Medical Properties Trust, Inc. (MPT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Medical Properties Trust earning -- Inc. (sic) [ Medical Properties Trust, Inc. earnings ] conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Charles Lambert, Vice President. Please go ahead, sir.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our fourth quarter and calendar year 2020 financial results. With me today are Edward K. Aldag, Jr., Chairman, President and Chief Executive Officer of the company; and Steven Hamner, Executive Vice President and Chief Financial Officer. Our press release was distributed this morning and furnished on Form 8-K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our website at www.medicalpropertiestrust.com. in the Investor Relations section. Additionally, we're hosting a live webcast of today's call, which you can access in that same section. During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed in or underlying such forward-looking statements. We refer you to the company's reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company's actual results or future events to differ materially from those expressed in this call. The information being provided today is as of this date only, and except as required by federal securities laws, the company does not undertake a duty to update any such information. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of, comparable GAAP financial measures. Please note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations. I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Thank you, Charles, and good morning to all of you listening in today to our 2020 recap and insight into what 2021 will look like for MPT. 2020 will be a year that we will all remember for the rest of our lives. For those of us at MPT, it will be remembered not only for the pandemic, but how well MPT was positioned to continue our outperformance. We outperformed our peers in almost every measurable financial metric. But what makes me the proudest about that is the fact that the business plan and the groundwork we put in place for the last almost 20 years was absolutely validated and reinforced during the pandemic. I also want to take this opportunity to congratulate the MPT workforce for the incredible job they did adjusting to the virtual offices and the new norms created by the virus. They did all of this without missing a beat. I also want to thank the tens of thousands of frontline workers in all of the hundreds of MPT hospitals for literally putting their lives on the line to keep health care available to people all around the world. MPT hospitals proved essential and extraordinary in 9 countries on 4 continents. Truly, our proudest moment to date. And while the year had untold numbers of challenges, I want to take just a moment to reflect on the remarkable accomplishments of our health care systems and providers worldwide. Just like we knew they were all capable of, our operators adjusted their operations on a moment's notice, they reconfigured their beds, added PPE ventilators and learned how to treat a new world disease. Our operators are world class. They moved quickly and amazingly to treat their populations with COVID while not ignoring their COVID -- non-COVID patients. I cannot say enough to express my gratitude through each and every one of them for the job they did. At MPT, we were able to continue our remarkable growth. We were able to close on almost $3.6 billion in transactions throughout 2020. We began 2020 with the announcement of our approximate $2 billion acquisition of BMI in the U.K. We entered South America for the first time with our Columbia transaction. We expanded our ownership of Infracore, the real estate owner of Swiss Medical Network, the second largest private operator in Switzerland. We acquired new and valuable hospital assets with established partners such as Prime Healthcare, Circle and MEDIAN, and we grew our earnest portfolio via several new earth developments throughout the U.S. We also established new relationships with operators, including the NHS in the U.K. and Curahealth, a U.S. operator of inpatient rehabilitation hospitals. And just like last year, we began 2021 with a major announcement of an approximate GBP 800 investment -- GBP 800 million investment to acquire a portfolio of real estate of Priory Group, the leading behavioral health provider in the U.K. This acquisition further expands our investment in behavioral health, an area of health care that we believe has a tremendous underserved need throughout the world. And also offers MPT a major platform for future growth. We were able to improve our concentration metrics with the Priory acquisition. Now with a total of 50 operators, our largest tenant represents 22% of our portfolio. And most importantly, no single property represents more than 2.8% of our overall portfolio. Remember, every single hospital serves a distinct local market. Health care is truly a local business. Regardless of parent ownership, the most important diversity measure is at the single property level. Our hospitals performed very well in 2020 despite hospitals across the world, being essentially shut down for 2 to 3 months. Let me take a moment to walk you through some amazing statistics. As we did last quarter, we want to be very transparent about our coverage ratios. So while first will provide you with EBITDARM coverages for the trailing 12 months, Q3 2020 with all brands, but still not including any Medicare advances that have been received by our operators to date. I will then give you those same ratios without any grants. Remember that we added 4 properties, 3 international IRHs and 1 acute care to our same-store reporting and we removed 4 acute care properties. Inclusive of the $706 million in grants through the CARES Act fund received to date, our same-store portfolio EBITDARM coverage for all sectors for the trailing 12 months ending Q3 2020 was 3.13x. This represents an 18.4% increase year-over-year. Same-store acute care EBITDARM coverage was 3.51x, which represents a 20% increase year-over-year. LTACH EBITDARM coverage was 2.39x, which represents an almost 50% increase year-over-year. IRH EBITDARM coverage was 2.21x, which represented a 6.6% increase year-over-year. Now those same ratios, excluding any grants and remembering all hospitals were essentially shut down for 2 to 3 months. Our same-store portfolio EBITDARM coverage for all sectors for the trailing 12 months ending Q3 2020 declined to 2.02x. And again, these coverages did not include any CARES Act and did include the 2 to 3 months of these hospital operators were essentially shut down. Same-store acute care EBITDARM coverage was approximately 2x, which represented a 32% decrease. LTACH EBITDARM coverage approximately 2.07x, which represented an almost 30% increase year-over-year, and the IRH coverage was 2.1, which represented a 1.4% increase year-over-year. So you see that even without any CARES Act grants whatsoever, our operators were still very well covered. And furthermore, without any grants, comparing the third quarter 2020 to the third quarter 2019, all of the operations are very close to or better than they were in 2019. Excluding any grants or advances, the total same-store portfolio EBITDARM coverage was off just 6% from 2019 levels for the third quarter. As I previously mentioned and Steve will report on in more detail, we have already had a great start to 2021. We continue to work on strong opportunities, both in the U.S. and abroad. We expect 2021 to be another successful year for MPT. MPT has the strongest portfolio of hospitals in the world. Our operators are at the very top of the class in their regions. We remain committed to quality, accretive investments and look forward to seeing MPT continue its role as the leading provider of capital to hospitals worldwide. Steve?

Thank you, Ed. This morning, we reported normalized FFO of $0.41 per diluted share for the fourth quarter of 2020. This represents growth of 17% over last year's fourth quarter results. And on a full year basis is an astounding 21% year-over-year growth rate during a period in which the entire world was battling a devastating pandemic. As Ed has just described, we expect continued double-digit per share FFO growth as we go into 2021. All else equal, even if we stopped our acquisition activities today and based on the assumptions underlying our updated run rate guidance, FFO per share would be expected to increase by another 10-plus percent. And we certainly do not expect to stop our acquisition activities. I'll make a few points about the financial results we reported with this morning's press release. First, we recorded $27.6 million or $0.05 per share in a debt refinancing charge during the fourth quarter. This is related to our redemption of $800 million of unsecured notes that were due in 2024. We redeemed these notes, which had a weighted average coupon of 6% with proceeds from our recent issuance of new notes that have a 3.5% coupon, generating long-term interest savings and a strongly positive net present value. Second, our practice is to deduct from AFFO, the unbilled or straight-line rent portion of revenue to reflect an amount closer to a cash basis. You will note that the $71.7 million deduction in our reconciliation to net income exceeds the $55.1 million of straight-line rent in the statement of income. That's because to be more reflective of cash like revenue, we also deduct from AFFO, the straight-line rent that is recognized by our unconsolidated joint venture operations and other noncash revenue. Finally, total G&A continues to represent about 9% of total revenue, and that total revenue adjusted similarly includes unconsolidated joint venture revenue. It is also helpful to point out that 35% of G&A is for estimated share-based compensation. A significant portion of which is not actually paid unless we continue to deliver strongly accretive acquisitions, dividend growth and market-leading returns to our shareholders. Other items immaterial on both an individual and collective basis included a small fair value adjustment loss on our equity investment in AEVIS, the parent of our tenant Swiss Medical Network; a favorable tax adjustment related to our investment in Infracore and other onetime items. During the fourth quarter, we closed on roughly $670 million of accretive transactions in 5 -- with 5 different operators. First, in late November, we acquired for GBP 50 million, the 999-year ground lease on the Royal Marsden Private Care, a general acute facility operated by England's National Health Service and prominently located in London's Cavendish Square at the very entrance to the world-renowned Harley Street complex of Premier London Hospital providers. It has been a long-term goal of ours to find an opportunity to demonstrate to the NHS, the ease of working with the hospital experts at MPT, and we could not have found a better facility. Already, this has led to other real opportunities that we fully expect to manifest in additional investments with the NHS. We also acquired in mid-December, the Reading Hospital for GBP 85 million. We actually bid to acquire this hospital several years ago when an institutional investor paid more than we were willing at the time. But when it came time to consider the impact of market changes and a stand-alone hospital operation in the very bespoke hospital real estate market, the institutional investor preferred to sell to someone with a long-term expertise in that market, and we ultimately acquired the hospital. Reading will be joined to our long-term master lease agreement with Circle, providing a substantial accretion of value to both the Reading investment and the overall Circle relationship. The United Kingdom and Central London, in particular, remain one of the most attractive real estate markets in the world. But even with keen competition, especially for the Premier Cavendish Square location on an ultra-long-term lease, these investments will yield to us a blended lease rate and spread to our funding costs consistent with our recent European and U.K. investments. We also added to our U.S. inpatient rehabilitation portfolio in the quarter with the mid-December acquisition of 2 properties in El Paso, Texas and Louisville, Kentucky, leased to Curahealth for roughly $58 million. Curahealth is an operator of 17 post-acute hospitals across 10 states and is sponsored by the respected and experienced health care investor Nautic. In addition, we purchased an Ernest facility for $17 million in Elgin, South Carolina and committed to the development of an Ernest facility in Stockton, California, at a total projected cost of $48 million. We also acquired from Ernest 4 hospitals that we had mortgaged as part of our initial 2012 transaction with Ernest. These hospitals, along with the Elgin and Stockton facilities have been joined to an existing master lease agreement with Ernest that now has a remaining initial term of 17 years until 2037. The Curahealth and Ernest leases have a weighted average GAAP lease rate approximating 10%. Finally, at the end of the fourth quarter, we increased our investment in Infracore by approximately CHF 207 million. As Ed mentioned, we kicked off 2021 with the acquisition for GBP 800 million of about 40 primarily behavioral hospitals that will be leased to U.K.'s largest operator, the Priory Group. The leases will be structured to provide master lease characteristics for a term of up to 45 years and a GAAP basis capitalization rate of about 8.6%. Simultaneously, Priory was acquired by Waterland Private Equity, the premier Dutch private equity investor who also owns Median Kliniken, the largest private operator of German post-acute and behavioral hospitals and our long-established and successful tenant. MPT has a 5.1% passive interest in Median, and we'll have a 9.9% passive interest in the Priory tenant. Even in the depth of the COVID environment, Priory attracted significant interest by competing bidders, but MPT had unique competitive advantages that led to our successful bid with Waterland. The Priory transaction has a structure similar to a very successful Median investment. As a reminder, with Median, we originated and then assembled a EUR 1.2 billion portfolio of hospitals at very attractive cash returns. We seasoned that portfolio and validated our underwriting and then recapitalized it with low-cost joint venture equity priced at a substantially compressed cap rate. And while there is no assurance that these results will be replicated with Priory, we think the value of our investment in the Priory real estate will be even further improved as Waterland executes its planned strategy to combine Priory and Median, creating the largest behavioral platform in Europe. Ed mentioned already that we did not slow down in 2020, and our recent transaction certainly demonstrate that. As we enter 2021, we continue to work on a vibrant pipeline, including expanding our investments and relationships in the U.S. As we negotiate these possible transactions, we see general underwriting and economic terms as unchanged from recent years' acquisitions. This includes a bias toward general acute facilities, consistent coverage projections and a mostly flat capitalization rate. I'll simply summarize what we previously reported about our capital activities in the quarter. I mentioned a minute ago that we recently issued $1.3 billion in 10-year unsecured notes at 3.5%, in part to redeem $800 million in unsecured notes maturing in 2024 that had a blended coupon of 6%. Also on the debt side, we recast our $1.5 billion credit facility earlier this month, extending the duration of the revolver and term loan components to 2024 and 2026, respectively. On top of that, we arranged for an interim credit facility under similar initial terms for up to $900 million, about $680 million denominated as GBP 500 million of which was temporarily drawn to fund the Priory deal. On the equity side, we raised a combined $828 million from fourth quarter ATM activity and our early January follow-on offering. As mentioned earlier, we have increased our run rate normalized FFO guidance range to $1.72 to $1.76. This is based upon fourth quarter annualized normalized FFO of $1.63 and adjusted for the annualized EBITDA effects of mid-quarter and post quarter transactions, completion of and billing for development and expansion projects and the effect on interest expense and share count of assumptions about the capital transactions that would be necessary to generally achieve our target net debt-to-EBITDA ratio. It is important for us to reiterate that this is not meant to be a forecast of earnings or FFO results for any particular quarter or year. In fact, this calculation will change with each material additional acquisition or disposition of assets, capital raising transactions, dividend modification, debt repayments and other planned changes to our in-place EBITDA. Accordingly, we will maintain our practice of updating this estimate periodically. What this calculation does show is that based on the economics of our completed and committed investments, and on current expectations about future capital transactions, we continue to achieve strongly and immediately positive per share increases in FFO and AFFO. Our liquidity remains excellent with roughly $1.5 billion of cash and immediate borrowing capacity as of today. With that, we'll turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from Joshua Dennerlein with Bank of America.

Ed, I just wanted to follow-up on a comment from your opening remarks. You mentioned that the Priory Group is going to be a platform for MPW within behavioral health. Curious, is that growth going to be focused on the U.K.? Or is it kind of a partnership across Europe?

Yes. And I didn't mean to imply that it was a platform within the Priory reorganization, more of a platform for us to invest in more behavioral health. It's something that we wanted to do for a long time. We felt like it was very much needed. And certainly, as you know, under the Obama Care, it was something that was mandated to have coverage. But it's just not -- hasn't grown in the U.S. like it has outside of the U.S. So we're excited to have the Priory behavioral health. We think there are other opportunities outside of Priory, but we -- by having that big investment in Priory gives us the ability to approach other operators.

Interesting. So it sounds like in Europe, it's a much bigger sector to invest in. Is that...

Yes, that is correct. That is correct.

Okay. Awesome. And then on the coverage ratios, can you remind me if the coverage ratio as you quote are trailing 12 months? And if so, how should we kind of think about the evolution going forward as kind of some of the pre-COVID operations rollout? And I guess I'm more focused on the coverage ratios, excluding the CARES Act grants.

Sure. Absolutely. They are trailing 12. So what we reported includes, obviously, the first quarter, the second quarter, in which all hospitals were basically shut down and in the third quarter in which they begin to come back into operations. Does not include any of the fourth quarter because of the reporting that we get from our hospital operators. We do have the unofficial October/November numbers from some of our operators. And it looks like the continuation of building back to where they were on a trailing 12 coverage to pre-COVID numbers look very, very positive. I certainly don't want to give the number where I think we'll be in the fourth quarter yet, but I think that it will be substantially higher without any CARES Act on where we are right now. Let me just give you a couple of statistics. As an example, just quarter-over-quarter, our same-store admissions for our acute care hospitals alone was up almost 20%, up 18%. In addition to that, many of the operators, as I mentioned on the last earnings call, were able to make lot of expense adjustments. We've seen that with some of the HCA reporting. That's the same thing with our operators as well. So I think that as HCA reported, I think that they all will come out of this in a much stronger position. And we're very excited about where they are operationally, and we'll continue to see those numbers grow. I don't know when we get back to a trailing 12 above where we were pre COVID, but these are very, very strong numbers. When you think about a 2x coverage with an entire quarter being shut down, that's extremely strong.

Our next question comes from Connor Siversky with Berenberg.

First one just to add to Josh's question on the investment activity in the U.K. I'm curious about behavioral health, some of the initiatives that have been laid out by the NHS there. I'm wondering if you can provide any color as to what kind of momentum that space is seeing in the U.K. in terms of funding from the NHS?

Absolutely. This actually started well before COVID. They made a very big push to outsource the behavioral health. The NHS' facilities were very old, very dilapidated. They didn't build any additional facilities. They instead closed the facilities and decided they were going to use the third-party private sector. So they have pushed it in a very big way. They've added additional funding. And all of this was pre COVID. So during COVID, they actually used some of the behavioral health hospitals in those early months and the same things that we had saw happen over here in the U.S. where they used some of those for true acute care facility. They didn't need as many as they thought they needed. So they very quickly opened them back up to behavioral. The behavioral came back in a very, very big way without any additional COVID funding from the NHS. So if you look at just the hospitals that we acquired from Priory, and remember that Priory has some 300-plus facilities, but a vast majority of those are educational or autistic, very small facilities that don't meet our criteria. So what we bought were the behavioral health hospitals. And when you look at those alone, they actually ended up 2020 about 2% better than they were in 2019 without any additional funding. But the NHS and all of England, as we've all learned even here in the U.S. that mental health, behavioral health is a real issue during the pandemic, and they are absolutely committed to increase the funding that they committed to prior to COVID. So it's in a very strong position right now.

That's great color. Change in gears a little bit, thinking about the race to distribute the vaccine versus some of the emerging virus of variants that we're seeing news flow on. Is there any commentary available from your operators, whether in the U.S. or elsewhere, in regard to the take-up of the vaccinations by the health care workers and how quickly it's -- they're being distributed through the facilities?

Yes, it obviously varies from region and how -- but it would follow the same that you would see people's additives about vaccines in general. But very generally speaking, very generally speaking, probably 70% of the hospital employees have agreed to take the vaccine. We don't have any operators at this point that have made the decision to require all of their operators. As all of us know, and some of us have had the opportunity to talk to some of the experts, particularly, in my case, with the people at Pfizer. They think that we need -- only need 40% of the population to take the vaccine along with roughly 30% of us that have already had COVID to get us to a herd immunity type situation. So the 70% of the health care workers that are taking the vaccine is a very, very strong number and stronger than what we're seeing throughout the population right now.

Okay. And then one more quick one for me. Just looking at pro forma leverage ticked up a little bit. So I'm just wondering when you consider the investment pipeline through the end of the year, maybe beyond if you're going to consider a different financing mix for future acquisitions?

No, it wouldn't be accurate to say different because over the last especially couple of years, we've really tapped any number of sources from a traditional common equity issuances to long-term unsecured notes, with the joint venture financing, equity financing along with secured financing in those joint ventures. We've used the ATM over the course of those 2 years, not even including the Primonial joint venture a couple of years ago. We've sold several hundred million dollars of assets and that's provided accretive financing. We've got a handful of more assets that are ripe for sale that would allow accretive refinancing. And then at today's dividend rate, we know we're generating upwards of $200 million a year in retaining to AFFO. So we will continue to tap all of those. As the need arises and as the circumstances mandate, which of those various alternatives are better at any particular time.

Our next question comes from Steven Valiquette with Barclays.

So Ed, when you were commenting in your prepared remarks around the pipeline, you talked about expanding investments in relationships in the U.S. So just curious -- I'm not to be able to get more color on the pipeline overall, but sort of balancing U.S. versus international opportunities. And also you've talked a lot historically about being able to better penetrate the not-for-profit hospitals in the U.S., I don't know if that portion of the U.S. pipeline has also accelerated. But I just wanted to get more color on the overall pipeline.

Sure, Steven. It really hasn't changed from my comments on the last earnings call that we had. Obviously, as we all know, the acquisitions don't all happen on the same day, and we just did a big U.K. acquisition. So it's a little bit skewed right now. But we continue to see about 60% of the portfolio in the U.S. and 40% outside. That obviously is it's not a fixed number as we go because of the way acquisitions work out. But we have a number of good, large acquisition opportunities that we are actively working in the U.S., which we hope to be able to announce over the next couple of quarters. We still continue to have opportunities outside of the U.S. again, most of what we're doing, it continues to be on a dollar basis, continues to be general acute care hospitals. But we also, as I mentioned earlier, have some good opportunities -- good-sized opportunities outside of the U.S. for behavioral. We still have behavioral opportunities in the U.S., but they're not big opportunities. So the vast majority of what we're looking at in both international and national is general acute care hospitals.

Our next question comes from Todd Stender with Wells Fargo.

For the Priory deal, how many hospitals ended up coming with the portfolio?

So Todd, it is approximately -- somewhere between 35 and 40 hospitals. And you remember that, as I've said earlier, Priory has a total of 300-plus facilities, but many of those are very small facilities that don't fit our model. So if you look at their overall EBITDARM numbers, the vast majority of that comes from these 35, 40 facilities that we acquired.

All right. So you've guys -- you've extended the loan. Is it cash flowing? Or that really just turns into real estate ownership upon consummation of the merger or acquisition of those operators?

No, it's current paying. And we'll just convert invisibly to observers from what will be categorized initially as interest to lease payments as we actually close each individual hospital.

I see. And what's the rate of the loan right now relative to that GAAP yield of 8.6%?

There's no difference.

No difference. Okay. How about the timing of the bridge loan? Is that consummated in the first half here? Is that what happens or that's...

The GBP 250 million loan that we made to the acquirer was funded. At the same time, we closed on the real estate transaction, and we expect that to be repaid during 2021.

Got it. Okay. And then how about the 9.9% interest, has that amount been determined yet or not yet?

That hasn't been disclosed.

Okay. Got it. And then just for behavioral health, you underwrote this at a 2x EBITDARM. Is that a fair number for us to kind of think about for the long term? Or should that trend a little bit higher into the 2.5x range?

Yes, it will absolutely trend higher. That's a very strong going in coverage there in the U.K., and that will trend higher. That does not -- that is on existing numbers. It does not take into consideration the improvements that the new operator will make.

Got it. Okay. One last one for me. Steve, you mentioned the Ernest transaction. Was the South Carolina asset, was that a loan converted to real estate ownership in Q4?

No. That was actually the purchase of a recently completed development.

Understood.

Our next question comes from Omotayo Okusanya with Mizuho.

Congrats on another strong quarter. Thanks for all the details in regards to rent coverage and the trend. Just kind of curious, is there a way you can share additional detail a little bit more on the tenant level around rent coverages rather than the total portfolio? Even if you don't want to talk specifically about one tenant, just to get are they all kind of trending the same way? Is there someone that kind of behind all the others because of something unique, especially for some of your larger tenants? Just trying to understand what would be happening at that level.

Absolutely, Tayo. And you'll notice in my very last part of my prepared remarks, I talked about the portfolio being the strongest group of hospitals in the world, and it truly is. These operators all across the board in our portfolio are trending in the same direction. They all have very strong coverages. We don't have any in the large group of operators that are having any issues whatsoever. You're seeing the same trends across the board. It is a very strong position where they are all right now.

Okay. That's helpful. And then second question, just -- and I think Steve, I think touched on it a little bit. Just when you think about U.S. versus U.K. opportunities, I know you kind of said this kind of 40-60 balance is kind of where you hope to end up but kind of when you kind of think about near term, what could happen? Is it really more of a U.S. opportunity that kind of lined up? Or is it more of a European or international opportunity?

No. Near term, it's more U.S.

Our next question comes from Jordan Sadler with KeyBanc Capital Markets.

Right. So a little bit deeper on Priory so as a partner in Median, I'm sort of curious about the financing. And Steve, I think you touched on it a little bit, what was done with Median. Eventually, you brought in, I think Primonial. And I was curious to see -- to know if they were invited to participate in the Priory deal, given that they're a partner in Median.

No, we did, on our own, the Priory transaction.

Okay. Well, that I know. Would it be likely that you would look to execute a similar type of structure around the permanent capital base of Priory?