And welcome to Q2 2020 Medical Properties Trust Earnings Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Charles Lambert, Vice President and Treasurer.
Thank you. Please go ahead, sir.
Good morning. Welcome to the Medical Properties Trust conference call to discuss our Q2 2020 financial results. With me today are Edward K. Aldag, Jr, Chairman, President and Chief Executive Officer of the company and Stephen Hamner, Executive Vice President and Chief Financial Officer. Our press release was distributed this morning and furnished on Form 8 ks 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'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 from those expressed and 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 atwww.medicalpropertystress.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.
Thank you, Charles, and good morning, everyone, and thank you for joining us today on our 20 22nd quarter earnings call. You all recall that on our first quarter earnings call, I made the following statement. Following government directives, all hospitals, including those in MPT's portfolio, stopped most if not all elective procedures. Please keep in mind that the word elective does not mean they are medically unnecessary, just that they are ones that can be delayed. These procedures will still need to be performed.
Our operators across the globe expect that there will be a large backlog of surgeries that will need to be done once we come out of the pandemic crisis. As hospitals around the world began to open back up in May June of this year, we have seen that these expectations were correct. As has been reported by companies such as HCA and others, the patients have indeed come back. This is also true in MPT's portfolio. Most of our operators are back within 92% of where they were in June of 2019 and some are even around or above 100%.
None of our operators in the COVID-nineteen hotspots are reporting any issues with COVID-nineteen patients or bed shortages. Our operators have done a good job in reconfiguring where necessary to not only be able to provide for COVID-nineteen patients, but also to be able to treat their non COVID-nineteen patients. While COVID-nineteen has continued to change our world, healthcare workers and hospital operators, both domestically and internationally, have heroically continued to keep pace with those changes. Some of those changes have been providing personal protective equipment for all staff, redesigning patient flow, rigorous testing and isolation procedures, enhancing hygienic and cleaning protocols, expanding telemedicine capabilities and repurposing beds to meet their specific needs. These efforts, both individually and collectively, demonstrate the ability of hospitals and health systems to quickly adapt and thrive within a changing environment.
Based on lessons learned in the early phase of the pandemic, hospitals are now better positioned to respond to the current surge of COVID-nineteen cases in some parts of the U. S. As was expected during this extraordinary time, we saw a decline in our tenant operator coverage for the quarter ending March 2020. However, even with essentially a halt to all elective procedures worldwide beginning in mid March, our overall lease coverage for that period remains strong. We added 2 properties, 1 domestic inpatient rehabilitation facility and 1 LTACH to our same store reporting and we subtracted 1 acute care property.
Our same store portfolio EBITDARM coverage for all sectors for the trailing 12 months Q1 2020 declined to 2.52x, a decline of only 16 basis points. It is important to note that this coverage does not include any grants or accelerated payments from the CARES Act. Same store acute care EBITDARM coverage is 2.67x, which is only 23 basis point decline quarter over quarter and 37 basis point decline year over year. IRF EBITDARM coverage is 2.16, which was flat quarter over quarter and actually up 17 basis points year over year. LTACH EBITDARM coverage is 1.82x, which is an increase of 6 basis points quarter over quarter and an increase of 29 basis points year over year.
MPT's portfolio of hospitals has historically operated at levels producing coverage ratios among the REIT industry's best and therefore providing significant cushion for these unexpected declines. Our operators have taken proactive measures to strengthen their balance sheets by raising capital and slashing expenses as volumes declined. In fact, our top 5 largest U. S. Operators, which account for nearly 80% of our U.
S. Investments, had combined liquidity of more than $5,000,000,000 at June 30. As you know, we at MPT are bullish on hospitals and we have long preached the integral role they play in the U. S. And international health systems and overall economies.
We were also confident that the U. S. And international governments shared that same understanding and would step up as necessary to ensure the long term viability of hospitals and continuing to provide quality healthcare to its communities. In the U. S, the federal government has stepped up via the CARES Act.
As part of the unprecedented relief package, the CARES Act allocated approximately $100,000,000,000 to U. S. Hospitals. Our largest U. S.
Hospital operators have received approximately $1,500,000,000 in grants. Additionally, they have received about $2,200,000,000 in accelerated payments for a total of $3,700,000,000 And recall that they currently have liquidity of more than $5,000,000,000 providing ability to repay any of that should they be required to do so. Our international operators have also benefited from various forms of government relief, including enhanced reimbursement mechanisms and cost sharing or offsetting arrangements. In Germany, the government is providing additional reimbursement for underutilized bed capacity directly linked to COVID-nineteen as well as providing labor cost offsets through its technical unemployment provisions, thus allowing healthcare facilities to remain their vital human capital. In Australia, the Federal Health Minister has confirmed that the federal government will guarantee the financial viability of the private hospital sector.
In the UK, private hospitals entered into a net neutral cost reimbursement operational agreement with the National Health Services to ensure full alignment from an operational perspective across the healthcare landscape and ensured quality patient care and needed capacity throughout the pandemic. These arrangements have also provided assurance to private hospitals that they will not be unduly burdened during these challenging times. In these unprecedented times, certain circle and BMI facilities have been transitioned into hospitals providing specialized oncology, cardiology, emergency and other types of care, which NHS hospitals have traditionally provided, reflecting a united approach to the focus on the health and well-being of citizens in the UK. In Italy, the government has created funds to cover the cost of PPE, COVID-nineteen testing and other COVID-nineteen related cost has guaranteed up to 90% of loans provided to impacted businesses, including hospitals and has continued its regular National Health Service budgeted payments to hospital operators regardless of changes in volume. Similar type efforts have taken place in Switzerland, Spain and Portugal.
These government relief programs and coordinated efforts coupled with already solid balance sheets have provided a firm financial foundation for our operators not only to weather this pandemic storm, but to emerge in prime position to benefit from a likely consolidation of the CARES Act and other government related actions, there are also many less visible benefits helping our acute care operators during these challenging times. Specifically, our post acute operators in the IRF and LTACH spaces have been able to maintain most of their pre COVID-nineteen volumes due to patient criteria waivers and the existence of strong relationships with general acute care hospitals. These waivers and relationships have enabled IRFs and LTACs to relieve volume spikes at acute hospitals and take on additional patients, including COVID-nineteen patients, without fear of penalties or reduced reimbursement. This in part is the reason why you've heard earlier when I provided our coverages that IRF and LTAC coverages are actually up year over year. Our discussions with our operators have confirmed that volume declines appear to have bottomed out in April and volumes have been increasing month over month in both May June.
We also know that there continues to be a significant amount of backlog in surgeries and other routine patient care, which will augment volumes over the coming months. It is also important to remind everyone that throughout this pandemic, MPT has continued to collect 96% or more of its rent each month of the pandemic. We expect to collect 98% as it applies to our full year 2020 collections with plans in place to ultimately collect 100% of our rent with interest. This is a testament to the effective and efficient operations of our hospital operators and the power of our lease structures. Like most U.
S. Hospitals, ER visits and surgeries dropped off in late March and trended down to a low point in April. May June volume has been consistently higher month over month. We have noticed similar volume trends in our international hospitals. With society's commitment to world class healthcare for the population and governments around the world quickly stepping up with unprecedented funding, our hospitals are in good position to continue to serve the needs of their patients and meet their own financial obligations.
As I stated on last quarter's earnings call, MPT continues to see opportunities across the globe. In today's announcement, you see that we have added another $1,100,000,000 to an already $2,000,000,000 we invested pre COVID-nineteen. We expect to continue to add quality investments for the remainder of 2020. Earlier this month, we had the opportunity to convert the last two Steward mortgage hospitals and to sell leasebacks for an additional $200,000,000 investment. Today, we announced the signing of an agreement on the acquisition of St.
Francis Medical Center, a large acute care hospital campus located in Southern California to be operated by Prime Healthcare. The total investment consideration is $300,000,000 Additionally, we are pleased to announce the execution of a definitive documents for the acquisition of the Mediendollner Hyde rehabilitation facility in Germany for 12.5 €1,000,000 This transaction further expands our relationship with Median, our strong German rehabilitation operator. We expect to fund this acquisition during the Q3. For the past year, we have discussed the potential to move into South America with an investment in the Colombian hospital market. We are proud to announce the commitment to fund the acquisition of 3 hospitals in Colombia for $100,000,000 This is in addition to the $205,000,000 investment MPT made in a joint venture that will operate these Colombian hospitals as well as serve as a vehicle for future international hospital acquisitions.
Closing of the Colombian transaction is expected in early Q4 2020. This will be MBT's first acquisition on the continent of South America. We have been working on these acquisitions for a little over a year. We've conducted detailed on-site visits in Colombia, including high level meetings by myself and others with the President and his administration. The country of Colombia is committed to healthcare for its people and is committed to a pro business and foreign investment agenda.
In excess of our recently closed commitment to develop a post acute facility with Earnest Health in Bakersfield, California of $48,000,000 we are at various stages with agreements to invest in $210,000,000 in acute, acute behavioral and post acute hospital investments in multiple locations. The healthcare system continues to generate high demand for these facilities and we are working diligently to meet that demand. Our pipeline remains robust with quality domestic and international acquisition targets. We again want to reemphasize and express our sincere gratitude and appreciation for all healthcare workers worldwide as they battle this deadly disease on the front lines. We're also very proud of our operators around the globe and the job that they have done during these historical trying times.
Steve?
Thank you, Ed. This morning, we reported normalized FFO of $0.38 per diluted share for the Q2 of 2020. As a reminder, due to our 30% plus compound annual growth over the last several years, the difficult to predict timing and size of individual acquisition transactions and the resulting lumpiness to fund this very high level of accretive investments, we have historically provided estimates of run rate normalized FFO. In other words, we estimate future normalized FFO based on our in place earning investments and our target long term capital plans. We do not attempt to predict the timing of future investments or funding of those investments.
So the $0.38 normalized FFO that we reported this morning is a 23% increase over 2019 Q2 and is consistent with our most recent estimated range of 1.65 dollars to $1.68 annualized run rate, taking into account among other reconciling items to follow. Similar to last quarter, our 2nd quarter results did not include the full GAAP rental income that we negotiated with respect to our $2,000,000,000 January acquisition and leaseback of 30 hospitals in the United Kingdom. Late in June, the British Competition and Markets Authority approved the new rate and we began recognizing rent at the full 8.9% master lease rate. Had we recognized that rate for the full quarter, our normalized FFO would have increased by approximately $8,000,000 or almost $0.02 per share. In addition, the reported quarterly normalized FFO does not include net operating income from properties that were under development during that period.
As Ed described, we expect to collect 100 percent of the rent and interest contractually due us in 2020. We expect 98% of that will actually be collected during 2020 as scheduled and the 2% that will be deferred will be collected over time with interest. We recognize 100% of these amounts in earnings because they are contractual and we are confident in their collectibility. But we do adjust AFFO for the amount of the deferral, which in the Q2 was approximately $7,200,000 Again, this will be collected over time with interest. Before moving on to comments regarding our outlook and near term investment plans, I want to mention a few items from the Q2 that were noteworthy despite their exclusion from our normalized FFO calculation.
First, we expect to terminate the leases on our 6 remaining facilities leased to Adeptus. This resulted in a $12,000,000 write off of primarily straight line rent that had been accrued from the 2013 inception of the initial master lease. We are currently entertaining offers for leasing these facilities to new operators and are highly encouraged with the level of interest. Although we do not include any replacement income in our updated guidance that I will address momentarily. 2nd, we booked a $5,100,000 straight line rent write off related to the sale of Easton Hospital for which we sold at a price that approximated our 2017 purchase price.
3rd, we booked a $3,600,000 gain related to our common equity investment in EVIS, the parent of our tenant Swiss Medical Network. Finally, we were required to recognize a $2,100,000 cash credit loss reserve expense related to the new loan accounting standards introduced in January. Moving on to our investment activities. During and since the Q2, as Ed mentioned, we completed or committed to complete approximately $1,100,000,000 in previously undisclosed investments. I'm going to describe each of these because the scope, nature and diversity of these strongly and immediately accretive hospital investments that we generated during the very worst days of the global pandemic speak to the ever increasing size, quality and market acceptance of our business plan.
First, we acquired the fee simple interest in 2 of Steward's previously mortgage and best performing hospitals in Utah. This was an incremental $200,000,000 over the prior mortgage balance and the facilities are now included in the Steward master lease at its double digit GAAP lease rate. There are no longer any mortgages in the Steward portfolio and in fact, our total mortgage loan exposure is now down to about 3.5 percent of our total assets. While not contractually bound as yet, we do expect to invest approximately $300,000,000 in a Los Angeles area hospital to be leased to Prime Healthcare pursuant to our Prime master lease structure. Then we acquired through a newly formed joint venture that Ed just described, along with Doctor.
Ralph De La Torre and certain others, the assets and rights of Steward to acquire and develop all of Steward's non U. S. Hospital investments. Our investment of $205,000,000 is in the form of a market rate loan to the JV and we will also own a 49% interest in the JV that we expect will provide a significant upside over and above the current interest yield. The first investment of the JV will be an approximately $1,000,000 acquisition of 3 hospitals in Colombia.
And while our commitment is not yet contractually binding, we expect this transaction to close in the second half of 2020. Next, we have committed to 5 separate investments, aggregating approximately 100 and $65,000,000 that we expect to become operational starting between 18 24 months from now and that will earn a commencing aggregate GAAP capitalization rate of approximately 10%. We expect all 5 of these U. S.-based agreements to have been executed and development underway during this current Q3 of 2020. And then we've made various commitments in Europe and Australia for 4 separate investments aggregating approximately $110,000,000 at GAAP rates consistent with our recent non U.
S. Investment.
So as we disclosed this
in this morning's press release and based on the items noted above and our recent investment activity, our Q1 results are right in line with our expectations and we are increasing our annualized run rate guidance to $1.68 to $1.71 per diluted share. This range could change possibly materially subject to risks described in this morning's press release and in the other risk factors described in our most recently filed 10 ks. With nearly $1,700,000,000 in immediate liquidity as of June 30, MPT's balance sheet remains flexible to accommodate growth opportunities that meet our underwriting standards and provide for attractive risk adjusted returns. Our recently increased dividend is well cushioned with AFFO. We have significant capacity on our revolving credit facility and we face no near term debt maturities.
While our current leverage is slightly above our long term target, we remind investors that fluctuations below this level, sometimes of even greater magnitude, have also occurred in our recent history. Furthermore, Global Capital continues to pursue attractive hospital and post acute real estate, providing MPT the flexibility to in select cases, consider harvesting gains and cash from JV partnership opportunities or outright dispositions. With respect to the public markets, we have approximately $830,000,000 available under our at the market share offering and recent conditions in the equity and unsecured notes markets are very attractive. With that, we'll turn the call back to the operator for any questions. Operator?
Your first question comes from the line of Joshua Dennerlein with Bank of America.
Hey, guys. Curious on the JV, maybe I'll start there. What other international markets are you targeting? And how are you choosing those markets? And maybe what's the broader scope of what you'll invest in within the industry?
Sure. And Josh, the JV is not going to be the only way we will invest in additional international hospitals. We will continue to invest with our existing international operators and other international operators. This particular JV with Ralph and some of his team members are from people within the Columbia Healthcare System and a couple of other places that we have not yet announced that they are working with. So it's people that have specific experience in those markets that we're working with.
We expect that there will be other opportunities in Colombia over and above this $100,000,000 investment.
Okay. And I guess on a go forward basis for funding on that, you'll just kind of continue funding projects at 49% of investment or is there an ability to kind of take down more of the JV or the construction?
Well, there shouldn't be any additional funding on the operating side. We'll obviously, subject to our underwriting, fund the real estate acquisitions.
But just to be
clear, Josh, we will very likely continue our historic strategy of using as much local debt as possible, while maintaining the overall unsecured leverage that we've always targeted. And that, of course, allows us to match the investment and the financing for that investment in the same currency.
Okay. Awesome. And I guess that leads me into my last question. Just kind of thinking about equity and debt needs going forward, just given it seems like you've acquired a lot more, it seems like you had a good pipeline. How should we be thinking about that?
So as I just mentioned, wrapping up my prepared remarks, it's really a very, very strong and attractive market for raising capital. We will maintain our 5 to 6 times leverage and to do that obviously with the type of accretive growth that we continue to generate that will require additional capital. And while we have not specifically targeted an amount, a time or components, we do have a number of avenues available to us. And as these transactions close and we continue to monitor our capital structure, we'll come out the other side with long term 5 to 6 times leverage as we've operated for quite a few years now.
Got it. Thanks guys. I'll yield before.
Thanks, Josh.
Your next question comes from the line of Jordan Sadler with KeyBanc.
Hi, guys. Good morning. This is Katie on for Jordan. I hope you guys are all doing well. I just kind of want to build off Josh's question for a second about investing with the JV.
Just kind of curious, are those assets like on a go forward basis if you guys continue to expand with the JV? Would those be markets that Steward would bring to you? How would you guys decide, allocating between some of your historical investment strategies of investing directly within the market or contributing those assets to the JV?
Well, there's really the JV, the way our JVs work, the way our idea structures work, just to remind you, there's really no difference with respect to the real estate. All of the real estate is owned by our U. S. REIT shareholders. There's no JV ownership of the real estate now.
The exception, of course, is Promenial deal we did a few years ago. But going forward, just for example, in Colombia, we will own the investment in the real estate, not through the JV. The JV will share the profitability in OpCo. So that won't be an issue just because we're investing alongside the Ralph Della Torre team on the OpCo side. And as Ed mentioned, just to be clear, we'll continue to source international opportunities and the JV is just one more avenue for sourcing those opportunities.
And Katie, this is exactly what we did back in the earlier days with Ernest Health Care, also with Capella, where we had some ownership in the operations, but we own the real estate 100%.
Got you. Thank you. That was really helpful, guys. And just following up on coverages, I know Ed kind of talked about it in your prepared remarks. Can you give us like any update on coverages into maybe the Q2, just like general description as some like elective procedures are still on hold?
Yes. So we don't have those numbers exactly at this point because of the way that we get reported. But two things to point out. 1, remember that the coverages I gave you did not include any CARES Act funding. So no grants or advances.
That was just purely operations. We hit the low mark in April. So we had a half of month of bad in the Q1. We'll have it at least 1.5 months or maybe 2 full months, a half of June I mean, sorry, half of May that are still back up on the upswing. So I expect that they will be lower, again, excluding all of the CARES Act funding and other governmental funding.
I expect they will be lower in the Q2 when we do report them, but they will have been increasing significantly since the middle part of May.
Your next question comes from the line of Steven Valiquette with Barclays.
Thanks. Good morning, everybody. Good morning.
Hey, so a couple
of questions here. First, just on the U. S. Market for a moment. So most of the publicly traded guys have talked about admissions, patient volumes getting back to 90% to 95% of pre COVID levels in June and some mentioned that for July as well.
I guess despite the COVID cases spiking in the Sunbelt and you've had some recommendations like in Texas, but not the requirement for hospitals to re shutdown elective procedures. Just curious if you're seeing any of your operators follow those recommendations to re shutdown some of the non critical care or are your operators generally keeping those parts of their procedures and volume still open?
Yes. As you know, the recommendations for the shutdowns of the electives were in order to save room or beds for COVID patients. And all of our operators, and this was updated just as recently as this week, all of our operators have plenty of bed capacity. So none of them have had the need to shut down or reduce their elective procedures again. So they continue to operate at full capacity and have room for COVID patients as well.
A number of them like Steward increased the number of their ICU beds, increased the number of their overall bed capacity by reconfiguring. Prospect did the same thing. Prime did the same thing. So given time, they were able to work better than they were obviously when the world fell off a cliff in March.
Okay. One other quick one just on South America for a moment here. As we think about MPT's underwriting discipline in Colombia and really just for South America overall, if you can generalize, is there any bias for the cap rates and or rent coverage ratios to be a little higher than your overall corporate averages when comparing to your current acute care portfolio? And also for South America sorry, go ahead. Yes, answer that one first and I'll have one other follow on.
Okay. So yes, absolutely. Our returns are a good bit higher in Colombia than they are here in the U. S. And we as I said in the call earlier, we spent little more than a year getting to know the market very well.
They have a really strong reimbursement system. It's a system where the government, the employers and the employees all contribute to a fund. It's been distributed out to different managed care groups and then all of the population decides which managed care group they want to go with. Everyone in Colombia, everyone is entitled to healthcare and has healthcare insurance. So it's a good market with a good base to it.
But we understand the added premium that needs to be in place and we have that.
Okay. Yes, the final one kind of tied into that. Just curious if there's any meaningfully sized either private hospital chains or health systems in South America where you think over time you be signing larger size deals in South America with one stroke of the pen? Or is it more likely we'll see deals where you're doing maybe a couple of hospitals at a time, kind of like what you just signed in Colombia?
Yes. I think so. We're not ready to announce any other any countries at this point. Interestingly, I did a tour of had an opportunity to do a tour of some of the other South American countries and meeting with some of the existing presidents and former presidents. And without exception, all of them rated Colombia as the best place for us to come invest in.
We're not there alone. United is there, Fresenius is there. There have been a lot of other big players that have come to Colombia about the same time that we have come. So it's a market that's well thought of right now and not sure there's anywhere else in South America at this point.
Okay. Appreciate the color. Thanks.
Your next question comes from the line of Omotayo Okusanya with Mizuho.
Yes, Good morning. Congrats on the solid quarter. Thanks, Tayo. First question on the JV, and I know we've kind of spent some time on this. The $205,000,000 investment, you said that's just strictly in the OpCo
with your partner? I guess I'm a
little bit confused about, as of today, what does that $205,000,000 get you?
Yes. So it is, Tayo, it's $205,000,000 in the OpCo joint venture and then $100,000,000 in the real estate that we own 100 percent of. What it gets us in the OpCo joint venture is that Steward has been working several international markets, only one of which we're prepared to announce today, and that's Colombia. They put an awful lot of time and effort and infrastructure in place. And that's what the $205,000,000 is for.
Got it.
Okay. Okay. It's our share of that. Okay. Now I got it.
Okay. The light bulb has gone off. I get it now. Then the second thing, any thoughts, and again, it's kind of sometimes tough to kind of wade into politics, but if you do end up in a world where Biden becomes President and a world where it's more of a democratic sweep of Congress. So does that kind of influence how you kind of think about healthcare in America, what could happen and what the implications could be for MPW?
So it really doesn't Tayo, and you've been with us a very long time, so you've heard me say this before. But on a totally non political basis, it really doesn't matter from MPT standpoint what political party is in the White House or in Congress or all of the above at the same time because we're still going to have hospitals. We may change the way we do reimbursement in this country as it has evolved over the last 50 plus years. But if it's a Biden administration with a Biden Congress, we believe that there'll be more funding initially. There may be also some more control, but you're still going to have hospitals that are very much needed for this country.
One thing that COVID-nineteen did for the entire world is that it reinforced to everyone what we've been saying for almost 20 years now is that you truly can't paint a picture without hospitals. The private hospital sector has played a very important role in every country that we're located in for the COVID-nineteen aspects of it. And the governments have all been very supportive and understand the need for the private hospitals as well as the public hospitals. And quite frankly, they've all worked very, very well together. Here in the U.
S, it's probably a little less well known that a number of our operators had plenty of ventilators and PPE and provided much of that equipment to various states around the country. So it's been a good partnership, and we don't have a political bias as to where we feel better about. We think that MPT and hospitals thrive under either administration.
Got you. And if you just indulge me a little bit more, the rent coverage ratios, again, you did not include anything in regards to grants as to kind of calculate those numbers. Any reason why this kind of given majority of these grants probably end up being forgiven? I understand about the advances, but why not include the plan?
It was just an attempt to be totally transparent, to not show a tainted picture or a rosier picture of the operations than they were. I wanted to show everybody exactly what the operations were without regard to the additional payments from the government. But then obviously, I wanted everybody to know what the payments were and then what the liquidity is, should any portion of it be repaid. But it's just a call trying to make it as transparent as possible.
And remember Tayo and all, we report our coverages on a quarter trailing basis. And at the end of the Q1, I'm not even sure when the grants were received. And I know HCA has gone through probably pretty sophisticated analysis of how much of the grants to include as they reported their Q2 and our people just haven't been through that yet.
Got you. Okay, that's helpful. Then the last one for me, I promise. The Adeptus leases and the decision to kind of terminate them, Can you just talk a little bit about what kind of drove that at this point?
What kind of what, Tayo?
What drove the decision to terminate the remaining Adeptus?
Well, we all get lost when we talk about the Adeptus portfolio because it is a very large number of properties. But this was only 6 properties. You remember the rest of the properties are leased to UCHealth, Dignity, Ochsner, Methodist and others. So this was only 6 properties, and this is just Adeptus old Adeptus throwing in the towel. We have really lots of people that want these facilities.
As Steve pointed out, we didn't include that in the guidance, but we think they'll be released fairly quickly.
Got it. So just to get some
of that depth just as kind of still struggling and so you guys are just kind of changing the operating tenants for the asset?
That's correct.
Great. Thank you very much and congrats on a great quarter.
Thank you, Tayo.
Your next question comes from the line of Michael Carroll with RBC Capital Markets.
Yes, thanks. Just on the JV real quick, is that with Steward or with the Steward's management teams as individuals, I guess? Who are your partners in that JV?
So that's a good catch, Mike. I used Steward in my last answer to Tayo and I caught that after I said it. But no, it is not Stuart. It's with Ralph and members of his management team, some of which are very, very important to the joint venture that are not a part of Steward. They are people in the local markets that Ralph and his team have been working with in putting these facilities together.
Some of them, particularly in Colombia, were part of the ownership team of some of these hospitals.
Okay. And then within, I guess, South America, should we view, I guess, this investment as a beachhead type of investment with the plan of getting it bigger over time, kind of similar to what you have done in Continental Europe and the UK?
Certainly, where Colombia is concerned. We really like Colombia, and we've got some really good opportunities there that will probably come to fruition late in the year or early part of next year.
Okay. So could that market get as big where you would want to open up an office in South America too like you did in Europe?
So I don't think so, although there's some beautiful places in Colombia. They but Ralph and his team obviously do have offices there in Bogota.
Okay. And then, Steve, in the run rate guidance numbers that you provided, that assumes that your net debt to EBITDA ratio is near 5.5%, correct? And if so, I guess, what's included in those assumptions? Is that assuming you're over equitizing future acquisitions that you've already announced? Or is that just assume you're doing a big slug of equity to get back down to that level?
Well, it's just a generic assumption. You're right. It does assume that we're in that 5.5% range, and that requires a certain level of additional equity that will be needed. Again, as our historic practice has been, as these acquisitions get to closing and we actually need the capital, then at that time, we'll decide what type of capital. And by that, I mean, is it ATM issuance?
Does it have to be an underwritten offering? Is it joint venture? Are there some properties that we may want to sell? All of that is available to us. There is no specific plan right now as to timing and what type of component of those that I've just described.
Okay. And then I guess last one for me just on the Steward investment, the incremental $200,000,000 Now I'm assuming that just kind of already those assets were already included in the master lease. So that incremental rent just kind of reduces your Steward coverage ratios by what, 10 to 15 basis points? Is that the right way to think about it?
No, I don't think so. There are a couple of questions in there. It was not in the Steward master master lease because they were mortgages. They are now in the Steward master lease.
But
and your point is by virtue of increasing the value by $200,000,000 that would not have a 10 basis to 15 basis point impact on coverage. Arithmetically, you're correct. It has some impact, but certainly not that magnitude.
And Steward's operations have been strong, ignoring COVID for a minute, particularly in Utah.
Okay, great. Thank you.
Your next Your next
question comes
from the line of Derek Johnston with Deutsche Bank.
Just to add quickly back to coverage ratios. Yes, Q1 probably had very little COVID impact, but certainly we could see some in the second quarter. Have you considered perhaps changing how you report hospital or operator coverage in 2Q and beyond?
Yes. So we've considered that a lot. We looked at trying to look at different ways. This quarter, we decided the best thing for this quarter was to continue with the old method and just lay it all out there like we have. We do have some ideas about trying to present it in a way that's more user friendly to analysts and investors, and hopefully we'll have that available sometime next quarter.
Okay, great. No, definitely understand. And as far as private market values and yield assumptions on new acquisition, Now how has this changed post COVID-nineteen? I guess another way to kind of ask it is, has your negotiating leverage in relation to new deals and has it improved, stayed the same or deteriorated post COVID-nineteen and the introduction of the CARES Act? Like what's the puts and takes, private market values, where are they treading and yield assumptions?
Thank you.
Well, that's an excellent question because you've seen a lot of people that have been successful like everybody in our portfolio that have come through this very strongly and are anxiously wanting to make some additional acquisitions and grow their companies. So while you can make a case that maybe private hospitals and some in particular saw their values decrease, There's a pretty big appetite for those hospitals. So I don't think we have we'll recognize any of the pressure from COVID-nineteen on the prices for the private hospitals. It may actually be the opposite. There may actually be a slight increase because of the demand for it from the good operators.
I think that our operators have all been very happy with the MPT leases, the fact that they lease their facilities, the capital and ability that it gave them for their balance sheets. So I think that we'll have more appetite from our existing operators and other operators that we have not yet done business with, but that I've been on the phone with for taking calls and making calls that I think will be more apt to do sell leasebacks with us than they may have been prior to COVID-nineteen. So I really think that we're in a really good position to benefit from the situation that the world is in.
Your next question comes from the line of Connor Seversky with Berenberg.
Hey, everybody. Thank you for having me. Quick question on EBITDARM coverage. I think your same store pool requires 2 years of operating data. So I'm wondering if there's any color you could provide to the potential impact of the acquisitions made through the end of 2018, early 2019 as they roll into the same store pool?
Yes. There would be and that's one of the things that we're looking at, Conor, as we're presenting coverages going forward. We tried to do that as a way to smooth out the coverages because we were making acquisitions so quickly. But I think it probably makes more sense to do it on a more total portfolio basis. But the answer to your question is if we included everything, it would have very little change to where the coverages are today.
Okay.
Thanks for that. And then in
a broad sense, we're seeing somewhat of an exodus from some of the major cities in the U. S. I mean, does this change the way that you look at your target markets at all or any perhaps secondary markets look more favorable?
Well, keep in mind that we're other than New Jersey, we're not up in that Northeast area. We're not in New York. New York doesn't allow for private hospitals or full private hospitals. That's not an issue other than the fact that remember part of our model is that we had the ability to replace the operators. And if your only ability is to replace them with a not for profit operator, that oftentimes would move too slow to being a situation that would work for us.
So to answer your question in general sense, no. We certainly don't think there's going to be a mass exodus from the major populations. But take Alabama as an example. Our major health care city is Birmingham. So even if people move outside of Birmingham, they're still going to come back to Birmingham to get their major medical needs met.
So I don't think it affects us on an overall basis other than continuing to keep us out of places like New York.
Right. Thanks for that. That helps. And then one final one. How are your operators faring related to the availability of test kits?
I mean based on recent news flow, we're seeing that more and more testing capacity has been promised to say skilled nursing facilities, but it seems like supply constraints continue to show through. So I'm wondering if your operators are really still on the top of that priority list no matter what market they're in.
So I don't know if it's because they're better organized, because they have the ability to be better prepared for a pandemic. All of our operators were better prepared for all of PPE type supplies. They seem to be in a much better position than certainly what you're hearing on the news. And I don't know if that's a situation of news exaggerating the situation. But we don't have a situation with any of our operators where they're not able to get tests.
Now that doesn't mean they're still not being very careful with the testing and being sure that we're trying not to test people unnecessarily. But we don't have a single operator that is crying about need for a test
right now.
Your next question comes from the line of Sarah Tan with JPMorgan.
Hi, this is Sarah on for Mike Miller.
Sarah, I can't hear you. If you could maybe turn your volume up.
Hi, this is Sarah Tan on for Mike Mueller.
I hear you now.
Okay, good. Just two questions for me. The first one is on the Stuart conversion to equity. Just wondering what triggered that at this point of time. And then the second one is on the new JV investment.
Could you briefly talk about the people who are involved? So Valve and the other team members, you mentioned their expertise in operating international hospitals and in Colombia.
Sure. So the first question, this is actually something that we've been talking to Stuart about for a while. So it wasn't something that just came up. It's just something that just was able to actually take place. But I know that you've heard Steve in particular talk about the our desire to be in a landlord position rather than a mortgage or position.
And so we began I really guess it was late last early last fall and the discussions with them about doing a conversion in that and just probably would have gotten it done sooner if it had not been for the other things that we were working on. But it's our desire to be in a landlord position over being in a mortgage position. On the second part of your question from the management team that Ralph has with him in Columbia, It's members of his existing Steward team, but it's also very importantly some international team members that are who are not part of Steward U. S. They are people who have distinct knowledge and experience in the countries where they are attempting to operate, obviously one of them being Colombia.
In Colombia, they actually have members of their team there that have actually had a hand in operating some of these 3 hospitals, at least one of these 3 hospitals that we are currently committed to. So it's a team that's well versed in not just Colombia, it's a team that's well versed in the Colombian health care system. You may know that Ralph is Cuban. He speaks fluent Spanish. All of his team members there speak fluent Spanish.
Most everybody there is very kind to me and speaks fluent English, but they all speak very good English. And when Rosa and I are there, they all translate for us.
Your next question comes from the line of Todd Stender with Wells Fargo.
Hi, thanks guys. Most of my questions have been answered. But when it comes to the Stewart mortgage conversion, did you essentially get your principal back? And maybe what were the yields on those loans compared to maybe what the lease yield is going to? Thanks.
Well, we basically exchange the mortgage loan along with the $200,000,000 increment to acquire the fee interest in the 2 hospitals. And the cash yields were very similar. The differences in the GAAP yield, which again goes in now to the master lease, which is in excess of 10%.
So no change in that yield. It just, I guess, reverts or
And at this time, there are no further questions. I would like to turn the call back over to Ed Aldag for closing remarks.
Thank you, operator, and thank all of you again for listening in today. We greatly appreciate your interest. As always, if you have any questions, please don't hesitate to reach out to us and everyone stay safe. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.