Q2 2022 Medical Properties Trust Inc Earnings Call
Good afternoon. My name is Dennis and I will be your conference operator today at this time I would like to welcome everyone to the medical properties Trust second quarter 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question simply press Star then the number one on your telephone keypad to withdraw your question Press Star one again.
I would now like to turn the conference over to Charles Lambert Vice President. Please go ahead.
Good afternoon, welcome to the medical properties Trust conference call to discuss our second quarter 2022 financial results.
With me today are Edward K Al that Junior 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 medical properties Trust's Dot com in the Investor Relations section.
Additionally, we're hosting a live webcast of todays 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 1095. These forward looking statements are subject to known and unknown risks uncertainties and other factors.
It 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 Companys 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 and.
In addition, during the course of the conference call, we will describe certain non-GAAP financial measures.
It 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 medical properties Trust Dot com for the most directly comparable financial measures and related reconciliations.
I will now turn the call over to our Chief Executive Officer, Ed <unk>.
Thank you Charles and thank all of you for listening in today to our second quarter earnings call for 2022.
You all will recall that the public reporting hospital operators reported Q1, 2022 results, reflecting the issues with the omicron surge in December January and part of February .
As we predicted last quarter since we report coverages one quarter in arrears. The results we reported from our operator today show that same softening.
Furthermore, just as we predicted with the public health systems like HCA and tenet.
Both published their Q2 results the positive trends that we're seeing in March and April has accelerated into May and June .
There are several points that we believe are important for us to address today.
First we underwrite every investment at the facility level, we believe reporting coverages at the facility level is the appropriate metric.
Whether we acquire a large portfolio of hospitals or single hospital, we underwrite that acquisition at the facility level understanding the competition market the physician referral sources and the operator.
We must be right on the market and the referral sources, but long term collection of our rent does not depend on the financial results of a particular operator.
And the few times that we've had to transition from one operator to another we have been successful in attracting high capable and qualified operators because we had acquired hospital real estate that were rescheduled to the community and in the right hand could be operated profitably.
And as a reminder, our rent typically represents approximately 5% to 7% of our hospitals net revenue.
Two rarely is an operator's real estate subject to an MPT lease rarely is 100% of an operator's real estate subject to an MPT lease in many cases NPD does not even own the majority of an operator's real estate and three hospitals can and do exist without corporate offices. However.
Corporate offices and their function would not exist without the hospitals they support.
Another item that is sometimes confusing to investors is the repair and maintenance numbers and the coverage there.
The repair and maintenance expense on the income statement and represents the bulk of non discretionary spending required to maintain the hospital real estate.
The hospitals capitalized expenditures then fall into two primary categories equipment related and building related in both cases, the entire amount of the expense does not represent an immediate cash outlay the.
The overwhelming majority of these costs are financed and repaid over the terms agreed to by lenders or vendors.
For larger true real estate capital expenditures like a new hospital tower, a new parking deck or roof replacement MPT has always been supportive of continued investment in our hospital real estate to the extent that a project meets our underwriting criteria.
Sometimes MPT has asked to finance these investments in which case there generally added to our lease space.
Moving on now to discuss our operators in the portfolio lease coverages.
You all may recall that historically, we provided coverages at the EBITDAR level over the years, many shareholders and analysts suggested that we provide EBITDAR coverages to be consistent with other Reits.
Internally, we use a conservative 5% of net revenues across the board with our tenants to approximate the management cost of operators.
Most of our operators actual cost is significantly less than the 5% the actual cause usually approximate between three and 4% and some even less.
We use the 5% internally to help show us direction and early warning signs, let me give you some specific examples.
Using our tenants actual numbers and not the 5% number we use internally across the board.
<unk> <unk> actual EBITDAR coverage for the trailing 12 months ending March 31, 2022, with 138 times Scion health was one seven times.
<unk> was 175 times.
Pipeline was one point O times and so on.
Whether we use the 5% or the numbers provided by the tenant this is an art and not a science.
Also remember that as announced during the last earnings call.
And as previewed by HCA intended and others. The first quarter of 2022 was a difficult quarter for everyone. Our operators have returned to more normal metrics. Since then.
Our total portfolio EBITDAR coverage for the trailing 12 month period, ending 331 2022 was two four times. This compares to the trailing 12 month period, ending 12, 31, 'twenty one of approximately two seven times.
Trailing coverage for last year's first quarter result was also two four times.
Using the surrogate number of 5% of net revenue from management fee EBITDAR total portfolio coverage for the trailing 12 month period, ending $3 31, 2022 was one seven times.
The details of our EBITDAR and EBITDAR coverages using the 5% number by operator are shown in our supplement report we filed this morning.
Now, let me take a few moments to provide some high level updates on some of our larger tenants.
Steward Steward operations continue to make dramatic improvements from 2020.
In 2028 stewards unadjusted EBITDAR was approximately $209 million in.
In 2021 based on current unaudited numbers Stuart generated an adjusted and unadjusted EBITDAR of more than $450 million.
This reflects a more than $240 million improvement.
Just on the most recent two months stewards internal unadjusted EBITDAR shows a run rate of more than $800 million.
The Utah and Miami markets alone continue to perform very strong and makeup approximately $350 million of that $800 million.
By the end of September Stuart will have paid back all of its map requirement. Excluding this small amount associated with the hospital in Massachusetts that was hit by floods two years ago.
The exemption of the payback of the money in September and the termination of the tenant management agreement will remain approximately $50 million additional cash dollars per month available to steward.
Volumes at Stewart are up 11% over the volumes in February and up more than 20% than the same time last year.
And very importantly, the quality of these volumes is strong.
Current labor calls that steward, our currently 9% lower than they were in January .
<unk> continues to reflect steady operations and coverages.
I'll pay admissions continue to trend upwards, which is a good thing in the UK is growing NHS backlogs are driving substantial wait times and the public sector and overall volumes are approximating pre pandemic levels.
Social Circle also continues to report that they are not experiencing any significant issues with staffing or inflation impact.
<unk> has not rebounded where we hope they would at this point post the third COVID-19 cycle and staffing changes and talking with management. They are still bullish on California, and believe that Pennsylvania has turned the corner after an enterprise system conversion.
Prospect. It continues to actively is actively involved in ongoing negotiations with the would be acquired for their Connecticut, and Pennsylvania markets to date, we have not been involved in any of these negotiations.
Swiss Medical network continues to perform well as well as they have in the past they continue to outperform the prior year from a revenue growth standpoint, and expect to continue that trend as they own born onboard their most recent acquisitions.
Medians operations and coverage remained steady as they have throughout the pandemic average occupancy through may has trended up from the prior year and additional increases are expected during the remainder of 2022.
Personnel costs through May 2022 had been managed below budget and are up only 6% year over year.
<unk> expects to be able to effectively manage in alignment with expectations during the remainder of 2022.
Priory saw an increase in coverage in Q1, 2022 and remains near two times coverage since the transaction last year occupancy remained strong and the remaining remainder of 2022 is currently expected to be in alignment with our expectations.
Health scope at the end of 2021 during the early months of 2022, Australia continue to institute periodic restrictions on elective surgeries due to the Covid pandemic health.
<unk> scope continues to work towards completion of multiple capital improvement projects at a number of our facilities.
Prime continued its strong coverage performance in Q1 2020 to 15 of our 22 facilities posted EBITDAR coverage of over three times with seven of our facilities covering over four times.
Volumes during Q1 2022, we're almost even with Q1 2021 and their cash position is strong Dr. Prem ready the founder and CEO of Prime healthcare was recently recognized by the Los Angeles business Journal as one of the 500, most influential leaders and executives.
In Los Angeles.
This was the third consecutive year that Dr. <unk> already has been recognized on this prestigious list and Dr. Davita Bajada, President and chair of the Prime Healthcare Foundation was also named to that list.
Lastly, before I turn the call over to Steve I'd like to provide a quick update on some of our recent activity on the acquisition front.
G with locations across Spain, the UK, Australia, and the United States.
Our second Spanish transaction as a development agreement with one of our current operators Ahmed recall back in 2015, we agreed to a similar deal with Ahmed to develop a brand new state of the art Hospital in Valencia, Spain.
That facility, which has graced the cover of our annual report on multiple occasions was completed in 2017 and has successfully served as their flagship hospital.
The facility has now matured and Ahmed is ready to begin the next phase of their growth strategy with the development of the three new acute care hospitals across the Mediterranean coast of Spain.
The estimated combined budgeted.
Our redevelopment projects is 121 million euros.
Each facility as a separate construction timeline, but with all the expected to be completed between the second half of 2023 and the second half of 2024, we are excited to grow our investments and our relationship with the team at Ahmed.
Early in the third quarter, we closed on a $26 million acquisition of another hospital in Columbia operated by a new tenant to MPT named FCB.
We are a pioneer in Columbia, and Latin American healthcare.
Excellent as the first received do receive JCR accreditation in Columbia.
Also during the quarter MPT acquired from separate third parties two facilities located in Arizona, and Florida and leased to steward for a combined $80 million.
The Arizona facility, which will operate as a combined ambulatory surgery Center imaging Center and freestanding Emergency Department is expected to drive additional volume to the nearby Mountain Investor Medical Center in Meso, which as a steward facility the Florida General acute care facility provides steward and economical way.
To expand within the same services area as their coral Gables hospital and its expected to commence operations in January 2023.
And with that I'll turn the call over to Steve. Thank you Ed. This morning, we reported normalized <unk> of <unk> 46 per diluted share. The one cent change from the first quarter's result was expected and is primarily related to the effect of the late first quarter close of the Macquarie joint venture.
This morning's press release noted our 2022 calendar year guidance of $1 78 to $1 82 per share remains unchanged.
Adjustments to normalized <unk> are routine and immaterial individually and in the aggregate and I'll be happy to address any questions during our Q&A.
So for the next few minutes I want to discuss a few of the slides we posted this morning as an investor update.
Frankly, these slides are more of a investor reminder, than an update because nothing has changed from how we have run the company and underwritten the real estate that comprises about 85% of our total asset since our inception.
But of course as we have grown from $0 in assets in 2000 $4 billion to $22 billion today, our investor base has certainly changed and some investors do not have the long term history that others have so we believe this is a good time to describe our general strategy for investing in hospital real estate and review.
The outstanding success is our strategy has delivered over that 18 year period.
Then before we go to Q&A I will briefly describe our expectations about investments and capital markets activities in the present market and economic environment.
First and foremost we invest primarily in real estate, we underwrite our real estate investments to attract successful operators.
Such that just like most Reits and other real estate investors. If any particular lessee is unable to continue paying our rent we expect to find another lessee that can.
In other words it is the characteristics of our real assets that we believe attract successful operators and sustainable real estate returns as opposed to relying on any particular, operator lessee to bring value to our REO assets.
Slide four in our Investor update summarizes some of the key characteristics of hospital real estate that if present will attract a profitable replacement operator if necessary.
The more of these real estate characteristics that any particular hospital facility has the more likely it is that that hospital is truly critical community infrastructure that a replacement operator will be able to run profitably and continue paying us attractive real estate returns.
Many of you have heard Mpt's executive officers acknowledged that it has the primary responsibility of MPT management to identify underwrite and invest in hospital real estate that has these characteristics.
And our history proves that we have been successful in doing so.
That is what slide five in the update demonstrates in.
In our 18 year history, we have invested about $24 billion in the real estate assets of about 530 hospitals.
And due to our specialized hospital expertise applied to our initial underwriting it has only been necessary to replace operators of 20 of these facilities.
That's in addition to the adapt this relationship which we described in last quarter's investor update slide.
Slide five demonstrates that we have actually made money.
<unk>. We think this is should be the expectation for real estate investors certainly across the long term and to be clear. This slide aggregates. Every instance of operator replacement over 18 plus years.
And by the way. This success is not solely due to our underwriting slide five also describes the value of being a lessor versus a lender and of the master lease structure, both of which are key components of our overall strategy and historical success.
Finally, slide five calls out three examples of the 11 instances of operator replacement each with differing causes and outcomes.
Town and country, which was a ground up development of a state of the art acute hospital and MLB due to our careful underwriting that we consciously designed to assure that this real estate was needed in and valuable to the surrounding community. This campus was extremely attractive to other prospective operators in the Houston market.
When the original lessee was unable to access profitable managed care contracts and by the way of risk then MPT identified very early in the underwriting process.
We had multiple alternatives and ultimately elected to sell our real estate for an attractive price to the dominant acute provider in the market and we more than recovered our investment.
Just to make clear again it was the real estate not the operator that was valuable to the buyer.
Shasta Hospital in Redding, California is a good example of what can happen when an operator's parent not mpt's lessee gets into financial stress and even <unk> bankruptcy.
Our hospital real estate was being operated at an attractive EBITDAR coverage ratio, even when the parent company and with our guarantor was deeply solvent.
Because at the facility level profitability.
And because our leases almost always mandate that our lessee is a special purpose entity creditors may not attach our real estate assets or Brazil facility operations other than secured receivables.
Shasta was truly a community infrastructure asset to the extent that the state of California regulators work with us and the replacement operator, the transfer of licenses and keep the hospital opened in a matter of 24 hours.
There was simply not enough capacity in the market to absorb the loss of patient access that a closure of Shasta would have created.
It has since then been operated at strong profitability and not only did we negotiate higher rents with the new operator, but we were paid a $12 million cash inducement fee. In addition to that ramp.
Finally, the slide comes out our small <unk> in New Orleans as an example, because it was our very first RIDEA transaction.
Giving us the ability to capture operating upside in addition to the real estate rents, which in this case were unchanged from the prior operator.
Just to summarize again.
In these cases in the few other instances when we have had to terminate a lessee. It was the quality and characteristics of our real estate that protected us from material financial losses.
The operating results of the terminated lessee did not impair our asset or impact the value of our recoveries.
And by the way virtually all of the $20 million in losses, you see on slide five resulted from a single relationship that comprise five of the 20 facility summarized.
And even some of this could have been avoided because we elected to contribute one of the facilities to the local community instead of selling it for value.
Are pointing going through this is not to highlight operator failures, but to point out that first we invest in real assets, whose values are not derived from any particular lessee.
Second if we continue to carefully underwrite as we have since our inception, even when there is as there will inevitably be operator weaknesses. We have good reason to believe that we will successfully re tenant or hospital real estate.
It doesn't simply turn into an empty building that generates no rental revenue.
But to be clear any such transition is disruptive and a management distraction and this motivates us to work with tenants that we believe can recover from their problems, sometimes even to the extent of providing financial support.
But the amount of any such financial support is considered in the aggregate $20 million loss mentioned on slide five.
Some reads address these tenant issues, but generally MPT has not done so with permanent reductions of brand other material amendments to lease obligations acquisition of equity or preferred ownership and purchase of tenant operations among other means.
I want to take a couple of minutes to consider our largest tenant relationship stewards, which add has already highlighted.
First the characteristics of the <unk> 41 hospitals, we own and lease to steward, regardless of whether or not to do it remains the operator are consistent with those that we've discussed earlier and that would be very attractive to competitors and other potential replacement operators.
Slide four refer to them in detail, so I will comment only briefly.
First and as we have previously discussed the real estate, we own and presently lease to steward comprises six different markets.
In the aggregate the facility level EBITDAR coverage for the 12 months ended March 31 was two six times.
Remember this includes as Ed mentioned, two relatively weak quarters of financial performance across the entire hospital industry.
That is evidenced by the publicly reporting operators, such as HCA tenant and others.
And my point of course is that even in the industry wide weak operating and financial environment. The steward facilities continue to operate profitably at the facility level.
And by the way EBITDAR coverages across the six markets range from 2.0 times to three seven times.
Secondly, I'll remind you that stewards, Massachusetts operations, its first and among its largest markets was recently objected to detailed and sophisticated underwriting as part of last quarter's completion of our joint venture with Macquarie infrastructure funds.
This process confirmed our own evaluation of the value of the Massachusetts real estate.
Finally, and very importantly, I will just reiterate what Ed discussed about the recent generation of EBITDAR for May and June on an annualized basis for these two most recent months to run rate EBITDA for Stuart approximated $800 million.
Including more than $350 million for the Utah, and Florida markets combined.
We're not suggesting that these annualized run rate will be sustained because there is no assurance that they will be.
But we are confident that steward, especially in its major markets is a healthy operator, and we will continue to pay its rent based on very strong long term coverage ratios.
And most importantly, even if Stuart is not the lessee, we believe the value and characteristics of our real estate currently leased to steward will attract frankly as it already has multiple potential replacement operators.
But we expect additional contribution Stewart's improving operations will also include again as Ed mentioned by the Middle of next month's Stuart will have fully repaid over $400 million of map funding and have completed its transition from tenants management of its recent Florida.
Portfolio acquisition, freeing up between total of $45 and $50 million of cash flow per month, starting earlier than in October .
That provides up to $600 million on an annualized basis, an incremental cash flow.
Almost $70 million of delayed Texas Medicaid waiver payments will have been received by the end of the third quarter.
Moreover, stewards, Texas hospitals expect to begin receiving an incremental $6 million per month.
Just on new Medicaid waiver calculations.
Elected procedures and steward, Massachusetts hospitals returned to normal during the second quarter.
And in fact, we expect that Stuart will receive state reimbursement in the near term of almost $30 million for Covid related losses.
Moreover, the staffing and other industry wide issues, which we've heard about from recent quarterly reports from public acute operators have similar to those reports also began to substantially improve across the steward system.
In addition to this recovery of cash that Stewart has funded in recent months Stewart has begun implementing strategic and operational initiatives that should lead to further near term improvements.
First the previously disclosed sale of stewards value based Medicare business to care Max will not only generate additional liquidity of as much as $125 million.
But just as importantly will align the interest of both organizations in a manner that will pave the way for future profitable growth opportunities.
Second as the industry continues to recover from the omicron related revenue and staffing pressures from late 2021, Stuart is almost completely executed substantial cost initiatives and labor purchased services.
The previously mentioned runoff of the tenant management services contract and further EHR cost rationalization in the aggregate Stewart expects these to range between 350 and $400 million annually.
Finally, let me give you a little perspective about the terminated sale of stewards, Utah operations to HCA.
Almost a year ago steward in HCA agreed to a binding agreement for the sale of these operations. Unfortunately, the FTC block the transaction and it was ultimately terminated.
Nonetheless, the value of stewards, Utah operations and the value of MPT, Utah real estate that we're both so attractive to HCA have not gone away.
In fact steward continued to improve the financial performance of Utah, even while waiting to close the sale to HCA.
<unk> now has alternatives with respect to Utah, including retaining and continuing to operate the highly profitable profitable market itself.
Notwithstanding steward strong recent and improving facility level EBITDAR performance across its portfolio. The most recent quarters have suffered from cash pressures. These recalls by for the most part the investment of more than $200 million.
And last summers acquisition to five hospitals in the Miami area.
The repayment of the previously mentioned $420 million in map obligations.
Delay of Medicaid reimbursement by the state of Texas.
Close to $70 million.
The mandated restrictions of elected procedures in Massachusetts late last year and earlier this year and of course, the termination of the HCA transaction.
And as I described a minute ago with the exception of the cash proceeds that were anticipated from the terminated HCA sale. These issues are almost fully resolved and even more importantly, we are confident in the near term improvements in operating cash flows that could aggregate up to $1 billion annually.
So all of this describes why we remain enthusiastic about first and foremost the value of our hospital real estate, but also of stewards near and long term outlooks.
This led us to agree early in the second quarter to facilitate stewards transition of its recent cash pressures through the strongly positive cash flow outlook I have just described by providing a $150 million debt facility to steward.
Among other key terms in the facility or a relatively short five year.
Cross Collateralization to our master leases mandatory prepayment from proceeds of any sale of Utah and other operations and attractive kicker interest payments.
The strength of our master lease structure, whereby we basically have first priority and the valuable, Utah and Florida operations, along with other market made this investment decision very attractive for MPT.
Moving on to a brief discussion of capital acquisition.
We previously predicted that our 2022 acquisitions volume will be in the 1% to $3 billion range and given the rapid and dramatic development in the capital markets and the global economic environment, even since our last earnings call acquisitions will likely be very likely be on the low end of that range.
There are no meaningfully sized transactions in the pipeline, although there are actually a number of potential transactions in the market and we are generally seeing indications that sellers are beginning to adjust their expectations in line with changes in the cost of real estate capital.
But I do want to reiterate in MPT strength that we have always felt has not received enough recognition and that is our built in inflationary rental escalations.
<unk> 13 in the update deck summarizes based on July 2022, U S and European inflation rates the increase in cash rents, we expect to receive in 2023 compared to a same store portfolio in 2022.
So in other words this accounts for the Macquarie joint venture as if it occurred on January one of 2022.
We estimate that our cash rents will increase in 2023 over 2022 by about $57 million as a.
<unk> of our inflationary escalators.
Thats, an average increase across the portfolio of approximately four 4%.
Applying an estimated an arbitrary blended capitalization rate of six 5% to this incremental cash results and the equivalent of about $875 million of additional leased real estate for which we have zero cost of capital.
So in capital markets that are temporarily squeezing investment spreads were very pleased with the built in improvements in yield that we expect beginning early in 2023 and of course, that's on top of the previously disclosed 2022 escalations.
And with that we will turn the call over to questions Dennis.
At this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad.
And your first question is from the line of.
Steven Valiquette with Barclays. Please go ahead.
Great. Thanks, Hello, everyone. Thanks for taking the question.
Just a follow up on the disclosure around the steward financials.
Annual run rate is closer to $800 million.
Somewhere in there I guess you mentioned, that's still an adjustment there.
Similar adjustment you would make to that is you've done for the other numbers you report when you do a year.
Rent coverage ratios.
Anyway, just to give us.
Math on where that would shake out.
On either EBITDAR or EBITDAR rent coverage the way it stands right now.
There are no. There are no adjustments those are those are just the numbers, we do not make any adjustments to any of the the EBITDAR numbers in any of the any of the tenants and those that we reported for tenants are not adjusted either Theyre unadjusted.
Okay.
That's helpful and then.
I guess it did dip from 2.8 to 2.6 on a sequential basis, but again that is <unk>.
And one quarter in arrears, so based on what Youre, saying, we should assume that when you're reporting this next quarter.
Else being equal that would probably trends back up where it sounds like that's kind of the main message that you're trying to convey I just want to confirm that.
Well all of these are our numbers from the first quarter. So we were behind the quarter and all of the publicly reporting so all of our tenants were experiencing the same issues.
<unk> reported reported about the same time, we were reporting our first quarter earnings.
Okay got it okay, alright thats helpful. Thanks.
Your next question is from a lineup of Austin <unk> with Keybanc capital markets. Please go ahead.
Okay.
Okay, we'll move on to the next person and that is from the line.
Joshua <unk> with Bank of America. Please go ahead.
Yeah, Hey, guys I appreciate it.
The new color in the presentation.
Alright.
Yes.
Yes.
5% proxy to go from EBIT arm to EBIT Dar I guess.
And the details.
But.
I'm just curious why you won't actually just use the actual.
Is that 5%, which sounds like it's always more.
Yes, George that's a fair question, we've been doing this a long time and the reason is that we're trying to get a number that standard across the board for us when we're doing our analysis. We obviously are looking at all of the numbers all the time, but windows, even when the tenants are providing us what there.
Management called Star, they fluctuate quarter to quarter. They there they are based on what.
What they allocate to their particular properties and remember very seldom do we own 100% of all of any one tenants or properties. So it gets very confusing and sometimes can be misleading. So we.
Just decided to be very conservative and use the 5% number.
Okay. So it sounds like that kind of like the upper limit you would ever ever kind of I'd say, yes that was it.
<unk> the vast majority of our tenants actual numbers that they provide or.
Two are much less than that 5% doesn't change some of the people is very much I listed some of the ones that that some of our bigger tenants.
And by my script there.
Okay, and then you mentioned the prospect health it sounded like they're having.
Slower recovery on that.
Cash flow fragrance example, lowest EBITDAR.
So just curious what's driving that.
Okay.
Yes, so their east coast facilities have never done as well as their west coast facilities. They are very bullish on the west coast facilities and continue to believe that those facilities will generate good coverage. They had the same issues in the first quarter that everybody else did some of our California properties.
So more of those issues from a labor standpoint, and across the country and Pennsylvania, there probably.
They're extremely bullish on where they are in Pennsylvania, but as you know they are in active negotiations on selling both Pennsylvania and the Connecticut facilities.
Okay. Thanks, guys.
Your next question is from the line of Michael Carroll with RBC capital markets. Please go ahead.
Okay.
I guess, Ed it sounded like in your prepared remarks that they are not hitting your expectations too so they're underperforming of where you thought that they should be.
<unk> has zero results started to rebound kind of post this omicron waves are they heading in the right direction now.
So they are Mike.
I should have gone into a little more detail about why my expectations were more they think they are right on track they feel very very good about it and when when you talk to them I just expect it to the improvements to be a little bit better than they were maybe maybe now that we're past the <unk> surge that we saw in the first quarter they will be.
Well when we report third quarter their second quarter, but digits. What we're all we're hoping that they would be but the management continues I spoke with the CEO early early this week and he continues to feel good about where they are.
And where are they impacted more by omicron than some of your other tenants to locate their coverage ratio dropped a little bit more.
You kind of compare them versus the other tenants between <unk> and <unk>.
Yes, I don't know about volume wise, but certainly the head probably more hospitalizations on the east coast for those <unk> patients that didn't generate the profit margins that previous COVID-19 patients were generating.
Okay, and then in your remarks to your kind of highlighting that they're excited about California, Pennsylvania, turning a corner, but what about Connecticut. You haven't you didn't mentioned about the viewpoint on what's going on with our portfolio.
Yes, I think thats because there is a further along with their negotiations with the potential buyer there. Although I haven't had as many discussions about operations as I have where they are about selling those facilities, but as I said in my prepared remarks, we still haven't had any discussions with a potential purchaser.
Okay, and when does that typically occur.
When when do they bring you and trying to get approval on.
Executing that transaction.
Well I'll, probably soon I think there have been some public going back and forth between <unk> and.
The prospect at this point, but they are probably pretty close to where they think they need debate and bring us in.
Okay.
Is the expectation still that the Pennsylvania, and the Connecticut assets will be sold.
Well that certainly for Connecticut that is their expectations.
I'm not sure that prospect feels that way about Pennsylvania anymore.
Okay, Great and then just last one for me I don't know if I heard an update on the prime purchase options do we have a viewpoint of what's going on with those assets.
Now there is no update Mike.
We remain kind of ambivalent.
On the one hand of course, it's a very nice attractive return for us on the other hand it.
It's about 300 upwards of $360 million that we would apply to debt reduce our leverage.
So so so that's as much of a report as we have.
And when do those leases officially expired.
Well the termination is really not that relevant they they actually expired.
At the end of last month, but it's typical.
On any exploration or.
Extension to continue to.
To negotiate there are still leasing theres still leasing from us at this point.
Okay, great. Thank you.
Your next question is from the line of Tyler Seversky with Barrett Berg. Please go ahead.
Hey, good afternoon out there. Thank you for having me on the call.
Go back to this but just in terms of stewards EBITDA run rate just so we're clear this only happens after we get through the 200 million dollar investment in Florida, $420 million, and Matt obligations and that delay in Texas funding, but.
Get to that point is that what necessitates the $150 million debt facility to steward in the interim it really it really it really is Conor when you add up all of that.
Hitting in a very tight timetable.
And.
So thats really what facilitated us being willing.
Frankly, a little bit eager to make this investment.
We truly expect fourth quarter and steward to be generating the very strong levels of EBITDAR.
If not the $800 million, then certainly very strong cash flow our free cash flow coverage.
Okay understood and then on page five of the Investor presentation slides.
Obviously outlined several models of success repositioning properties over the years and then in consideration of some of the deferrals booked over the last several quarters are there any assets that are kind of falling into this pool right now or anything you're repositioning currently and if so what's the timeframe on that could look like.
No the only new deferrals is a very limited amount down in Australia, because they once again earlier in the year shutdown.
<unk> procedures, so youll remember in the very earliest days of <unk>.
Covid, we deferred a couple of 50% of a couple of quarters, we're now collecting that back.
We agreed to a very limited.
Amount that fact that ended in may so we are.
Back in June we were fully collecting again, that's the only deferral we've done that's not in accordance with the with lease terms.
Got it understood and then last one from me just.
Considering what happened in Utah.
From your perspective, what's the most attractive Avenue to take here I mean, do you leave Stuart and the facilities or do you see your JV partner, which might be a little a little more difficult given the rate environment or is there another operator that could potentially step into to buy those operations I'm just curious to see what the most.
Most attractive outcome to you guys would be.
Well from from selling the operations Thats, a steward decision Stewart is doing very very well as we mentioned.
If if you take roughly $125 million.
Run rate EBITDA for Utah alone.
And put a market multiple on that that's EBIT by the way.
Stuart has options they may elect to sell or joint venture with another operating partner.
For us the biggest advantage frankly of.
Would be in diversification.
But we're very confident in having Stuart is our tenant in Utah and that may ultimately be what they choose to do there is theres a lot of opportunity as a very strong market.
Okay understood. Thank you for the time.
Your next question is from the line of Vikram Malhotra with.
<unk>. Please go ahead.
Thanks, so much for taking the question. So just maybe going back to the coverage is.
And just bigger picture, how they're how the believes may be structured so if I heard you correct. You highlighted obviously labor costs are an issue, we're probably coming off off of.
Of funds that the government has provided into care funds.
Some of the public hospitals like HCA et cetera said volumes in a lighter can you give us a sense of what the trailing three month coverage is just so we know what spot looks like and do you anticipate that to dip before things improve.
So I don't.
Make sure I understand your question you are asking what the coverages where for the.
Last three quarters.
Quarter for second quarter, just for the quarter well if you have the spot you have like I mean, I guess you gave it.
<unk> trailing if you just have like what's the in place if you do it on a on a trailing three month because the number went from two to $1 seven on an EBITDAR basis. So I'm just wondering like on a spot basis, what would that would be yes.
Yes, I don't have the exact number for you other than to tell you that it is they are they are up from where they were in the first quarter quarter over quarter.
Not trailing 12 quarter over quarter.
And quarter over quarter, that's essentially <unk> over <unk>.
That's correct, Okay and then in the leaves is I just wanted to clarify when you have a say.
Our needs with the hospital and in some case, assuming you had you mentioned you have a guarantee means.
The way hospitals are structured as a guarantee with the sort of the mother ship. The obligated group or is this a guarantee with the SPV at a state or city level.
No. It's the parent typically and of course every relationship has differences, but typically it's the parent company. So so every one of our facilities is occupied and leased by as you point out a special purpose entity.
And.
And that's where we derived debt facility level coverage, but we also have the protection of the guarantee typically buys by the parent company.
Okay. That's helpful. And then just last one I guess.
Given where your cost of capital and the Boston, you've talked about potential new JV <unk>.
There was also some talk about <unk>.
<unk> and Ramsay and I'm just wondering.
Yes.
What sort of interest have you seen broadly in the hospital space.
JV for your assets and can you.
Give me give them is that is the ramsay transaction as something of interest to you.
Well, we typically wouldn't comment on.
Transactions that we may or may not be involved with.
But but frankly I'll show my hand here by saying I am really not up to date on what's going on with Ramsay and.
That.
The cap rate that KKR was seeking.
What's going to be hard to get done.
But thats just my.
Historical recollection.
There is nonetheless remains a very very strong interest in these types of asset and it's driven really by bye bye to criteria. One I mentioned that dialogue at the end of my prepared remarks, and that is really really strong inflationary protection.
That is long term and is permanent that's very attractive in today's market and then secondarily of course really going back to just just the beef.
Before Covid started COVID-19 demonstrated the absolute certainty that governments and peoples are going to support their infrastructure like hospitals.
And.
So so all of that has led to a very high level of interest.
In the private area and Thats with sovereigns and pension funds and asset managers and people like you just mentioned KKR.
So we expect that that continues.
As in any real estate cycle typically.
I think the sellers are the last ones to come up to the table and recognize that well.
Not going to get a 4% cap rate like I could have 12 months ago.
But as I mentioned earlier, we are seeing that shift we're seeing some recognition that.
The current interest rate and cost of capital environment is not going to support pricing that it may have supported a couple of years ago.
On top of the pricing that Steve was just referring to we like Ramsay, We think Ramsay is a good operator, we owned six Ramsay hospitals.
But we're not interested in the structure that was the original until like Steve haven't kept up with it but the.
The original structure was asked investors to be a part of a fund and we didn't have any interest in that but we do like Ramsay as an operator.
Okay. Thank you very much.
Your next question is from the line of Derek Johnston with Deutsche Bank. Please go ahead.
Hi, everybody.
Ed So how is your acquisition pipeline standing today and and really.
What's it going to take to drive acquisition volumes.
Are you seeing any positive developments to get back to like pre COVID-19 activity levels.
So the pipeline is still there and it Didnt go anywhere there is still plenty of things out there that that are all just kind of floating around but I think everybody from the sellers and potential buyers like us are all kind of sitting around waiting to see where the world goes.
I don't think there are many deals getting done right now we certainly don't have any interest in doing any deals right now with the market as confused as it is so I'm not sure I can give you an exact answer for when we get back to.
The regular normalized type acquisition levels, it's not that the opportunities arent. There is that the world is in such a flux right now we arent actively trying to pursue.
The levels that we have been historically.
Thanks.
That is helpful. And then switching gears a bit sort of slipping coverage ratios are a bit of an issue and I feel like we've covered that.
But the question is can they also be a leading indicator for future acquisitions.
Potentially like driving higher volumes as hospitals look to <unk>.
Sales lease backs to unlock capital to reinvest.
No.
I think that implies that.
Hospitals in financial distress or more willing to do sale leaseback transactions and that may be but that's never been our target.
Again, using trailing 12, particularly including the trailing six months.
<unk>.
As of the end of the first quarter.
<unk> is really not the right baseline.
In any year in the first quarter is the weakest quarter.
I'll know that first quarter activity, and particularly general acute hospitals is weaker than the other quarters, but in this particular first quarter.
It's exponentially weaker than any other quarter would be so I'd be careful I think we are careful of reading into.
The decline in coverage is indicated by our calculations that thats something.
That's not going to be recovered pretty quickly.
And maybe we would have been concerned that if they didn't all bounce back like we knew they were going to bounce back and we already saw what the.
At the end of February and March were looking like when we did the first quarter earnings call.
Got it that's it for me.
Your next question is from the line of Mike Mueller with Jpmorgan Chase. Please go ahead.
Yeah, Hi, I guess going back to acquisitions as you move into 2023, if the stock isn't back to a level, where you like where you would feel more comfortable issuing equity should we think of you as having another pool of assets that you would potentially sell or joint venture or just potentially kind of wait it out.
Okay put keep the pause on the acquisition volume.
Yes, Mike I don't know im not ready to try to predict what 2023 is going to look like at this point with the.
The economy, where it is the fed as confused as it is with the administration and so it's not just our stock price, obviously, but its all all of those pieces together. So we wouldn't have the need to do the big joint venture. If we didn't if we weren't in an acquisition mode.
Got it okay.
Okay. That's fair thank you.
Okay.
Your next question is from the line of Teo Cusano with Credit Suisse. Please go ahead.
Hi, Yes, good afternoon first of all Ed Steve on the team. Thank you so much for all the additional disclosure.
Hi, Sue.
Super helpful and I hope, we I hope that this is kind of here to stay so thanks for that.
First question is Stuart I have it.
Two part of that.
The term loan and a five year term loan could you tell us again exactly when that kicks in and what the.
The interest rate on it is on any kind of pick interest payment that you talked about if you could just shed a little bit more detail about what potential upside could come from that and then second of all Stuart itself their line of credit as men's and mature the extremity on a revolving line is meant to mature in September and I think it's like the one thing you haven't talked about.
In your <unk> you Stuart update if you have any update for us in regards to that particular line item.
Sure Tayo, let me take the ABL first and you and I have been together for a long time, so I know youre healthcare background and you know that the ABL or are highly secured loans secured by the receivables and have very good margins.
So it's usually not something that we even even think about mentioning obviously.
We've never had an issue in any of our tenants being able to renew their ABL and certainly don't expect that situation here either.
Ill just go but I'll take the opportunity to Io to mentioned the Shasta Hospital that was in our prepared remarks and as in the slide.
Five of the update even even as we were transitioning from one operator to another and coming through bankruptcy.
Chester Redid their ABL again, because as Ed said and again you know.
It it's well over secured by government receivables, primarily with the discount on that so.
That's the reason that just doesn't get a lot of attention from us with respect to the credit facility we provided.
It was closed and completed by the end of the quarter.
Frankly, well before the end of the quarter.
It has a a nominal and escalating interest rate that would be equivalent to a lease.
And as you know, we don't we don't disclose specific terms of those the kicker.
Is is attractive.
<unk>.
I mean, it's it's.
It's it's.
It's not hundreds of millions of dollars by any means but it would it would increase the nominal interest rate by several terms turns.
And aside from that I mean, thats generally what we would disclose about any particular transaction very very well secured of course.
And provides us an accretive even in today's market a nicely accretive transaction.
What causes the ticket to kick in as this.
They have Martin indeed.
Im sorry, you broke up higher what causes the kicker to kick in at what are the terms that make you kind of again Karen.
We find that yeah. It built then it is not dependent on any particular transaction.
Matt.
That's helpful and good to know.
As in prior quarters with deal with your rent coverage of always kind of helps us understand what the governments.
Grants in that number and what kind of influenza was having on the on the rent coverage is that something you could provide this quarter as well.
You took that outlet coverage dropped 30 bps or 40 bps slightly like you kind of expressed last quarter.
Or are you talking about the grant.
Our branch still locking in the coverage model, if we get that exact number tayo, but we're about done with those I don't know the exact number what it is right now.
Okay. That's helpful.
Then just to confirm one more the rent deferrals against $7 million year to date I think you mentioned earlier on that that all relates to held scope is that correct or were there any other kind of rent deferrals in that number.
That's correct.
Excellent.
And again are already back to paying 100% of that yes.
Yes.
Thank you.
Your next question is from the line of Jonathan Hughes with Raymond James. Please go ahead.
Hey, good afternoon.
Just kind of following up on Tyler's questions that can go on that $150 million debt facility. I think you said there was an extended at the end of the quarter was that is that as of June 30th or Youre talking about late this quarter.
And I guess, maybe why was put off the change.
Change in yet.
No.
It was it was completely closed during June .
And it.
It's not a long term sustained investment kind of like what's our bread and butter thats really the only reason we didn't put it on there.
We certainly will be clear in the 10-Q, and we were eager to get it out there today and.
And in this morning's comments, that's really all there was to that.
Okay.
Fair enough and then.
When you talked.
<unk> talked about potential JV.
A lot of demand out there.
If there are any of those transactions.
Should we expect kind of the <unk>.
Entirety of any.
Those potential JV proceeds to be used for debt repayment.
Capital recycling or could we see some use for <unk>.
Buybacks I understand that.
The huge but and leverage does play a part but that is an investment in your own company that comes with no underwriting uncertainty would be at an attractive and a high cash yield 15% discount.
Yes.
Yeah, all of which makes Erith medical center of course, but.
We don't we don't have a JV yet we don't have anticipated proceeds. So we certainly haven't given thought to how we might apply those proceeds it will depend just two.
To sort of repeat what Ed said a minute ago. It will depend on a lot of things. We don't know right now what is going on in and the economic environment.
I mean, what's going on in the political and global.
Environment.
What.
What's available.
<unk> to us insofar as higher cap rate <unk>.
Investments potentially we just we just don't know, but all of all of the.
The uses that you named are certainly available to us.
Yes.
Okay, and then one more on the.
Kind of Capex disclosure clarification, and I realize you can scan it standard standard practice and the standard cost for hospitals, but it's a little unique in the traditional net lease world is that part of the reason why maybe it wasn't emphasized before this is just kind of status quo on the hospital side.
But as we look at other types of traditional net lease real estate, we generally see that below the EBIT Ros.
Jonathan I think I think it's because hospitals are what we know and sometimes we forget it's not what everybody else mode were not traditional real estate people.
Okay.
Yes fair enough. Thank you for the time.
Okay.
Your next question is from the line of John Pawlowski with Green Street. Please go ahead.
Thanks for keeping the call. Thanks for keeping the call going Steve do you expect to release, an amended 10-K with stewards audited financials. This year.
Not at this point and the reason is primarily because we always want to follow what the.
What the SEC rules are.
The SEC rules.
Do not required so because they don't require it.
You would have some issues with our tenants and on our own filing financial statements.
Alright.
So I struggle with the optics of that you disclosed it in a few years in the past now youre extending additional financing.
Highly levered entity that struggle with cash flow, it's an issue for the stock. So I'll may feel better about the selective disclosure of doing it in the past and not doing it today during a very tough operating climate why are we need visibility on financial health.
All fair points.
John but we disclosed it in the past because of the SEC requirements.
And we're not required now it's a very specific requirement.
And if we if we do become required to disclose it under the SEC rules, we absolutely will.
<unk> to provide as much as we can I know, we're doing that gradually but we made a lot of progress over the last couple of quarters.
Ed Ed describe kind of the high level results on an unaudited basis early in his prepared remarks and.
So thats, where we have it now.
Okay I wanted to spend a minute on prospect so property level coverage of six times and that excludes lower quality hospitals.
I know you've endorsed prospect and others as high quality operators. So I just don't see a scenario where our next operator can come in.
<unk> and cover ranked so can you help us feel better about low ranked coming for prospect hospitals, given the high quality hospitals or at <unk> six times.
Yes so.
We don't share the same.
Sounds like kind of more urgent immediate concern that you have one prospect.
If if there are hospitals in any of our tenant portfolios that are weaker than other hospitals in that tenant portfolio. That's the power usually of the master lease arrangement.
We've emphasized as prospect management has emphasized the value of the west coast portfolio.
And in any so called excess value over our lease space in those west coast hospitals is applied to what could be a deficiency.
And I'm not saying there is but if there is a deficiency on the east Coast, then we get the benefit of the excess value on the West coast.
Okay. I guess my point is there is no excess value on the West coast is there a sub one times, but maybe the final question would be any plan to extend incremental debt financing to prospect.
Bridge that is similar to Stuart.
No we don't expect that will be necessary.
<unk>.
Yes, we don't expect that to be necessary.
We are aware of conversations and potential transactions that we can't speak to in a public environment, but we have reason to think that.
Prospect is not going to result in any material.
Impairment or lost MPT.
Okay. Thank you for the time.
Your next question is from the line of Jon Petersen with Jefferies. Please go ahead.
Thanks, you saved all the Johnson Jonathan for the end of the call.
Okay. So just to follow up on the.
Steward financials that you have a footnote where you say that because of the value of it is less than 20%.
You don't have to disclose it I think that's the SEC rules and your revenues are 28% can you pull back the curtain a little bit and maybe just help us better understand how you value the assets internally in your portfolio to get to that hurdle.
It's a it's a GAAP basis calculation.
There is no valuation.
Other than whats on the books.
I see I see Okay, and then you guys you had I appreciate your comments on the HCA steward.
<unk> in Utah I was just curious if there's any more just higher level thoughts there on I guess the ability for your tax to sell their operations or are you guys to re tenant as the FTC is going to.
Step in and win.
When they have some of these concerns it would seem like the natural operator to come in would be one of the larger ones in the market, but if the FTC is just going to block those deals.
How should we think about prospects for re tenant in hospitals.
Fair point.
We have.
We have an extreme environment and antitrust today, and it's not just hospitals, particularly hospitals.
But it's but it's all around but HCA is already a competitor and the market that was defined by the FTC others may reasonably.
Object to the to that definition, but the fact is the fact, the FTC said there is a particular.
Market HCA was already in it and therefore.
This transaction.
<unk>.
Thanks, FTC objected to it so the simple answer there is quite a simplistic answer is it generally if a.
Our perspective, operator comes in and is not already a.
A competitor then it wouldn't have the same scrutiny of the FTC.
Forgetting terminate.
John I don't Dare speak for the FTC, but in addition to that not only was HCA already in the market and then combined HCA and steward would have represented 30% of the market is still not a huge number but ACA is the highest cost provider and thats, primarily if you read the information thats, what the FTC hung their head on that.
HCA bought steward, they would raise the prices and the market would lose their one of their low cost providers. That's not the case for some of the other people in the market that don't have the same.
The percentage that <unk> had in and certainly are recognized as the high cost provider.
Alright Thats helpful. Thank you.
Your next question is from the line of Austin <unk> with Keybanc capital markets. Please go ahead.
Great Thanks, and good afternoon.
Given the current cost of capital today, and sort of the leverage position you discussed the low end of the $1 billion to $3 billion range as being a higher likelihood at this point I guess, one is achieving or exceeding the $1 billion dependent at all on the outcome of the primes repurchase option and then second what's sort of the right level of invest.
<unk> you are comfortable going forward, if there isn't a meaningful change in your cost of capital.
Well, yes.
Sorry about the earlier win.
I don't know what the glitch was when we call it on your phone.
And I apologize about that.
No.
So I am not.
I certainly can't tell you, where I think we will get back to.
We certainly ought to be able to in a regular environment continue to do three plus billion dollars.
And acquisitions.
But given.
Where the market is as a bigger driver right now that and by market I mean, just the entire market not not MDT stock not net of cost of capital, but just.
Be confusions within the market as a whole where we are in a recession or whatever you want to call it and those types of questions as to whether or not.
We will exceed the $1 billion by much or exceeded at all so it's not dependent on the on the prime potential repurchase of their properties.
Got it that's helpful. And then just secondly, I guess given the.
The comment earlier on.
Disclosure requirements for Steward should we expect that you could continue to give us updates on tenant house and maybe that run rate EBITDA figure at least in the short run.
Going forward.
Yes, absolutely Austin.
We're doing although we can to continue to provide information to get everybody comfortable.
Understood. Thank you.
And this does conclude the Q&A session of the call I will now turn the call back over to Ed for closing remarks.
Thank you very much and thank all of you again for listening in today. If you have any follow up questions. Please.
Don't hesitate to call luxury retail.
Okay.
This does conclude the medical properties Trust second quarter 2022 earnings Conference call. Thank you all for joining you may now disconnect.
Okay.
Yes.
Okay.
Okay.
Thank you.
Sure.