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Executives

Charles Lambert - Managing Director

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

Steven Hamner - Executive Vice President and Chief Financial Officer

Analysts

Jana Galan - Bank of America Merrill Lynch

Daniel Bernstein - Stifel Nicolaus

Mike Mueller - JPMorgan

Medical Properties Trust, Inc. (MPW) Q3 2012 Earnings Conference Call October 30, 2012 11:00 AM ET

Operator

Welcome to the Q3 2012 Medical Properties Trust Earnings Conference Call. My name is Ellen and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Charles Lambert, Managing Director. Mr. Lambert, you may begin.

Charles Lambert - Managing Director

Thank you. Good morning. Welcome to the Medical Properties Trust conference call to discuss our third quarter 2012 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 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 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. - Chairman, President and Chief Executive Officer

Thank you, Charles and thank all of you for listening in today. First and foremost, please know that all of our thoughts and prayers go out to those in the path of Hurricane Sandy. We pray that you and all of your families are safe, dry and warm.

Today, we announced the continuation of a truly spectacular year for Medical Properties Trust. With today’s announcement, we show a continuation of our strong performance resulting in an FFO payout ratio of 80% for the third quarter. We also announced that we have made an additional $259 million in acquisitions since our last call. Year-to-date in 2012, we have now made a total of $781 million in strategic acquisitions and commitments. This is a record level of acquisitions for us and is approximately 80% higher than we have ever done in one year. And we still expect to complete additional acquisitions in the fourth quarter.

Based only on our existing portfolio, which includes the acquisitions announced today, we expect our annual run-rate FFO per share to be $1.8. Said in a slightly different way if we made no further acquisitions, no more in the fourth quarter and none in 2013, our 2013 FFO would be $1.8 per share. This equates to a pay-out ratio of 74% from our in-place portfolio. We have a strong pipeline of potential acquisitions for next year. We will provide guidance for what we expect in 2013 as we get closer to year end 2012. In any event given our low cost of capital and our ability to continue invest in properties at an average of going in cash cap rate of 10%. We expect our acquisitions to be immediately accretive.

Our portfolio continues to produce one of the highest EBITDAR lease coverage ratios in the REIT universe. And I know most of you know this, but again just to be sure we are all on the same page. We analyzed our lease coverage ratio using EBITDAR, not EBITDA or like some of our peers as it means to be conservative we made the assumption that if we were to have to replace the management company, we would still have to pay a third-party management fee.

Our overall portfolio EBITDAR lease coverage for properties that have been in our portfolio for at least 12 months is right at 5 times. Both the LTACHs and IRFs produced a good year-over-year increase to their coverage with the LTACHs increased into 2.5 times and the IRFs to 3.6 times. The only decline we saw was in the acute care sector with an approximate 5% quarter-over-quarter decline. This is fairly normal for the third quarter over second quarter results for the acute care hospital sector and it’s been similarly reported by non-MPT hospitals all across the country.

Our acute care hospital EBITDAR coverage for the third quarter was approximately 6 times. Our RIDEA investments continued to outperform. As we projected the annualized return for our non- Ernest operating investments exceeded 35%. Ernest continues to perform well generating EBITDA more than 3% ahead of budget. We recently sold two properties both LTACHs, one in the Western part of the U.S. and one in the Eastern part. These two properties were sold to third parties not affiliated with MPT or the tenant. We sold these two properties for 27% more than our original cost, which equates to a 260 basis points cap rate compression. These two properties were not stand-out properties they were right in the middle of the pack, average performers in our portfolio. We believe this gain is indicative of the value of our total portfolio which has grown from an EBITDAR lease coverage ratio of about 3.2 times in 2006 to about 5 times today.

Despite the political back and forth surrounding sequestration, we wanted to show you the strength of our coverages. We have used two different scenarios to illustrate this point. Both assume that our operators make no adjustments in how they operate. For example, we assumed no changes in patient mix or case mix indexes or reduction in expenses. These are obviously very conservative assumptions because in all cases our operators would make such changes. But in any event we ran two scenarios one assumes a 5% across the board cut to Medicare and the other assumes a 10% across the board cut to Medicare, both significantly higher than the assumed 2% sequestration.

In the first scenario, the 5% cut, our overall portfolio coverage would go down to approximately 4.25 times. Acute care hospitals will see an approximate 70 basis point drop and LTACHs would see an approximate 50 basis point drop and IRFs an approximate 40 basis point drop. Under scenario two, with a 10% across the board cut to Medicare revenue, MPTs total portfolio coverage would see a drop of just more than 100 basis points, and LTACHs would decline about 100 basis points to produce a coverage of slightly more than 1.5 times, while the IRFs would still have a coverage exceeding 2.5 times or approximate 80 basis point drop.

As we have said numerous times we do not expect to see long-term cuts to today’s rates. We believe any cuts will come in the form of cuts to the future growth in rates. And if we see any cuts, we believe the actual effect will generate no negative impact on MPT because our properties would still be producing strong coverage ratios. Furthermore, we continued to believe the regardless of what happens with the upcoming election or the federal budgets, we fundamentally believe that hospitals will remain at the core of our healthcare system. There have been numerous political changes throughout the history of the country and hospitals have always remained at constant. We are confident that these institutions will continue to be the top of the pyramid in the healthcare delivery system in this country.

In summary, I want to point out again that our existing portfolio is now generating an FFO which produces a payout ratio based on our current dividend of 74%. Our portfolio will continues to generate strong EBITDAR lease coverages, our pipeline for future growth looks robust and our balance sheet is poised to take the advantage of these opportunities.

At this time I’d like to ask Steve to continue with the detailed financial results for the quarter which further demonstrated the strength of MPT. Steve?

Steven Hamner - Executive Vice President and Chief Financial Officer

Thank you, Ed. The third quarter financial results continue to improve the value of our strategy. We invest in high-return hospital real estate and lease to operators who have proven over decades of evolving hospital economics and regulations that they are able to profitably navigate the largest and one of the most complex segments of the U.S. economy.

So, I will summarize the quarter’s financial highlights. Normalized FFO was $33.4 million, a 71% increase over 2011 second quarter. On a per share basis that translates into $0.25 per share in the third quarter of 2012, 39% higher than 2011’s $0.18. We have now posted two quarters in a row of year-over-year per share FFO growth that exceeds 35%. And as we have been predicting our dividend payout ratio has correspondingly improved to 80% for the third quarter with further improvements expected in 2012 and beyond.

The great majority of our FFO of course is derived from our lease and mortgage interest revenue, but also included in FFO in the third quarter is $3.5 million of income from our investment in Ernest operations. And this is included in interest income, and another $1.1 million in earnings from our six other investments in tenant operations. That $1.1 million is up 25% over last quarter and reflects an annualized return exceeding 40% on approximately $10 million of total investments. This continues to validate our strategy to limit our RIDEA-type investments to those in which we are able to acquire significant upside opportunity, over and above our already high real estate returns at little incremental investment.

Remember, that we separately earn rent and mortgage interest of approximately $50 million annually from these operators. There are two items that reconcile funds from operation to normalized FFO. Number one, cost associated with asset acquisitions of $410,000, and secondly the non-cash charge of accrued straight-line rent related to a facility that we sold during the quarter of about $1.6 million. I’ll review the sale in further detail in just a moment.

Our strongly positive outlook regarding growth opportunities was once again confirmed by activity during the quarter. We added three general acute care hospitals to the Prime relationship for a total investment of $210 million. Commenced construction of a new $18 million in patient rehabilitation hospital that will be added to the Ernest master lease entered LOIs to acquire two existing LTACHs during the fourth quarter for an aggregate $31 million and agreed to the terms of $100 million proposal to fund the development of 25 full service emergency facilities for a leading provider of these types of services.

The weighted going in cash cap for these transactions exceeds 10% and the majority of the rates increased by inflation each year. A few do have floors and ceilings on the CPI measures. We also sold two properties during and after the quarter as Ed has already described. Since acquisition in 2004, these properties generated an un-levered internal rate of return exceeding 15%. And to reiterate Ed’s point, the cap rate based on the sales price represented a 260-point compression versus what we were earning at the time of the sales. That’s an important data point for any investor’s estimate of our portfolio NAV. And one of the several benefits of this sale is that it provides visibility into the market for these types of hospital assets.

We used our revolver to finance the third quarter acquisitions and expect to use it for the fourth quarter acquisitions. Other than these transactions, there were no other material changes in our capitalization during the quarter, and a summary of our debt is included in the supplemental that was released earlier this morning.

Turning to guidance, this morning we are increasing our estimate of 2012 normalized FFO to $0.90 per diluted share, a $0.05 increase from our estimate from last quarter. In arriving at this estimate, we took into account our assets and debt as of September 30, acquisitions and disposition since the end of the quarter that we have just described, placement into service of our three Emerus emergency hospitals during the quarter, and approximately $31 million of fourth quarter acquisitions. Based only on these assumptions, plus the developments that will come online during 2013, the normalized FFO run-rate as of January 1, 2013 is as Ed has just said, estimated to be approximately $1.8 per share, representing a dividend payout ratio of less than 75%.

Just to reiterate that is not an estimate for 2013, we expect to provide guidance on 2013 later this year, which will include among other things, our estimate of the effects of the acquisition and capital activities in 2013. But because we are able to invest at cash cap rates that have exceeded 10% this year combined with our low cost of capital. We remain highly confident that our acquisitions in 2013 will be strongly accretive from day one of the acquisitions, with annual inflation adjustments improving that accretion each year. Any level of acquisitions therefore further improves our outlook for FFO in 2013. This strategy focused on lease revenue from hospital real estate is what will account for the great majority of our future earnings growth. 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 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.

And with that, I will turn the call back to the operator and we will take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Jana Galan from Bank of America Merrill Lynch. Please go ahead.

Jana Galan – Bank of America Merrill Lynch

Thank you. 2012 has clearly been very successful in terms of sourcing acquisitions and I was wondering what the pipeline looks like currently and should we going forward be thinking about this $400 million per year run-rate or given the results this year, should that be a little bit higher?

Edward K. Aldag, Jr.

Jana as we said earlier, we have not given an exact number for what we expect 2013 to be. The pipeline is very robust, it is probably more heavily weighted towards the acute care sector than it is the post-acute care sector as I’ve stated in the previous calls. We certainly hope and expect that it will be much closer to this year’s total acquisitions than the prior year’s averages, but we’ll update with the firm number later in the year.

Jana Galan – Bank of America Merrill Lynch

Thank you. And then how should we think about the funding of acquisitions. Will you be looking at further dispositions or are you thinking more of 60% equity, 40% debt going forward?

Steven Hamner

Yeah, we actually do think there could be opportunities for limited dispositions. The market rates that we achieve with the sale of the two LTACH hospitals are very encouraging to us and we believe that that market it continues to grow and will be available should we selectively want to sell certain properties, which we will consider. The debt market as probably everyone on this call knows are at historic lows with respect to market interest rates, so that is very attractive and abundantly available to us as we sit here today. And as the stock price has improved over recent weeks and months that makes it more attractive for us to reach that mix as you point out Jana of roughly 60-40.

Jana Galan – Bank of America Merrill Lynch

Thank you. And then just a quick question on, it looks like you have three leases maturing at the end of this year, I was just curious if you expect to renew or you’re looking – marketing it to other tenants?

Edward K. Aldag, Jr.

There are three, you’re right. We absolutely expect to renew two of those. I’m having trouble coming up with the third. Oh, yeah, I’m sorry I’m just – two of them, we are already in the process. We’ve extended them and are working on documentation for renewal. And the third, I’m sorry I just don’t remember. I’ll have to get back to you.

Jana Galan – Bank of America Merrill Lynch

Okay. Thank you, very much.

Operator

Our next question comes from Daniel Bernstein from Stifel Nicolaus. Please go ahead.

Daniel Bernstein – Stifel Nicolaus

Good morning.

Edward K. Aldag, Jr.

Hi, Dan.

Daniel Bernstein – Stifel Nicolaus

I am actually happy to be on the call here with (actually) in power. I just wanted to ask you, what is the actual cap rate on the sale of the assets in the fourth quarter, are you able to disclose that?

Steven Hamner

Yeah, it’s about 9.5% and those were paying us in excess of 12.5% at the time we sold.

Daniel Bernstein – Stifel Nicolaus

And then just we get the cap rate, because of the lease coverage and effectively whatever demand there was out there for the assets?

Steven Hamner

Right.

Daniel Bernstein – Stifel Nicolaus

Okay. And then I just want to see in the emergency room, freestanding emergency room development, I mean what makes those assets attractive to invest in and it’s different than urgent care correct and then that these are not urgent care facilities?

Steven Hamner

You’re right, Dan, absolutely different from urgent care. These are roughly 6000-ish square foot facilities. They are freestanding on attractive retail locations, including out pads. They are staffed 24/7 by emergency board qualified physicians, which is one way that makes them significantly different than urgent care. They do fairly advanced procedures obviously if there is something life threatening, the patient will be stabilized and then moved to a more appropriate facility. We think it is an absolutely attractive new development in healthcare delivery. As you know, we already have a relationship with another emergency provider, and in that case, Emerus are actually licensed hospitals. The $100 million that we just announced, those hospitals or those facilities will not be licensed as hospitals, but absolutely will provide a top-flight emergency care with board-certified physicians.

Edward K. Aldag, Jr.

And they are actually licensed emergency rooms, not all states that have the ability to have this type of facility, but in the states where these facilities are and planned to be, they are actually licensed emergency rooms, very similar to hospital obviously without the overnight stay.

Daniel Bernstein – Stifel Nicolaus

This is equivalent to a certificate of need (indiscernible).

Edward K. Aldag, Jr.

No, it’s not a certificate of need state, its states where the license share for those hospitals are actually, I mean, those facilities are actually emergency rooms, but they are not in certificate of need states.

Daniel Bernstein – Stifel Nicolaus

Okay. So, it does provide some level of barrier to entry?

Edward K. Aldag, Jr.

That’s right.

Daniel Bernstein – Stifel Nicolaus

Okay.

Edward K. Aldag, Jr.

Yeah. It’s very different than an urgent care.

Daniel Bernstein – Stifel Nicolaus

Okay. And is there a timing on the – these are development fund – this is development funding and a leaseback at the end correct, and so what is the timing of the development, I assume you are going to get some interest income or money on the initial construction money that you provide, is that correct?

Steven Hamner

Well, we will Dan, we don’t recognize that though. We absolutely earn it, but the accounting rules say we capitalize that into the cost of the facility and then it ends up increasing the rate. As the announcement says, we think there will be up to 25 of these facilities closing anticipated on the first several, early, very early in fact in 2013. We expect all 25 to have been commenced within 18 months of signing and completed within 30 months of signing.

Daniel Bernstein – Stifel Nicolaus

Okay. And I know New Jersey is a real mess right now, and I hope all your patients at your facility in New Jersey is doing okay, but have you had any word from your New Jersey acute care hospital is whether everything is okay there or not?

Edward K. Aldag, Jr.

Yeah. Dan, we have actually stayed in contact with all of the facilities up in that part of the country. All throughout the night, we were getting reports literally throughout the nights with our (indiscernible), because I was up with them. But the initial reports are fairly good. I don’t want to give a complete report until we have all the information. Obviously, our facility in Hoboken was evacuated before the storm that was made public as the evacuation was going on. I think of all the facilities that’s probably the one that we’ll look at the most closely. I think the reports from all the others are pretty good.

Daniel Bernstein – Stifel Nicolaus

Okay. Okay, well thank you and I will talk to you soon. Thanks for taking my call. Thanks.

Edward K. Aldag, Jr.

Thanks, Dan.

Operator

(Operator Instructions) The next question is from Mike Mueller from JPMorgan. Please go ahead.

Mike Mueller – JPMorgan

Hi, can you hear me?

Edward K. Aldag, Jr.

Yeah.

Mike Mueller – JPMorgan

Okay, great, great. Few questions, first of all, the First Choice following up on that, are the new facilities, it looks like everything we have now is in Texas, like Dallas, Houston, Austin, if I am correct, will the expansion facilities be in Texas as well or going to different geographies?

Edward K. Aldag, Jr.

They will be in Texas and some of the surrounding states.

Mike Mueller – JPMorgan

Okay. And then I was wondering I think on the last quarter call, I am working remotely to it, so I don’t have everything with me. You talked about $200 million of fourth quarter acquisitions, I was wondering if you could just reconcile that to maybe what closed in the third quarter, what you’ve announced so far that could be hitting in the fourth quarter, what some of that move forward into the third quarter just tie the two together, it would be good?

Edward K. Aldag, Jr.

Well, the $200 million would have made the $759 or the...

Steven Hamner

$781 million.

Edward K. Aldag, Jr.

$781 million, be $800 million exactly. And as I said earlier in the call, we expect to still have some additional fourth quarter closings as well. I think that we will certainly meet the full $800 million.

Mike Mueller – JPMorgan

Okay, so but some of that $200, some of that it sounds like some of the stuff you are talking about closing in the fourth quarter now, but maybe some that was moved into the third quarter is that the right way to think of that?

Edward K. Aldag, Jr.

Well, I think you are talking about the $100 million development line for First Choice, and that is correct.

Mike Mueller – JPMorgan

Okay, great. And then last question, the 2012 guidance went from $0.85 to $0.90, it went up a nickel, the 2013 run-rate went up about $0.02 from the $1.06 to a $1.08, what’s the disconnect there or the difference why ‘13 goes up significantly less than what the fourth quarter is, is it asset sales – that your asset sales are back-end loaded and that’s going to – that’s impacting the run-rate and kind of pulling that the $0.05 bump in this quarter down towards the $0.02, is that what the impact is?

Steven Hamner

No. I mean, it’s basically the timing Mike and including not only timing, but the rates that we’ve got and we’ll get in the rest of the fourth quarter are meaningfully higher than what we had – what we had modeled, which I think if you recall we’ve been saying that we expect to close deals in 2012 between 9.5 and 11. And so when we modeled, we used the lower end of that. The rates have actually been as I say meaningfully higher. And yeah...

Edward K. Aldag, Jr.

So, it’s a combination of higher rate and timing. Obviously, when we gave the $1.06 to now the $1.08, it was all a 12/31/2012 number. And so for the 2012 up to $0.90 we made acquisitions quicker in the year than we had originally anticipated.

Steven Hamner

At better rates.

Mike Mueller – JPMorgan

Okay. Okay, thank you.

Operator

We have no further questions at this time. I will now turn the call back to Ed Aldag for closing remarks.

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

Ellen, thank you very much. And again thank all of you for listening today. And as always, please don’t hesitate to call any of us with any questions you may have. Thank you very much.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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