Medical Properties Trust Inc
NYSE:MPW
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Medical Properties Trust Inc
Earnings Call Analysis
Q3-2023 Analysis
Medical Properties Trust Inc
Medical Properties Trust remains steadfast in their core business strategy, emphasizing long-term investments in hospital real estate and executing a capital allocation strategy geared towards enhancing liquidity and addressing debt maturities. The company has executed nearly $3 billion in asset sales over the past 18 months, though these transactions were profitable, they resulted in a diluted adjusted funds from operations (AFFO) of roughly $0.21 per share. In response, the company has right-sized its dividend to ensure a AFFO payout ratio below 60%, aiming to preserve about $335 million yearly.
MPT's portfolio shows robust performance, particularly in the UK with Circle Health's operations, which are to be sold to PureHealth. The continued expansion of private insurance in the UK has enhanced the value of MPT's real estate interests in Circle facilities. Additionally, Priory and Median have cemented their positions as leading providers in healthcare services across Europe. Swiss Medical Network's strong performance and increased valuations reflect the company's positive trajectory within the European healthcare landscape.
Operators like CommonSpirit and Prime Healthcare demonstrate strong property-level performance, with Prime in particular showing impressive EBITDARM coverage despite the challenges of nursing shortages. Ernest Health adds stability to the portfolio with consistent EBITDARM coverage, while MPT's planned operational expense reductions for 2024, estimated at a double-digit annualized reduction compared to 2022, signify an efficient cost structure moving forward.
In light of the current high-rate credit environment, MPT is considering options to maximize shareholder value. While the option to sell assets with strong coverage and increasing rents exists, MPT might elect to secure financing on these properties instead of selling them in an elevated rate context. The strategy underscores MPT's focus on preserving value and addressing liquidity needs in a challenging market.
The move to potentially access secured financing rather than relying on asset sales stems from the company's commitment to bolstering its balance sheet in a restrictive unsecured credit market. Although this approach may deviate from the company's typical preference for unsecured debt, it represents a tactical response to current market dynamics, prioritizing balance sheet health over growth opportunities.
MPT's optimism about operators like New Haven Health and the intention to restart growth when capital becomes affordable again showcase the company's belief in the resilience of its assets and the healthcare real estate market. Continued interest from infra funds and other asset managers who aren't as sensitive to internal rate of return (IRR) requirements confirm that MPT's assets are still considered valuable despite market challenges.
MPT has committed to filing delayed financials for Steward Health upon receiving the necessary documentation. The company's robust dialogue and management changes with Steward, including the intent to provide temporary working capital support, reflect MPT's transparent communication and active stakeholder management.
The company is set on a strategic path that emphasizes cost efficiencies and recognizing the value of its assets, whether through sales or potential use as collateral for secured financing. Selling assets that the market undervalues or that don't align with MPT's core focus presents an opportunity to simplify the investment narrative, making it easier for investors to discern the true value of the company's holdings.
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Good morning, and welcome to the Medical Properties Trust Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Charles Lambert, Vice President. Please go ahead.
Good morning, and welcome to the Medical Properties Trust conference call to discuss our third quarter 2023 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 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 the federal securities laws, the company does not undertake a duty to update any such information.
In addition, during the course of this 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 [indiscernible] 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 thanks to all of you for joining us this morning on our third quarter 2023 earnings call. Steve and I are pleased to be joined for today's discussion by 2 of our esteemed colleagues, [ Rosa Hooper ] and [ Kevin Hanna]. Rosa has been with MPT for 14 years, beginning as Director in our asset management and underwriting group. In 2016, Rosa took over full responsibility for that group of some 30 people. Rosa started her career in public accounting and among other rows, served as Chief Financial Officer of Birmingham-based Hospital. As our current Senior Vice President of Operations, Rosa is the perfect person to provide a detailed look at the strength and diverse nature of our portfolio and the reasons underpinning MPT's confidence in future cash rents.
Kevin joined MPT in 2008. He started his career at Ernst & Young and has nearly 30 years of public accounting experience. Before MPT, Kevin served as Controller for Fruit of the Loom, a Berkshire Hathaway subsidiary. Kevin currently serves as our Senior Vice President, Controller and Chief Accounting Officer. And we thought his perspective would be valuable in addition to ours during the Q&A discussion today.
I want to begin by reiterating our conviction in the underlying strength of our core business. For more than 20 years, our business model has centered on profitable, long-term investments in hospital real estate. This business model has not changed. Our primary focus is on executing our current primary focus is on executing a capital allocation strategy that will provide the liquidity to satisfy our debt maturities even debt that doesn't mature for several years.
Ultimately, we expect this strategy to enhance available liquidity, address our debt maturities and solidify our portfolio for sustained long-term value creation. Upon successful execution, we'll be well positioned for a return to growth. In establishing this refreshed capital allocation approach, our Board carefully considered the cash profitability of our current portfolio, particularly the cash flow impact of the recent and pending transactions.
We note that MPT has executed nearly $3 billion worth of asset sales over the past 18 months. While these sales have generally been quite profitable, they've also had a dilutive effect on AFFO that I'd like to address.
The net cash impact of all acquisitions and divestitures since the end of 2021 has been an adjustment to AFFO of approximately a negative $0.21 per share. At our previous dividend level, that means asset dispositions alone would have increased our AFFO payout ratio to the mid-80% range after considering cash interest savings.
We're also considering the negative $0.16 per share impact of the prospect recapitalization transactions announced earlier this year. Our AFFO payout ratio would have approached 100%. By rightsizing the dividend level to a near-term AFFO payout ratio below 60%, we expect to preserve approximately $335 million of cash per year.
Notably, our new dividend has been set to a comfortable level to absorb the dilutive effects of additional near-term asset sales, which will obviously also be offset by some interest savings. Importantly, since announcing this update strategy, we've already made significant progress. Through a series of open market transactions, we repurchased approximately 50 million pounds of notes due in December of this year. And a few weeks ago, we closed on the sale of our 4 remaining Australian facilities for approximately $305 million, or a 5.7% cap rate.
We are actively contemplating additional sales as sophisticated real estate, health care and infrastructure investors continue to express appetite for our assets. On several occasions this year that is already manifested in unsolicited offers for various assets. We recently engaged a leading financial adviser to help evaluate these offers and explore the sale of various assets around the world. We will only execute transactions if we can realize attractive prices that confirm underwritten asset values. I'll now turn it to Rosa to update you on the performance of our portfolio during the past quarter.
Thank you, Ed. It's great to be able to participate in today's discussion. For those of you that I haven't met, I've spent essentially my entire career in health care and have been with MPT for over 14 years. Today, I have overall responsibility for our business operations, including asset management and underwriting. In this capacity, I maintain regular contact with our tenants, and I'm encouraged by what I've repeatedly heard from operators about the continued normalization of hospital utilization and cost trends in 2023.
As you will see in our supplemental information filed this morning, our tenant's operational performance which as a reminder, is reported 1 quarter in arrears, remained strong with trailing 12-month total portfolio EBITDARM coverage of 2.4x.
Let's go through some highlights across the portfolio, beginning with our U.K. operations and Circle Health. In late August, Centene signed a definitive agreement to sell surplus operations to [ Pure Help ] for $1.2 billion. The transaction is expected to close in the first quarter of 2024 and no changes are expected to Circle's operations or leadership from this sale.
As private insurance coverage continues to expand in the U.K. it's clear that investors are increasingly attracted to opportunities involving independent U.K. hospitals, which is, of course, great news for the value of our real estate. This is also reflected in the recent outstanding financial performance of MPT's portfolio of circle facilities with revenues up 11% and EBITDARM up 12% on a trailing 12-month basis year-over-year.
Shifting to Priory, which has cemented itself as the largest independent mental health care provider in the U.K. by a number of beds. MPT leases 37 behavioral health facilities to Priory. These properties have maintained EBITDARM coverage of approximately 2x since acquisition. Given behavioral health trends across the globe, post-pandemic occupancy rates and recent improvements that Priory has made to staff recruitment and retention practices, we believe they can continue to deliver strong financial performance.
Priory is managed by one of MPT's long-term operators Median, which is based in Germany. Median has been a model tenant for roughly 10 years and is the leading player in the German private inpatient rehab market. Today, our portfolio consists of 81 inpatient rehab facilities, and our rents on these properties have steadily increased and now offer cash yields approaching double digits with EBITDARM coverage reliably in the 1.5 to 2x range over the last decade.
Together, Priory and Median are among Europe's leading full-service rehab and mental health providers, and we continue to be pleased with and confident about their role in our portfolio moving forward.
Sticking with Europe for a moment, Swiss Medical Network continues to deliver strong performance with margins improving year-over-year. Swiss Medical continues to advance development of the [ Genie ] Innovation Hub, a new state-of-the-art multi-tenant lab, training simulation platform and office space attached to their flagship acute care hospital.
Notably, [ Vasina ] Health, one of the leading health and accident insurers in Switzerland recently purchased an ownership stake in Swiss Medical at a valuation well in excess of MPT's cost basis in the company.
Moving to our U.S. portfolio. In September, CommonSpirit launched a new services platform focused on expanding access to equitable care through health analytics, network management and care coordination. We've been extremely pleased with CommonSpirit's strong property level performance an excellent liquidity profile since taking over Steward's Utah properties in May.
Prime remains a coverage leader in the portfolio with trailing 12-month EBITDARM coverage of 4x. Importantly, Prime has been able to maintain this strong coverage in the face of unprecedented nursing shortages over the past 2 years because of their exceptional expense management discipline.
Ernest Health leases 29 properties from us, including both inpatient rehab and long-term acute care hospitals. In the aggregate, Ernest has maintained steady EBITDARM coverage of greater than 2x this year. During the third quarter, MPT commenced rent collection from Ernest latest state-of-the-art inpatient rehab facility in Lexington, South Carolina, which closely follows completion of their stock in California development in the prior quarter. Over time, we expect these new facilities to further strengthen Ernest's ability to drive revenue and cash flow.
Over the last few years, LifePoint Health has grown and evolved to become one of the more diversified health care delivery networks in the country. Today, LifePoint Health operates not only acute care hospitals, but also behavioral health and rehabilitation facilities. They recently had a successful debt offering that was oversubscribed, confirming lender and investor confidence in LifePoint Health promising growth trajectory. Specific to MPT's portfolio of LifePoint's acute care business, we are beginning to see contract labor expense reductions related to their execution of strategic initiatives around nurse retention and physician recruitment efforts.
Additionally, our LifePoint acute care portfolio is reporting favorable surgical trends. And notably, since our acquisition of the LifePoint behavioral portfolio in the fourth quarter of 2021, they have delivered sequential improvements in EBITDARM coverage driven by strong admission trends and an increased focus on cost efficiencies across several areas.
I will now turn our discussion to 2 operators that have recently received considerable attention from investors as well as the MPT team. Before doing so, it's important to note that my remarks so far have encompassed most of the top operators in the remaining 70% of our real estate portfolio.
Beginning with Prospect, recall that only their California hospitals will be a part of our portfolio going forward. As expected, Prospect has resumed paying MPT cash rents for these 6 California properties. These payments were received on time in both September and October.
Turning to Steward. Their hospital operations continue to perform well as evidenced by strong trailing 12-month EBITDARM coverage of 2.7x. In addition to cutting run rate expenses by nearly $600 million in the last 16 months, more than $150 million in the last quarter alone, in part due to a 90% reduction in contract labor utilization, Steward believes it's making progress on its revenue cycle management and accounts payable backlog. With new technology and dedicated resources focused on enhancing claims quality, reducing initial denials and resolving denials more quickly.
Steward is reporting improved efficiency of collections. Steward expects these improvements will result in an incremental $50 million of cash annually based on current volumes. In the third quarter, Steward was also able to successfully upsize their new ABL by $30 million. Further, it is resuming a noncore asset sale program that [ McKenzie ] recommended prior to the global pandemic, which is expected to provide significant liquidity to Steward's balance sheet.
So in summary, before I turn it to Steve, we strongly believe MPT has constructed a unique portfolio of assets that is highly diversified by facility type, geography and operator mix. The vast majority of this portfolio is performing exceptionally well and is poised to capitalize on increasing global demand for health care services.
Our leases are long term. And while certain operators may hit some bumps in the road over the lifespan of these leases, our portfolio is sufficiently diversified to ensure MPT's long-term success. Steve?
Thank you, Rosa. This morning, we reported a GAAP net income of $0.19 and normalized FFO of $0.38 per diluted share for the third quarter of 2023. There are a few components of these reported results that I will point out, and we will, of course, take questions in a few minutes.
First, as expected and as Rosa already mentioned, Prospect commenced cash rent payments of about $3.3 million monthly on its California properties in September and is required to begin paying full rent in March on this $513 million portfolio at a mid-8% cash rental yield.
Second, similar to our second quarter results, we recognized about $13 million or $0.02 per share in noncash prospect rent and interest. As a reminder, this is an accounting requirement resulting from the recapitalization transactions that we announced in May of this year, which included MPT's exchange of certain real estate and other assets for interest in prospects managed care business, PHP Holdings LLC. This noncash and nonrecurring $13 million recognized as a portion of the rent and interest that would have been collected in 2023's third quarter.
Moving forward, we do not expect to be required to book any additional rent and interest in connection with the May recapitalization. Just to be clear, our year-to-date statement of cash flows will not reflect either this or the $68 million recognized last quarter.
Third, the approximate $47 million in noncash fair value adjustments is primarily comprised of about a $20 million adjustment to our investment in Swiss Medical and about a $30 million adjustment to our interest in PHP holdings, offset by some minor items. To be clear, the PHP fair value adjustment is separate from the $13 million that I just described.
Finally, we have reached agreement in principle with the tenant group to exit our relationship that will result in our expected collection of approximately $17 million in previously deferred rent during the first half of 2024. There's also approximately $32 million of unbilled straight-line rent that was scheduled to be billed over the remaining term of the leases. Accounting rules require us to write off these amounts, even though we continue to expect collection of the deferred amount. These adjustments are included in normalized FFO. This tenant is not among our top 10 in terms of investment, actually only about 1% of gross assets, rental revenue or number of facilities.
Turning to operating expenses. On a normalized basis, adjusting for stock-based compensation and the net tax impact of recent transactions such as the sale of our Australia properties, the U.K. reorganization as a REIT and certain other initiatives, we have successfully reduced total annualized operating expenses by approximately $19 million since the first quarter.
We expect further sequential declines in the fourth quarter and going into 2024, our G&A and other operating costs and expenses are expected to be well below comparable full year 2022 levels.
As Ed discussed, our near-term strategy is focused on increasing our liquidity and demonstrating that we are well positioned to satisfy our debt maturities in coming years. I'd now like to pick up on that discussion by sharing some additional detail on how we envision this strategy playing out over the next several quarters.
We continue to evaluate the potential sale of certain assets including through joint venture structures, limited secured financing of assets and possible amendment and extension of certain bank loans. While we will not presently specify any particular assets that we are considering monetizing or the specific timing of possible transaction. I can say that we are targeting approximately $2 billion of liquidity transactions over the next 3 to 4 quarters.
In the current credit market, the prices offered by some property investors may be constrained, although there are buyers who do not use leverage. Nonetheless, in order to retain shareholder value with respect to properties that have strong coverage and ever-increasing cash rents, we may elect to access liquidity through prudently underwritten temporary and limited secured financing instead of permanently relinquishing value by selling assets into a higher rate environment.
And even in such an environment, when the estimated current values of some of our hospitals are compared to our initial investment values, we are encouraged by the market ability for sale of those assets. Just a couple of examples. Rosa mentioned a few minutes ago, the announcement during the quarter of the acquisition of Circle by Pure Health, which is expected to close during the first quarter of 2024. Many of you will remember that we completed the acquisition of about 30 Circle hospitals for GBP 1.5 billion in 2020. The Pure Health acquisition places a value on Circle operations of about 3x higher than when we underwrote the 2020 transaction.
Second, you will remember that last year, Prime repurchased, had a very attractive IRR to MPT, a portfolio of hospitals, including a facility near San Diego called Alvarado which MPT had owned for more than 12 years. Merely as a point of reference for value indications and even though this hospital was not strongly profitable, it's virtually irreplaceable infrastructure characteristics yielded a roughly $200 million purchase price when Prime recently agreed to sell the real estate and operations.
And as a reminder, unlike this 12-year-old agreement that allowed prime a fixed price purchase option and return for above-market rents during the lease. Virtually none of our remaining leases include such a fixed option price. In other words, we would benefit from 100% of the real estate fair value increase.
Proceeds from such monetization transactions might first be used to reduce our revolver balances on which we most recently have paid interest at about 6.9%. As we recently deployed the AUD 470 million of Australia sale proceeds to it. Beyond that, we believe successful execution of this strategy will afford us a number of attractive balance sheet options including possibly tendering for discounted unsecured notes or simply reducing our revolver balances and holding cash against out-year maturity of low coupon unsecured notes.
To put a bit more specificity around anticipated production activities, in December, we expect to repay from on-hand liquidity, the remaining GBP 350 million pounds of maturing unsecured notes. The same notes that we already repurchased 50 million pounds up at a discount during and after the third quarter. Maturities in 2024 have an aggregate balance at current exchange rate of about $430 million. We expect to have access to ample resources to satisfy those 2024 maturities before even considering any expected proceeds from the sale of our Connecticut hospitals to Yale New Haven Health which we remain optimistic about.
Meanwhile, as Rosa discussed, we continue to effectively execute our core business of collecting annually escalating cash rents from the vast majority of our tenants that likewise represent the vast majority of our cash flows.
Beginning with our interest in prospects Managed Care affiliate, PHP Holdings LLC summarize a few key points. PHP continues to respond to questions from the California Department of Managed Health care, and it remains PHP's and our expectations that the department will approve the reorganization. However, our agreement with Prospect basically provides that we will have a convertible note, preferred equity or some combination of those. Whatever it is, the economies are identical to us.
We account for our investment in PHP, either convertible debt or preferred equity on the fair value method. As I mentioned a few minutes ago, the fair value adjustment to PHP as of the end of the third quarter was about $30 million. Of course, this is an estimate of fair value, and there is no assurance that any such estimate will ultimately be realized. Prospect expects to begin marketing the company soon, and we continue to expect a transaction in 2024.
Meanwhile, we do not include any fair value adjustment in our normalized FFO and AFFO metrics and we have not anticipated any transactions in connection with managing the out-year debt maturities I just discussed. That is no recovery from PHP is included in our $2 billion monetization target.
Turning to Steward. This morning, we posted to our website some incremental supplemental information about our Steward investments. Given Steward's strong facility-level operations, we remain confident in the real estate platform's long-term profit potential despite the near-term cash flow headwinds mentioned in the press release this morning. The core reasons underpinning that confidence are the facilities continue to generate strong EBITDARM coverage of more than 2x fixed rent payments.
This is indicative of strong underlying patient flows that Steward simply would not receive, if not for its operating competence. In both of Steward's major markets, the Boston area and South Florida, which when we include 100% of Massachusetts, comprise about 2/3 of the total steward. These physical facilities are critical to the health care of the surrounding communities.
Absent some unexpected series of events, we expect that our real estate will remain fully occupied in operating as hospitals into the foreseeable future. Importantly, the supplemental information posted this morning provides some more details regarding the temporary and limited working capital support MPT has occasionally extended to Steward in the past. With that, we have time for a few questions, and I'll turn the call back over to the operator.
We will now begin the question and answer session. [Operator Instructions] Our first question will come from Michael Carroll of RBC Capital Markets.
Steve, Rosa, can you provide some additional color on Steward's working capital problems right now that you mentioned? I know that you highlight there has been some improvement, but does Steward need to make additional improvements to kind of narrow the differences between the cash and GAAP results.?
Yes. We expect Steward will continue to make improvements, both on its operations and its revenue cycle management. And by that, of course, just to reiterate, we mean collecting more of their billings earlier than what has happened in the past. And so we absolutely expect further improvement in that.
And can you talk about some of the issues right now with those receivables? I mean are there concerns that they have receivables on the books that can't be collected or going to be collected at a lower rate that's currently out there?
Sure, Michael. So there is no concern at this time that they will not be collected. There have been system changes and -- so the technology is in place now. They have the people that they need. And so there is no concern that it will -- there will have to be write-offs surrounding the accounts receivable. They are working denials. Their denials have been higher than they have wanted them to be and higher than they should be and they are putting procedures in place to address that. But no, there's no concern that they will not be ultimately collectible.
Mike, a few years ago, they actually outsourced this whole process, which is terribly uncommon. But it has always been everyone's experience or most likely been everyone's experience that's better handled in-house. They brought it all back in-house and they've made tremendous improvement in not only their cash collections but the lack of initial denials. Now initial denials merely means could mean from an insurance company that a proper form or something from the doctor wasn't filed properly. So those have been great improvements.
And Michael, I'll just say -- I'll just add to that. That -- the denial issue is not Steward's alone. Insurance companies have gotten more and more difficult from that perspective and denials across the industry have increased.
You may have seen the ruling that CMS came out with recently that made it much easier for hospitals and doctors to admit patients under the Medicare Advantage plan. That's exactly the type of thing that's where insurance companies can't second guess a doctor's orders.
Okay. Great. And then just last one for me. I mean, how are these receivables accounted for in your coverage ratios? I mean are they accounted for at the billable amount? Or is it being recognized at some lower, more likely collectible type level?
No, it's a net revenue. It's typical in health care.
But Mike, on the receivables, they're collecting, even some that are more than 120 days old, there aren't -- there haven't been any discounts.
The next question comes from Vikram Malhotra of Mizuho.
Just maybe following up on Steward. I just wanted to understand from here on, one, if you -- is there a way you could give us sort of a -- what's the size of the receivables issue -- and perhaps are there any -- I'm assuming they're also to cut -- to improve cash flow, perhaps they've also deferred some payables as well. But just like magnitude wise, what's the size of the receivables issue and any payables? And then would this entail you having in the future to provide perhaps another short-term credit to them? .
Well, first and foremost, Vikram, that is not the anticipation, the plan, the desire, and we don't think it's necessary. On the payables, clearly, the legacy payables that is the old payables continues to demand a lot of the profitability, the profitable cash flow coming out of operations. Steward is working that along at the same time is working on increasing the collections.
The third leg to that stool is, as Rosa mentioned in her prepared remarks, the very significant efficiency initiatives. Cutting out $600 million plus of annual operations, annual cash expenses going into 2024. All of that comes together to bring cash flow such that clearly, there's still some old payables. Steward continues to chip away at those. And then the next step, and again, we refer to this very briefly, the next step is working on the balance sheet.
Before the pandemic, Steward had pending plans in place to rationalize its overall operations selling certain pieces of nonhospital operations. That is now being accelerated and is expected to provide a fairly significant amount of liquidity in the coming quarters. All of which is to say we're satisfied with Steward's effort and the success they've had, tangible success they've had in all of these initiatives. And again, just to repeat, working on paying that down out of increased cash flow that comes from a significantly reduced expenses and elevated improvements to collections.
Okay. And just to clarify the question previously on the coverage reported. So is the coverage sort of a pro forma cash flow number over the rent pro forma for all these changes that you just described?
No, it's a GAAP number. And nobody goes to a hospital or any hospital and pays when they leave. So that includes the insurance company. So there's a delay in payment for everyone, and this has done the same thing for every one of our coverages.
Okay. No, I just felt it was a bit a [ Q2]. So I was wondering if there were any adjustment, but that's helpful. Just one more. So you've laid out some of this aggressive plan and you also called out the rate environment perhaps limiting that or maybe you've changed to a more secured financing in the near term. But just can you give us a bit more color on how you're thinking this $2 billion shakes out U.S. versus non-U.S.? Any color or even qualitatively or what type of buyers exist today for the -- given the rate environment for hospital-type assets?
All very good questions. The buyers today, even in this rate environment, include operators, for example. And again, you've seen even in the last year, we've sold facilities back to Prime, for example, and others. Sovereigns who remain interested, probably weighted more toward Europe and higher acuity than the U.S. at this time, but in the U.S., in particular, infra funds and other managed assets that, again, as I alluded to earlier, aren't IRR determined.
So by that, I mean, in order to make and attractive investment based on their return requirements. They don't need to load up on high rate secured debt right now. So those are the buyers. And when combined with that level of demand with real estate assets that -- I mean, this is not like office or retail that has really structural some would say even existential issues about keeping occupancy and rate.
Hospital assets are long-term, well-covered absolute net lease with inflation protection and is drawing a significant amount of attention. So even in this rate environment, we're not seeing the kind of discount demands or lack of a market even that other types of real estate are having.
Okay. That's helpful. And then just one last, if I may. Just given you've had a bar in the last year or so, you've had a multiyear period of growth -- external growth and now you're sort of switching more dispositions, reducing the leverage. From an incentive to, I guess, senior management or leadership, do you envision or how perhaps maybe the hurdles for LTIPs or just other incentives may change as the strategy is changing going forward?
Well, it does change and it has changed. And of course, when we file the proxy in the coming months, you'll see that even in 2023, there were meaningful changes in what the Board is incentivizing management to do. There's no longer aggressive accretive growth that we successfully executed in earlier years.
That's certainly not going to be what you see in the proxy that describes the 2023 plan and I doubt very seriously that when the compensation committee gets together to look at 2024, you'll see a continued evolution towards fixing assuring a good strong balance sheet and a return to access to affordable capital because the market we're in remains, in our view, very, very attractive. The attraction to all of the buyers that I just described, whether it's operators or sovereigns or infra funds or pension funds continues to be drawn to these types of assets. And part of the reason for that is their continued performance vis-a-vis other types of real estate when you consider -- if you consider and you have to believe this, that these truly are critical community assets that will remain occupied and operated by competent hospital operators.
We're eager to see a return to affordable capital so we can continue to participate in that. And as Ed mentioned earlier, actually restart growth at the appropriate time.
The next question comes from Jonathan Hughes of Raymond James.
Just on Steward, do you still expect to file the financials for last year? And if so, just what do you think you might have an expected time line that you could share?
We do. When we receive the financial -- the origin financials with auditor consents, it's our expectation that we will file them as the SEC has asked.
Okay. I just want to make sure that was still the case. And then maybe turning to the 7 facilities that are being sold back to a tenant in the first half of next year, just trying to understand the operator's decision to buy them in the current higher cost of capital environment. Were those subject to a purchase option, and it was kind of now or never? And then maybe when did those discussions beginning, can you share expected yield on that sale?
So I can give you some of those answers, Jonathan. So the properties that we have with this tenant actually performed fairly well. The coverages are good, strong coverages in the middle of our range for those particular types of facilities. They have issues with other facilities that other people own that we don't have anything to do with.
So from a corporate standpoint, that's where their issues have come from. We knowing the value of our properties have pushed them to fix their issues. And they came back with, hey, it may take longer than you're willing to do or you may take longer than you want, what if we just buy them, buy these particular ones back from you. And we said, "Sure, if you can make it hold, we'll do that." So that's where that came from.
Okay. And then I mean just -- are you able to share like again, the expected kind of yield on it? Or is that still under negotiation?
No, it's not under negotiation, but we generally, as you know, don't disclose those, but it's a good strong yield in today's market.
Okay. And then maybe switching to another part of the portfolio. I realize -- look, it's not very big, but just the outlook, if you could share kind of your views on the outlook for the long-term acute care space, coverage there continues to kind of trend a little bit lower while the other asset types have stabilized or even improved. Would those be potential divestiture opportunities within that expected $2 billion of liquidity over the next 12 months?
Well, you're right in the first part of your question for sure is that they represent a very, very small part of our portfolio these days. And you're also right that they've come way down. The entire industry has come way down from the exemptions that they all had during COVID when those went away. We think they essentially stabilized at where they are now, not great coverages, but at least coverages and we don't expect to see any further decline in those.
I'll also point out, Jonathan, most of them are part of larger portfolios that are master leased and it's not just LTACs in those portfolios. So they're well covered at a master lease level.
Okay. Last one for me, and -- and this is kind of going back to the updated capital allocation strategy announcement from August. And that was a discussion of kind of expected cost reductions. Are you able to share anything like magnitude or timing? What line items are being reviewed there? We were [ ex the ] litigation expenses. We've noticed that G&A is already down kind of mid-teens year-to-date already. So there's been good progress there, but just curious how much more savings we can expect over the next 12 months or so?
Well, yes, to the extent we commented in our prepared remarks, it continued sequential. By that, we mean in the fourth quarter, we expect to see further reduction virtually every line item. Of course, we're looking at and you're seeing those reductions. So that going into 2024, and of course, we haven't announced any guidance yet. But compared to 2022, we expect to see double-digit annualized reduction in those costs. And the reason the comparison is 2022 is because obviously, 2023 has been a very transitional year already.
The next question comes from Mike Mueller of JPMorgan.
I guess, first, given the comments about having ample liquidity to address near-term maturities. Just curious why you're considering tapping the secured debt?
Well, the reason would be because of the credit environment that we're in now and that translates into -- or a lot of buyers, not all of them, but for a lot of buyers that rely on debt, it drives the purchase price down. Now to the extent you believe that maybe this environment we're in now is not long-lasting or not permanent, it's better for us, all else equal to borrow against those assets rather than permanently give up value by virtue of selling them. And again, to be clear and to reiterate, I wouldn't expect that we would do all $2 billion under secured debt. It would be limited temporary and frankly, not that dilutive given where we're paying interest right now in any case.
Okay. And then I guess you kind of touched on the next question. For the $2 billion of new liquidity -- should we think of that as largely coming from asset sales with only a minor portion of that coming from the secured debt? Or I mean any kind of ballpark guidance on a mix of those 2?
Yes. I just don't know about the timing, the pricing, the cost and the character. So other than to repeat, it would be limited secured debt then that's probably as far as I'd be able to predict.
Okay. And maybe last one here if I could sneak one more in. Any high-level commentary on what you're seeing, expecting, thinking about cap rates on asset sales given the current environment that you're evaluating?
Well, nothing specific other than to absolutely acknowledge that cap rates are elevated vis-a-vis where they were even 6 months ago, as you can imagine. And that again is why we may not, under certain circumstances, we may not be willing to take those cap rates. We may prefer because we know our rent on those assets will continue to increase at least inflationary levels then we may prefer to monetize on a temporary basis versus selling into a high cap rate environment.
The next question comes from Connor Siversky of Wells Fargo.
Just another one on Steward, looking at the rent coverage, but the figures represented look to be at the facility level. I'm just trying to get any indication of what those numbers could look like coverage at the corporate level.
Well, if you look at their corporate level, remember that it includes a lot of other things than just the hospitals. So when you look at if you try to take what the actual [ M ] would be on the facility levels, then if you reduce that just by that amount, the coverage goes down to just over 2x.
Okay. Okay. Understood. And then just one more on the secured debt question for Steve. I can't ask for individual properties, but is $2 billion the maximum amount of gross assets that you would use to collateralize such an instrument?
We -- I mean, we don't have anything we're looking at that -- that's not what the $2 billion was meant to imply. The $2 billion are meant to imply liquidity of $2 billion. So -- and again, without being able to even predict answers to Mike, earlier questions, how much is secured debt, how much is sales? You should not look at that $2 billion as being a collateral value.
Okay. Understood. And then just last one, jumping back to Steward. On the ABL, I know there are some transactions MPW selling off a piece of the exposure, but any indication of what the total draw is on that ABL right now?
No. I think that's -- first of all, I don't know. And secondly, I think that's more for Steward.
The next question comes from Tayo Okusanya of Deutsche Bank.
First question I have is with the announced recap and this idea of kind of $2 billion of kind of asset sales and unsecured debt. I'm curious when you think about asset sales and just the overall structure of the company at this point, what opportunities do you think you may have to potentially sell assets that maybe the Street does not give you guys a lot of value for? And specifically, I ask about things like again, a lot of the investors, you have investments, you have your operators or even investment you may have in markets where the average investor may not be as knowledgeable about that market like Colombia or Spain or somewhere like that.
Well, I think we actually have interest in every single one of the things you just said with maybe not as much excitement about the LTAC portfolio. But certainly, from the acute care, the IRFs, the behavioral in every geographic location that we have. Obviously, it's not the same buyers for each one of those areas. I think the biggest thing that the Street doesn't give us credit for that's there, which is that we will -- we have tremendous interest for these assets at greater than our net book value.
Got you. But do you see value in maybe, again, focusing on selling some of those things you don't get credit for? So that the story becomes simpler and in many ways for investors to kind of calculate what the true value is.
So we understand that, and we understand we don't get credit for that. We do actually have some investors that are interested in that. But keep in mind, it's a very small number.
Got you. Okay. That's helpful. And then just another quick question just around Steward as well. I think you did mention that you'll be filing the financials and they kind of have this whole plan in place. Anything else happening there in regards to -- I know they had a bunch of management changes earlier on at the beginning of this year, have those positions been filled? And kind of from a strategy perspective, is the company kind of have a well-rounded management team again?
Yes. We're very comfortable with our management team, and I suppose the 2 that you're referring to, the first one is [ Sanjay], who was the President of the company for a little while. He left under very good circumstances. He stated the company and his and Steward's request for a fairly long time after he announced that he was going to a managed care company. Still maintain a very good relationship with them.
And then the other one, primarily I think you're referring to would have been the Chief Financial Officer that was there for a very short period of time that was replaced with a former Chief Financial Officer. So yes, we are very comfortable with the management team.
Our last question comes from Josh Dennerlein of Bank of America Merrill Lynch.
One follow-up on the secured financing. Guess how should we think about the rates that you could potentially achieve on secured financing versus maybe just like unsecured market right now?
Well, the unsecured market is available to us right now. So it's probably at best an apples and oranges comparison.
Okay. But what about the rate on a secured note today?
Yes. I think as you probably know better than we even it would depend on the asset type, on the coverage on the quality of the asset on the term and other less direct components like who and if there is a guarantor and so on and so forth. But we probably wouldn't publicly announce what we think we would take.
Other than to maybe say way below what the implied rate security.
Yes, yes, that makes -- yes. Exactly.
Okay. That's helpful. And then the 7 facilities that I guess you're going to sell back to the tenant. Sorry if I missed it, but did you say like what the cash proceeds would be from those sales? I think I heard you get $17 million of deferred rent back, just not the overall.
I said that we would not only get the deferred rent back, but we would also be made whole on our investment.
We did say it's about 1% of the total. So you could probably do that arithmetic.
This concludes our question-and-answer session. I would like to turn the conference back over to Ed Aldag for any closing remarks.
Again, thank you all for listening in today. As always, if you have any additional questions, please reach out to Drew or Tim, and they'll get the right person with you. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.