Medical Properties Trust's (MPW) CEO Ed Aldag on Q4 2015 Results - Earnings Call Transcript

| About: Medical Properties (MPW)

Medical Properties Trust Incorporated (NYSE:MPW)

Q4 2015 Earnings Conference Call

February 09, 2016 11:00 AM ET

Executives

Charles Lambert - Managing Director

Ed Aldag - Chairman, President and CEO

Steve Hamner - EVP and CFO

Analysts

Jordan Sadler - KeyBanc Capital Markets

Tayo Okusanya - Jefferies

Juan Sanabria - Bank of America/Merrill Lynch

Michael Carroll - RBC Capital Markets

Phil DeFelice - Wells Fargo Securities

Eric Fleming - SunTrust Robinson Humphrey

Michael Mueller - JPMorgan

Operator

Good day, ladies and gentlemen and welcome to the Medical Properties Trust Fourth Quarter and Year End 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference Mr. Charles Lambert, Managing Director. Sir, you may begin.

Charles Lambert

Thank you. Good morning, everyone. Welcome to the Medical Properties Trust conference call to discuss our fourth quarter 2015 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 risk, 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 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 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.

Ed Aldag

Thank you, Charles and thank all of you for listening in on our fourth quarter 2015 earnings call and for your interest in Medical Properties Trust. Success is defined by Webster’s Dictionary as having a favourable or desired outcome. 2015 for Medical Properties Trust would have to be described as a tremendous operational success. Our total revenue increased from $312 million to almost 442 million, an increase of $130 million or 42%. But revenue for growth sake is not enough.

Net income increased by 180% to approximately $140 million up from $50 million. Normalized AFFO per share increased by almost 25% which allowed us to increase our dividend and still reduce our payout ratio. For the fourth quarter that just ended our payout ratio was 63%. On a same-store basis, Q3 2014 trailing 12 month total portfolio EBITDAR coverage was 3.66 times. Q3 2015 trailing 12 month total portfolio EBITDAR coverage grew to 3.75 times. Acute care hospitals were flat at 4.5 times. Our rehab hospitals grew a dramatic 49 basis points from 2.41 times to 2.9 times, and our LTACHs grew at an impressive 13 basis points from 1.79 times to 1.92 times.

I noticed this morning in one of the early reports there is some confusion over our methodology of reporting coverages. Just to remind you, we report same-store on facilities that have been in our portfolio for 24 months. So each quarter the same store coverages will be updated buckets. Last quarter we reported acute care hospitals at 4.7 times. Showing the exact same bucket of acute care hospitals this quarter we would have also reported a 4.7 times, again flat as we previously said, because this quarter we had the additional hospitals that have now been in our portfolio for 24 months. The coverage for last quarter was reported at 4.5 times compared to this quarter of 4.5 times, still flat.

There has been no operational deterioration in our acute care hospital portfolio. Our hospitals have maintained their very strong coverage quarter-over-quarter and year-over-year. In addition, on a same-store basis, admissions for our general acute care hospitals increased 1.6% year-over-year for the three month period ending in September. Our rehab hospital admissions increased 5.2% and the LTACHs decreased 4.1%. Just like our portfolio HCA’s most recent quarterly report on its financial performance further demonstrates that hospital sector, the nation's healthcare industry produces financial returns that are growing and sustainable into the foreseeable future.

On a fully-funded basis at 12/31/14 our largest property represented 2.6% of our total portfolio. Today our largest property represents 1.9% of our total portfolio. At 12/31/14 our largest tenant represented 19% of our overall portfolio. Today our largest tenant only represents a little more than 17%. In the U.S. general acute care hospital represents 67.5% of our total portfolio, rehab hospitals 11.1, LTACH 9.6 and freestanding emergency rooms 7.7. 80% of our portfolio is within the United States with 17% in Germany and the remaining in Italy, the UK and Spain. Our portfolio is certainly one of the strongest portfolios in the REIT world. Our coverages are at the top of the industry and our properties have a long history of exceeding expectations. We have no near-term significant debt maturities other than the $125 million due later this year.

Our fixed charge coverage of 3.5 times is in line with many of our peers and other investment grade companies. We currently have approximately 1.1 billion drawn on our revolver which comes due in late 2018. We have always been long-term managers and we'll continue to be so. As we have planned since late last summer, we will permanently finance a large portion of the borrowings under the revolver and divest some properties and use the proceeds to pay down or off the revolver.

Permanent financing may include a $500 million bond issue, since we announced last fall our desire to use some very selective property sales for this purpose, we've had over 900 million of unsolicited offers for properties in all of our property sectors. Over the last few months, we've hired advisors to work with us to ensure that we maximize the value of any sales. Clearly, we do not intend to sell $1 billion of properties but we feel it is important for the market to understand what kind of interest we have had. We expect the revolver to be paid down with permanent financing and property sales during the first half of 2016. Even with the permanent financing and the selective property sales, we expect FFO per share for 2016 to grow from its 2015 level.

Steve will go over this in more detail with you in just a few moments. Again we want to emphasize the strength of our overall portfolio and the strong position this company is in with regard to its balance sheet. We continue to have tremendous opportunities. We continue to see our existing customers flourish. MPT’s portfolio has proven itself since our IPO in 2005 and it continues to outperform the market. We are well positioned for the future and we look forward to the next 10 years.

Steve?

Steve Hamner

Thank you, Ed. This morning we reported normalized FFO for the fourth quarter of $0.35 per diluted share, a 25% year-over-year increase. Our year-to-date results of $1.26 per share represent a 19% increase over full year 2014 results. We will discuss our future expectations momentarily but I do want to highlight that our per share FFO growth is expected to continue into 2016 and beyond. Even if we assume only very limited investment in 2016 along with asset sales, we believe calendar year 2016 normalized FFO will increase to further 4% to 5%.

I'm not going to read what you've already seen in the earnings release from this morning. So, let me point out a couple of items that will help you better understand our reported results. Number one, the only difference between so called white paper FFO and our normalized FFO is the $4.3 million in acquisition cost. The great majority of which is related to transfer taxes and other costs paid as we had closed the sale lease back transactions of the MEDIAN acquisition.

Included in both measures of FFO is share-based compensation which had averaged about $0.05 per share annually. When share awards are granted, even 100% performance based and multi-year awards, generally accepted accounting principles requires us to expense the value of those awards as expensed. Even if the performance hurdles are not achieved and no shares ultimately are awarded, companies are prohibited from reversing that expense in subsequent years.

For 2015 because total shareholder return was negative, MPT management permanently forfeited 100% of the value of the three year award that was granted in 2013. This resulted in a reduction in compensation of more than $6 million that had been recognized over the three years ended December 2015. Aside from wanting to demonstrate the rigorous and direct pay for performance philosophy behind our compensation plan, it is also important to point out that the GAAP reporting for compensation does not mean that management continues to be rewarded for underperformance. It is just the opposite in fact as it should be and as it is.

However, even given the full GAAP amount of share-based compensation our G&A continues to decline as a percentage of assets and revenue demonstrated how we have scaled the business with limited incremental overhead. As we continue to grow over the long-term, we will continue to benefit from the scalability.

Since the end of the third quarter after completing the Capella transactions we have made limited investments, in the aggregate totalling about $150 million. These investments included a previously announced $35 million hospital for Capella. The $96 million funding of the Italian joint venture with AXA and the $20 million rehabilitation hospital for MEDIAN.

As of the end of the year, we had limited firm commitments totalling $65 million to complete the development of Adeptus facilities which will be extended over the next three quarters and approximately $45 million for acquisitions for other tenants which are not certain to occur. Our supplemental package which was posted to our Web site this morning provides further details on our current portfolio metric. We will happy to take questions about the portfolio in just a few minutes.

Our outstanding debt as of December 31 is also scheduled in the supplemental package. As of today, our borrowings under the revolving credit facility remain $1.1 billion. Our near-term plan is to reduce this balance by up to about $500 million with proceeds from long-term permanent financing and we are monitoring conditions in the credit markets on a daily basis and intend to be in a position to launch such an offering when market conditions are favorable. As Ed mentioned earlier we also have a $900 million plus pool of assets that have already attracted interest from perspective purchases. The proceeds of any of these sales would also be available to reduce the revolver balance.

During the first half of this year, we expect to substantially reduce the revolver borrowings with proceeds from permanent financing and with the luxury of having time to maximize sale proceeds, along with limited and selective new investments we believe we will be able to make substantial further reductions in the revolver balance during 2016.

A very important additional benefit to this would be the improvement of our leverage metrics. Based slowly on our targeted property sales, we expect that as of completion of the sales our net debt will not exceed six times our resulting annual EBITDA. With room for further reduction through additional sales or market improvements, we have always managed our investments, our capital and our overall balance sheet for the long-term. When market conditions as they and inevitably will become disconnected from underlying fundamentals, we have designed our capital and operating structures to provide us plenty of time to wisely execute long-term strategies that are not destructive to long-term shareholder value.

So in today's disconnected global conditions, we have only $125 million of debt maturing in late 2016. A side from the 2018 maturity of the revolver we have no major maturities until 2019 and they are very well laddered and thereafter. Our bonding investment commitments are limited. We have no capital expenditure obligations for our properties, as our tenants are fully responsible for all maintenance, repairs, refurbishments and improvements between now and 2022 our average list maturity as a percentage of rent is less than 1% annually. Our normalized FFO dividend payout ratio is less than 65% and expected to continue to improve based on the built in annual escalators in our leases. This reflects substantial FFO in excess of dividend requirements which is also available for debt service and repayment. And as we have discussed we have outstanding assets that sophisticated, well capitalized, long-term investors are attracted to. All of these conditions which we have constantly designed into our business modelling good years and bad give us the ability to carefully consider and execute the best long-term capital and investment strategies for our shareholders. It is a very good position to be in.

This morning we are implementing a new guidance methodology. We will no longer estimate our operating results based on an animalization of our in place assets and capital structure. Instead we will estimate a range of normalized FFO per share for the current calendar year based on our present intentions concerning the portfolio and capital and other transactions. For calendar year 2016 we estimated normalized FFO per share will range between the $1.29 and the $1.33. In perspective last quarter, we estimated our run rate annualized results to range between a $1.28 and $1.32.

The major assumptions underlying our calendar 2016 estimate are as follows. We expect to complete permanent financing for about $500 million and our present estimate is that, that will be done during the first quarter. We have limited commitments as we have already discussed to make new investments in hospital real estate. And as Ed and I both have described already through the remainder of 2016, we expect to sell assets unused sale proceeds to reduce our revolver balance. We estimate that our results will be on the lower end of the range if we raised permanent debt financing and/or wholesale assets sooner than our present expectations and of course the opposite is also true, There are other factors that will affect our actual results including interest rates and other capital markets conditions pricing and amount of potential asset sales, tenant operations and other unforeseen conditions.

And with that will be happy to take questions and I turn the call back to the operator.

Question-and-Answer Session

Operator

Thank you ladies and gentlemen.[Operator Instructions] And our first question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Your line is now open.

Jordan Sadler

Could you guys give us a sense of the asset sales I realized there has been some unsolicited interest and I am curious there relative to the package that you guys have actually put together to market for sale? Are those two separate tracks or potential areas for sales? Or how would you characterize your efforts to actually sale assets versus the unsolicited interest?

Ed Aldag

Jordan it's pretty much all have being going all simultaneously, most of it has been unsolicited offers as opposed to us getting out and marketing specific packages. It is properties within all of our property types and it is a pretty significant gain on most of those potential gains on most of those properties. Obviously it is just like acquisitions you don’t know exactly when all of them will happen. And as I’ve previous said, we certainly don’t want all of them to happen and so it's hard to give you an exact to which properties is it likely end up being at this point.

Jordan Sadler

And can you discuss the nature of the potential investors?

Ed Aldag

You mean like who are they?

Jordan Sadler

Yes, the folks who have sort of solicited you directly, or these as you said in the press release real estate, healthcare investors. I am just curious is it pension funds, is it private equity, all the above…

Ed Aldag

It is all the above, mostly domestic not that many pitching funds mostly opportunistic private equity funds and real estate funds.

Jordan Sadler

And then as it relates to pricing, is it too soon to tell there and/or maybe give us a sense of what’s being modeled within the guidance, because obviously the range is reasonably narrow at this point with the initial guidance that’s been put out. So I am just curious what we kind of layered in there?

Steve Hamner

It's, as I said earlier that most of the potential sales are with fairly significant gains there are some rather new acquisitions that have smaller gains built in. But the number is pretty easy to figure out the arithmetic in our model. We’ve got roughly 1.1 billion on our revolver. We think we’ll do roughly 500 million in permanent financing which will be somewhere between 500 million and 600 million remaining on property sales if we were to pay it all.

Jordan Sadler

And so it's all basically within the model here assumed that a midyear-ish convention in terms of timing?

Steve Hamner

Yes.

Jordan Sadler

Given the asset sales and the bond issuance?

Ed Aldag

Well, it's just that Steve pointed out we expect the permanent financing to be sometime in the first quarter.

Operator

Thank you. And our next question comes from the line of Tayo Okusanya with Jefferies. Your line is now open.

Tayo Okusanya

Could you guys give us a sense in general what you’re expecting from a reimbursement perspective specifically for long-term acute care hospitals in 2016?

Ed Aldag

We expect overall Tayo that the revenue for our LTACH operators will decline slightly. We don’t expect significant decreases as you saw we actually had pretty good increases in the last quarter. We do expect that there will be some decline in 2016, but we expect that most of our operators will actually end up doing better than they did in 2015.

Tayo Okusanya

Is the decline volume driven, is it mix driven is it…?

Ed Aldag

It's mostly mix driven, it's mostly as they all adjust. We expect that 2017 would be back on the in-plan that mostly this is an adjustment year.

Tayo Okusanya

And then just a quick sense in regards to some of your larger investments if you could kind of give us a general sense of how things are going with, I know definitely it is going pretty well, but if that’s so some of the German investments Ernest and also Capella?

Ed Aldag

Tayo truly our portfolio is performing better to-date than it ever has. All of our operators are performing exceptionally well. The bigger acute care hospitals here in the U.S. have been essentially flat which is good considering there’re extremely strong coverages. Our German operator actually has increased and they continue to perform very well, they continue to see opportunities in the German market. And overall all of the portfolio even the LTACHs for the last quarter performed very well for us.

Tayo Okusanya

One last one from me, the bond offering that you were expecting to do this year, do you expect that to be more U.S.-based or you're going to do something you would denominate or a mix of both?

Ed Aldag

No, we expect that to be entirely U.S.-based.

Operator

Thank you. Our next question comes from the line of Juan Sanabria with Bank of America. Your line is now open.

Juan Sanabria

Just ticking with time if I ask question on the bond offering, what kind of duration are you looking for and do you have any range or potential costs that you're looking at in your model?

Ed Aldag

Juan we yes while we want to go as long as we can, I certainly think it'll be at least eight years, we'd like to see 10 years our guide will be much longer than that. But we certainly want to go as long we possibly can.

Steve Hamner

Pricing Juan and again as we mentioned we're in daily contact with the bankers and the other advisors and it's volatile as everybody on this call knows, but we would expect around a low six handle rate, again depending literally sometimes it depends on the time of day but that's our expectation.

Juan Sanabria

And that's unsecured?

Steve Hamner

Yes, correct.

Juan Sanabria

And then on the asset sales, can you give us a sense of the range of CapEx or like a weighted number, weighted average type cap rate you're modelling to come up with guidance?

Ed Aldag

You are talking about what we’d be selling the properties for?

Juan Sanabria

Correct.

Ed Aldag

Let me give it to you in a slightly different way because it's a mix of properties, but I think that where we are today based on the longer tenured properties that we've got in our portfolio that we've had interest in that we could have this much as a 20%-25%-30% gain. But let me just point out because it goes back to an earlier question with respect to guidance and of course what we're guiding is normalized FFO per share and there would be very little impact on that particular metric whether we sell at a 7.5 or 8.5 cap rate and then clearly the proceeds would increase or decrease which would have an impact on the amount of debt outstandings but as a $6 billion company with the volume of sales that we expect whether the cap rate is 100 points more or less than somebody's midpoint and so it is going to have a very little impact on the $1.29 to $1.33 calendar year guidance.

Juan Sanabria

And then for G&A just curious if you can give us some color on kind of were you expecting any plans to open up European office or how should we think about management costs?

Ed Aldag

I think they would stay along with where they are, we don't have any expectations at this point for opening up a European office as I have said previously to that question I think that actually we probably slightly decreased our overall costs, you would see it because it wouldn't be that much. I think the synergies that we get right now from everybody walk the halls together it's much more valuable to us than the small savings that we would have by having the office directly in Europe. It's easy to get to Europe from this part of the United States, so we're very comfortable with where we are and we don’t see any significant increases in personnel at this point.

Operator

Thank you. Our next question comes from the line of Michael Carroll with RBC Capital Markets. Your line is now open.

Michael Carroll

With regard to the asset sales, could you guys give us an idea of timing I mean should we think about a mid-year convention or you're close to near these transactions I guess in the first quarter?

Ed Aldag

Yes Mike I think that the answer is to think about it in a mid-year convention is certainly the way we've modelled it. It obviously is not all going to happen on the same day, but we expect between now and the middle of the year that most of that will be taking care of.

Michael Carroll

And then are you focused on the real-estate sales or are you willing to sell from the zero investments in the half-year alone so are the investments in Ernest and Capella?

Ed Aldag

It is everything it is all buckets of our portfolio.

Michael Carroll

And then are you willing to sell more than 500 million that was highlighted in the press release or do you guys just want to do 500 million right now then look at it again and maybe next year?

Ed Aldag

Mike we're certainly opportunistic but our plan right now is that that 500 million is the right range.

Michael Carroll

And then Steve I guess with those $500 million of sales, I mean where do you expect your leverage metric to connect to the trend towards, are you still going to be well above your launch from target, are you okay with that?

Steve Hamner

No Mike -- if we did only the 500 million in property sales and we would be slightly below or right at 6 times EBITDA, our long-term historical average has been closer to the 5.5 times and again taking a long-term view that's where we want to get back to, we think that's generally the right place to operate the company at least under the current market conditions and regulatory and operational issues as we evaluate our risk in our assets. So we do expect to see that continue to trend down even after the call it the initial priming of the pump so to speak by selling assets and getting us into that 6.0 times which by the way puts us very right in the middle of where the peer group would be not withstanding again our view is to carefully continue to manage it down.

Ed Aldag

And Mike obviously as we pointed that earlier that's with very strong coverages.

Michael Carroll

And then how are you guys looking at the investments markets right now with the volatility in the capital markets then your current leverage position. Are you willing to do the relationship deals right now are you looking to another things how should we think about that?

Ed Aldag

If I understand your question, are you talking about our potential acquisitions out there?

Michael Carroll

Exactly.

Ed Aldag

Yes. Right now we are only focused on our existing customers and we are being very selective we certainly don’t want to be in a position where our leverage is increasing we don’t want to be in a position where our leverage is staying the same as we pointed on this call it is our intent to decrease it at the same time taking care of our customers as best we can.

Operator

Thank you. Our next question comes from the line of Phil DeFelice with Wells Fargo. Your line is now open.

Phil DeFelice

Last year's dividend raise came slightly as per the Q4 results were reported, given where current yield is and a conservative payout ratio you’re wondering what your target current payout ratio is on a FFO and FAB basis? And then how you are thinking about the dividend in light of your capital position and currently in these expected asset sales?

Ed Aldag

Phil it's certainly something that the Board discusses it every single meeting as I've pointed out earlier our payout ratio in the fourth quarter was 63% that's obviously below our historical target but these are very interesting times we certainly see what the stock market has done today as an overall whole has done since the beginning of the year as an overall as certainly don’t think that the board would think that a raise in a dividend rate today would be beneficial to anyone. I think that where our coverage's are today, where our dividend is today is something that's you already look forward to in the near future.

Operator

Thank you. Our next question comes from the line of Eric Fleming with SunTrust. Your line is now open.

Eric Fleming

Just a quick question on the divestitures that you are talking about that 500 million that's the expected price as of the book value would be 25% below that our there are some number below that?

Ed Aldag

Some number below that yes.

Eric Fleming

Okay. Just want to make sure, I had those numbers right. Thanks.

Operator

Thank you. Our next question comes from the line of Michael Mueller with JPMorgan. Your line is now open.

Michael Mueller

Great, thanks. Just wanted to revisit the couple of things to make sure I am headed down the right way. So on the debt side you talked about rate being in the low sixes is the timing there mid-year as well or is the timing in the first quarter?

Ed Aldag

Yes. Now we expect that any bond issue that we would do would be in the first quarter.

Michael Mueller

And dispositions I know you said modelled mid-year but you think they are going to close before that so is anything [Multiple Speakers]?

Ed Aldag

Mike obviously they won't all happen at the same time. I think that the spread out between the first quarter and midyear would be the right modelling.

Michael Mueller

Got it, but your guidance assumes midyear?

Ed Aldag

Correct.

Michael Mueller

Okay, got it. And then Steve not to completely try to back you into a corner here but when you throw out 7.5 to 8.5 for cap rate range is that a reasonable assumption that these folks could turn the models for dispositions?

Steve Hamner

Yes. I used those numbers consciously.

Michael Mueller

Got it, okay. Just two more, in terms of capital commitments when you talked about just remaining capital commitments that's embedded in guidance does that include was it the 65 or is that in 45 for relationship acquisitions is that what the numbers were and is that embedded in guidance?

Steve Hamner

Yes, yes and yes.

Michael Mueller

Okay, got it. And last question Steve I know you talk about no CapEx commitments. Just I think curiously in the right year structures where you own a stake in an operator like Capella is it structured so even though you own the operations that the other partner is on the hook for all the CapEx is that how that works?

Steve Hamner

Well that is how it works and of course on an operating company like that you expect, you hope, you underwrite so that there won't be additional requirements for operating capital?

Michael Mueller

But all of the normal maintenance CapEx and everything is on the hook by the other?

Steve Hamner

Yes, yes absolutely yes.

Michael Mueller

Okay that was it. Thanks.

Operator

Thank you. And our next question is a follow-up from the line of Tayo Okusanya with Jefferies. Your line is now open.

Tayo Okusanya

So yes just a quick follow-up. Since you are talking about meaningful gains of some of the assets sales you would be thinking about a special dividend or not?

Ed Aldag

Well Tayo there are a lot of ways to deal without including rolling into new properties and timing special dividend none of which is that we've made any determination about.

Operator

Thank you. And I'm showing no further questions at this time. I would like to turn the conference back over to management for any final remarks.

Ed Aldag

Thank you operator, and again thank all of you for your interest. So if you have any questions please don’t hesitate to call Tim Berryman, Charles Lambert or Steve or myself. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a great day.

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