Medical Properties Trust, Inc. (NYSE:MPW) Q1 2024 Earnings Call Transcript

Medical Properties Trust, Inc. (NYSE:MPW) Q1 2024 Earnings Call Transcript May 9, 2024

Medical Properties Trust, Inc. misses on earnings expectations. Reported EPS is $-1.18853 EPS, expectations were $0.25. MPW isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the First Quarter 2024 Medical Properties Trust Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Today’s call is scheduled for 60 minutes. Please note this event is also being recorded. I would now like to turn the conference over to Mr. Charles Lambert. Please go ahead.

Charles Lambert: Thank you, and good morning. Welcome to the Medical Properties Trust conference call to discuss our first quarter 2024 financial results. With me today are Edward K. Aldag, Jr., Chairman, President and Chief Executive Officer of the Company. Steven Hamner, Executive Vice President and Chief Financial Officer; Kevin Hanna, Senior Vice President, Controller and Chief Accounting Officer; and Rosa Hooper, Senior Vice President of Operations and Secretary. 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 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 thanks to all of you for joining us this morning on our first quarter 2024 earnings call. I’m pleased to be joined again today by Steve Hamner, Rosa Hooper and Kevin Hanna. You will hear from each of them shortly. For the past several quarters, you’ve heard me say that we’re focused on executing a capital allocation strategy to generate at least $2 billion of additional liquidity in 2024. I’m pleased to share that we’ve made strong progress on this strategy, executing $1.6 billion of total liquidity transactions this year, including the recently announced sale of 75% of our interest in 5 Utah hospitals to a new joint venture with a leading multibillion-dollar asset manager. We’ve used the proceeds from these transactions to pay down near-term debt, including full repayment of our Australian term loan that was due in 2024.

Importantly, while we’ve already reached 80% of our initial liquidity target, we’re just getting started. And now, expect to exceed that amount for the year. Our early results prove there is strong demand for our assets at attractive valuations. We have several available levers to generate additional liquidity and we remain actively engaged in numerous discussions. As with the transactions already executed, we expect to continue demonstrating the value and cash flow potential, embedded in our portfolio throughout the year. Turning to Stewart and its decision earlier this week to commence a Chapter 11 restructuring process. There has obviously been a great deal of media attention on this filing. And we want to take a few minutes to share our perspective directly with all of you.

First, if you’ve had an opportunity to read through the first day declarations that Steward filed with the US Bankruptcy Court, you will find a clear story of how Steward got here. Notably, no mention was made of rent as a contributor to Steward’s distress. We believe that bankruptcy will facilitate the retenanting or sale of Steward Hospitals in an orderly and timely fashion. We firmly believe that an orderly transition of Steward Hospitals to new operators is in the best interest of everyone, and we’re committed to providing a $75 million in debt financing to help achieve that. We expect Steward to use this financing to ensure continuity of patient care while accelerating the retenanting of these hospitals. To be clear, we have not committed to providing any additional funding beyond this initial $75 million.

As I said before, rent is never mentioned by Steward on the list of contributing factors to his financial stress. That’s because rent, which represents only a small fraction of a hospital’s total revenue is virtually never the primary cost of financial stress for hospitals. And as Steward wasn’t paying rent, they’d be paying interest and principal repayments on some type of financing for the facilities, because as we all know, buildings are not free. While we’ve seen a great deal of misinformation recently reported about our business model, the fact remains that MPT provides hospital operators permanent and affordable capital enabling them to redirect the substantial cash resources that would otherwise be used for real estate to their primary mission, healing patients.

We continue to be pleased with the progress we are making with parties interested in the Steward Hospitals. It would be inappropriate for us to discuss the details of each of these transactions until they are approved by the court. I will now turn it over to Rosa to discuss the performance of our portfolio. Rose?

Rosa Hooper: Thank you, Ed. As with the past few quarters, I’ll take you through some of the highlights across our portfolio of critical hospital real estate, beginning with a few high-level comments. During the fourth quarter of 2023, we were pleased with the solid sequential and year-over-year coverage improvements delivered across our portfolio. In fact, on a discrete quarter-over-quarter sequential basis, our general acute inpatient rehab and LTAC segments all reported increasing coverage in the fourth quarter. And during the first quarter of 2024, volume trends across our portfolio, excluding Steward and Prospect grew in line with and, in some cases, outpaced the growth of large public operators. Behavioral health hospitals, which represent 14% of our portfolio, continue to see increasing volumes year-over-year as these facilities prove their enduring value in their respective communities.

While LTACHs have seen declining year-over-year volumes as a result of the CMS waiver expiration last May, it is worth noting that these facilities represent just 1.5% of our portfolio and are generally part of larger operators that include inpatient rehab and/or acute care hospitals, therefore, ensuring diversification and additional coverage for ongoing rent payments. Going forward, we will no longer provide individual disclosure of LTACH coverages but will instead begin to combine them with inpatient rehab coverages for a post-acute property type. In the U.K. and Continental Europe, operators continue to benefit from strong growth in reimbursement rates, overall volumes and higher acuity emission. Leading most operators to report increasing operating profit year-over-year.

Circle remains well positioned in the U.K. private health care market with steady volume growth and increasing patient acuity that is expected to extend through 2024. With the sustained growth of private health insurance coverage and self-pay in the U.K. Circle has delivered steady financial performance and expect that strong performance to be maintained. As the largest independent mental health care provider in the U.K. by a number of beds priority continues to capitalize on increased demand for behavioral health services within the U.K. They are seeing steadily improving reimbursement trends, along with stable occupancy levels and remain focused on cost-effective management to ensure quality and efficient care. Together, these focus areas are driving incremental improvements in coverage and earnings.

[indiscernible] parent company, MEDIAN, has largely recovered from the impacts of the COVID-19 pandemic on its German operations with improving occupancy, favorable reimbursement rates, moderating inflation and strong cost control. MEDIAN’s operating margins have proven resilient over the past several years and we expect them to maintain that stability. While Swiss Medical’s profitability was marginally impacted by inflationary pressures, and investments related to its pioneering integrated care network in 2023. Initial results from the first quarter already indicate that these temporary headwinds are abating. In addition, Swiss Medical’s Janelle Innovation Hub, which began construction in 2021, remains on track to open in the second half of 2024.

Turning to our U.S. portfolio. Excluding Steward & Prospect, we’re seeing increasing admissions almost universally across our diversified portfolio of general acute hospitals, inpatient rehabilitation facilities, or IRFs, and payroll health facilities. Reimbursement rates are generally accelerating and operators are doing a commendable job of controlling costs in this inflationary environment. A major highlight for the quarter was the announcement of the new JV, we formed with a leading investment firm involving our hospitals in the Salt Lake City area of Utah operated by common spirits. We are pleased to retain an approximate 25% interest in these facilities and expect strong performance trends to persist over the long-term. Ernest Health reported stable performance with consolidated EBITDARM coverage above two times.

Ernest IRF are performing well with coverage in excess of two times on their same-store IRF, excluding Ernest’s three recent developments, it is approaching three times. Ernest total reported coverage was adversely impacted at its LTACH facilities by the volume headwinds I mentioned earlier. As an important reminder, LTACH comprised less than 20% of our investment in Ernest and their rent is more than covered by the IRFs. Shifting to Prime, as part of the California and New Jersey sale transaction, MPT and Prime agreed to a new 20-year master lease for our remaining four Prime hospitals. The new master lease includes a purchase option for Prime to buy the real estate of these remaining hospitals for a minimum purchase price of $238 million.

They report increasing volumes and normalization of labor costs, which has led to improved EBITDARM for MPT owned hospitals. At our LifePoint hospitals, volumes have sustained momentum, following the nice rebound we saw in the fourth quarter of 2023. As a result, LifePoint MPT-owned LifePoint facilities have delivered meaningful EBITDARM improvements over the last several months, including an encouraging March in which they deliver the highest monthly EBITDARM in more than two years. LifePoint’s recently dedicated cardiovascular and Surgical Care Pavilion at Conemaugh, Memorial and Pennsylvania, has been very well-received by the community, and we remain optimistic that it will further position that market for future success. Our LifePoint behavioral facilities inpatient volumes have steadily increased, offsetting seasonal declines in volumes from partial hospitalization programs and intensive outpatient programs.

At ScionHealth, general acute facilities reported nearly a full turn improvement in coverage year-over-year to 1.9 times, driven by double-digit volume increases and substantial reductions in contract labor. However, like Ernest, LTACH performance has been adversely impacted by the waivers that expired in 2023. Finally, Prospect paid cash, rent and interest of approximately $7 million during the quarter and reported EBITDARM coverage of approximately one-time on its California portfolio for the 12 months ended December 31, 2023. Coverage has further increased to approximately 1.3 times on a trailing 12-month basis through the end of February. Prospect paid March rent for California after the end of the quarter. However, at this time, MPT has not yet received rent for the months of April and May.

To briefly summarize, before I turn it over to Kevin, the majority of operators in our highly diversified portfolio continued to perform well, and we are encouraged by the volume and cost trends we’re seeing across geographies and care settings. As such, we remain confident in the core pillars of our business model and the long-term cash flow potential of our portfolio. Kevin?

Kevin Hanna: Thank you, Rosa. This morning, we reported a GAAP net loss of $1.23 per share and normalized FFO of $0.24 per share for the first quarter of 2024. As mentioned in our earnings release, first quarter results included approximately $18 million of consolidated cash revenue from Steward and Prospect. It is worth noting that Steward additionally continue to make full payment as it relates to the Massachusetts partnership portfolio, about $19 million in the first quarter at MPT share. Subsequent to quarter end, Steward has paid $9.5 million in rent, half of which is MPT share and Prospect has paid roughly $7 million. We also described approximately $693 million in non-cash impairments recorded in the quarter, primarily related to non-real estate investments in Steward and International joint venture.

These charges were estimated and recorded pursuant to U.S. GAAP accounting rules and reflect conservative assumptions regarding potential recoveries, which MPT remains committed to pursuing. As was the case last quarter, investments in the operations of Steward and investment in the operations of the International joint venture were evaluated with assistance of a third-party independent appraiser. The first quarter charges included the full impairment of MPT’s approximately $360 million loan to Steward made in 2021, the remainder of its equity investment in Steward and other obligations. Further, we impaired our full investment in the international joint venture. As a reminder, these investments were previously moved to cash basis accounting and no related income was recorded in the first quarter.

It is worth noting a couple of other adjustments to normalized FFO. First, we adjusted the book value of our investment in PHP Holdings downward by approximately $60 million, based on the most recent third-party independent appraisal. Further, we recognized an approximately $8 million loss on our sales of priority term loan, as well as an $8 million negative adjustment to the fair value of marketable securities, such as our shares and EBIT. One thought before I hand it over to Steve, we remind investors in advance of our 10-Q filing, that first quarter cash flows from operations is typically influenced negatively by the timing of cash interest payments on our debt, assuming no impact from transactions or Steward retaining activity, we would expect 2024 cash flow from operations to be seasonally weighted to the back half of the year.

With that, I will turn it over to Steve for a discussion of liquidity and our overall capital allocation strategy. Steve?

Steven Hamner: Thank you, Kevin. I’ll begin by echoing Ed’s earlier comments about the success of the liquidity plan we described late last year, which is working even better than we predicted. At that time, we estimated that during all of 2024, we would generate $2 billion from asset sales and secured financing. By halfway through April, we had achieved $1.6 billion or 80% of the initial estimate. And those transactions were executed during a particularly volatile period, in terms of inflation and interest rates. Based on those early successes, we believe we will exceed our $2 billion target for 2024, with additional transactions at attractive valuations and capitalization rates well inside of what our public securities imply.

Going back a bit further, MPT has reduced its net debt by $1.6 billion since this time last year. We’ve accomplished this delevering primarily with about $2.4 billion of proceeds from profitable asset sales, including completely exiting Australia, selling hospitals back to operators pursuant to their repurchase options, and most recently, our sale of 75% on of our Utah facilities for almost $900 million of cash proceeds, and that does not include the $190 million of non-recourse financing proceeds. As a slide note, this Utah transaction fully validates the price we paid for these hospitals in 2020, when they were operated by Steward. We are pleased to retain a 25% interest, which provides us the opportunity to participate in any future increases in the values of these assets.

We currently have about $900 million in immediately available liquidity through cash balances and revolver capacity. Planned uses for this current liquidity as well as future operating cash flows and any proceeds from potential additional transactions include up $275 million for the Steward debtor in possession loan. And as Ed mentioned, we have made no commitment to fund any more than that. Repayment of £100 million, that’s about US$130 million in a sterling-denominated seller financing loan, due late this year and prepayment of approximately another £105 million or another roughly $130 million, related to our Sterling denominated term loan. And up to about $230 million in development commitments, including two projects that may be sold, so the actual amount of that funding is uncertain.

Partly in recognition of our success in selling assets at attractive valuations and also in light of the deteriorating Steward situation prior to its bankruptcy filing, we recently amended our bank facilities. One of our bank loan financial covenants limits the amount of unsecured debt as a percentage of unencumbered assets to 65%. For that calculation, the amount of unencumbered assets leased to tenants in bankruptcy is limited to 10%. The Bank Group agreed to waive this 10% limitation through the early — through the quarterly June 30 test, which means that all else equal. Steward assets will remain in the unencumbered asset calculation for financial covenants until the next quarterly test on September 30. Our plan and expectation are that during the five months until September 30, we will replace Steward with better qualified operators at many of our hospitals they are currently leased to Steward.

So that even if Steward remains in bankruptcy at that time and the waiver is not extended, its effect on our unencumbered asset value-based financial coveted expected to be mitigated. Second, given our current priorities and the liquidity generated from asset sales and financing transactions already executed and expected in the future, we no longer need the large $1.8 billion revolving credit facility that we had during earlier years, when our acquisitions exceeded $3-plus billion annually. Accordingly, we offer to reduce the revolver commitment by $400 million down to $1.4 billion. Further, because the majority of these liquidity transactions are expected to be sales rather than secured financings, we project relatively low levels of secured borrowings for the foreseeable future.

And accordingly, we were willing to reduce our secured debt basket from 40% down to 25%. Before going to questions, I’ll just summarize and point out, we have addressed all our 2024 maturities. We have only the 100 million-pound sterling mortgage remaining to be paid. And we expect to have significant liquidity going into 2025, and that’s before considering the possible liquidity that we expect to achieve from the additional transactions that I’ve alluded to. Our plans remain to continue to monetize assets, increase liquidity and reduce debt and re-tenant hospital real estate that is currently leased to Steward. And with that, I will turn it over to questions, operator.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Austin Wurschmidt: Hey, good morning, everybody. First, just wondering if all of the facilities leased to Steward are open and operating and whether you expect that will remain the case? And just wondering if you’re still receiving the weekly cash flow reports from Steward’s Advisors and just any changes for better or worse there?

Edward Aldag: So, Austin, all of the facilities other than the ones that were previously closed prior to bankruptcy continue to be operating. And then the second question, we do continue to receive cash flow reports from Steward advisers, and they have so far exceeded their projections on, I believe, every week.

Austin Wurschmidt: So as you start negotiations or have been in negotiations with other parties to backfill the operations at these facilities, I mean, what’s the thinking around potential rent moving forward relative to Steward’s prior contractual cash rent?

Steven Hamner: So the hospitals, as we’ve been saying for many months, on a localized four-wall perspective are generating positive EBITDAR. The issues with Steward, which are very well laid out in the bankruptcy filings, are around legacy payables, revenue cycle management, the level of revenue reimbursement. So all of that is to say that we believe that these hospitals can continue to pay rent at the contractual levels. Now there’s obviously a lot that goes into negotiation. And with bankruptcy, there’s more scrutiny. But that’s a long-winded way of saying we anticipate across the portfolio to continue to get at or near the amount of rent that the current lease agreements call for.

Austin Wurschmidt: And then just last one for me. I guess, any sense on the time line of when you could start to get any of these facilities back or whether any of these leases will be rejected for any reasons either for better or worse? That’s all for me. Thank you.

Steven Hamner: I’m sorry. I think your question was around the time line. And I think, again, in the bankruptcy filings, there are some very strict target date to have agreements in place, that would then start the regulatory process. I won’t get into bankruptcy law because I don’t think many of us are lawyers on this call. But we have no indication that Steward would have any motivation in rejecting either of the two master leases.

Austin Wurschmidt: Thank you.

Operator: Next question will come from Joshua Dennerlein with Bank of America. Please go ahead.

Joshua Dennerlein: Yeah. Hey, guys. Thanks for the time. Just curious on the DIP financing, why did you guys feel the need to provide the DIP financing? And then I was looking over the BK documents. Just curious why it’s called junior debt and then what is it in your build?

Edward Aldag: Josh, the reason that we decided to do the $75 million DIP financing is exactly as I said in my prepared remarks is that we think it’s very important that the hospitals continue to operate as we go through this process.

Joshua Dennerlein: Were there no other potential folks you would be willing to provide the financing in the BK?

Edward Aldag: Yes, they absolutely were. There are other lenders involved, as you know, but we’re not going to get into the details of those negotiations at this point.

Joshua Dennerlein: Okay. And then in the BK document, it was referred to as junior DIP financing, I think it’s correct term. Just curious, does that mean it’s junior to other like debt or claims? Or why was that term used?

Steven Hamner: Well, because of the security waterfall, and as you alluded to, there is — there are other lenders that have first liens on the typical collateral of receivables.

Joshua Dennerlein: Okay. I am — if I was — I’m wrong, but I always thought that financing was like the most secure claim. On the PHP holdings write-down, just could you kind of walk us through like what drove the fair market adjustment? Like what’s driving that? And how does that potentially impact the potential monetization, I think you guys have talked about in the past?

Steven Hamner: It’s based on, as we do every quarter, independent appraisals and evaluations of a lot of inputs, including things like discount rate financing rates. So it’s really on a private basis. I think, as Kevin described, like any other security that we value on a fair market basis. It’s clearly an estimate, and it is not based on our — necessarily our expectation of what happens to PHP or when.

Joshua Dennerlein: Okay. So just the way that you answered it, was it more based on just like moves in interest rates? Or was there something that changed with like the cash flows of the underlying investments?

Edward Aldag: Yes. I think the biggest piece, as Steve alluded to, was the discount rate and some working capital adjustments as well, but mainly the discount rate.

Joshua Dennerlein: Appreciate the time. Thanks.

Operator: [Operator Instructions] Our next question will come from Vikram Malhotra with Mizuho. Please go ahead.

Unidentified Analyst: Hi, this is George Hoglund [ph] on for Vikram. Can you just comment on prospects? How should we think about the rent recovery there?

Steven Hamner: The rent recovery, is that what…

Unidentified Analyst: Yes, rent recovery.

Steven Hamner: Well, as Rosa pointed out, we have collected the rent on the California assets through March, but that March payment came subsequent to March. And as of now, we’ve not collected April or May.

Rosa Hooper: There’s a point, the cost payments are expected in the coming months, which will be a slug of cash for prospects. So we would anticipate getting — them having additional proceeds at the time.

Unidentified Analyst: Okay. That’s helpful. And just can you provide more color on the pricing of the dispositions that you did in April and you mentioned you’re likely to exceed the $2 billion target of liquidity. How does this number look like today? And what are your expectations?

Steven Hamner: So I think we mentioned this, and it’s a good question last quarter with respect to the Prime assets that we sold, which we calculated a mid-7s cap rate. And we said that the negotiations we were under going at that time, and frankly, we remain where we closed one of those and we remain negotiating others. That cap rate in the mid-7s plus or minus, is very indicative when adjusted for geography and size and quality of assets to what we expect to achieve on the additional sales or financings that we have mentioned.

Unidentified Analyst: And just how large do you think the pipeline would be? Like how much above the $2 billion? If you can provide more color, that would be super help.