Medical Properties Trust, Inc. (NYSE:MPW) Q4 2022 Earnings Call Transcript

Medical Properties Trust, Inc. (NYSE:MPW) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Good morning everyone and welcome to the Q4 2022 Medical Properties Trust’s Earnings Conference Call. All participants will be in a listen-only mode. Please also note, today’s event is being recorded. At this time, I would now like to turn the floor over to Charles Lambert, Vice President. Sir, please go ahead.

Charles Lambert: Thank you. Good morning and welcome to the Medical Properties Trust conference call to discuss our fourth quarter and full year 2022 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 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.

Edward Aldag: Thank you, Charles and thank you all for listening in today on our fourth quarter earnings call. As one of the largest publicly traded owners of hospitals in the world across 10 different countries on four continents, we find the outlook for our tenants extremely encouraging on all fronts. Recent public comments from US operators confirm the optimism about the industry. Staffing costs are dramatically improved going into 2023, and as is access to qualified patient care staff. And our tenants are implementing innovative means to develop and retain employees. Contract labor costs peaked last March and have come down approximately 33%. Our operators continue to take advantage of advances in technology to increase efficiencies, deliver quality patient care and reduce cost on a per patient basis.

My point being that simply because an inflation index is high, doesn’t mean that our operators do not have arrows in their quiver to reduce structural costs, transform procedures, et cetera. Hospitals have been for decades required to continually improve process procedures, treatments and optimize charges to maintain equilibrium with a rapidly growing demand for patient treatment. As we move into 2023, the prognosis for generalized margin improvement across the entire industry on an increasing volume is encouraging. Our operators are experiencing low to mid-single-digit comparable revenue increases, depending on the diagnosis, acuity and payer, which, along with improving volumes and expanding reimbursement programs all along the scale are expected to generate an attractive 2023 for MPT’s tenants.

We’ve been very busy during all of 2022, maintaining relationships, building new ones and keeping our sights on our abundant opportunities throughout the world. We continue to see tremendous opportunities and are prepared to act on them as soon as the world settles down on the new normal for interest rates. We continue to have a strong pipeline in our current markets like the United States, Europe, and South America but we also continue to explore new markets across the NAFTA and Asian business quarters. Our portfolio continues to produce operating results in line with our original underwriting standards. Like the results posted by the publicly reporting hospital operators, our operators continue to see vast improvements to the labor issues that affected the market this time last year.

In December of 2022, we acquired approximately £230 million of additional properties. This addition of six Priory hospitals purchased from a third-party will be added to our master lease with Priory and improve the already strong Priory portfolio. And as you all know, we recently completed the Springstone transaction with Apollo. Springstone will be added to the LifePoint portfolio. This is another good example of our acquiring a holdco spinning out the operating piece out to a third party for profit and retaining the real estate. I’ll spend a few minutes reviewing Prospect due to its relevance this quarter. Prospect continues to make progress with their East Coast divestitures in Rhode Island and Connecticut. The transaction in Connecticut with Yale, New Haven Health Systems is still tracking for a midyear close.

While the non-MPT facilities in Rhode Island are expected to close in the latter part of 2023. On an extremely encouraging note, intermittent third-parties have valued Prospect’s managed care business at around $1 billion. With our security interest in this managed care business, our share of proceeds from the Yale sale and the excess value in the California properties, we believe we have more than sufficient collateral even without regard to the value of the Pennsylvania properties to more than realize the full return of our investment in prospects, including any deferred rent. In addition to multiple initiatives at their hospitals, Prospect management is focused on an aggressive cost-cutting measure that should enable them to return the Pennsylvania market to profitability in approximately12 to 18 months.

The California facilities are currently generating a coverage of 1.2 times on a trailing 12-monthbasis as of the end of the third quarter 2022. That being said, given the elongated timing of the Pennsylvania recovery, we felt it prudent to write off previously recorded straight-line rent and write down the Pennsylvania facilities. Last week, Steward and CommonSpirit announced a definitive agreement for Steward to sell the operations of their Utah facilities to Catholic Health Initiative, a CommonSpirit subsidiary. The purchase price will be used by Steward to pay down debt obligations, including the loan MPT made to Steward last summer and provide Steward with a good amount of liquidity. We announced our agreement to lease our entire Steward Utah hospital portfolio to Catholic Health Initiatives.

This will be the second transaction we’ve done with CommonSpirit, and we are excited to expand this relationship. As you know, CommonSpirit with a credit rating of A is one of the country’s largest and most respected not-for-profit health care providers. The announcement made last week regarding Steward’s pending sale of its Utah facilities, once again validates the MPT model of underwriting and further validates the value of our entire portfolio. Our track record of underwriting hospital real estate where the demand for the operations, and hence, the value of the underlying real estate and far outlast the operator itself has a 20-year outstanding history. I want to close this part of our earnings call to make a few comments about one in mine and Steve’s co-founders, Emmett McLean.

Today, we will announce Emmett’s retirement from MPT effective on September 1st ,2023. Emmett and Steve and I met in 2003 and have worked closely with each other ever since. It has been a remarkable collaboration of different streams. I want to take this time to publicly thank Emmett for his work and dedication for the past 20 years. Emmett, we know that you and Catherine, your children and those precious grandchildren will cherish your much earned retirement. Congratulations. We will issue a press release and an 8-K later today on Emmett’s retirement. Steve?

Steven Hamner: Thank you, Ed. This morning, we reported normalized FFO of $0.43 and $1.82 per diluted share for the fourth quarter and full year 2022, respectively, in line with our prior expectations. We also introduced our estimate of 2023 calendar net income and normalized FFO, which I will reconcile to the fourth quarter’s results momentarily. First, I’ll just mention a change we made to our supplemental reporting around our concentration metrics. In prior quarters, we had based operator concentration on an adjusted gross asset basis. That is a non-GAAP basis. Starting this quarter, we are using GAAP numbers. That’s because in December 2022, the SEC published updates to its non-GAAP financial measure guidance and basically stated that non-GAAP disclosures in charts, tables, and graphs need to display the related GAAP measure in equal or greater prominence.

In order to avoid duplicative disclosures of these charts, tables and graphs, we chose to provide the GAAP-related charts tables and graphs to reduce confusion. However, we did provide our historical non-GAAP concentration metric on our key operators in the footnote to page 11 of our supplemental for comparative purposes to the prior quarters. As described in the press release and Ed’s earlier comments, included in the determination of fourth quarter normalized FFO, our adjustments to reserve prospects straight-line rent and the carrying value of our Pennsylvania Prospect’s facilities. In conjunction with Prospect’s continuing progress in improving its East Coast operations and strategies, we have decided to fully exit our non-California Prospect investments and reallocate that capital to new investments.

At the end of this period of transition, we expect that we will have recovered and have available for reinvestment, most or all of our original investment plus any interim deferrals of rent through the following; as we have alluded to in recent months, Prospect owns a valuable managed care business that we believe, based on third-party offers and negotiations and independent valuations is currently worth about $1 billion. More immediately, we continue to expect the pending sale to the Yale New Haven Health System of our Connecticut hospitals to close by late next quarter. We do anticipate also that as hospital operations and financial results improve over the next several quarters, our Pennsylvania hospitals will become increasingly attractive acquisition targets.

And proceeds from their future sale will provide additional resources for reinvestment. The accounting adjustment in the fourth quarter to recognize an impairment acknowledges the possibility that such proceeds may be less than our original investment. However, we expect the value of the managed care business will significantly exceed the aggregate amount of the fourth quarter impairment. Any investment unrecovered from cash proceeds from the sale of Connecticut and the non-real estate loan that we originally extended to Prospect in 2019. During this transaction period, and Ed earlier mentioned that it is likely to extend beyond calendar 2023, and — we are considering providing rent and interest deferral options to Prospect and expect to account for rental income from our non-California Prospect investments, along with any interest from our $115 million non-real-estate loan on a cash basis.

And our 2023 guidance estimates take into account the range of our expectations about rent and interest that may not be paid during that period. So, today, we are providing our estimate of calendar 2023 normalized FFO. The following may help investors bridge from our fourth quarter 2022 normalized FFO annualized run rate of about $1.71 to our guidance range of approximately $1.50 to $1.65 for normalized FFO on a calendar basis. Starting with the $1.71. Contractual rent escalations will add about $0.05 a share and the impact of rent and interest income from acquisitions and dispositions and the CommonSpirit Utah transaction, their related cash proceeds and interest expense with respect to transactions in the fourth quarter and through today, is an aggregate pro forma of another $0.03 a share.

So, those estimates on their own would yield a guidance estimate of approximately $1.79 of normalized FFO on a Prospect-neutral basis. That is as if Prospect paid all its 2023 rent and interest obligations. Our estimates of potential outcomes regarding Prospect range from a worst-case scenario, in which case we would recognize no rent or interest to our more reasonably expected likely outcome that we recognize most of our California and Connecticut rent, but nothing from the Pennsylvania investment. The per share range of these scenarios would be 2023 normalized FFO of between $1.50 and $1.65 and that is what we reported in this morning’s press release. Even at the $1.65 high end of our 2023 guidance, it does not consider incremental FFO that would be created by the recycling of our current investment in our Prospect East Coast investment, assuming succession the restructuring and monetization of Prospect’s managed care business.

With that, we have time for a few questions, and I’ll turn the call back to the operator.

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Q&A Session

Operator: Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. Our first question today comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead with your question.

Austin Wurschmidt: Hey good morning everybody and thanks for the time here. I just want to — Steve, I want to hit on that — the guidance and sort of the buildup that you provided. So, it sounds like when all is said and done, that $1.79 captures all of the announced activity that you’ve announced over the last six-plus months? And would be maybe a reasonable jumping off point once we think about sort of you reinvesting proceeds into any future activity once you’ve buttoned up the Prospect deal. Is that a fair way to think about it? I’m just trying to understand what sort of the exit rate or run rate is on a go-forward basis once accounting for Prospect?

Steven Hamner: I think that’s generally correct. And again, assumes generally that we will replace the Prospect income with income from new investments, again, assuming the recycling of that capital.

Austin Wurschmidt: And then I was hoping that you could maybe share with us how to think about sort of the monetization of the managed care? Do you expect to receive proceeds, I guess, from the sale of their managed care business? Or could you end up in some scenario with just a partial investment in that business down the line that maybe takes longer to monetize and ultimately reinvest the proceeds? I mean, is there any time line you can give us on when you expect to received that investment? Or proceeds from that investment?

Steven Hamner: Yes, I think it’s the 12 to 18 months that Ed mentioned earlier. That business, as probably many on this call are aware, is very, very vibrant, very, very attractive right now. And again, we just saw yesterday the Amazon closing of its transaction with a kind of a similar business plan. And it isn’t up and running and currently profitable business for Prospect now. And to try to anticipate kind of beyond a 12 to 18-month sale process, which could involve any number of alternatives, and I won’t mention them here. But that’s our expectation is that — we hope not to end up with a long-term equity type investment, and we don’t think that’s the likely outcome. We think it’s more likely that there will be a sale or a recapitalization that will recover at least and possibly more than our investment in the East Coast properties.

Edward Aldag: You’re absolutely right. It is our intent as we work through this to push forward sales sooner rather than later, but there are other issues that have to work through.

Austin Wurschmidt: Understood. And can you just remind us what the total dollar investment is in those 4 Eastern PA hospitals? And then what the contractual annual cash rent that those — from those buildings?

Steven Hamner: So, the Pennsylvania hospitals have an aggregate gross investment of about $420 million. Yes, before impairment.

Austin Wurschmidt: Before impairment. And then we should just describe sort of a high single, low double-digit type yield on that to get to an annual cash rent from those facilities?