually number of years now is we want that normalized payout to be kind of right where it is today between 75% and 80% payout on a normalized FFO basis.

Juan Sanabria - Bank of America Merrill Lynch

Okay, thanks guys.

Edward Aldag, Jr.

Thank you.

Operator

Thanks. And your next question comes from the line of Tayo Okusanya with Jefferies.

Tayo Okusanya - Jefferies

Yes, thanks for taking my follow on. Ed, in your comments you kind of talked about Monroe, it sounded like there were some opportunities to kind of do something with that asset. Am I reading too much to that?

Edward Aldag, Jr.

No, you are not, Tayo. We have good negotiations going on right now with a number of potential operators, but I am not going to get really excited yet.

Tayo Okusanya - Jefferies

Alright, good. Okay, I guess we will wait for news coming out of that then. Thank you.

Edward Aldag, Jr.

Alright.

Operator

Ladies and gentlemen, this will conclude today’s question-and-answer session. I will now turn the call back over to Mr. Ed Aldag for closing remarks.

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

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

Operator

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

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