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Medical Properties Trust, Inc. (NYSE:MPW)

Q4 2010 Earnings Call Transcript

January 27, 2011 11:00 am ET

Executives

Charles Lambert – Finance Director

Edward Aldag Jr – Chairman, President and CEO

Steven Hamner – EVP and CFO

Analysts

Jerry Doctrow – Stifel Nicolaus

Ralph Davies – J P Morgan

Karin Ford – KeyBanc

Fred Morgan – RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Medical Properties Trust, Inc. earnings conference call. My name is Stephanie, 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) I would now like to turn the conference over to your host for today, Mr Charles Lambert, Director of Finance. Please proceed.

Charles Lambert

Good morning. Welcome to the Medical Properties Trust conference call to discuss our fourth quarter and year-end 2010 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 Web site at www.medicalpropertiestrust.com, in the Investor Relations section. Additionally, we are hosting a live webcast of today’s call, which you can access in that same section.

During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, 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 such information. In addition, during the course of this 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 measures in accordance with Regulation G requirements. You can also refer to our Web site 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

Thank you Charles. In the second half of 2010, we renewed our acquisition activities announcing to the market that we anticipated investing $150 million in new properties in 2010, just half of our historical normal levels prior to the global recession. We ended the year by investing approximately $213 million, 42% ahead of projections.

We acquired three new existing inpatient rehabilitation hospitals with an established but new to MPT tenant, two new existing LTACH hospitals and one in escrow, again with an established but new to MPT tenant, and started the development of one new acute care hospital with an established operator but one that was also new to MPT. These acquisitions further improved our already strong tenant and geographic diversification, and continued to enhance our strong returns with a weighted average going-in cash cap rate of almost 9.5%.

In addition, the six existing properties in this $213 million generate EBITDAR lease coverage of over 2.5 times, which is right in line with our existing LTACH and rehab hospitals. As we have said on recent calls, our acquisition pipeline is very strong and we expect 2011 investments to be back to normal levels. You will recall that we said in late 2010 that we expected to invest at least $300 million in new investments in 2011. Due to the excess we are having, we are raising that guidance today to at least $350 million.

In January of this year, we have closed another $87 million of investments and have another $56 million at the stage where we are hopeful the transactions will close any day now. We continue to feel very positive about the hospital industry. Due to the fact that this fourth quarter earnings call is only three weeks after the year-end, we do not have all of the financial data for most of our hospitals for the month of December. And in fact, most of our publicly reporting tenants will not report their 2010 results until late February. So we will not have the specific coverage numbers for you today. However, it is clear that our portfolio continues to produce strong coverages.

It appears that our acute care hospital sector will most likely remain flat to slightly down with EBITDAR coverage in the 6.5 times to 7 times. The LTACH portion, which was 2.17 times last year trailing 12 months looks like it will end the year in the same range, and the rehab hospitals, which were three times last year trailing 12 months looks like it will end the year essentially flat as well.

As we indicated in 2010 and actually put to work on a small scale in early 2010, we will continue to take advantage of our hospital knowledge and make some ideal [ph] investments in several of our new facilities in 2011. We continue to see investment opportunities where we can achieve out-size returns allowing MPT to increase its year-over-year organic growth.

The tenants in two of our properties with least maturities in 2011 had notified us of their desire to purchase the properties at the expiration of the lease. Both of these properties aggregated investment by MPT of approximately $40 million. On one of the properties, we have reached an agreement to terms but have not yet closed, and the other properties in the early stages of negotiations.

Monroe is very close to finalizing a new relationship with regards to its operations and we hope to be able to report on that soon. With this being January 27 and having already closed approximately $87 million worth of properties with another $56 million expected to be imminent, combining to represent almost half of our 2011 acquisition guidance with 11 months remaining, we feel very good about our total investment outlook for 2011.

At this time, I would like Steve Hamner to go over the actual operations, the operating results for 2010. Steve?

Steven Hamner

Thank you Ed, and good morning everyone. I will briefly run through the highlights of the fourth quarter financial results, and then we will open up the call for your questions.

For the fourth quarter of 2010, we reported normalized FFO of approximately $18.2 million, and adjusted FFO of approximately $18.6 million or $0.17 per diluted share for each measure. This is in line with our outstanding guidance after adjusting for certain non-routine items primarily consisting of gains on real estate sales, the write-off of accrued straight-line rent associated with those sold properties, and settlement of litigations. The net effect of these items was an aggregate cost of $3.6 million or $0.03 per diluted share.

In addition, we have normalized FFO by adding back the amount of deal cost associated with successful acquisition pursued. These are costs that until accounting rules changed last year were capitalized into the cost of the successful acquisitions. In 2010’s fourth quarter, these costs totalled $713,000 or $0.01 per diluted share. For the full year in 2010, these costs aggregated $2 million or $0.02 per share.

Net income for the quarter ended December 31 was $10.6 million or $0.09 per diluted share compared with $7.4 million or $0.09 per diluted share for the year ago period, which by the way has been restated for the effects of the classification of certain operating results to discontinued operations. Similar to FFO results, net income for the quarter includes the gain on the sale of our Montclair Hospital and Sharpstown facility of $2.9 million, related write-off of straight-line rent of $1 million, and the settlement of litigation surrounding the former Bucks County tenant, we expected a payment of $1.4 million on the $3.8 million of unpaid rent from 2007 and took a related $2.4 million charge from the remainder.

In comparison of these results to those of the same period a year ago, the per share amounts were affected by an increase in the weighted average diluted common shares outstanding to $110 million for the three months ended December 31, 2010. This is up from $79 million for the same period in 2009, and is primarily due to the common stock offering of 29.9 million shares that we completed in April of 2010.

I will briefly review our present capitalization and commitments during the quarter, and through January 26, we have drawn $33 million on our lines of credit, and we received approximately $63 million in repurchase and prepayment proceeds. As of today, the company has approximately $345 million in available liquidity through cash balances and credit facilities for investment in new hospital real estate. Ed mentioned earlier, the $56 million in pending acquisitions that we expect to close in the next few weeks. In addition, we have another $153 million in properties under LOI that we are confident will also close as early as in February.

In at least two instances, the spending transactions include provisions that should allow us to earn attractive returns from our investment in the operators of our properties, in other words ideal type transactions. We continue to operate with a very low debt ratio of 23% of net debt to gross real estate assets and our net debt to recurring EBITDA on our last quarter annualized basis is only 2.7 times. We do expect the leverage levels to increase in the near term as we execute pending acquisition and development agreements, but even when we are fully invested with our existing capital sources, we expect our leverage to be less than 45%.

We have a $40 million revolver that matures in June of 2012 and $82 million of notes that come due in April 2013. Aside from our larger revolver, all our other outstanding loans are due after 2015 and it will continue to be a part of our strategy to stagger and to increase the tenor of our debt. For the foreseeable future, we have substantial access to liquidity in order to pursue attractive investment opportunities in health care real estate.

Moving to guidance historically our policy has been not to provide estimates of future quarterly financial results. We have provided estimates of annualized FFO based solely on assumptions about a specific portfolio and that was what we have done again this quarter. So based solely on the December 31, 2010 portfolio plus the January acquisitions, we estimate that annualized normalized FFO per share would approximate $0.68 to $0.72. The company further continues to estimate that its existing portfolio of assets plus approximately $345 million of assets expected to be acquired with available liquidity will generate normalized FFO of between $0.94 and $0.97 per share.

This estimate assumes that average initial yields on new investments will range from 9.75% to 10.5%. These estimates do not include the effects if any of cost and litigation related to discontinued operations, real estate operating cost, interest rate swaps, write-offs of straight-line rent or other non-recurring or unplanned transactions. They also do not include any earnings from ideal type investments and operations, and they do not include any revenue expected from re-leasing our River Oaks property. In addition, this estimate will change if $345 million of new acquisitions are not completed or such investments’ initial yields are lower or higher than the range of 9.75% to 10.5%, market interest rates change, debt is refinanced, assets are sold, other operating expenses vary, or existing leases do not perform in accordance with their terms.

That concludes our prepared remarks for today. I will now turn the call back to the operator, and she will open it up for any questions that you may have. Stephanie?

Question-and-Answer Session

Operator

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

Jerry Doctrow – Stifel Nicolaus

Good morning.

Edward Aldag Jr

Hi.

Jerry Doctrow – Stifel Nicolaus

I think nice quarter and looked out and played just the way we expected. I just had kind of two things that I wanted to pursue. One was sort of acquisition pace was just trying to get a little bit more color, I mean clearly you have got a lot that you are about to close. Is there any particular property type that has kind of motivated people to sort of sell development versus kind of in-placed assets, just a little bit more color about the market would be helpful.

Edward Aldag Jr

Jerry, the acquisition pipeline, those that we have closed and those that we expect to close shortly and those that we are still working on, look very similar to our existing portfolio with the (inaudible) from a dollar standpoint the vast majority of it being acute care hospitals. As you know, roughly 75% of our portfolio is general acute care hospitals now and that will continue to be the same going forward. So, from the aspect of existing versus development, the majority of the hospitals those that we are working on are existing facilities. There are some developments as you know from the ones that we have already closed but the vast majority of them are existing established facilities.

From the standpoint of what is prompting everybody from our experience even throughout the global crisis there was the need but everybody was concerned about where the world was going to over the last year and a half. I think everybody is comfortable now that we have seen the worst of it and are willing to continue to go forward, I do not think anybody thinks that the recovery is going to be a steep climb back up, it is going to be a long steady climb but I think (inaudible) is comfortable that the worst is over.

Jerry Doctrow – Stifel Nicolaus

And then just on the ideal, I mean you have done some things before like some of the stuff I think with prime where you have got sort of a share of upside but you had kind of a guaranteed base. So I guess I just want to understand in the ideal stuff, you will get operating income and also probably take some operating risk, again a little bit more color there types of deals you do or much of which you might do, why you think the risk is worth the upside that kind of stuff.

Steven Hamner

Jerry, just to clarify in none of the transactions that we have done to date and in none that are in the pipeline now is there any downside risk other than the level of our initial investment in the operating side, and that so far has been fairly limited. The interest we have regardless of their legal structure typically are structured more as profit interest and we have upside and no funding risk. Again, other than this, clearly we are at risk on our initial investment.

Jerry Doctrow – Stifel Nicolaus

Okay. So while you are calling it ideal and I am sure legally (inaudible) the way I should be thinking of it is more like with a Centinela where you basically had kind of a return or a preferred return on a certain base level investment and then you shared and sort of – I cannot remember if it was revenue or profits above that level, so it would be that kind of structure rather than what we are seeing in a senior housing area where people have taken the upside and downside on the P&L.

Edward K Aldag Jr

That is exactly right, and the facility was Shasta, it was not Centinela, it was Shasta, and again we have a similar arrangement at a small hospital, Covington hospital down in the New Orleans area, and it is based on profits now, that was the beauty of ideal to us is we could base that upside on profits rather than the revenue line, which is where we first structured the Vibra transaction you remember many years ago.

Jerry Doctrow – Stifel Nicolaus

Yes, okay.

Edward K Aldag Jr

That was phenomenally successful for us and for that matter for Vibra, but structuring that on the revenue line creates a high level of volatility that we do not have to deal with anymore, we can do it just based only on profits.

Jerry Doctrow – Stifel Nicolaus

Okay, and when you would do that deal, should we assume that initial base rent maybe lower than what you have done on some of the more traditional triple net stuff and that you have got upside above that or shall we be assuming –

Edward K Aldag Jr

Not at all Jerry. From the real estate standpoint it would look just like a traditional sell leaseback with traditional rates that we are doing. The profit’s interest is totally separate and our investment is totally separate.

Jerry Doctrow – Stifel Nicolaus

Okay, that will be great, I will jump off and come back if I have more, thanks.

Edward K Aldag Jr

Yes, thanks Jerry.

Operator

Your next question comes from the line of Michael Mueller with J P Morgan. Please proceed.

Ralph Davies – J P Morgan

Hi, good morning. It is Ralph Davies on the line with Mike. Just in regards to the loan repayment that you guys announced, can you give the economics in terms of the interest rate that was being paid on that?

Steven Hamner

Yes, I think we did that loan several years ago, so I will give it a new guess, we were in the mid-10s, we were earning mid-10s on that loan, it was a loan on the Marina Hospital in Marina Del Ray in California. We expected at par and that is generally it.

Edward Aldag Jr

Just to clarify Ralph, that is not mid-teens.

Steven Hamner

Mid-10, 10.3, 10.4 [ph], something like that.

Ralph Davies – J P Morgan

Okay, got it. And then kind of along those lines, you talked about this $350 million gross investment target but is there other stuff kind of coming due or other repayment expected? Do you have kind of a net investment expectation for 2011?

Edward Aldag Jr

Ralph, as I said earlier in the call, we have got actually three leases that mature in 2011, two of them have already said that they wanted to repurchase, one of them we have already reached terms, and the other one we are in negotiations, but it is in total an aggregate of $40 million there. So it is not a large number, the $350 million is a gross number.

Ralph Davies – J P Morgan

Yes, got it. And then the final question I had was just in terms of when you are thinking about these ideal opportunities, can you talk a bit of how you look at the economics of those deals versus the triple med [ph] I do not know, maybe the yield that you need to see in order to do that type of deal or –

Steven Hamner

Well, as Ed just responded to Jerry there, there are two separate components. We get market raise on the lease and because we are able to bring something, whether it is access to the transaction or something else and that is usually it. We get market rate on an operating investment also, and that runs the scale really. In the case of the Shasta transaction, we had a ceiling on it of $15 million, and then we expected an early pay-off of that at a discounted rate. In most of the transactions, we will not have a ceiling, and so we expect the same kind of equity returns that the operator and investors put in these transactions and we are hopeful of getting 20% plus returns.

Ralph Davies – J P Morgan

Thank you.

Operator

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

Karin Ford – KeyBanc

Hi, good morning. Can you give us an update on the leasing status at the north campus River Oak? Have you gotten any leases signed in please and what would be the potential timing of rental income starting there?

Edward Aldag Jr

Karin, it has not changed any from the last call. We still have the four tenants that were working with their, they were actually waiting on us at this point. We have just started the renovations and we expect the rentals to commence there in mid fall of 2011.

Karin Ford – KeyBanc

Great. That is helpful. Could you just clarify the timing of the mortgage that was repaid this past quarter and when you think the other two asset repurchases will take place and the timing of that in 2011?

Edward Aldag Jr

The mortgage was repaid at the end of the year and the other two will be March 1 and sometime in June I believe.

Karin Ford – KeyBanc

That is helpful.

Edward Aldag Jr

Probably July.

Karin Ford – KeyBanc

Okay. Next question just relates to the property related expense line, it was $2.3 million this quarter that was a little high relative to our numbers. Are there any one-time items in there or what should we expect from a run rate there?

Edward Aldag Jr

That is virtually 100% the DSI, receivable write-off the litigation that we settled.

Karin Ford – KeyBanc

Got it. So that number should go down close to the zero from a run rate perspective next year.

Edward Aldag Jr

Yes.

Karin Ford – KeyBanc

Okay, that is helpful. And what time of G&A expectations do you have in your guidance?

Edward Aldag Jr

We have not changed I think from the last several quarters. We have said $5.5 million to $6 plus million that has been on the higher side of that, so close to $6 million now. What is also included in there you will note, is that $713,000 of deal cost and so when we previously said $5.5 million to $6 million run rate on G&A has not included that because again previously that has been capitalized. So it is just literally not possible to predict what that deal cost amount is going to be quarter to quarter but it is going to track the level of acquisitions.

Karin Ford – KeyBanc

Final question is just on the acquisitions, could you just talk about your financing plan for that. I know you are probably the next slug [ph] will come off your line of credit, can you talk about what your permanent financing would then be and what your cost of debt financing is today?

Steven Hamner

Yes there is any number of alternatives and those alternatives will be evaluated and selected at the appropriate time, which will be as we draw down the revolver. Right now as we discuss, we have got close to $350 million of availability. Ed mentioned a couple of properties will take proceeds on, so that will give another $30 million or $40 million and then depending on the timing of the acquisitions, that will determine obviously when we need to think about refunding the revolver. We are constantly in communication with capital sources about joint venture financing possibilities. The public markets are wide open on almost every type of product be it preferred to high-yield debt to convert, I think even the bank debt is alive again. So there are a number of alternatives that we cannot predict which one will be appropriate at the time we need them.

Karin Ford – KeyBanc

Could you just give us an order of magnitude as to what you could raise say either high yield or bank debt out today?

Steven Hamner

I think given an attractive use we could raise some several hundred million dollars, I do not think that is an issue at least that is what your investment banking colleagues tell us.

Karin Ford – KeyBanc

And what is the rate they are telling for that?

Steven Hamner

Well again, it depends on the nature of the transactions, it depends on what the product is, the high yield really is almost a misnomer today. I think we are seeing high yields done in sub 7s in some cases. Converts are being done in the very low single digits, preferred actually are – you are beginning to see some of that again in the 7 handle range. So we do not make assumptions on that until we get real close to doing it because obviously those markets can close and the pricing can change pretty rapidly.

Karin Ford – KeyBanc

No –

Steven Hamner

The key to us is, we are still investing at 10 plus percent going in cap rates and it is clearly our goal to get the lowest cost of capital but we can make significant accretive investments when capital costs are much higher than they are right now.

Karin Ford – KeyBanc

It is very helpful, thank you for the color.

Edward Aldag Jr

Thanks Karin.

Operator

(Operator instructions) Your next question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Jerry Doctrow – Stifel Nicolaus

Thanks. I think you may have touched on this in a quick response to a question from Karin, just there a couple of development properties that I think we have coming on sort of fourth quarter, one is the re-work of River Oaks and then the one in Arizona, the new facility, I just wanted to again clarify timing on that, was that what you were saying fall of –

Edward K Aldag Jr

For River Oaks it will be fall of 2011, for the Arizona project, it will be the early part of 2012.

Jerry Doctrow – Stifel Nicolaus

Okay that is helpful, thanks.

Operator

Your next question comes from the line of Fred Morgan [ph] with RBC Capital Markets. Please proceed.

Fred Morgan – RBC Capital Markets

Good morning. You spoke a little bit about your ability to grow the asset base and no real change in the kind of assets or the mix of assets that you are looking to acquire, but I am just curious, are you starting to see, given the superior yields that you get going into assets, are you starting to see more players come into this market do you feel like from a competitive standpoint? Has anything changed there?

Edward Aldag Jr

Not many. There are some but as all of us know that some of the other REITs have looked at it from time to time but it really takes a specialized management team focusing on hospitals to invest in hospitals. So there is not a whole lot of it out there. But as you have also heard me say that we certainly welcome the competition. We think that the competition actually would be good for the market, but from an education standpoint both on the investor side and on the operator side.

Fred Morgan – RBC Capital Markets

And from your perspective in terms of these returns that you are talking about kind of north of 10% yield, no change there either in the current marketplace, is that what you are saying no real change?

Edward Aldag Jr

That is correct. That is based on a weighted average basis we see returns on both the north and south side of that range, but weighted average we are still getting 10 plus percent returns.

Fred Morgan – RBC Capital Markets

Okay, thank you very much.

Edward Aldag Jr

Thanks Fred.

Operator

There are no further questions in queue. I would now like to turn the call over to Mr Ed Aldag for any closing remarks. Please proceed.

Edward Aldag Jr

Stephanie, thank you very much, and thank you for all of you. We always welcome your interest and please do not hesitate to call on Charles, Steve or myself later on in the day if you have any follow-up questions. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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