Medical Properties Trust's CEO Presents at Bank of America Merrill Lynch 2012 Health Care Conference (Transcript)

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Medical Properties Trust, Inc. (NYSE:MPW) Bank of America Merrill Lynch 2012 Health Care Conference Call May 16, 2012 4:40 PM ET


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

R. Steven Hamner – Executive Vice President and Chief Financial Officer


Armando Lopez – Bank of America/Merrill Lynch

Armando Lopez – Bank of America/Merrill Lynch

I am Armando Lopez; I am with Bank of America Merrill Lynch. And it’s my pleasure today to introduce Medical Properties Trust. Today, for Medical Properties Trust we have Chairman, President and Chief Executive Officer, Mr. Ed Aldag. With him today, we also have the companies Chief Financial Officer, Steve Hamner, and the Finance Director and Head of Investor Relations, Charles Lambert.

Before I turn the floor over to Ed, I would like to provide a brief background Ed has served as Chairman and President and Chief Executive Officer of Medical Properties Trust since it was founded in August of 2003, prior to that he spent 15 years at Guilford Capital Corporation and Guilford Medical Properties. Mr. Aldag, was the President and a member of the Board of Directors of Guilford Capital from 1990 to 2001, serving as Executive Vice President, Chief Operating Officer and a member of the Board of Directors. He also served as President and a member of the Board of Directors of Guilford Medical Properties from its inception until selling his interest in the company in 2001. He received a Bachelors Degree in Commerce and Business from the University of Alabama and it’s my pleasure to welcome Mr. Ed Aldag. Ed?

Edward K. Aldag Jr.

Thank you, very much and thank all of you for being here today, your interest in Medical Properties Trust. Let me start off by go over with you what I would like to accomplish today. When you listen to the program, you listen to my presentation the things that I want you to take away from it.

We’ve got a strong covered dividend, I’ll go through that in more detail with you in a moment. It’s from a portfolio properties that are extremely well performing and they have a history of being extremely well performing. And very importantly it’s in an industry that is very stable. The hospital industry have and what you work through all of the headline news is actually very stable industry and I’ll get through that in just a few moment.

Also with the very low leverage that we have and a large pipeline that we have, we positioned ourselves very well to grow the company dramatically over the upcoming years. If you look at our operational results and you look at our FFO, from the inception of the company, we’ve had good FFO growth. If you look at the chart here, you’ll notice that we had a small dip from 2008 and 2009, and in the rest of the time period we’ve had good growth. Now those were the strategic decision by the company.

We actually sold a small portfolio of properties in 2008, going into 2009 to further diversify away from our then largest tenant. From time-to-time we’ll do things like that in order to keep our tenant concentration, geographic concentration and our property mix where we want them to be. But it’s important as you go through this presentation with me today, you keep this graph and these charts in mind and see the history of why we’ve proven our track record to be with our FFO.

Also if you look down at the bottom left hand corner here, you see that our EBITDA, our lease coverage ratios. These are organic growths rates from our existing properties in our portfolio. You see in 2006, our EBITDA, our lease coverage ratio was approximately 3.5 times. Today, on a portfolio-wide basis, that EBITDA or lease coverage ratio is over 5.5 times. I’ll show you what it is broken out on an each segment there in just a few moments.

Last week in our earnings call we gave updated guidance. Our updated guidance for the first time we actually gave guidance for calendar year 2012. We also gave a run rate for 12/31/2012. In that run rate, we assume that we made an additional $300 million in acquisitions. We have about $100 million of debt that we could see that’s very imminent, that we expect to close very shortly within this quarter.

With the other $200 million, we’re excited to close by the fourth quarter. Now with that we were projecting that we will have a $1.6 FFO per share. And with our dividend rate of $0.80 per share, that puts us below an 80% pay out ratio. And that’s very important because those of you that follow us know that that’s been one of our goals. We’ve had some strategic opportunities here that we’ve taken advantage of. We’ve raised some equity to take advantage of those acquisitions. And so we’ve had some dilutions, so we’ve been above the 80% threshold. With the 80% threshold, that’s where we want to be before we start raising the dividend, we expect to be there again by the end of the year.

Now even if we don’t do the $200 million in acquisitions that we’ve scheduled for the fourth quarter, we’re still going to be above $1 per share in FFO, given it’s still greater than an 80% - less than an pay out ratio.

Now, the healthcare real estate market, what we invest in, hospitals is extremely large. We project it is approximately $400 million, and very little of that is REIT owned or public company owned, most of it owner occupied. It really isn’t anyone else out there doing what we do, and that is investing in the big box hospital, acute care hospital in both acute hospitals.

If you look at our management team, and I’ll walk you through this in just a moment. Our management team are people that came out of the hospital industry. We literally could say, any hospital in our portfolio with the management team that we have back in Birmingham, and operate that hospital today.

Another thing that we have, you know that we’re a triple-net leased REIT. With a triple-net leased REIT, you have very small organic growth rates. Our organic from our existing leases is whatever CPI is. So that’s just historically been in the 2% to 3%.

Recently, we’ve made some significant investments in RIDEA structure, and that’s always been a part of the MPT story. And we’ve only have the RIDEA (inaudible) since January of 2009.

We announced in last week’s earnings call that we currently have about $110 million invested in RIDEA transaction, $10 million of that was prior to our Ernest transaction, which I’ll go over with you in just a moment. But from those transactions, we expect our return from those investments will be somewhere in the neighborhood of 15% to 35%. That will provide some additional organic growth from our existing portfolio.

When you look at all the pieces to the puzzle, what we need in place to continue our growth, and we’ve got it. All the pieces are there, we’ve got a strong balance sheet, we’ve got low leverage, we’ve got good liquidity, we’ve got a proven track record of accessing all different types of the capital market.

Last year, we had a credit upgrade, just recently we had a credit upgrade from the credit rating agencies. We have a lower cost of capital than we’ve ever had. We’ve got a history of making good investments in good hospitals that generate good returns.

We’ve got a great pipeline that we believe that gets us to the point where we can continue to grow well beyond that dollar safe that you saw a few minutes ago. Now, what does our portfolio look like? it’s all across the acute care services spectrum, it’s general acute care hospitals that everybody thinks of when they generally think of an acute care hospital, and it’s also post-acute that they also add to nurse.

this chart shows you what our existing portfolio looks like, it’s about 50% acute care, about 19% inpatient rehabilitation hospitals, and about 24% long-term acute care hospitals. Remember, historically that number has been about 65% to 70% acute care, and you’ll see this chart with those numbers going back up, that’s the more normal number.

We just recently made a $400 million acquisition in a post-acute care company, which [killed] these numbers slightly. By investing in the continuum of care, we believe that our properties compliment each other through complimentary markets, all across the country.

And who are our tenants, our tenants are people that you know, they are some of the nation’s largest most well respected tenants, Prime Healthcare, the 10th largest operator of acute care, general acute care hospitals in the country. Ernest Health, our most recent acquisition, one of the largest post-acute care operators in the country, consistently ranks in the top 10% with patient outcomes. Vibra Healthcare our original tenant; is the third largest LTACH provider in the country. HealthSouth, also headquartered in Birmingham, the largest inpatient rehabilitation hospital operator in the country. Cambridge, IASIS, Community Health Systems, HMA, all companies that are our tenants, and these names represent about 65% of the revenue in our portfolio.

So let’s talk about hospitals being a stable industry. Hospitals are here to stay, until we invent the magic wand that we can wave over each person when they get fixed, and make it, we don’t have to go into hospitals, we are going to always need hospitals. And I don’t care whether you’re talking about the republicans plan or whether you’re talking about the democrats plan, or you’re talking about somewhere in between. They all have one thing in common, and that is that the hospitals are the hub and spoke, hub of the hub and spoke system. They are the linchpin of our healthcare delivery system.

So it doesn’t matter what form reimbursements are going to take. They’re absolutely going to be there in some form to pay for the hospital care. Now I’ve got my start back when DRGs came along, you couldn’t get much Tony in that particular point, we used to be reimburse the old cost basis, when you got reimbursed on a per procedure basis and hospitals throughout under that to that.

If you have good operators, you have good management teams, they can operate in these environments, you’re going to do very well. If you look at the utilization of hospitals during the worst of time, during every recession, we discuss this overhead. They’ve actually gone up. All of you know, that during the healthcare conference you know that every rating agency out there said that the hospitals were going to hold an hand bucket during this late recession with the unemployment’s that we have. From 2007 to 2011 utilization in hospitals on a per bed basis was essentially flat. But on EBITDA basis, on a per bed basis EBITDA actually went up, it went up fairly dramatically.

So when you look at again hospitals being the linchpin of the delivery system and you look at our portfolio, we feel very good about where our portfolio is. And a few minutes ago, that we talked about the specifics of our coverage along the (inaudible) spectrum. Our acute care hospitals are currently generating more than seven times EBITDA, lease coverage ratio. Our LTAC is little more than 2.5 times, and our inpatient rehabilitation hospitals a little more than three times.

So a total portfolio wide basis of 5.5 times, stated earlier, I want to repeat it. That’s an organic growth rate from 2006 of 3.2 times, but we underwrite a hospital, an acute care hospital. We generally like to see going in three times EBITDA coverage. So that’s how we underwrite our original hospitals at. Our LTAC nurse we generally write at 175 to two times coverage. And you see this is the growth they’ve had during one of the worst times this country is ever seeing.

Now this chart, actually surprises most people, may not surprise this crowd, again because you’re here at a healthcare conference, but this is every hospital in the country. They are about 5,000 hospitals in the country. All hospital operators are not treated equal and therefore all hospitals are not treated equal. But if you look at the top tier of hospital operators and that’s our perspective tenants and our existing tenants. They’ve had record profits for the last seven years in a row, and that’s the people that we are going after. But what you’re going to see a lot more, than we’ve had. An example of this is our couple of acquisitions that we’ve done recently, in some of the very poorly managed hospital authority type hospitals that are being taken over by four profit facilities and converted and we are helping in that transaction.

Now what is our geographic mix; even from the very beginning, we just started when our portfolio consisted of six properties, we had a good geographic diversification. We continue to still have a very good geographic diversification. Our properties are all across the country, as you know. We headquartered in Birmingham, Alabama, but our properties go from coast to coast.

Now when you look it back at the chart and you see that in California, Texas we have 21% and 24% of our properties located in those areas. We have very little state based risk exposure from state reimbursement. And this is our Medicare, Medicaid and Private Pay. People are often surprised to hear that we have 40% of our revenue comes from private pay. About 50% comes from Medicare and a very smaller portion 10% comes from the state Medicaid program.

So it doesn’t matter if our properties are in California or they are in Texas or they are in South Carolina. We have good reimbursement programs in all of those properties. And this is our lease maturity schedule for the upcoming properties, again this shouldn’t surprise you because we are relatively down [for our assets] 2003, we have very little leasing maturities coming due.

Most of our leased maturities don’t come due until beyond 2022. I’ve been doing this since the early 1980s. The experience with hospitals is that they don’t move very often, and it’s hard for a hospital to move, all the ancillary services that have build up around them, doctors who want to have to drive all over [county] and treat a patient at this hospital and at their doctors office.

So generally speaking hospital will renew and continue to add, and continue to expand. We’ve from time to time have had lease renewals where they did not renew, and we were able to find new tenants. We are yet to have a situation where we haven’t been able to find a placement tenant.

Now, one of the things, when you look at our portfolio, you can hear me talk about diversification. We certainly talked about tenant diversification. Right now we have no tenant that represents more than 20% of our portfolio. But this chart here on the right-hand side is the most important to us when it comes to diversification, and that’s on a property-by-property basis. We’ve done largest exposure to any one property, currently that’s a little over 4%, not long ago that was 8%, that’s a number that we will continue to push down and down.

And when you look at this chart here, when we look at how we do our underwriting. It’s a bottoms up underwriting. I don’t care if they’re parent company, it’s HCA, HMA, tenant or whomever. We start with the underwriting at the local level, because if it doesn’t make sense at the local level, it doesn’t make sense regardless of who the parent company is. I want to know that if we somehow made a mistake and who the operator is, there is still a need for that hospital, and we can bring it and you operate it. So the first I look at is the need. Is it needed that community? Is it over bed, is the community over bedded, is it under bedded?

Secondly, the physician support, unless there is a physician in this room there is no one here that can admit themselves to a hospitals. You got to have the physician support, and get that in a whole lot of different ways, but you absolutely have to know that, that’s where that physician wants the practice. Years ago we competed with a very large healthcare REIT on a hospital in Kentucky.

It clearly was the number four hospital in that community. Our term sheet in the other healthcare lease term sheet were almost identical. The terms were very similar. They will make it real estate play. We will induce the transaction, unless they somehow pad up to the physicians to that hospital, because this hospital was never going to be easing other than the number four hospital in Bordeaux town without the physician support.

So we wouldn’t call it a transaction until they did a physicians indication. They chose to go with the other healthcare REIT. Less than 12 months later, that hospital filed bankruptcy, you absolutely have to know that you’ve got the local support.

Then talk a little bit about our largest transaction that we’ve just completed is our largest transaction to-date. This was a very strategic very exciting transaction for a number of reasons. one, there was a $400 million acquisition that accomplished an awful lot, that accomplished bringing our largest tenant down from 30% roughly down to 20%. it expanded our footprint into 12 different markets in three different states. It also expanded our horizon in the LTACH and inpatient rehabilitation business.

But also very importantly, it provided us with an in-house supply of properties, now this was a company that was funded by a venture capital funding, a private equity fund that have been in the company for a very long time and get called with equity firm, get called in the recession.

Ernest continued to perform very well. but the venture capital firm didn’t have access to additional capital so Ernest wasn’t able to grow. We knew the demand with there we knew the management team, this is the management team that we knew from the day the national medical enterprises they’ve been together very long. So when we actually chain to this management team, they were being recorded by some of the countries, largest post-acute care operators. but those post-acute care operators; wanted to buy the company and deal away with the management team. Because we can’t legally manage the facilities, we wanted to keep the management team in place and we felt very comfortable with the management team.

So we were able to offer the exact same price that everybody else was offering. but the extra care was we left the management team in place. Now what this did for us, was opened a whole new avenue of additional businesses in companies that we can invest in. It also provided us with a supply of properties for the foreseeable future, but we’ll probably do in additional three or four properties with Ernest over the next few years each.

So in the Ernest transaction, we will go just a second, in that Ernest transaction in addition to the real estate, we actually invested in the operations, we made a $300 million real estate transaction triple-net lease like I used to think, but we also made a $100 million investment in the operations. We think it's very low additional incremental risk and our initial returns from that in the next two years were probably 15%, we have six other (inaudible) transactions, where we have $10 million invested these were our original stock. We announced this last week that we expect in the foreseeable future to return approximately 35% on those $10 million over the next few years.

So let me go back over some of the summary here, we have had strong sustainable FFO growth, we’ve had a great track record of steady cash dividend payment even during the height of the great recession. We’ve got a deleveraged balance sheet, our balance sheet leverage is only approximately 45% right now. We have moved out the tenure of all of our debt, our debt maturity – average debt maturity is approximately eight years. We have fixed the cost on that debt. So that our only floating debt that we have outstanding right now is what’s going to be under the revolver.

We have approximately $400 million of an unused revolver to use for dropout and for acquisitions. We just got an upgrade from our credit ratings. And we have incredible increased financial flexibility from the unsecured debt financing that we have recently done. Steve, do you want to walk through some of the balance sheet items here, we have got just a few minutes less.

R. Steven Hamner

Thank you, and I’ll just take a few minutes, let me backup just a snapshot again of the company from its inception. When we put the company together back in 2003, we had no asset, we had no contracts to acquire assets. We went out into what was a very different market at that time actually in the spring of 2004 with nothing but a management team and a plan, and we went out to raise $200 million in the private 144A market. We came off the road a very long and grueling road show with orders for almost $1 billion.

So it clearly was a much different market than when you could what was essentially was clearly a blank cool offering in a very new space like hospital real estate. And so we accepted $250 million of that and put that to work.

And so you see from 2004, through the first quarter of this year very, very steep growth curves. What this really does if you did the (inaudible) over our history from inception, we’ve averaged about $300 million a year in acquisitions, and that’s important as we come back in a minute to our guidance.

Ed mentioned our very strong financial flexibility through a very liquid balance sheet, and a low leveraged balance sheet. We have about $940 million in debt, represents today a little less than 45% leverage on a cost basis. Of that $900 million something, we’ve got virtually no maturities until 2016, when we have two separate issuances totaling $225 million coming due.

So the great majority of the maturities are in 2018 and 2020, and those are unsecured long-term notes that have an average rate of about 6.5%. The notes coming due in 2016, we fix those rates about 5%. So we’re in a – what we think is a uniquely advantageous capital market to us that gives us liquidity that we have now. As Ed mentioned, we’ve got a $400 million line that is completely untapped, we’ve got over $100 million in cash on the balance sheet and we’ve got a very, very strong pipeline.

Recently, over the last couple of years or last 12 months, I guess we’ve increased our revolver to the $400 million we talked about very, very strong pricings no LIBOR for on the revolver. As I mentioned, we’ve issued two tranchées of unsecured notes totaling $650 million with a very, very attractive blended coupon for us.

Since 2009 we’ve doubled the size of the company and assets and when we do that keep in mind, we take this very low cost capital and we invest at going in rates of 10% cash. So we have a unique situation where the cause of the returns on the hospital real estate we are going in immediately being accretive even with the stock price where we’ve issued recently, which is not where we think it will end up being clearly after we demonstrate this $1.2 to $1.6 run rate going in the 2013.

So we’ve got a tremendous access to the capital, we’ve got tremendous availability immediately. And as you can see, over the last two years $1 billion of acquisitions and we are highly confident in the remaining $300 million that we’ve projected in 2012.

I think most of this just summarizes again whatever is said but we’ll leave a little bit of time if there are any questions either I will be happy to address them.

Question-and-Answer Session

R. Steven Hamner

Yes sir.

Armando Lopez – Bank of America/Merrill Lynch

First time I’m seeing you guys I’m just trying to reconcile what you are just talking about in terms of returns relative to the fact that you guys are the only ones kind of in the REIT space that are doing it also then reconciling the fact that things traditionally hospitals that wanted to own the real estate for the most part. So it could be a whole new kind of connect with that.

R. Steven Hamner

Well, our goal in cash cap rates, right now very widespread depending on a lot of factors, strength of the tenant and other factors range between 9 and 11, roughly speaking. That’s obviously substantially higher than what the other healthcare REITs are doing. If you remember the story that I’ve told back to about competing with the other healthcare REIT on the hospital, and they were making a real estate play, and we were making a hospital healthcare play.

When you look at our management team compared to all the other healthcare REIT management teams, there isn’t anybody else out there with the expertise to do what we do, which is to underwrite a hospital as if we were going to operate it tomorrow. In the same sense I can’t compete with them on assisted living facilities or on a medical office building. We don’t have the staff to do that, we don’t have the expertise to do that. What was the other part of the question?

Armando Lopez – Bank of America/Merrill Lynch

And that hospitals that tend to be one off.

R. Steven Hamner

Yeah, I don’t think that’s accurate. I think the more accurate is that, hospitals haven’t had the opportunity to do a sale lease back. If you look at their medical office buildings, they caught on to that very quickly, and they’ve sold most of their medical office buildings. When it come to them and talk to them about doing a certain sale lease back on the big box if you will. Every single time that we’ve gotten in front of a full profit operator, and talk about doing a sale lease back, they get it. They understand that the retail scenario, I can make a lot more money doing operating returns than I can having my money invested in real estate.

Now, if it’s an operator that’s not in a growth mode, and there’s nothing else to do with their money then they ought to leave their money in the real estate but then they’re not a very good candidate of ours anyway. Where there is some of that, is primarily from the religious order churches, religious order hospitals whereas they think of it -- they have a hard time understanding that a sale lease back is nothing more than a financing mechanism and they [say but well] I can’t lose the mothership, I can’t sell the mothership, so there is some of that, particularly there, but we’ve never had that issue on the four projects, not only just never really anybody ask them the question.

Armando Lopez – Bank of America/Merrill Lynch

Okay. And just also second reconcile that the rent coverage or lease coverage that you guys show vis-à-vis other kind of sold asset there are subclass of real estate within the space, trying to understand that relative to the returns, because you show the one sure there has the profitability of the industry, you guys are targeting the upper cortol presumably the vast majority of the money sold. Help me out trying to understand the profitability relative to the rental coverage?

R. Steven Hamner

Well, if you look at our portfolio and all that we’d able to win that red-dotted line box, and the profit margins are extremely strong. the profit margins were actually sort of in the high teens all the way of up into the high 20s, when you look at, spoken out in our subsectors, general acute care and in the (inaudible) and in the LTACH. When you look the general acute care, their capital needs, their CapEx needs are substantially higher than what you have in the post-acute setting. Just the equipment alone and so when we go in and underwrite a general acute care hospital, we generally like to go in underwriting three times and that’s what those hospitals that are now generating at seven times, that’s what they were underwriting, that’s what they were generating at the time that we acquired them. The difference between that and the 175 to the two times on the post-acute, which is just the capital needs are so much greater for general acute care hospital than they are for the post-acute sector.

Unidentified Analyst


Armando Lopez – Bank of America/Merrill Lynch

$300 million more in acquisition this year, would you be willing to do even more than that?

R. Steven Hamner

Absolutely, if you look historically at what we’ve done? Historically, we’ve done more than $300 million a year. obviously with Ernest in the transaction of February that kind of skews all of that. the pipeline is almost an endless for a limitless for us right now. Our limitations right now are us people ask me all the time what keeps you up at night, it’s not reimbursement, it’s not the healthcare industry, it’s our ability to make the right bet on the right managers. We pick the right operators to operate these hospitals. So our only limitation on our pipeline that we have is the right people helping us underwrite internally our portfolio potential properties.

Armando Lopez – Bank of America/Merrill Lynch

And our cap rates are running higher or lower than they were last year.

R. Steven Hamner

And probably about where they were last year clearly highlights where they were before the recession started in the late 2008, we cut off our pipeline in August of 2008 officially, there are still opportunities out there, but in most of 2009, nobody was doing anything not because they want opportunities they as you saw all of our hospitals continue to perform very well, but we all (inaudible) do anything.

Armando Lopez – Bank of America/Merrill Lynch


R. Steven Hamner

We thank you very much. Feel free to call, either I’ll ask Charles Lambert to follow-up with any questions you may have. Thank you.

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