Q3 2022 Medical Properties Trust Inc Earnings Call
Good day and welcome to the third quarter 2022 Medical properties Trust earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero today's call will last one hour. After today's presentation there'll be an opportunity to ask questions.
Please note. This event is being recorded I would now like to turn the conference back over to Charles Lambert. Please go ahead.
Good morning.
Welcome to the medical properties Trust conference call to discuss our third quarter 2022 financial results.
With me today are advocate Outback 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.
You did not receive a copy it is available on our website.
Www Dot medical properties Trust 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 $19 95.
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 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, which should be considered in addition to and not in lieu of comparable GAAP financial measures.
Please note that in our press release medical properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements.
You can also refer to our website at Www Dot 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 and Al that thank.
Thank you Charles and thanks to all of you for joining me today on our third quarter 2022 earnings call.
While economic uncertainty and inflationary pressures continue to weigh on investors and businesses worldwide. We're seeing some positive trends over the last couple of months within the health care sector that are worth noting.
Volumes in fluctuated throughout 2022 but August saw increasing volumes would you provided a good boost in revenues.
So while our trailing 12 month coverage as may see marginal declines.
Grant funds roll out of the prior periods, we're seeing positive trends in quarter over quarter and August over July discrete coverages.
As we have previously discussed our operators, especially the general acute care facilities have experienced the same general conditions and environments.
Oh hospital systems, including HCA tenant and others are operators had been executed on initiatives to reduce contract labor utilization and at the same time negotiate more favorable pricing for contract labor that remains in place due to short staffing in.
In February of this year, our operators expand experienced the highest level of contract labor, but have subsequently seen a decline through the month of August .
A similar decline has occurred in overall salaries wages and benefits.
I wanted to take a moment to remind everyone. The nature of reimbursement for hospitals generally speaking hospitals are paid after services are rendered and more notably these rates are adjusted at various intervals based on prior year's data. What this means is that reimbursement rates are not currently reflective of the increase in calls.
To care for patients and hospitals have incurred over the last year or two CMS will catch up remember historically Medicare rates have on our whole outpaced inflation.
It is also important to note that our operators contract with and are reimbursed by numerous distinct payers. The terms of these contracts generally range from one to three years. Our operators are actively negotiating new contracts with their payers and expect to be successful in negotiating increased reimbursement rates.
Or even greater than CMS increases it may not be immediate and all at once but it is coming and then an escalating manner.
As our operators effectively worked to bring down cost and as reimbursement rates increase we expect to continue to see coverage is improving within our portfolio.
As our operators adjust and adapt we are confident they will continue to be successful. This is a long term investment and while we focus along with our operators on the month to month quarter to quarter metrics. We are more focused with the long term strength of our portfolio of assets. It can become too easy to lose the forest through the trees.
<unk> bought myopically folks at focusing on a monthly spike in contract labor or coverages quarter after quarter.
Our underwriting and managing of these assets are not done in a vacuum nor on a quarter to quarter time span, we see the forest we've seen our portfolio go through numerous cycles over the years hospitals have always adapted to whatever the new norm and then they do it again.
Earlier, this month pipeline announced that it filed for an petition for reorganization relief under chapter 11 protection.
Many of the financial challenges for the pipeline the organization involved there hospitals in Chicago as a reminder, MPT does not own or lease those hospitals to pipeline, we own pipelines for Los Angeles hospitals, we remain confident in pipeline as an operator, especially considering the value of our hospitals.
Properties that serve a vital need in their respective communities, we understand the decision to restructure as it will provide us flexibility and implement sustainable strategies for their cooperation going forward. We fully expect that our risks will continue to be paid and our hospitals will continue to serve their respective.
<unk> during the duration of the bankruptcy process.
Over the past couple of decades M. P. T has successfully underwritten tens of billions of dollars in health care real estate and in that time, we've had very few operators go through the bankruptcy process.
Our success rate is not perfect, but it's pretty darn close last quarter, we provided at Investor update report on our website that details. Some of these occurrences, where we've had needed to replace or transition operators not all of which were the result of bankruptcy. It almost all of these situations.
There was no interruption of services provided to the communities by these essential assets rent continue to be paid and we were successfully able to transition the in place lease agreements for new tenants.
Regarding coverages for the 12 months ending June 30 of this year, we continued to see the impact of the Covid Grant monies rolling off the trailing 12 month period.
However, as I stated earlier, we are seeing positive increases in quarter over quarter coverages. This is being bolstered by increased volumes and decreases in contract labor and overall salary wages and benefits.
Our lease coverages are amounts are spelled out in detail in our supplement filed this morning with our earnings release, but there are a few points that I'd like to highlight.
We are almost at the point, where no COVID-19 grants will be included in the trailing 12 months. The EBITDAR coverage for the trailing 12 months ending June 30th with or without brands is only seven basis points apart.
Another very important point to note is that the coverages for our total portfolio and each separate category of hospitals. So an increase in coverage during the second quarter over the first quarter. The total portfolio was up 40 basis points.
Up 60 basis points for acute care up 10 basis points for inpatient Rehabs up 20 basis points for behavioral health and up 90 basis points for our long term acute care facilities.
And before turning the call over to Steve Let me outline the strong operating performance that Stewart is reporting to us.
Unadjusted EBITDA for the second quarter was approximately $51 million.
Third quarter expect is expected to be more than $30 million.
Fiscal year 'twenty, two unadjusted EBITDA is projected to be between 50 and $80 million.
Contract Labor in Q3 fiscal year 'twenty two is decreased 30% from Q1, FY 'twenty two run rate and is expected to decline an incremental 20% in Q4, resulting in a 50% decline since the first quarter of this year.
Stewart is also forecasting unadjusted EBITDA of more than $350 million for fiscal year 'twenty three.
Steve Thank you Ed.
This morning, we reported normalized <unk> of 45 cents per diluted share in line with our prior expectations, including slight dilution relative to our previously announced use of capital recycling proceeds to continue our reduction in leverage.
As this morning's press release noted we have refined our 2022 calendar year estimate to a range of $1 80 to $1 82 per share simply narrowing the previous range to the higher end.
Implied fourth quarter results, primarily consider a full quarter impact of the third quarter recycling activity and higher interest rates.
Adjustments to normalized F F O, our routine and immaterial individually and in the aggregate, but I will be happy to address any questions. You have about this during our Q&A.
Let's review Mpt's reliable sustainable and inflation protected cash based business model.
Year to date as of September 30, MPT had collected 99% of contractual rent.
In the interest of accuracy and transparency, However, I will point out the following definitional considerations.
First as we reported last quarter MPT supported steward and prospect with loan facilities and I will review these momentarily.
Second in earlier quarters of 2022, we allowed one non U S tenant relationship to defer $7 million of Brent over four months.
That tenant is now back to paying 100% of Brent and will repay the amounts deferred with interest over 12 months starting in January .
And finally.
Many U S states have so called supplemental Medicaid programs that basically collect an assessment or attacks on all hospitals in the state.
This aggregate assessment is often matched by the federal government and then as periodically allocated to the states hospitals based on each hospital's relative provision of services to eligible patients.
There is frequently a long gap between payment into the fund and receipt of distributions from the fund often in excess of a year or more.
And for some hospitals this represents a meaningful portion of periodic reimbursement.
Some of our leases are negotiated with these timing gaps in mind by allowing limited deferral of brands based on the specific statutory provisions of each element of the supplemental program in that state.
In which case the deferred rent is paid to the landlord when the state distribute the supplemental funds.
Yeah.
As of the end of the third quarter $24 million of such deferred rent has been recorded.
This will be satisfied over the next nine quarters.
Just as important as Mpt's historical rent collection performance is the likelihood that we will sustain that collection performance in the future.
And we currently expect that we will continue that level of collection performance over the long term.
I'll make a few tenants specific comments that we hope will relate to you our own confidence and our continued collection of brands, including rents from some of the real estate that has attracted attention in recent periods and well start with Stuart.
Stuart has faced the same operational staffing COVID-19 related revenue inflationary and other pressures that the overall U S Hospital environment has dealt with for well over two years.
As we discussed in detail on last quarters call. During this time stewarts cash flow has been burdened by having to repay to CMS. The vast majority of map advances approximating $450 million.
Delayed Medicaid reimbursement in Texas of about $70 million the revenue impact of state of Massachusetts mandated elected procedure restrictions earlier this year.
And finally, Stuart $300 million, plus cash investments in and working capital support for the five acute care hospitals in South, Florida acquired about a year ago.
When we reported to you three months ago Steward was in the middle of managing its cash flow to satisfy these cash requirements.
Since then and again with some assistance from MPT Stewart has weathered this cash drain and is now on the flip side of these circumstances and expects to be strongly cash flow positive starting with the fourth quarter of 2022.
I'll call out a few additional indicators of stewards long term capacity, which we hope will make even more clear why our second quarter loan to steward was a prudent and profitable investment.
Remember that HCA valued stewards, Utah operations and solely the Utah operations at $850 million.
This transaction ultimately did not occur, but only because of the antitrust position of the FTC.
But the value of stewards, Utah operations did not suddenly go away just because one particular, operator faced antitrust issues.
Steward of course still owns these valuable asset and has the option to continue to operate Utah on its own and generate strong after rent cash flow asset is doing now or to explore monetization of the Utah operations by selling to other prospective purchasers, who would not faced the level of antitrust scrutiny at HCA.
Often attracts under either scenario and whoever has the operator in Utah the community infrastructure like characteristics of Mpt's, Utah real estate assets should result in profitability and cash flow to pay mpt's rent at attractive coverage levels.
Similarly earlier this year and P. T sold a 50% joint venture interest in our Massachusetts real estate that is leased to Stuart.
The JV simultaneously play secured debt on that real estate and MPT recognized an approximate $600 million gain on the sale and received an aggregate of $1 $3 billion in cash.
The self evident point to be made is that two very sophisticated institutional investors. The interim infrastructure fund and the lender did substantial diligence on the operations cash flow and value of stewards, Massachusetts operations and concluded that mpt's contractual rents on its real estate were well supported.
Again, the value of those operations is not suddenly gone away.
<unk> also owns nine hospitals in Florida that are leased to steward.
Where operations since last year when Stewart acquired five of these hospitals from tenet have continued to improve.
And by the way performance was very attractive even from the time of acquisition.
These three markets, Utah, Massachusetts, and Florida comprised nearly 75% of stewards total annualized rental obligations.
On a weighted average basis Steward's EBITDAR coverage in these markets has ranged from two seven times for the trailing 12 months ended June 32022 to in excess of three times preliminarily for a Standalone August with.
With these coverages Stewart appears well able to continue paying MPT rent.
And that of course is the cornerstone principle behind Mpt's very long term track record of buying hospital real estate that needs to be needs to continue operating in order to serve the critical health care needs of people and its community.
It is by identifying those physical and market characteristics in the real estate, we invest in that has led to MPT avoiding <unk>.
Renegotiation of rents or other impairment over our almost 19 year history.
And this is why during the earlier part of this year when steward was working out the issues I. Just described that NPT elected to fund alone to steward rather than require steward to borrow from another lender.
Another lender would have required MPT to relinquish our existing and powerful security position and the value of stewards best operations.
<unk>, we have by virtue of our master lease security agreements and inter creditor agreement.
We elected instead to retain this key position in value for ourselves for relatively little incremental exposure, all while earning an attractive return for doing so.
A brief update on prospect.
First we announced a few weeks ago that the Yale New Haven Health system has agreed to acquire prospects, Connecticut facility.
Including our real estate.
Which excuse me, which we expect to sell for approximately $457 million of which cash proceeds from Yale are expected to compromise a substantial majority.
That is equivalent to the original investment we made about three years ago.
In addition to the expected recovery of our original investment since that acquisition three years ago prospect has paid us cash rents of about $104 million.
Some analyst and investors have opined that our prospect investments are not among our stronger assets.
And while we will not comment on that observation. This morning, if it is true that the Yale transactions will be an especially notable financial result for our shareholders and for our underwriting.
That is an investment considered weaker nonetheless generates a strong unlevered cash return and recovery of the original investment.
All during the worst economic and health crisis in over a century.
Gail's attraction to these facilities is a good example of why we think hospital real estate should not be valued based solely or even primarily on the financial performance of any particular, operator during any particular time period.
And why we monitor and report on lease coverage ratios only for directional indications.
It is critical for a successful investor in hospital real estate to understand the value that a specific facility has to the healthcare needs of the community. It serves and just because the goals and periodic performance of one particular, operator are not met in a certain location does not at all mean that.
The performance of other operators cannot satisfy their own goals, resulting in a real estate investor enjoying attractive well underwritten returns.
On our second quarter earnings call, we said that while we were unable to discuss certain potential and confidential prospect transactions that we had reason to believe that such transactions would result in mpt's avoidance of material impairment or loss with respect to prospect.
We continue to be prohibited from disclosures about confidential discussions, but we remain cautiously optimistic about repayment in the relatively near term of the related second quarter $100 million increase in our original 2019 first lien mortgage loan.
Of course, there is no assurance that any pending transactions, including possible repayments of mortgage loans in the near term will occur.
Okay.
Let's briefly review, our strong capital and liquidity position.
Our quarter end cash and revolver capacity provides about $1 $5 billion in immediately available liquidity.
Recall that earlier this year in recognition of inevitable inflationary and interest rate pressures MPT restated and amended our $2 billion revolving credit facility and extended its term to mature with extension options to June of 2026.
In addition to the $1 $5 billion, we have of course announced expected proceeds in 2020 Three's first half from pending transactions that is bring stone and Yale of up to another $650 million.
Our earliest debt maturity is more than a year in the future when our 400 million pound Sterling issue comes due in December 2023.
Next in sequence to mature in 2024 is our approximately U S dollar equivalent $750 million term loan the proceeds of which were used in 2019 to fund our acquisition of the health scope portfolio in Australia.
Beyond that as a well ladder maturity schedule of our various unsecured note, which is detailed in our third quarter supplemental package.
Looking forward to possible uses of our liquidity. It is evident that capital cost are not generally favorable for significant investments in today's global economic environment and our situation is not different than other investors.
Year to date, we have invested subject to foreign currency fluctuations about $750 million and most of these investments were made early this year.
For the foreseeable future any additional acquisitions will require compelling economics limited use of liquidity and strategic supportive opportunities presented to us by our strong operator relationships.
Other evident uses may include reduction of debt and repurchase of our very attractively priced common shares.
But even without use of capital for new investments our inflation linked lease revenue should result in substantial internal and highly accretive rent growth, especially given recent global inflation.
We continue to selectively explore additional opportunities to recycle invested capital through specific one off asset sales and larger portfolio transactions. Although we are not prepared to make any announcements this morning.
Finally.
MPT has long standing consistent and successful business model has always been to invest in hospital real estate that regardless of the operator is underwritten to generate sustainable long term cash rental revenue.
The key investment criteria for this success is our acquisition of real estate that is critical to the delivery of hospital services and any particular community.
We considered it a mistake for real estate investors or analysts to assess hospital value based primarily on periodically volatile operating result, instead of the important characteristics of the underlying real estate.
Our unequaled results in rent collections through many years of operating volatility related to disruptive regulatory changes the 2008 financial crisis reimbursement uncertainty and evolving payment methodologies Obamacare, the affordable care Act and its continuing disruptions uncertainties in after <unk>.
Fix three years of an unprecedented global pandemic that included virtually closing many hospitals for months.
And most recently previously unseen disruptions to hospital employment and compensation, along with Generationally high spikes in inflation inflation and disconnect between reimbursement and cost levels are unequaled results validate our skill and investing in the kind of hospital real estate that Maxim.
<unk>, our likelihood of continued long term success.
With that we have time for a few questions and I'll turn the call back over to the operator.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
You're using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from.
Vikram Malhotra from Mizuho. Please go ahead.
Thanks, so much for taking the questions.
Maybe just wanted to start off with.
Sure.
And so the value.
Describe for the real estate you also referenced the.
Unadjusted EBITDA improving for.
Potentially 2023.
So given all of that I'm, just wondering you know two things one.
Any sense or any update you can give on.
Your own thoughts on them getting a permanent.
The permanent ABL extension.
And then second given the improvement in the value can you just give us a sense of like other <unk> that may be wanting to buy that you buy certain select Stewart operation.
How close is that something on the table or is it just highly envision right now.
Thanks, Vikram on on the ABL, what Stuart announced a few weeks ago was that they had an extension until the middle of December .
And during which time they expected to complete documentation requirements.
Two presumably extend that for a full year beyond the time, they they delivered those documentation requirements, it's our understanding that.
The primary documentation is delivery of the 2021 audited financial statements and its our further understanding although we don't have direct.
Influence is that steward its auditors.
And the lender group.
<unk> is well on its way to to successfully delivering that documentation.
And then just on your second part of your question there as you recall on the Utah HCA transaction Stewart did not do a process they didn't have the property.
Bigger hospitals up for sale HCA came knocking on their door, but is often the case when people learn that somebody might be have an inside track to buying something you can imagine that a lot of other people have called as well, we're certainly not privy to those conversations and where they may be in any of that but we certainly are.
We're of other people that have an interest not only in the Utah facilities with some of the one off facilities as well, but we don't have any any direct knowledge of where they may be in any of those discussions.
Okay. That's helpful and then just.
On prospect.
You know obviously you now included additional assets in that calculation of upgrades. So we're seeing the negative coverages there.
But can you just help us understand all the sources of capital that prospect has then you know kind of your rent is current today what are your what.
What's your confidence around that rent being current going forward.
So that's a good question. So we included Pennsylvania and the coverage this time.
It is important to note that the California facilities continue to perform at acceptable levels.
Pennsylvania facilities are not where we would like them to be certainly disappointed in where they are.
I think that the changes or some of the changes that prospect is going on in Pennsylvania is certainly in the right direction Havent borne fruit that we certainly would hope that they would at this particular time, but.
Remember they've got the managed care business, which is extremely profitable that generates strong cash flow for them and as Steve pointed out earlier, there are potential transactions out there that we're not in a position where we can comment any further than that on that gives us comfort at this particular time and we remain comfortable in the.
California facilities.
Okay, Great and then just last one.
Can you just clarify or provided an update at this point, where we are in the cycle just look what the what's happened in the hospitals broadly the improvements you referenced do you anticipate the need to provide any additional loans to any of your tenants.
So that's a good point about the hospitals in a point that sometimes we take for granted that we probably should spell out more remember that these coverages that we present or on a trailing 12 month basis. So there will look back and on top of that we report a quarter in a row.
Years. So this is really second quarter trailing 12 month information. So it includes one of the worst quarters that hospitals have had in a very long time, the first quarter of this year and as I pointed out in my prepared remarks.
Includes a trailing off of the Covid grants and some of those earlier parts of the 12 months. So it is important to note that if you look at second quarter to third quarter. The the preview we don't have all of the numbers and from all of our hospitals at this point, but what we've seen so far is that there is an improvement.
Over the second quarter from first quarter and there is also a continued improvement in hospitals.
In the months of June I'm, Sorry July and August So we expect that to continue to improve just like most of the.
Publicly reporting companies or operators have made great strides with their labor costs and so we expect that to continue to improve as well. Their volumes are also up now obviously August is always a slow month in the hospital business.
Used to be the month that everybody takes vacation. So we will see what the third quarter presents just from that particular aspect, but we expect that all of the operators will see better continued going forward coverage, we do not have any knowledge or or needs foreseeable need that we would need to.
Loan any money to any of our tenants for any rent needs.
Thank you so much.
The next excuse me. The next question comes from Jonathan Hughes from Raymond James. Please go ahead.
Hey, good morning.
Hey, Jonathan.
I'd like to just focus on corporate governance.
What steps has the board taken.
The announced dispositions.
The stock buyback plan given the dislocation heightened focus on the company. This year have there been any changes to your committee members have plans to further refresh. The board has there been a special committee created to address the <unk> concerns that have negatively impacted the company all year have there been any discussions actions.
Taken to help.
<unk> communication and our messaging to help us in.
In the investment community better understand NPD.
I think a lot of people listening to this call.
We want to hear that the board outside of Youtube, even aware of what's going on and are taking steps to address these issues and govern the company.
So Jonathan as you probably know there were changes to committee members and composition. This year is as is often the case.
In most years and those were published following.
The annual meeting we also added an additional board member as you know as well Emily Murphy joined joined our Board recently as well. Our board is very very involved we have a risk committee that meets on a regular basis that reviews all aspects.
The company potential risk and and obviously current market conditions. The board meets regularly obviously on a quarterly basis and Burson. We also have very often phone calls meetings and we go over everything in great detail. They are not only informed from.
And Steve but.
They're also very informed from our outside in.
The advisors.
Okay.
Yes, I didn't know about the changes are I don't think I knew about the committee changes Oh I'm sorry.
In addition to the board, but I guess, maybe going back to kind of communication and how the board.
Relays that to you and I see us in the Investor community, but with regard to the pipeline.
I think we all found out about that Bloomberg and up.
Tears 8-K versus of filing for you and I know, it's a small part of your portfolio and you did talk about what's going on there in your prepared remarks, but yes.
That just seems like it would have been an easy way to improve this communication that has been an issue among investors for years and in your defense. It has gotten better but you know maybe going forward could we expect a little bit more forthcoming and disclosure on those types of events, if they do happen in the future.
So pipeline.
<unk> is a very small piece of our portfolio pipeline is fully paid cash rent virtually all other obligations as as of the end of the quarter.
When they filed for.
Bankruptcy.
We fully expect that this again relatively small.
<unk> will continue to pay rent.
We will come out of bankruptcy, either under current ownership or or another ownership with our leases in intact as of today, we have about $13 million in deposits and reserves.
On the pipeline relationship.
In addition of course as I say to the to the what we think is adequate assurance right now for continuing to get paid.
And so.
I'm not sure how we would have reacted differently.
But we did not have.
Advance notice.
On Sunday night that they plan to file bankruptcy.
So I'm just not I'm not sure what we would have done differently frankly once once the news was out.
I mean, maybe an 8-K or press releases about household but I do understand that you didn't have any.
Previous knowledge of it so that's a fair answer.
I guess just one more for me then.
Capital allocation.
Congress dispositions, but.
How do you view other avenues to create or prove value outside of monetizing real estate like with the Springs down operating company transaction in August is there any interest in <unk>.
Packaging some of those op co investments with real estate in an effort to.
Maybe create more incentive or upside or potential partners or is it going to be more just to focus on looking at potential real estate deals.
So the spring stone transaction that that whole series of transaction going going back 18 months now is just a really really good example of how we use our.
RIDEA type investments.
Spring Stone was a platform a well developed well managed private equity owned platform that was developed over many years.
And even though it was it was developed over many years the real estate was was relatively newly developed.
State of the art.
Behavioral hospitals. It was 18 hospitals worth about $750 million that we have had our eyes on for many years frankly in order to capture that very attractive real estate, which is now already grown as we thought it would as brings down continues.
To grow its business across the country in order to capture that when the private equity firm was ready to exit.
Like most private equity firms and like several other transactions I could describe with similar examples the sellers not willing to bifurcate real estate in Opco and make two separate sales. So in order for us to capture the real estate, which is what we wanted and which was 75% to 80%.
Of the total value, we had to be willing and capable frankly up of acquiring the whole company and that's what we did a little over a year ago and even before we close that transaction, we have multiple parties interested.
In approaching us and acquiring the Opco, which while we are absolutely capable of.
Managing along with our management team partner, that's not our business that's not what we want to do long term and so within six months, we had agreed with Apollo and life point.
For them to acquire a majority interest.
And the operating platform for a very significant gain on our part and now we have or we will have presuming closing that's expected, but certainly not guarantee early in 2023 now we will have what we wanted from the beginning which is a very very good.
Leo of well developed specifically behavioral.
Health care real estate. So I think it worked out again I know it worked out very very attractively for us.
We are we are proud that we've developed the scale to underwrite operating companies because it gives us a tremendous competitive advantage when when we do have opportunities to look at.
Companies that are for sale at the total enterprise is for sale and there is a significant portion of real estate and again I won't go through it all.
In detail, but this is what we did with Ernest very very profitably over five.
Five or six year hold period, we did it with similarly short hold period with Capella back in 2015.
And on smaller scales we've.
We've captured significant gains on our equity interest for example in median.
In a toast to German.
The platforms that we have and.
Excuse me again on smaller scales than others. So so springtime worked out exactly like we like it to work out and we would hope that it would work out like that in the future on additional transactions, sorry, sorry, I went kind of long winded on that.
That's fine I mean, I understand the strengths.
Alan.
So let me get my questions also would you look at potentially selling part of your equity stake in Stuart Opco with real estate to get a deal done.
And 10% in store today sell 5% or so in package that with real estate is that something that could be considered.
Well, that's not an unfair observation I think be because there is a a level a high level of interest you.
You're already solid of course with Macquarie earlier this year on the Massachusetts portfolio. There is a similar level of interest from other infrastructure and other funds that may be willing actually to consider something that you've just described.
I don't I don't.
Again, we don't have anything to.
Two announce or are even hint at this morning.
But it's not an unfair observation John .
Okay Alright.
Alright, thanks for the time.
The next question comes from Michael Carroll from RBC Capital markets. Please go ahead.
Yes. Thanks.
Steve regarding the potential prospect deals that you've kind of highlighted in your prepared remarks.
No you don't want to provide too many details on that but can you highlight the potential timing of those transactions, let me how far along are those discussions.
Does the changing interest rate environment put those yields at risk at all.
Well that's a very good question also.
Mike I think anything that depends today on a high level of of of.
That any type of transaction.
I don't think anybody should assert any any certainty maybe with the exception tomorrow at the Twitter thing it looks like it'll get done but.
But leverage lending right now is is.
It's pretty volatile and while you're right. It's not that I don't want to comment. It's really we're just legally prohibited from comment just as a general observation.
The capital markets, including maybe even especially the leverage lending market is particularly volatile and our view right now.
Okay does the changing in the interest rate environment does that impact those potential deals or you just can't comment on that right now.
Yes, we just can't comment on it on it right now okay.
And then with regard to the sale of the Connecticut sale to Yale I guess, what type of regulatory hurdles still needs to be clear. There is there any concern that those.
Those risks to that.
Well there is risk to that Theres no question Theres risk to that anytime you have the regulators involved primarily the biggest hurdle.
Is the.
The transaction does require a certificate of need approval now given the circumstances given the.
The financial the political.
The.
The other influence and power and benefit of bringing Yale to these hospitals, one would think that the regulators would would prefer to see Yale come in and stabilize these.
These facilities and so again, one would one would think maybe the risk is mitigated but that is that is the risk and.
And we do understand that it's not going to be an overnight decision.
Okay, Great and then just last one from me I know you kind of highlighted that there are several portfolios that youre looking to sell.
In your portfolio currently and I know that there was reports that the MPW might be willing to sell the <unk> properties.
Sure. If you can provide any color on potential transactions outside of what's already announced but maybe could you provide some color on private market valuations and how those have been impacted by by the current interest rates. I mean is it reasonable to expect that you can get some of those larger transactions completed in the current environment.
Well, we think we think so that's a really interesting answer to your interesting question.
Because as I just made the comment that the debt capital markets.
You know a pretty volatile.
There are investors, primarily sovereigns pension funds and others, who are still assessing.
Pretty attractive at least.
Preliminarily based on what we see in the market pretty attractive cap rates on well.
Well underwritten hospital real estate.
And so while we shouldn't kid ourselves that if interest rates were up a couple of hundred basis points, then that's not going to affect <unk>.
Pricing.
It's not affecting our early indications as much as you know.
If we were trying to sell to a private equity firm for example, so.
It's not a very clear answer I understand other than to say that there is still a high level.
Infrastructure like cash flows that have the kind of inflation protection that many hospital leases have.
Okay, great. Thank you.
The next question comes from John Pawlowski from Green Street. Please go ahead.
Yeah, Thanks for the time.
I may have missed the number in the beginning but can you just let us know what's driving the difference between what sounds like a $350 million EBITDA projections for steward next year versus the $800 million run rate disclosed last quarter.
Well the $800 million in EBITDAR number.
And the 350 is an EBITDA number.
Okay.
Then could you dip, but then.
Then could you share kind of how you bridge, the I guess $50 million to $80 million EBITDA figure for 'twenty, two up to the $350 million for next year.
Uh huh.
From the what the projections of the fiscal year. This year being the 50 to 80 million to $3 50 next year because that's the question.
How do you get there right now most of that is continued improvement in the operations, but the biggest number that is the full effect of the cost savings that will be in effect in 2003.
Okay final question for me.
Could you just give us a sense just in terms of your broader just all your hospitals, but what percentage roughly in order of magnitude what percentage of Capex projects have been deferred over the last few years.
Hospitals have had bigger.
Bigger priorities just stands on liquidity just trying to get a sense for the wave of deferred capex like we could expect.
The next few years.
So John I suppose you're talking about the Capex that is funded directly by our operators not the capital additions that we find and if that is the right question I've been doing this for almost 38 years and it is it has been.
A nice thing to see that hospitals generally do a very good job of keeping their hospital capex up to date.
If they don't then they certainly will see declines in their operations to date, we do not have any facilities that we have seen substantial or material departments of capex and we have teams here in the company that go out to every single prop.
30 every year and review each one of those specific aspects for every property.
I'll just add a final comment on that John , particularly in Europe , and even in Australia.
Cause of the nature of the reimbursement, which comes from employers and employer related pension funds.
Our facilities are inspected frequently by these reimbursement pay ores specifically.
Poor quality of the of the physical plant for the capital expenditures and as Ed just alluded to if they're not totally up to date.
Then revenue reimbursement is is penalized so.
It does no good for a hospital, even if they were <unk>.
Even if they were so inclined in those circumstances to cut back on.
On Capex.
Okay. Thanks for the time.
The next question comes from Steven Valiquette from Barclays. Please go ahead.
Great. Thanks, good morning, everybody.
So.
Good morning, a couple of questions here interrelated on Steward S. First your my understanding was that another use of cash within steward over the past year.
Capital expenditures on the Florida hospitals that Stewart acquired from Tenet healthcare.
If the payoff on those investments is a big part of the expected EBITDA improvement that Stuart and twenty-three versus 22.
And that does kind of is really tie into my bigger question is.
With that.
EBITDA projected to be $50 million to $80 million for steward. This year and then go into $3 50 next year.
About that just in the context of the breakdown of the store facilities geographically.
But you guys always show on page 11 of your supplement between Utah, Florida, Texas, Arizona et cetera.
Are you able to discuss just at a very high level, which of those geographies may have the biggest improvement year over year.
So just thinking about it geographically as well it might be helpful. Thanks.
I think without a doubt the biggest improvement is indeed, Florida, Florida is way exceeding our original underwriting expectations. It may even be exceeding good stewards.
<unk>, but I do know that those particular facilities have done exceptionally well.
But all of their fulfill all of their markets continue to perform well.
The Ohio, Pennsylvania area.
That is probably the least performing but none of them are negative they all.
All are performing very well.
Okay that certainly helps for context. Thanks.
The next question comes from Mike Mueller from J P. Morgan. Please go ahead.
Yes, Hi, I have two questions and just wanted to check the math. So first can you break down the $650 million of proceeds that youre expecting for next year, along with a blended yield and then second can you talk about the different geographies, where you see our 10 year financing rates at this point.
And then the math I wanted to check was it.
It's tourists expecting $3 50 of EBITDA next year I think your cash rent payments of around $3 75, So does that imply about a one nine times coverage.
Okay.
The quick answer to that last question is yes.
Okay great.
The quick answer to the first question is the 650 is comprised of an estimated $200 million that we expect to receive.
In the first half of 2023 from proceeds for the spring Stone transaction and then roughly another $450 million from the Yale transaction.
And that comprises the $6 50, and I'm, sorry, I forgot the middle question right.
Oh, yes, just financing rates in the different geographies.
Yeah.
Hi.
And it's an extraordinarily.
Ordinarily high you know in a couple of cases, primarily the U K, where you've just seen and kind of an incredible social political situation that that spiked interest rates and in currency transactions, but just order of magnitude Mike if we're talking about the U S.
We're the last issuance we did.
It was three years ago.
We issued 10 year unsecured at three 5% I think we would feel very fortunate if we had to do that today, which of course, we do not but if we issued 10 year U S dollars today, it's probably going to be 8%.
Okay.
Okay.
And any similar commentary on euros pounds, Australia.
Well, we certainly don't have any any plans, especially in Australia.
Remember the only debt we have down there its Australian dollar debt is the term loan that we borrow from the banks in order to buy health scope three years ago.
Still has two years left on it and so we and that's a very very attractive.
Transaction that we did we are well well into the money on the swap it.
The debt that we executed for that loan.
On the U K, which is our earliest.
Maturity and a little over a year I think is December of 2023.
That was a relatively short term issue and.
I don't know what that would be today, even but.
<unk> gas and maybe it's a bit of a hope is again because of the political situation in the U K.
That rate will come back to something more normalized which nonetheless would be much higher than that I think we're paying about two 5% on that right now.
Got it.
That's helpful. Thank you.
The next question comes from Joshua Diner line from Bank of America. Please go ahead.
Yeah, Hey, guys.
You commented in the press release, you expect rent growth of 4% to 5% next year how.
How does that compare to potential rate increases.
Like.
It might be getting from the payers.
So that's a great question obviously.
CMS has already announced what their rate increase will be I think it was four 5% in that range.
Very interestingly, we've just recently learned.
That Germany is going to be somewhere in the neighborhood of 6% I believe and so you're seeing those types of rates on a go forward basis.
I think the conceptual thing to remember Josh is that with respect to rent to the landlord rents, especially on acute care hospitals, it's a relatively small piece of net revenue generally around 5%. So when it comes to inflation pressures.
Our hospitals are focused on paying a little bit higher rent on 5%. There. There's certainly much more focus as Ed described a little earlier on getting down the.
The inflationary escalations on salaries wages and benefits and other supply chain.
Issues, and then again over time going all the way back to when records first started being kept for Medicare.
Overtime, which doesn't mean from quarter to quarter, obviously, but revenue reimbursement.
Has always kept up and in fact exceeded inflation.
Can you maybe walk us through that a bit more like.
What kind of lag there is with the payers and <unk>.
Inflationary pressures.
Are there certain times of year, where we should look for announcements from the payers.
CMS is every year.
And then the.
The commercial insurance payers will vary because people enter into contracts that vary in length from one year to three years and it's different for every single one of their Payors. Some states like Alabama only has one basically a commercial insurer, but states like Texas have a lot.
So you'll have a hospital operators, having 50%, 40% to 50% of their revenue coming from a lot of different.
Commercial insurers and those are being negotiated all throughout the year.
Okay. Thanks, guys.
The next question comes from Tayo Okusanya from Credit Suisse. Please go ahead.
Hi, yes.
Good morning, everyone. Just a couple of quick ones on Steward first of all and then I may have missed it because I did get on the quality of the meat, but the delay.
In the Texas development by.
By about a year and a half could you just talk a little bit about how that decision was made.
Also notice that Stuart rents were kind of down this.
This quarter from night, So wondering if 17 million from $125 million before just curious if you could help us reconcile that difference.
So Stuart commenced active pre development for the Wadley Hospital about this time last year. So sometime in mid to late 2021, and then later that year MPT.
<unk> made an initial advance funding.
And then in 2022.
Stuart accelerated trying to line up and pre fund or at least pre identify.
Yeah.
In recognition of supply constraints materials cost and lining up contractors and general contractors.
Any way that that was the process through.
Through 2020 to the early part of 2022 at which time.
Stuart decided to change the general contractor and so that that change disrupted the timing and it's our understanding that we're very close to new agreements with with a new.
New general contractor and construction will restart late this year or very early next.
Okay.
That's helpful.
And then the lower rent.
<unk>.
So remember a few years ago the.
Auditing rules makers made us.
<unk> as an NPT expense, let's just say for example, we paid an insurance premium sometimes insurance premiums and frankly in this case are very large on an annual basis say say $7 million.
We have to recognize that even though we turned around and the next day or the very same day, we collect a check back from the tenants because tenants of course under Triple net lease are responsible for paying insurance. So there is a timing.
Issue that you're referring to.
In recognition of an MPT expense in one period and then in the same or a different period over the next year, you'll you'll see that expense has turned around into income or vice versa.
Gotcha that's helpful.
And then last one for me the the big change in the straight line rents as well during the quarter just kind of help us.
Better understand what created that.
Okay.
Well the biggest issue on straight line rent was just writing off.
The accrued straight line rent.
With respect to those prime assets you remember we sold.
We sold 360 plus million dollars of prime assets, which had been accruing straight line rent for many years and so that's just that's just a noncash write off.
Great.
Thank you very much.
Our last question is a follow up from Steven Valiquette from Barclays. Please go ahead.
Oh, Thanks, just one quick clarification question.
I think on Stuart you mentioned it was roughly $50 million of EBITDA <unk> and you said it started to be $30 million, maybe $30 million plus in the third quarter I wasn't sure. If that was for the full third quarter or just quarter to date or something like that or maybe a couple of months, but also that as the full quarter and just any quick color on why that was sort of stepping down sequentially.
I heard those numbers correct.
It is for the fourth quarter as David and I don't I don't have the detail on why the step down.
Okay. So we can follow up maybe offline later on okay alright.
This concludes our question and answer session I would like to turn the conference back over to Ed All day for any closing remarks.
Thank you very much and again I appreciate everyones interest today and I appreciate all the questions and please don't hesitate to call us with any additional questions. Thank you very much.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.