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Medical Properties Trust, Inc. (NYSE:MPW)

Q2 2011 Earnings Call

August 4, 2011, 11:00 am ET

Executives

Charles Lambert - Director, Finance

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

Steven Hamner - EVP & CFO

Analysts

Austin Wurschmidt - KeyBanc Capital Markets

Joseph Dazio - JPMorgan

Operator

Good day, ladies and gentleman and welcome to the second quarter 2011 Medical Properties Trust earnings conference call. My name is Brian and I’ll be your operator for today's call. At this time, all attendee lines are muted and in listen-only mode and we will be facilitating a question-and-answer session at the end of today’s remarks. (Operator instructions). As a reminder, this call is being recorded for replay purposes.

I would like now introduce to you Mr. Charles Lambert, Director of Finance. Please proceed, sir.

Charles Lambert

Good morning. Welcome to the Medical Properties Trust conference call to discuss our second quarter 2011 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 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 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 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 K Aldag, Jr.

Charles, thank you and good morning everyone and thank you for joining us on today’s call. This is a good time for Medical Properties Trust. Our portfolio continues to generate some of the highest EBITDAR lease coverages in the industry, the reimbursement environment continues to be favorable for our portfolio. Our capital structure and access to capital are better than they have ever been and our opportunities for further growth continue to exceed our expectations.

First let me turn to our portfolio. As I mentioned on the last call, with the number of facilities we’ve acquired over the last twelve months, some of our newer properties are still in the ramp up stage and are thus lowering our overall coverage artificially when compared to some of our mature properties.

For example, Alvarado has only been in our portfolio for approximately five months and Prime is still installing their systems. That property generates EBITDAR lease coverage ratio of about two and half times which is well below Prime’s average of more than five and half times but still a very strong coverage.

When comparing trailing 12 months ending 5/31/11 versus 5/31/10, the acute care hospitals in our portfolio had EBITDAR lease coverage of approximately six and half times which was a slight decline of about 30 basis points. This is primarily due to some softening in admissions which was consistent with other hospitals across the country. However, when looking at same-store comparisons, discharges, ER visits and net revenue were all up in our facilities.

Our LTACHs and inpatient rehabilitation facilities were both essentially flat to slightly up with strong coverages of about 2.1 and 3.2 times respectively. We have no standalone skilled nursing facilities in our portfolio and very few total [stiff] beds. Thus our portfolio of properties will not suffer from any ill effects of the CMS cut to the nursing home reimbursement rates. As you probably know CMS has now released the final fiscal year 2012 rates for acute care hospitals at approximately 1.1% increase and LTACH at approximately 2.5% increase and ours at approximate 2.2% increase. Just to show you how strong our coverages are, assume that our acute care hospitals had their Medicare rates cut 11% and there were no operating adjustments made by our operators, which I have said before is a really bad assumption but a very conservative one.

Our coverage would decline by approximately 100 basis points to about 5.5 times EBITDAR coverage, still an extremely strong coverage. Year-to-date for 2011 we have closed on 268 million of new investments including the one facility that is waiting regulatory approval, which Steve will discuss in little more detail. We still expect the net number to exceed $350 million by year-end. The opportunities we expect to acquire is spread fairly evenly over our current property type and are predominantly with new clients. Shortly after the close of the second quarter, we acquired a 40-bed LTACH in the DeSoto Texas just out of Dallas operated by Barbara.

In this investment we not only did a traditional sale-lease back with market rates in terms on the real estate but we also took an ownership interest of 25% in the operations for an additional $2.5 million. During the second quarter we finalized unsecured credit facility and issued $450 million ten-year unsecured bonds with a coupon of under 7%. In July, we purchased $69.5 million of our 9.25% convertible notes. Steve will go through these in more detail with you in his financial report. Steve?

Steven Hamner

Thanks Ed and good morning. I will briefly run through the highlights of our second quarter 2011 financial results and then describe our outlook for future periods and then open up the call for any questions.

For the first quarter of 2011, we reported normalized FFO of approximately $17.5 million, and AFFO of approximately $17.8 million or $0.16 per diluted share for both measures. As at the end of last quarter we had estimated on a quarterly basis our in-place AFFO run rate to $0.17 to $0.18 per share. But that estimate included revenue form our previously announced Hoboken investment. Though Hoboken is not yet closed this quarter $0.16 per share is well in line with our run rate estimate.

As a reminder we normalize FFO by adding back the amount of deal cost and in 2011 second quarter the cost totaled $616,000 or about half a penny. Also in this quarter we added back approximately $2.4 million in charges related to our reassessment of our [Denim Spring] investment, which I’ll discuss in few minutes. Finally, we added back $3.8 million in charges related to the completion of our refinancing early in the second quarter.

Net income for the quarter ended June 30 was $2.6 million or $0.02 per diluted share compared with net income of $6.2 million or $0.06 per share in the year ago period. Net income in 2011 quarter was affected by the [Denim Spring] charges and the cost of debt refinancing.

In comparisons of these results to those of the same period a year ago the per share amount was affected by an increase in the weighted average diluted common shares outstanding to 111 million for the three months ended June 30, 2011. This is up from 103 million shares for the same period in 2010 and is primarily due to common stock offering of 29.9 million shares completed in April of last year.

Turning to recent capital activity, as you all aware we completed the refinancing of much of our balance sheet early in the quarter and have previously described in detail those transactions. We will be happy to address any question about those transactions during our Q&A in a few minutes.

In June we launched a tender offer any and all of the outstanding 9.25% exchangeable notes that are due in March of 2013. Subsequent to the end of the quarter we completed that offering and acquired about 85% or $69.5 million face value of those notes. We will recognize a charge in the third quarter for early payment those notes approximating $10 million.

This morning we posted to our website a supplement information package that includes a summary of debt as of June 30 2011. Other than the reduction of $69.5 million in the 9.25% notes that schedule remains materially accurate as of today.

As I mentioned a few minutes ago, we routinely assess our investment for indication of impairment. In the 2011, second quarter we concluded that it was more likely than not that we would not receive all of the amounts to us from our tenant at the [Denem Spring] LTACH. We established reserves for approximately $1.8 million in outstanding receivables and recorded real estate impairment of approximately 564,000.

This hospital continues to operate and we believe there are opportunities for improved operations and profitability and we have not terminated at least and have no immediate plans to do so. However, we will discontinue rent accruals. Just to remind you all Denim was part of two-property transaction that included our successful Covington Hospital. When we recaptured these assets from the bankrupt parent of our tenant, we recovered value that was substantially higher than our investment in Covington. And today as a result, we own 18% of that operating entity, that we did not own originally.

Accordingly and consistent with our underwriting assumptions and our initial diligence, we have protected the value of our initial investment in these two hospitals, even though the accounting rules required that we now treat the hospital separately and prohibit us from recognizing the incremental Covington value that we have acquired.

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’s what we have done again this quarter. Based solely on the June 30, 2011 portfolio, plus the anticipated Hoboken acquisition, the recently completed DeSoto transaction and the effects of the completed tender offer, we estimate that annualized, normalized FFO would approximate $0.72 to $0.76 per share. And to reiterate, that’s upon closing of the Hoboken transaction which we continue to anticipate, will close during 2011 third quarter.

So, taking into account the currently existing capital structure, which is expected to provide at least $370 million in available liquidity, and limiting our overall leverage to less than approximately 50%, we would expect to invest approximately $325 million in future quarters. We believe the portfolio after such investments, will generate normalized FFO between $0.93 and $0.97 per share on an annualized basis once fully invested.

This estimate assumes that average initial yields on new investments will range from 9.75% to 10.5%, We continue to believe that we are able to complete these investment by the end of 2012. These estimates do not include the effects if any of cost and litigation related to discontinued operations, debt refinancing costs, real estate operating cost, interest rate swaps, write-offs straight-line rent or other non-recurring or unplanned transactions. They also do not include any earnings from the RIDEA-type investments and operations and they do not include any revenue from releasing our River Oaks or from the Florence development.

In addition this estimate will change if $325 million in new acquisitions are not completed or such investments initial yields are lower or higher in the range of 9.75% to 10.5% market rate change, debt is refinanced, assets are sold or 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 he will open it up for any questions that you may have.

Question-And-Answer Session

Operator

Thank you, sir. (Operator Instructions) And your first question comes from the line of Karin Ford of KeyBanc Capital Markets. Please proceed.

Austin Wurschmidt - KeyBanc Capital Markets

Hi guys this is Austin Wurschmidt here. You had mentioned that you expect to exceed your $350 million of investments this year. What should we expect on the timing and do you have anything under contract today?

Edward Aldag

Austin, as you know we have not historically given what we expect of the timing because very sudden the things happen to exactly when we expect they will. We expect that will happen before year-end. And we do have properties under letters of intent, but not in a formal contract stage at this point.

Austin Wurschmidt - KeyBanc Capital Markets

That’s helpful. Given kind of what’s going on with healthcare spending time being a target for future deficit reductions, have you seen any delays in investment decisions or any increases in hospital cap rate?

Edward Aldag

Yeah Austin, we haven’t seen any delays in the acute care or rehab investment decisions being made and we haven’t really seen any changes in hospital cap rates from where we’ve been pretty much throughout the year which has been a pretty widespread depending on the strength of the operator ranging basically anywhere from the low lines all the way up to 12, that’s a very widespread, but every operator is not created equally.

Austin Wurschmidt - KeyBanc Capital Markets

Thank you. And should we assume kind of then what you have coming for the remainder of the year to kind of be in that same band that you provided in your press release of high 9% to….

Edward Aldag

Yes, we expect so.

Austin Wurschmidt - KeyBanc Capital Markets

Okay, thank you. And then just lastly, could you give us an update on the situation with Prime?

Austin Wurschmidt - KeyBanc Capital Markets

What situation would that be Austin?

Austin Wurschmidt - KeyBanc Capital Markets

Related to the billings?

Edward Aldag

You’ll have to expand on your question specifically.

Austin Wurschmidt - KeyBanc Capital Markets

Prime wasn’t previously under investigation for the billings under Medicare I believe in California and I was just curious if there are any updates you can provide?

Edward Aldag

Austin, Prime has not been under any investigation for any billings to our knowledge or to anyone’s knowledge that they’ve been able to show us anything differently than the article written by the California Watch with the SEIU. We have worked with Prime in reviewing that particular article as you know Prime has recently acquired not with us, but through their not-for-profit arm, another hospital. It was approved by the Justice Department and approved by the State of California and if Prime were under investigation for those types of actions, I doubt that would have been approved for that additional acquisition.

Austin Wurschmidt - KeyBanc Capital Markets

Okay, thank you.

Operator

(Operator Instructions) And your next question comes from the line of Michael Mueller of J.P. Morgan. Please proceed.

Joseph Dazio - JPMorgan

Hey good morning guys. It is actually Joe Dazio here. A quick question on the run rate guidance, does that include the potential dispositions that you outlined, I think there was $37 million of assets at books value that you noted in the press release that tenants were looking for potential repurchase, so I just wanted some clarification there?

Steven Hamner

Yes, it does.

Operator

And at this time gentlemen, there are no further questions in the queue. I apologize, there does appear to be a follow-up question from the line labeled as Karin Ford, one moment.

Austin Wurschmidt - KeyBanc Capital Markets

Hi guys, its Austin here again. Could you just give us some update on the, you had previously talked about some single tenant looking at your River Oaks hospital and could you just give us some update on the timing of when you expect lease could commence there and what kind of demand you are getting?

Edward Aldag

Yeah Austin, we are getting a tremendous amount of demand from the multi-tenant which what we had originally expected, which would probably be a combination of our surgery center and LTACH beds. We have had some interest from a single tenant; they are interested, the timing probably won’t work for us and so it looks like we are on-track for the original schedule which is late at the end of this year, early part of next year.

Operator

And gentlemen it appears there are no further questions in the queue at this time. I would now turn the call back over to Mr. Edward K Aldag, Jr. for any closing remarks.

Edward Aldag

Ryan, thank you very much, and again thank you all of you for listening today. If you have any further questions please don’t hesitate to call myself, Steve Hamner or Charles Lambert. Thank you very much.

Operator

Ladies and gentlemen, that concludes today’s conference call. You may now disconnect your line and have a nice day.

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