Good day, ladies and gentlemen, and welcome to the Q1 2019 Medical Properties Trust earnings conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Charles Lambert. Sir, you may begin.
Thank you. Good morning. Welcome to the Medical Properties Trust conference call to discuss our first quarter 2019 financial results. With me today are Edward K. Aldag Jr., Chairman, President, and Chief Executive Officer of the company, and Steven Hamner, Executive Vice President and Chief Financial Officer. Our press release was distributed this morning and furnished on Form 8-K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our website at www.medicalpropertiestrust.com in the investor relations section. Additionally, we are hosting a live webcast of today's call, which you can access in that same section. During the course of this call, we will make projections and certain other statements that 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 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. Except as required by the federal securities laws, the company does not undertake a duty to update any such information. 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 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 www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations. I will now turn the call over to our Chief Executive Officer, Ed Aldag.
Thank you, Charles, and thank all of you for being on the call today. The first quarter of 2019 has been very busy for Medical Properties Trust. Our acquisitions and underwriting teams have been actively engaged in performing underwriting and due diligence on potential acquisitions valued at over $2.5 billion, with another $2.5 billion a little further behind in the process. No potential acquisitions have fallen out since our last earnings call. While we cannot guarantee the closings of these transactions, we feel good about where we are in the closing process. They are all attractive and exciting additions for our hospital portfolio. These potential acquisitions represent about 50% domestic and 50% international opportunities. The vast majority of properties are with new operators, allowing MPT to continue to diversify operator concentrations within our portfolio.
If we are successful in completing all $2.5 billion that we are actively working towards closing, Steward's percentage of the portfolio would fall to the low 30s. The investments are high-quality inpatient hospitals representing a strong mix of acute care and a few behavioral and post-acute care facilities. Most of the facilities are based in major metropolitan markets with significant market share in their respective service area. We hope to be able to publicly announce these deals over the next several months. As you saw this morning, we completed a $45.5 million transaction with the acquisition of our fourth hospital in the U.K. with an operator who is new to the MPT portfolio, BMI Healthcare. BMI Healthcare is the U.K.'s largest privately owned healthcare provider, with over 50 hospitals and healthcare facilities across the U.K. This facility is up and running and performing very well.
our company and the hospital industry at large. We continue to believe that the healthcare industry doesn't show any signs of slowing down. Aging and growing populations, greater prevalence of chronic diseases, and advances in innovative technologies continue to increase healthcare demand and expenditures. Many healthcare organizations looking to optimize financial and operational performance continue to turn to mergers, acquisitions, and partnering to add capabilities and build scale. MPT will continue to be there to play a vital role to assist in financing these transactions. It's worth mentioning that we were pleased to read the recent fiscal year 2020 payment rates proposed by CMS.
Our previously announced transaction to acquire 11 hospitals in Australia from Healthscope is on track with an expected closing date in late second quarter. Despite some of the political noise from the current Democratic presidential debates around Medicare for All, we continue to believe that the healthcare industry doesn't show any signs of slowing down. Aging and growing populations, greater prevalence of chronic diseases, and advances in innovative technologies continue to increase healthcare demand and expenditures. Many healthcare organizations looking to optimize financial and operational performance continue to turn to mergers, acquisitions, and partnering to add capabilities and build scale. MPT will continue to be there to play a vital role to assist in financing these transactions. It's worth mentioning that we were pleased to read the recent fiscal year 2020 payment rates proposed by CMS.
If anything significant occurs in this segment, we will certainly report on it. The U.S. represents 78% of our total portfolio. Acute care hospitals continue to make up the bulk of our investments domestically at 79%, which is right in line with our target range. It is an important reminder that approximately 94% of our same-store portfolio is master leased, cross-defaulted, or includes a parent guarantee. MPT has never been in a stronger position than the present, including, but not limited to our opportunities, our balance sheet, and our staffing. We continue to grow in size and reputation as the global leader in hospital real estate financing and the industry's preeminent source of capital. We are actively engaged in billions of dollars of domestic and international acquisitions, with more opportunities coming our way. Steve?
Thank you, Ed. This morning, we reported normalized FFO of $0.31 per diluted share for the first quarter of 2019. These results were as we expected and reflect the stable portfolio of hospital real estate throughout the quarter. I will take a few minutes to point out a couple of details behind these results, describe certain accounting changes, and then address our investment expectations for the remainder of the year, after which we will take some questions. Included in property-related expenses for the first quarter is about $1.6 million in ground lease expense that in prior periods has been netted against rental revenue. This change is a result of our adoption of the new lease accounting standard as of January 1, which requires lessors to gross up certain impositions to show the lessor's contractual payment obligations as an expense and reimbursement of such expense from lessees as rental revenue.
Our general and administrative expenses were $23.5 million for the quarter, which is up from previous quarters due to assumptions we have made about stock compensation expense. As you may recall, our stock awards are heavily weighted toward achievement of objective predetermined performance measures. Given our strong operational and total shareholder return performance in 2018 with a one-year total shareholder return of 25% and 73% over the last three years, along with our confidence in executing our robust pipeline, we believe it is more likely that such performance awards will be earned and have adjusted our stock compensation expense accordingly. From a go-forward perspective, we believe general and administrative expenses will range between $23 million-$25 million per quarter in the remainder of 2019, which we expect to represent 9%-10% of our revenues once our acquisitions target for 2019 is met.
Excluding stock compensation expense, G&A for the first quarter would be approximately $16.7 million, or about 9.3% of reported total revenues. Going forward, we expect that our adoption of the new lease accounting will have no material impact on our results of operations. We made a transition adjustment during the quarter that had the effect of increasing assets and liabilities both by less than $100 million, but with no income or FFO impact. As already noted, certain reimbursable impositions that our tenants are responsible for paying, such as ground rents, and in some instances, property tax and insurance, will be presented gross in the income statement. Our primary focus so far in 2019 has been and will remain on the acquisition of new hospital real estate.
Taking important steps with respect to the AUD 859 million Healthscope acquisition, initiating and completing the acquisition of a very attractive hospital in Southern England last month, signing agreements that we expect will result in additional acquisitions this quarter, and making great progress concerning other targeted acquisitions that we are not prepared to discuss this morning. The point, as Ed has already made, is that we remain highly confident that we will complete the acquisition in 2019 of $2.5 billion in high-quality hospital real estate that is essential to delivery of healthcare to the surrounding communities. Reflecting our confidence is the fact that we have raised more than $1.3 billion in acquisition capital in anticipation of these investments, $500 million in common equity under our ATM program, and over AUD 850 million in unsecured Australian-denominated term debt at an expected rate of less than 3%.
Our current net debt to EBITDA ratio is approximately 4.2 times, and upon closing of the Healthscope acquisitions expected in early June, it will remain historically low at no more than 5.0 times. It is not possible to precisely predict when our additional acquisitions will be completed, but we expect to maintain our prudent leverage strategies on a long-term basis. Accordingly, we remain confident in the guidance we provided on last quarter's call that upon completion of $2.5 billion in 2019 acquisitions-
Our annual normalized FFO run rate will range between $1.54 and $1.56 per diluted share. And with that, we will be happy to take questions. Operator?
Thank you. Ladies and gentlemen, if you would like to ask a question to our speakers, please hit star, then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may hit the pound key. Again, if you would like to ask a question, please hit star then 1 on your touchtone telephone. Our first question comes from Michael Carroll with RBC Capital. Your line is now open.
Yeah, thanks. I wanted to touch on the BMI deal real quick. I know you've been trying to get into the U.K. market, I guess, more meaningfully after the Circle acquisition. Does this investment provide a foothold in that country, and does it allow you to invest more aggressively over time, or should we think it more of a one-off type transaction?
Well, Mike, I think that's a good question. Obviously, you know I've been disappointed with the slowness of our investments in the U.K. We still have a good team there, and we think that we'll be able to see some greater traction there in the very near future. Having said that, this is a one-off investment here with BMI. We don't have any contractual rights for additional properties, but obviously, it builds the relationship and just gives us another foothold there.
Okay. What are the terms, I guess, of the lease? I know, I think in the earnings release it was 7% GAAP cap rate, I guess. How long is the lease, and what are the rent bumps?
We have 14 years remaining on the lease.
They're fixed rent bumps that we've not disclosed the detailed terms.
They're in the range of what we're used to, Michael.
Okay. How long was the initial lease? What was the initial lease terms? If there's 14 years remaining when it was signed, how long was it?
I'd have to get back to you on that, Mike.
Okay, great. I want to talk about the, I guess, the LTAC coverage. It does seem like coverage has dropped year-over-year. How are you thinking about that part of the portfolio right now? If I remember correctly, I believe the coverage was weak related to the Ernest assets. Is that the case, and does the IRFs in that portfolio continue to support that coverage ratio?
Actually, Mike, it's pretty mixed. We've got a number of facilities that aren't Ernest related. The Ernest related ones are some of the ones that are closer to near to the bottom. When you combine the other rehab coverage and all of the cross-defaults with the strong-performing LTAC, these are well-covered facilities with the Ernest facilities. There is one facility that is not crossed, that has nothing to do with Ernest. It has to do with another operator. We have an extremely large letter of credit there, so we feel very comfortable about that because the property itself is a very valuable piece of property. Maybe it's something other than an LTAC ultimately down the road. What you've seen is just the continuing everybody trying to find a bottom with the patient criteria. We think that we're close to there on most of them.
There are probably a couple of them that still have a ways to go. Remember that this is 13 properties, $283 million. It's just not that big part of our portfolio at this point, and we don't see that growing.
Okay. I guess finally, I know, I think that sometime soon you're supposed to report Steward financials. Is there a timing on that? Is there an expectation of when you'll be releasing those financials?
Yeah, we expect it to be fairly quickly.
Okay, great. Thanks, Keith.
Thank you. Our next question comes from Drew Babin with Baird. Your line is now open.
Hey, good morning.
Morning, Drew.
Starting out on the coverage ratios, it looks like both the acute care hospitals and the IRFs have very much stabilized year-over-year. I guess, kind of doing the attribution of that based on the financials you've seen from the fourth quarter and anything from the first quarter. Are things sequentially improving? Might we see kind of those lagging coverage ratios begin to creep up a little more as time goes on?
Yeah, Drew, I think so in all categories. I'm not sure about the LTAC yet, certainly in the IRF and the acute care.
Okay. Do you attribute that mostly to just operator improvements and operators like Prime working out some operating issues they've had in the past? Is something maybe more on the legislative front maybe contributing that?
I think you're right. It's on operator efficiencies, operators improvement. Prime in particular is truly humming. They've done an incredible job of getting their house back in order after doing probably too many acquisitions too fast. Their portfolio is just truly fantastic. Some of the other portfolios are catching up to where they wanted to be, probably in the fourth quarter last year, in the first quarter here. We think 2019 is going to be a great year for the acute care hospitals in particular.
Okay, thanks for that. Are you able to talk at all about potential pricing terms on the Aussie term loan? I think we had modeled something in the threes kind of looking at that market, any color on what that might look like?
Yeah, I think if you use a three flat, that's going to be pretty close to what it ends up. It will be driven off of what's known as the BBSY reference in Australia, which today is in the 1.6, 1.7-ish times, our spread is one and a quarter. As of today, it would actually be slightly less than 3.0.
Okay. One last one, apologies if I missed this, did you provide a cash cap rate on the BMI deal? I know the GAAP yield seven.
No, we did not.
We did not. We generally don't for, obviously, negotiating purposes with other tenants.
Okay. Fair enough. Thank you.
Thank you. Our next question comes from Omotayo Okusanya with Jefferies. Your line is now open.
Yes. Good morning, gentlemen.
Hey, Tayo.
Good to talk to you from me. Morning. First of all, just wanted to get your thoughts on the new fiscal year 2020 CMS proposals for Medicare reimbursement rates for hospitals as well as for LTACs.
Tayo, if I heard your question right, I was having to increase the volume as you were talking, but I think you were asking about the CMS proposals for acute cares and LTACs.
Yeah, for fiscal year 2020, just what your thoughts are on the proposal.
For acute care hospitals, we're obviously very pleased with what they proposed. We'll obviously have to wait and see what the final results are. Actually, we're surprised pleasantly with the proposal for the LTACs. The key on LTACs continues not to be so much the rate reimbursement, but the patient criteria. We think most of the LTACs in our portfolio have hit the bottom there, if you will. We're still watching a few of them there.
Got you. I know you kind of talked about no longer reporting the coverage, I think, again, while it's a small part of your portfolio, I think I would advocate for you guys to continue to kind of give us that disclosure, given that there's a decent amount of interest around how those assets are performing from the investor perspective.
I hear you.
Okay. Lastly, Steward, just curious about the deal that you did do post 1Q19, if you could talk about that a little bit. I was a little bit surprised in the disclosure that you discussed exposure to Steward being almost in the low 40s now. That just seems rather high. I'm not quite sure what that number represents.
Yeah. Let me address both of those, Tayo. The acquisition last month of a very small hospital for Steward was really a unique one-off and actually very attractive opportunity for us to protect and in fact, improve Steward's and MPT's position in West Texas, where we have existing investments. It is not by any means an indication of any near-term future meaningful Steward investments. It's really just to fill in, as I say, to protect our market. With respect to the calculation of Steward exposure on a revenue basis, I think you're probably looking in the supplemental. I would just point out a couple of things there that the measurement, as you'll see on page 11, is actual recent results. You'll see that, for example, Healthscope, which we've included, has no revenue. It also doesn't include adjustments for the joint venture.
Again, as you'll see, there's half a billion dollars of other assets. A lot of that is under development. Also has no revenue associated with it. If you pro forma those out, you'll get right back to where we've always been reporting Steward, and that's in that 38% range, which is also similar to the investment level.
Okay. That's helpful. Thank you.
Thank you. Our next question comes from Jordan Sadler with KeyBanc. Your line is now open.
Hey, good morning.
Hey.
Wanted to start on the Australian term loan. It looks like the size of the term loan is pretty substantial relative to your investment in Healthscope. Can you maybe speak to maybe what the LTV is there, or am I just looking at it the wrong way?
No, you're looking at it exactly right. As is typical with our non-U.S. investments, we over-lever, and that's for a couple of reasons. Number 1, to take advantage of the much lower cost of debt, both in Australia and in Western Europe. Then secondly, to offset-
Hedge.
To naturally hedge our investment. It's an unsecured loan, so it's totally fungible to the rest of MPT's debt, which is why it makes sense for those two reasons, again, as we've done with historical European investments to over-lever. That just means we have to offset that when we do U.S. acquisitions. That's why we're confident in being able to say that going forward, we'll retain our overall corporate unsecured leverage in that five to five and a half times range on a long-term basis.
It's essentially 100% LTV.
It is 100%. It absolutely is.
Separately, so the guidance tweak, I know you suspended this year. I presume, is that purely a function of timing in that you've used the ATM in the quarter and the acquisition closing timing has just become a little harder to predict?
It is 100% acquisition timing closing. It is extremely lumpy as it always has been, when we're talking about dollar sizes the way that we are right now, it is just harder to exactly predict. As I pointed out in my previous announcement, that no properties that we've been working on have fallen out since the last earnings call. It is not an issue of that, it is just an issue of timing.
I guess the only change, because everything pretty much seems the same. I guess you did the ATM, which might have been a little bit more than you would have expected to be able to do. Did the timing of the acquisitions push back a little bit?
What really started this, when we first gave guidance, in that roughly $1.45 a share range back in the fourth quarter of last year, we were counting on a fairly large transaction to happen very early in January. That's when we were, I think, at that time, anticipating $1.5 billion in acquisitions. That January transaction didn't happen, but we continued to develop the pipeline and added another $1 billion to it. We remained, at least until recently, confident that we could still meet that $1.45. As we approach middle of the year now, and we're still not sure specifically about timing, then it just becomes more and more difficult. That's the history of basically the $1.45 and why we're now saying it's unlikely to be $1.45 on a calendar year basis.
Okay. I guess, just to follow up on that, 2Q, right now at least, looks like it might be pretty similar to 1Q, just assuming that you did a small acquisition, but you obviously did quite a bit of ATM. Just correct me if I'm wrong there. Separately, the run rate, I noticed you bumped up the run rate guide by a couple pennies at the high end, or at least you made a range.
Yep.
I was curious if there was anything driving that.
Yeah, just more clarity on terms other than timing.
Yeah. As we're already very near the end of the second quarter, the properties that'll close in the second quarter will all be back-end loaded. You're right, there won't be much difference between the first quarter and the second quarter from that standpoint. We hope to have more announcements by the end of the second quarter.
Okay. A quick follow-up on BMI. Does that have an extension option or a renewal option?
Yes.
You guys assume it's likely that it'll be extended?
Well, 14 years from now, I'm not sure.
You don't make an assumption in the GAAP rate.
No
It's kind of what drives.
No. Oh, no.
Not for that.
The GAAP rate is driven by accounting rules, which is basically the initial term.
This is a strong performer for BMI, but 14 years out, who knows?
Okay. For some reason, Steve, I guess I was thinking over time, you guys have had to make assumptions as it related to certain renewal options, as it related to the accounting rules.
That's right. That's with respect to when there's a large master lease, and when we are analyzing whether an operator really has the leverage to walk away from any single asset because it can't walk away from all of the assets.
Okay. As opposed to a one-off.
Right.
Okay. Large master lease, you brought it up. Just on Steward, can you give us any color on what coverage has looked like there, how it's trended?
On Steward overall?
Yeah.
Yeah. It's trended up, we expect 2019 to be a very strong year for them.
You get that, they provide you just sort of a preliminary EBITDA coverage, by facility metric?
Oh, yeah.
They don't give you their overall financials?
Well, we get daily information on all of our facilities, not just Steward. We're working with them on a regular basis, we do have insight into what all the facilities are doing.
Okay. Thank you, guys.
Thank you. Our next question comes from Chad Vanacore with Stifel. Your line is now open.
All right. I'll keep it to one quick question. Ed-
Yeah
You did comment on slower growth in the U.K. than you'd like. I'm curious, what have been some of the hurdles to expansion on the level that you would've liked to have seen?
Yeah. Well, that's going back seven or eight years or more with the U.K. They introduced a long time ago, any willing provider where their citizens can use the NHS insurance cards for any private hospitals. They've got the ability to do it, but it just psychologically hasn't happened yet. It's just been a longer process than we had hoped.
All right. That's it for me. Thanks.
Thanks, Chad.
Thank you. Our next question comes from Karen Fehr with MUFG Securities. Your line is now open.
Hello, good morning.
Hey, Karen.
Hi. Wanted to ask about the 7.5%-8.5% GAAP acquisition yield range that you'd given before. I think you had said previously that most of the rest of the 19 deals outside of Healthscope were going to be in the U.S., and that would bring the average into that range. It sounds like now you've increased your targeted split to be more international, 50%, I think you said. Is that range still good for us?
Yeah, it is, Karen, because you remember when we talked about it last earnings call, we're still getting the same spread in both the U.S. and overseas because of our lower borrowing costs overseas.
Okay. Just for modeling purposes, is a 7.5% GAAP yield still a reasonable number, or could it fall below that just on the yield side?
That's a good, reasonable number.
Okay, fair enough. Just a question on Healthscope. It looks like the Northwest REIT publicly said that they were delaying their update on that acquisition from late April to now mid-May. Is there a chance that that deal could slip to 3Q, and any chance that you might be able to step into Northwest's shoes if they're unable to get over the finish line?
Highly unlikely that it slips to 3Q. The more likely answer would be exactly what you just said. If Northwest is unable to perform, that we then step in.
Okay. The last question. It looked like there was a $2.6 million write-off of straight-line rent in the quarter. Can you just talk about what that was related to?
Yeah, that was actually a number of minor transactions going in and out. It's not all straight-line rent. Frankly, off the top of my head, I can't recall exactly what it was in, but just ordinary course adjustments that netted out to that $2.6 million.
Okay, thank you.
Thank you. Our next question comes from Todd Stender with Wells Fargo. Your line is now open.
Thanks. In the past, you've given some clarity on Steward's rent coverage just by the six markets that you're in. Can you give those rent coverages by those markets?
Well, let me give it to you. I don't have it in front of me by the six markets, but on an overall basis, Steward's coverage is well over two times. It's actually in the two and a half range.
Okay, two and a half. Okay. Some of those markets were in excess of three.
Yeah.
Okay. All right, I'll switch gears. The Steward property in Big Spring, Texas, is that a straight acquisition? Is that wholly owned by you guys, or is there more of a debt financing investment?
No, we own the real estate and only the real estate.
Okay. Did you provide the GAAP yield on that and also the lease term?
We did not, but it rolls into the Steward master lease.
Okay. Comparable yield, is that fair?
Yes.
Okay. All right. That's it for me. Thank you.
Thanks, Todd.
Thank you. Our next question comes from Michael Mueller with JP Morgan. Your line is now open.
Hi. Good morning, everyone. It's actually Sarah on for Michael Mueller. Just a quick question on equity issuance. I guess you guys just now touched upon raising the run rate guidance by a penny at the higher end. How can we assume the pipeline gets funded to reach that run rate? In terms of equity issuance, what can we think the rest of the year should look like, given that you want to remain at the lower end of your debt-to-EBITDA range, but also having issued that $1.2 billion of term loan debt?
Well, when we close Healthscope, having issued half a billion dollars in equity under the ATM, and as Jordan pointed out earlier, financing Healthscope 100% with debt, even with that, we'll be at 5.0 times leverage. Going forward, as we've said now lo these many years, that on a long-term basis, our expectation, our plan, and our history is to run the company at between five and five and a half times leverage. That doesn't mean that any day we wake up or any day immediately following an acquisition, we will be there. Our plan and expectation is that as we make these $2.5 billion of acquisitions, we will be adjusting the balance sheet to maintain that very prudent leverage level.
With respect to timing and when we do debt and when we do equity, it's all obviously driven by the acquisition velocity, and we just have no ability to be precise. I'm not sure that answered your question.
Yeah. Thanks.
Thank you. We have a follow-up from Omotayo Okusanya. Your line is now open.
Well, actually, I took myself off the queue. Thank you.
Thanks, Tayo.
Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the call back to Edward Aldag, CEO, for any closing remarks.
Thank you, Jimmy. Thank all of you for your interest in the call today. If you have any additional questions, please don't hesitate to call our offices. Thank you very much.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program, and you may all disconnect. Everyone, have a great day.