Medical Properties Trust Inc
NYSE:MPW
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Medical Properties Trust Inc
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Good day, and thank you for standing by. Welcome to the Q1 2021 Medical Properties Trust 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 Mr. Charles Lambert. Thank you. Please go ahead.
Thank you. Good morning. Welcome to the Medical Properties Trust conference call to discuss our first quarter 2021 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 medicalpropertiestrust.com in the Investor Relations section. Additionally, we’re hosting a live webcast of today’s call, which you can access in that same section.
During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed and/or underlying such forward-looking statements.
We refer you to the company’s reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company’s actual results or future events to differ materially from those expressed in this call. The information being provided today is as of this date only, and except as required by the federal securities laws, the company does not undertake a duty to update any such information.
In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of, comparable GAAP financial measures. Please note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations.
I will now turn the call over to our Chief Executive Officer, Ed Aldag.
Thank you, Charles, and thank all of you for listening in today for the Medical Properties Trust First Quarter Earnings Call. 2021 is shaping up to be another fantastic year for MPT. More on that in just a few minutes.
But before I move on, I’d like to once again express our appreciation for all of our hospital operators and the nurses and doctors and other health care workers across the globe that have fought this deadly disease. They faced the dangerous head on like a fireman running into a burning building, while simultaneously saving hundreds of thousands of and maybe millions of lives. We remain in all of their bravery and commitment to their patients.
The pandemic has troubled the world a lot. And in particular, for our industry, there is no second guessing the need for hospitals, especially acute care hospitals. The world could not have survived without the hospital industry this past year, at least in our lifetimes, people will continue to have to come to hospitals for their acute needs. The advancements in outpatient services and particularly in telemedicine have helped to funnel patients to hospitals. Today, because of the technological advances in services, such as telemedicine, hospitals are seeing a whole new group of patients they wouldn’t have seen before.
In April and May of last year, we knew that as soon as hospitals opened back up, the patients would come back and come back quickly. This wasn’t a choice of going out to dinner or to a movie. This was life and death. As has been reported throughout the industry, hospitals are performing well with EBITDA back at 2019 levels or above. Our portfolio is no different. Like every industry, hospitals were shutdown for basically a quarter last year. That period makes looking at trailing 12 months coverage truly irrelevant.
What matters is how hospitals are performing now. Therefore, I’m going to compare fourth quarter 2020 to fourth quarter 2019. But please note the downward skewed seasonal effect of only including the fourth quarter, is not totally comparable to an annualized coverage over a trailing 12 months. Now excluding all grants and advances, the acute care hospital segment of our portfolio was 2.3x coverage in the fourth quarter 2020 compared to 2.72x for the fourth quarter 2019.
For IRHs, it was 2.01x compared to 2.23x. And for LTACHs, it was an amazing 2.47x compared to 1.92x in 2019. These are all truly remarkable numbers, an amazing recovery from the deaths of COVID. Now even those coverages don’t tell the complete story because they include the rental increases on all of our leases. So just comparing EBITDAR, again, excluding all grants for those same periods, our operators were only down 6% in the fourth quarter of 2020 compared to the fourth quarter of 2019.
Looking forward, we have some partial results for a small number of our operators for January and February. And like the public company hospitals that have already reported, our operator saw a softer January and February from a utilization standpoint. This has been primarily due to the harsh winter storms in that time period and the very light flu season the world has seen. We are hearing and getting reports that the numbers are back up in March.
On the acquisition front, as we mentioned on last quarter’s call, 2021 started off with a great momentum with our announced GBP 800 million Priory acquisition, which significantly expands our presence in the behavioral health space with the leading behavioral health provider in the U.K.
Also during the first quarter of 2021, we continue to expand our relationship with our hospital operator in Switzerland, the Swiss Medical Network, with an additional investment of approximately $158 million. You may recall, Swiss Medical Network is the second largest private operator in Switzerland. We started our relationship with the Swiss Medical in early 2019. Since that time, we have executed multiple accretive transactions, bringing our total investment in these Swiss organizations to $1.3 billion.
We have also increased our investment in Steward by an additional $335 million investment, which provides strong returns and additional opportunities with Steward.
Since the beginning of 2020, we have successfully executed approximately $5 billion in transactions. Our active pipeline not only continues to be strong, but continues to grow. We expect to be able to make some additional exciting announcements late in the first half of this year and early part of the second half.
During 2020, we added approximately 35 people to our corporate team. We have expanded our offices in Australia and Luxembourg. We are in the process of moving our offices in New York to a new location where we can add more staff there. We also expect a staff and office in London with people who are currently in Luxembourg. We have worked very well, mostly remote for a little over a year now.
Our Birmingham offices have been revamped, and we are ready to bring everyone back as soon as it’s safe and prudent to do so. We are well positioned to handle not only the remarkable growth we’ve had over recent years, including 2020, but also the growth we expect in 2021 and beyond.
I will now ask Steve to go through some specific financial reviews before we open it up to questions. Steve?
Thank you, Ed. This morning, we reported normalized FFO of $0.42 per diluted share for the first quarter of 2021, a 13.5% increase versus last year’s first quarter result. And this comes on top of the 21% annual FFO growth for calendar 2020. And even before we begin to fully recognize the contractual 8.6% GAAP lease yield on the recently closed Priory transactions and before any additional 2021 acquisitions.
And by the way, it is notable that AFFO grew at a similar rate. This provides for continued capacity to increase our dividend, as we did last quarter. As a reminder, our run rate guidance of $1.72 to $1.76 is an estimate of the expected annual FFO for our in-place assets, plus other assets that are under development or binding agreement to acquire. Taking simply 4x this morning’s $0.42 per share, would yield an annualized $1.69 per share, obviously within a few pennies of the run rate guidance.
There are a handful of items that are included in our run rate that were not yet reflected in the first quarter’s actual results and vice versa. These include: First, the GBP 800 million real estate loan that we funded to close our purchase of the Priory Group is to be replaced with sale-leaseback arrangements on 35 high-value behavioral hospital facilities. When this is completed, which we continue to expect during the second quarter, we will begin recognizing lease revenue at that higher rate than the current interest rate on the existing real estate loan.
Second, we are in the process of developing 2 inpatient rehabilitation hospitals that are pre-leased to Ernest Health pursuant to a master lease. As of certain points in construction, expected by this time next year, we will begin recognizing lease revenue from these projects and also from other projects that are under development.
Third, in conjunction with our Priory investment and in addition to the GBP 800 million real estate loan, we made a $250 million loan that we expect to be repaid this year. We recognized interest on the loan in the first quarter, but such interest is not included in our run rate FFO.
When the impact of these adjustments is combined, along with the expected further impact of deleveraging transactions, we are highly confident to reaffirm our most recent run rate guidance of between $1.72 and $1.76 per diluted share.
There are a couple of additional items that deserve mentioned, even though their impact is not included in FFO. Our press release and Ed’s comments this morning mentioned the very attractive opportunities we have created for increased investment in the operations of several of our tenants.
As part of those and similar investments, we received during the first quarter a distribution of $11 million from Steward, approximately $0.02 a share. For accounting purposes, though, this is treated as a return of capital, but to be clear, it was a cash receipt and a result of Steward’s ongoing and increasing success. Second, as usual, we do not include an FFO, the fluctuations in the fair market value of our investment in the publicly traded securities of Aevis, the Swiss parent of our tenant, Swiss Medical Network. But for the quarter, we recognized a gain in this investment of $4.1 million.
I’ll move on to an update on our current and near-term financial position and capital availability. After completing our $711 million equity issuance in January, we issued GBP 850 million of senior notes in the pound sterling market to permanently fund our Priory investment at fixed rates. The 2.9% weighted average interest rate on these sterling notes with maturities in 2026 and 2030 is highly attractive and assures a highly favorable spread compared to the 8.6% yield in the sale-leaseback of the 35 Priory behavioral facilities as well as the very important natural currency hedging benefits.
As part of the January equity offering, our ATM was necessarily inactive until early March. But during the following 6 weeks, we issued about 8 million shares for $173 million in net proceeds at an average price of $21.72. There are at least 2 important things to note about that. First, based on the program being active for only half a quarter, it indicates capacity in the market for a quarterly run rate of at least $350 million, which would provide to us a very meaningful source of lower cost to common equity. And second, the all-in per share proceeds to us under the ATM were approximately 11% higher than what we received through the January offering.
We have ample liquidity available to meet any expected near-term funding needs, including $1.7 billion in cash and revolving line of credit capacity and more than $400 million remains available on our ATM. In addition, with a very well-covered dividend to AFFO payout ratio, and that ratio is even stronger, considering that we did not include in AFO, the $11 million in Steward distributions, we expect free cash flow from operations in excess of our dividend will approach $200 million, plus we also expect approximately $550 million in dispositions and loan repayments in 2021, including the GBP 250 million Priory short-term loan that we have discussed.
Global demand for investment opportunities in hospital real estate continues to grow, particularly from sovereign funds, public and private pension funds, infrastructure investors and other sources of private institutional capital. Because of the speed at which we are able to underwrite complex hospital real estate transactions, the amount of funding that we can deploy on short notice and our reputation for mutually beneficial relationships with tenants, we have a very strong competitive advantage to attracting this type of highly efficient capital. We continue to evaluate several options. But given the resources available to us that I’ve just described, we have the luxury of being very selective insofar as both the portfolio of assets we may contribute and our potential partners.
To summarize our liquidity and capital positions, we are very comfortable with our ability to address a significant amount of near-term new investments. Before turning to questions, I’ll briefly review our first quarter investment activity that aggregated about $1.6 billion. Of course, we had previously discussed at length our $1.1 billion investment in Priory real estate. And if questions remain about that transaction, I’ll be happy to address them shortly. And as Ed mentioned, we also made a few non-real estate investments, immaterial in the aggregate and certain operators, including Swiss Medical Network, Priory Group and Steward.
These investments reflect attractively priced opportunities to supplement our real estate returns further align us strategically with our tenants, provide incremental insight and influence over real estate decisions, and in some cases, participate in potential increases in the tenants value. And again, to reiterate, Ed’s comments, the nature, quality, geography and diversity of the projects we are currently underwriting have us very enthusiastic about further accretive growth in 2021.
Of course, there is no assurance that we will ultimately succeed in acquiring all of the facilities that we are now underwriting, and that is especially true given the growing competition for hospital real estate that I mentioned earlier.
With that, we’ll turn the call back over to the operator for questions.
[Operator Instructions] Your first question is from Sarah Tan [ph] with JP Morgan.
Just one question on the $335 million loan that was extended to Steward. Could you talk a bit about for the long-term plan for that and any strategic reasons going down the road there?
The loan, the investment that we’ve made on both Steward and in the Swiss Medical Network, it’s part of our original business plan. So for those of you who’ve been with us since the beginning of time, you’ll know that we have done this a lot. We’ve had the opportunity to take advantage of our health care knowledge. And some of you will know that my background is actually in hospitals. And when we put the company together, most of the people that we hired have backgrounds in hospitals.
So from time to time, we have the opportunity to make these types of investments, and we have and we’ll continue to do so. Where we’ve made these investments in the past, they have been highly successful. Probably our very first and biggest investment with Ernest Health Care, in which case we earned a tremendous return on that. So the next largest one would have been Capella Health, again, which propelled us into our relationship with LifePoint and Apollo, again, a fantastic return.
But in addition to that, we have equity investments in tenants such as MEDIAN, our German operator. And by doing these types of investments, it continues to provide us with additional avenues to make the real estate investment and align our interest at the same place as our tenant. This is a long-term investment that we’ve made with Steward. We think it’s a wonderful opportunity and are excited to have this potential opportunity.
It’s also an opportunity we weren’t necessarily expecting for the Swiss Medical Group, but glad it came along, and I think it just further strengthens our position with that particular operator. So nothing new here from the standpoint of our business plan, part of the original business model, and things that you’ll continue to see as we continue to grow.
Sure. Just one follow-up on the question. Like with regard to the loan itself, could you talk a bit more about -- give more -- could you give us a bit more color on sort of the rate at which you’re extending that?
The rate is a nominally profitable rate for us. The goal of the investment is not necessarily to earn a high profit interest rate. As Ed has just described what it does is better align us with the Steward strategies, with growth opportunities. And in this particular case, it gives us additional opportunities to participate in any value increase in Steward.
Your next question is from Steven Valiquette with Barclays.
So one common theme that we’ve seen across some of the publicly-traded hospital operators recently is that a higher acuity patient mix is more than offsetting the admission declines relative to the pre-COVID baseline. We’re actually seeing EBITDA upside from a lot of the operators on the public side. So if you are able just to speak high level, whether you’re seeing any similar trends or feedback from some of the private operators in the U.S.?
And also is that a trend that might be somewhat prevalent among international operators? And as a quick follow-on, sort of a similar question, do you have any sense whether on that treatment of COVID patients is more profitable on average versus non-COVID? There’s been some debate around that, like you want to opine on that? Or if you want to just hold up or if you’re going to stir that question out there as well?
Thanks, Steve. Absolutely, I’ll address those. So, we are indeed seeing with our operators, the higher acuity levels and thus the higher profitability. I’ve discussed in some of the past earnings calls. So one of the things that has not come back for anybody is things like the ER admissions or visits to the ER. They’re still hovering around 69%, 70% of what they were in 2019. But that’s actually a good thing. As we all know way too many people come to the ER, and you don’t get as many admissions from those types of patients as you do today.
Today, with higher acuity levels that are coming there, you see a lot higher percentage of admissions from the ER. Same thing with the surgeries and other procedures. What’s being done are primarily the higher acuity levels, as I mentioned on the last 2 earnings calls, our operators were able -- forced to during the height of COVID in the early days to really tighten their belts on the expense side. They continue to be able to do that. So you’re seeing an overall profit margin higher than what it was previously with somewhat lower utilization levels.
Now most of the utilization levels and our operators today are essentially back where they were in 2019 with the exception of the ER visits. But the answer that you’ve seen in the last 2 or 3 publicly reporting companies is exactly what we’re seeing in our companies as well. It’s slightly different and internationally, they probably are seeing a higher utilization volume than what we’re seeing in the U.S., but you’re still seeing because of the tightening of the belt and some of the ways that the foreign governments handled their payment to hospitals, which is where they generally handled payment of the staff and the workforce, you’re still seeing higher profit margins there as well.
So all in all, all the way across the globe, our operators are in very strong positions.
Okay, great. That’s helpful.
Steve, let me answer your question about the COVID profitability. It’s not a highly profitable area. We -- I think everybody would just assume that the COVID patients go away, but they’re certainly not losing money at this point on the COVID patients.
Your next question is from Jordan Sadler with KeyBanc Capital Markets.
[Indiscernible] on the line for Jordan. I just want to ask about the expansion into New York with the new office lease. If you could provide some more color on your thought process there? Maybe what percentage of your employee base could be based in New York? And also any color on the pipeline and some of the deals you’re seeing in the market would be appreciated.
So we’ve had an office in New York for a long time. We have space that I think the date was somewhere around right after the financial crisis, I think, is when we entered into this particular lease. We’re committed to New York. We think it’s very important to have a presence there, particularly with some of our acquisition team. We have overall corporate staff of about 130 people in the New York office, so we currently have about 6 people, I believe. And with the new office space, we’ll probably be able to more than double that. But in the near future, we’ll probably get that number up to around 10 people.
So it’s not a large percentage of our overall staff, but we do think it’s important to have an office there, and we had the opportunity to upgrade the office space to expand the office space. It’s very similar location to where we are now and are excited to have it being put together in the near future. And if you repeat the question about the pipeline, I’d...
Yes. If you could just provide any color on the pipeline, and what you’re seeing in the market?
Sure. So almost all of the pipeline continues to be general acute care hospitals. It’s probably split 50-50 internationally and in the U.S. What we’re -- have most near-term is our U.S. acquisitions, and that is almost exclusively in general acute care hospitals. We are seeing some movement in the U.S. in the behavioral health. As we all know, that market is still very, very fragmented. We do see some additional opportunities in the inpatient rehabilitation segment, but even that it’s just a small number. It won’t move the needle from that standpoint. But that’s where most of the acquisitions are right now.
Your final question is from Michael Carroll with RBC Capital Markets.
Steve, can you explain how the Steward loan will help MPW profit on the potential upside of that operator? I mean, is this a straight loan? Or is there some type of equity component tied to it, too?
No, there’s no equity, but there are opportunities other than a direct equity to over time recognize opportunities to capture value increase that the details are not going to be disclosed.
Okay. And then, I guess, can you talk about the reasoning for this one? I think you said it was planned. I mean, was it just simply to take out the PE fund and does that allow Steward to operate any differently today? Or did those big control changes occurred when that convert was originally issued in, I guess, the middle of last year?
No, it’s a good question, Mike. It does remove some prohibitions that the former PE sponsor had that do allow Steward more freedom to grow and also create the kind of value increase that we’ve just been talking about. And specifically, Steward had a tremendous amount of liquidity and equity value available that found its way to us by virtue of that $11 million distribution we commented on, that would not have been possible under the prior structure.
And Mike, let me add with the prior equity sponsor out, it is truly a physician-owned company now with approximately 600 physicians involved. The thinking process is obviously much more long term and much more aligned to the thought process with MPT.
Okay. That makes sense. And I guess, on the dividend, I guess, now that -- I guess there are a lot of the issues with dividend is should we view that as more of a onetime type of occurrence? Or is that going to be more reoccurring down the road like on a quarterly or annually -- annual-type basis?
No. I don’t think you should expect any predictable periodic distributions. They’re -- things go very well as we hope, and there will be further distributions as conditions kind of mandate. But no, don’t build that into some model that we’ll be expecting X amount every X quarters or anything like that.
Okay. And then I guess, just finally, can you talk a little bit about the joint ventures? I mean, are those still in under discussion right now and potentially planned for the back half of this year? I guess, how should we think about that?
So we have no timing. Other than to answer the first part of your question, yes, we continue to discuss various, as I mentioned in my remarks, various different portfolios that could be dropped into a joint venture at the same time, having direct discussions with multiple potential partners. We do feel, again, as I mentioned, that we have the luxury of time. We have nothing pressing that would make us have to do something. And the market just continues to get better in our view.
So yes, we continue to have discussions. We have nothing new to announce specifically. But we do see this as a very attractive way to access very efficient capital for us.
Okay. It has COVID slowed those discussions down at all? Or is this really just driven by MPW? Just trying to think of the right time, I guess, for you guys to be able to do something like that?
No. COVID has really had no impact on it.
There are no further questions at this time. I’ll turn the call back over to Mr. Ed Aldag for closing remarks.
Thank you, Erica. And again, thank all of you for listening in today. We remain very bullish on MPT. Excited about the remaining part of 2021 and the future ahead. If you have any additional questions, please don’t hesitate to reach out to us, and we’ll be glad to get back with you. Thank you very much.
This concludes today’s conference call. Thank you for participating. You may now disconnect.