Medical Properties Trust [MPW] Conference call transcript for 2023 q1
2023-04-27 15:32:03
Fiscal: 2023 q1
Operator: Good morning, and welcome to the First Quarter 2023 Medical Properties Trust Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Charles Lambert, Vice President. Please go ahead, sir.
Charles Lambert: Thank you. Good morning, and welcome to the Medical Properties Trust conference call to discuss our first quarter 2023 financial results. . With me today are Edward 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 medicalpropertiestrust.com in the Investor Relations section. Additionally, we're 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 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 medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations. I will now turn the call over to our Chief Executive Officer, Ed Aldag.
Edward Aldag: Thank you, Charles, and thanks to all of you for joining us this morning for our earnings call. The overall preliminary results from our operators for the first quarter of 2023 are following in the same positive trends we have recently seen from other publicly reporting hospital operators. Remember, we report a quarter in arrears, so today's results are from the quarter ending 12/31 '22. On the volume side, our domestic operators, same-store missions across our portfolio are positive with admissions steadily increasing over the last few months, including January 2023. Surgical volumes look even better. On a same-store basis, surgeries are up year-over-year trailing 12 months Q4 2022 versus trailing 12 months Q3 2022. We're also seeing good momentum on a discrete quarter basis with quarter 4 up 3% over quarter 3. The number of ER visits have been steadily rising since the beginning of 2022, and topping off in December with the highest ER volumes, our portfolio saw in all of 2022. Internationally, we are seeing particularly strong demand both from an admissions and surgical perspective in the Spanish market. Recall that we're currently developing 3 ground-up general acute care hospitals along the Mediterranean coast of Spain with IMED. It's great to see the demand in this market continuing to grow at such a high rate with our IMED Valencia Hospital seeing admissions up 8% year-over-year and surgical volumes up 11% during the same period. The German and UK markets are also experiencing continued improvement with the German occupancy up 6% year-over-year through February 2023. In the UK, circles admissions and outpatient volumes continue to increase with overall volumes exceeding pre-pandemic levels. In Colombia, 2022 admissions and surgeries were up over 20% year-over-year. You can refer to our supplement filed this morning for more information on our EBITDARM coverages, but some points I'd like to highlight for you. We're getting close to the point where CARES Act Grants will no longer impact the trailing 12-month coverages. General acute, inpatient rehab and behavioral health were all flat for the trailing 12 months quarter 3 over quarter 4. Long-term acute care coverages declined from 2.3x to 1.9x. Remember that LTACHs represent only 1.4% of our total portfolio, and the 1.9x coverage is more in line with historical coverages. I know that people are specifically interested in Stewart Hospital's performance. So excluding grants, Stewards Hospitals 2022 coverage increased to almost 2.5x from approximately 2.2x in 2021. Coverage has increased another 18 points for the trailing 12 months ending February of 2023. Also relating to Stewart, the transaction with CommonSpirit is still scheduled to close next week. We look forward to expanding our relationship with CommonSpirit and the liquidity this transaction brings to Stewart. On Prospect, we've seen some positive events, which Steve will go over in more detail in a few moments, but just briefly for me. On the Yale sale, this continues to move along positively. This week, one of the biggest unions came out to support the sale. The California operations continue to see improvements with volumes near historic levels. Additional capitation agreements have been signed by the hospitals, which will allow those volumes to continue to grow. Labor costs continue to hold down the trailing 12-month coverages, but they've seen good improvement in that over the last few months. The managed care business continues to grow its membership and its profits. It continues to exceed budgets. We remain confident that our overall investment in Prospect will be fully realizable from that investment. Our recent announcement to sell our Australian investments operated by Healthscope is a testament to the steady demand of hospitals. Anticipated cash proceeds from this divestiture will result in sufficient liquidity to repay the term loan used to fund the acquisition back in 2019. Our well-laddered debt maturity schedule, along with our inflation-protected long-term leases, allows for our cash flow to continue to increase without adding additional properties. Until the global markets stabilize, we do not anticipate making any significant acquisitions. However, our relationships with our operators create numerous organic growth opportunities. We will continue to analyze these opportunities as they come in and make prudent decisions about the use of our capital. We announced this morning an acquisition with Priory for 5 behavioral hospitals for 44 million pounds. This closed in the second quarter. Additionally, we closed on the purchase of 2 medium rehabilitation hospitals in Germany for EUR 47 million, with the third expected to close later this quarter for EUR 23 million. Speaking of growing relationships, it was announced earlier this month that Intermountain Health, based in Utah, has acquired a minority opco interest in both of our Idaho Falls Community Hospital and Mountain View Hospital. This partnership will provide these 2 hospitals with additional access to highly trained specialists and vast resources as a result of collaborating with one of the region's largest and most successful health systems. While the financial terms of the investment have not been disclosed, we can say that they are an impressive valuation resulting from this equity investment, which once again proves the essential nature of our hospital real estate. Steve?
Steven Hamner: Thank you, Ed. This morning, we reported net income and normalized FFO of $0.05 and $0.37 per diluted share, respectively, for the first quarter of 2023. There are a few components of these reported results that I will point out. First, this includes no rent or interest income related to Prospect. As we reported last quarter, we are currently recognizing Prospect rental income only as cash is received and Prospect paid no rent or interest during the quarter. I will have a further -- a little further information on our Prospect investment in just a few minutes. Second, there are 2 transactions that we expect will generate more than $900 million in cash proceeds that we plan to use to repay debt. About $830 million will come from the previously announced binding agreements to sell our Australian assets. And just this morning, we announced that Prime Healthcare has elected to exercise its option to repurchase 3 general acute care hospitals for $100 million in cash. Because both transactions are binding and considered probable, accounting principles mandate that we recognize their estimated earnings impact even though neither has closed yet. Accordingly, we adjusted normalized FFO or the non-cash real estate impairment and other charges of approximately $90 million as follows: about $11 million is related to unbilled straight-line rent on the 3 prime hospitals, and I'll come back to Prime in just a minute. And about $79 million in charges relates to the Healthscope sale. That's further broken down as follows: of the total $79 million, these are U.S. dollars, by the way, approximately $37 million is unbilled straight-line rent. Then there are $8 million in fees and costs to sell the hospitals. $13 million is the recognition of previously capitalized currency exchange rate deferrals. And finally, there is a net $20 million difference between the contractual purchase price and our current carrying value, offset by the value of our related interest rate swap agreement. And we will continue to earn rent until closing of both of these transactions, and we'll report that in future quarters as earned. Finally, we do not include a normalized FFO and in direct cost and expenses incurred to respond to the defamatory statements published by certain parties, including those who are dependent in the lawsuit we filed late last month. So upon closing of the Healthscope and prime transactions, receipt of the $900 million plus in cash and the reduction of debt with those proceeds. We have refined our 2023 calendar normalized FFO estimate to a range of between $1.50 and $1.61 per share. This also adjusts for the acquisitions in England and Germany that Ed mentioned and our estimates of revenue from Prospect during the year. With respect to Prospect, during the first quarter, we agreed as part of an expected series of additional agreements to invest $50 million in a convertible loan issued by Prospect’s managed care entities. Subsequent to quarter end, Prospect received a binding commitment from several third-party lenders for financing, which should provide Prospect with significant liquidity. Importantly, A portion of the proceeds of this anticipated financing will be used to pay off Prospect's existing receivables-backed loan arrangement, the result of which will be the Prospect will face no near-term debt maturities. In conjunction with these commitments, we and Prospect agreed to pursue certain follow-on transactions at the closing of which MPT's investments in Prospect assets will be comprised of the following. a master lease covering 6 California hospitals. MPT purchased these hospitals in 2019 for about $500 million. The current contractual cash rental rate is roughly 8.25% and and escalates annually reference to inflation. We presently expect to recommence collection of a portion of the contractual monthly rent in September of this year. Secondly, a first lien mortgage on the Pennsylvania real estate. Third, up to $75 million in a loan secured by first liens on Prospect’s accounts receivable. This amount, which will be fully -- the receivables will be fully unencumbered is well below the existing ABL arrangements borrowing base. And finally, a significant noncontrolling ownership interest in Prospect’s managed care business that will have an agreed value closely tied to the remainder of MPT's recorded investments, which will include unpaid rent and interest. The managed care business has continued to perform well, and we think that is evidenced by the commitment letters for attractive new financing that Prospect has received. As our press release noted and in light of continuing global inflationary banking and other economic conditions, we made limited investments during the quarter. In fact, we continue to emphasize transactions that generate return of capital to us and liquidity for debt reduction. With liquidity at quarter end of approximately $1 billion, plus the more than $900 million from sales that I just mentioned, along with additional cash expectations from the sale of Connecticut to Gale, repayment of Steward loans and other transactions we will be well able to satisfy all of our roughly $1.4 billion in 2023 and 2024 debt maturities. Just a couple of comments back to the prime expected repurchase. This is not a bargain purchase option. Prime is required to pay us the amount that we originally bought the properties for 10-plus years ago. The vast majority of our leases that have repurchase options provide for a repurchase price of the greater of fair value and our original investment. In fact, this $100 million portfolio is the last of the Prime master leases that is at that fixed original price. We were satisfied with these terms at the time we completed the original transactions because of the very attractive lease rate that we negotiated in return. And that will make the sale back to prime FFO dilutive, albeit a relatively small impact because of the high rents we have earned until recently, but the benefits of recycling this capital in the greater liquidity and lower leverage offset that slight dilution. Shortly after quarter end, we closed or committed to acquire a total of behavioral and rehabilitation hospitals in England and Germany were up to an approximate $150 million investment. Similar to our limited late 2022 acquisitions, these acquisitions selectively add to certain existing relationships in ways that strategically strengthen the respective portfolios. At present, there are no other scheduled or expected near-term acquisitions. We have virtually completed our new build hospital for Earnest in Thachton, California, and it will come online and begin paying rent during the second quarter. The earnest new build in South Carolina is still underdeveloped. We continue development of a new state-of-the-art behavioral hospital in Texas for Springstone, now a part of LifePoint. And we continued construction of the 3 general acute care hospitals for our premier Spanish tenant IMED. In conjunction with the redevelopment of Stewart's Norwood Hospital, what you may remember was made unusable by storms and floods during COVID. We advanced $50 million that is secured by, among other things, proceeds from Steward's Insurance claims well in excess of the advance. This development is well underway. Finally, we have already noted the Prospect convertible debt of $50 million we funded in conjunction with the binding funding commitments from third-party lenders to Prospect. Also, as noted in this morning's press release, our Board has declared a quarterly dividend unchanged at $0.29 per share and will be paid on July 13 to stockholders of record on June 15. After a virtually unchanged business model since we started the company almost 20 years ago, I thought I would make a few comments that are relevant to analysis of that model sustainability. At the highest level, one might say that the product MPT sells to its lessees is capital. And capital, of course, has a cost. Our business plan has always recognized that we do not control the cost of that capital particularly with respect to debt cost. And this is true for most REITs and other real estate investors. That is why all of our long-term debt is at fixed rates. It is also why we carefully plan on staggered maturities, both of those cornerstone strategies are consciously designed to help avoid a situation that might otherwise arise if interest rates spike upward and significant amounts of debt mature simultaneously. But critically, our model has always anticipated the likelihood of rising interest rates and the need for our contractual rental rates to increase with the inflationary pressures that result in higher interest rates. Hospital leases typically do not have provision for periodic market rent resets. There are good reasons for that, but beyond the scope of this morning's discussion. Instead, virtually every 1 of MPT's leases provide for annual contractual rental increases that are tied to inflation. Moreover, even in recent years when inflation has been minimal, and, in some cases, even negative, our cash rent has continued to escalate each year. Based on these annual contractual increases in our cash rent, and under almost any reasonable and historically normalized assumptions, rents from our existing portfolio only are expected to increase at rates at least comparable to interest rate increases in our maturing debt issues. My point, of course, is that our model is designed to anticipate normal course volatility in interest rates and other macroeconomic conditions. And moreover, analyzing a straw man scenario that any REIT might be forced to immediately refinance all of its debt at shock interest rates, even though that debt matures over many years in the future is probably not a good use of anyone's time. Finally, we did point out in this morning's press release that recent transactions have supported the values of our leased assets. We think it important to point that out. because it demonstrates that sophisticated investors and operators recognize and are willing to invest billions of dollars based on the long-term sustainability of our model, particularly our receipt of annually increasing rental payments that are generated from local hospital operations. With that, we have time for a few questions, and I'll turn the call back over to the operator.
Operator: [Operator Instructions]. At this time, we will take our first question, which will come from Connor Siversky with Wells Fargo.
Operator: And our next question will come from Michael Carroll with RBC Capital Markets.
Operator: Our next question will come from Jonathan Hughes with Raymond James.
Operator: Our next question will come from Steven Valiquette with Barclays.
Operator: And our next question will come from Austin Wurschmidt with KeyBanc Capital Markets.
Operator: And our next question will come from Vikram Malhotra with Mizuho.
Operator: And our next question will come from Josh Dennerlein with Bank of America.
Operator: And our next question will come from Michael Mueller with JPMorgan.
Operator: And our next question will come from John Pawlowski with Green Street Advisors.
Operator: And that concludes our question-and-answer session. I would like to turn the conference back over to Ed Aldag for any closing remarks.
Edward Aldag: Thank you, operator. And as always, if you have any follow-up questions, don't hesitate to call to Drew or Tim. Thank you very much. .
Operator: The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.
