Medical Properties Trust, Inc. (NYSE:MPW) Q3 2023 Earnings Call Transcript

Medical Properties Trust, Inc. (NYSE:MPW) Q3 2023 Earnings Call Transcript October 26, 2023

Medical Properties Trust, Inc. misses on earnings expectations. Reported EPS is $0.19 EPS, expectations were $0.35.

Operator: 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.

Charles Lambert: 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 are 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 maybe 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 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 third quarter 2023 earnings call. Steve and I are pleased to be joined for today’s discussion by two 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 a Birmingham-based hospital. As our current Senior Vice President of Operations, Rosa is the perfect person to provide 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 will 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 have 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 are 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 have already made significant progress.

Through a series of open market transactions, we repurchased approximately £50 million 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, healthcare 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 will now turn it to Rosa to update you on the performance of our portfolio during the past quarter.

Rosa Hooper: 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 healthcare 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 am 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 one 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 UK operations and Circle Health. In late August, Centene signed a definitive agreement to sell Circle’s operations to PureHealth 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 UK, it’s clear that investors are increasingly attracted to opportunities involving independent UK 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 healthcare provider in the UK by 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 1.5x 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 Genolier 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, Visana 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 have been extremely pleased with CommonSpirit’s strong property level performance and 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’s 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 healthcare 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 two 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 non-core asset sale program that McKinsey 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 healthcare 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?

Steven Hamner: 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 non-cash 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 non-cash and non-recurring $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 non-cash 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 is 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 UK 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 three to four 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 £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 AUD470 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 £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 two-thirds of the total steward. These physical facilities are critical to the healthcare 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.

Operator: [Operator Instructions] Our first question will come from Michael Carroll of RBC Capital Markets. Please go ahead.

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Q&A Session

Michael Carroll: Yes. Thanks. 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.?

Steven Hamner: 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.

Michael Carroll: 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?

Rosa Hooper: 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 is no concern that they will not be ultimately collectible.

Edward Aldag: 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 have 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.

Rosa Hooper: 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.

Edward Aldag: 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.

Michael Carroll: 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?

Rosa Hooper: No, it’s a net revenue. It’s typical in healthcare.

Edward Aldag: But Mike, on the receivables, they are collecting, even some that are more than 120 days old, there aren’t – there haven’t been any discounts.

Michael Carroll: Okay, alright. Great. Thank you.

Operator: The next question comes from Vikram Malhotra of Mizuho. Please go ahead.

Vikram Malhotra: Thanks for taking the question. 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 are also to cut – to improve cash flow, perhaps they have 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?

Steven Hamner: 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 is 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 non-hospital 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 have had, tangible success they have 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.

Vikram Malhotra: 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?

Edward Aldag: 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 is a delay in payment for everyone, and this has done the same thing for every one of our coverages.

Vikram Malhotra: Okay. No, I just felt it was a bit a Q2. So, I was wondering if there were any adjustments, but that’s helpful. Just one more, so you have laid out some of this aggressive plan and you also called out the rate environment perhaps limiting that or maybe you have changed to a more secured financing in the near-term. But just can you give us a bit more color on how you are 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?

Steven Hamner: All very good questions. The buyers today, even in this rate environment, include operators, for example. And again, you have seen even in the last year, we have 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 an 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 leased with inflation protection and is drawing a significant amount of attention. So, even in this rate environment, we are not seeing the kind of discount demands or lack of a market even that other types of real estate are having.

Vikram Malhotra: Okay. That’s helpful. And then just one last if I may, just given you have had a bar in the last year or so, you have had a multiyear period of growth – external growth and now you are sort of switching more dispositions, reducing the leverage. From incentives 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?

Steven Hamner: Well, it does change and it has changed. And of course, when we file the proxy in the coming months, you will see that even in 2023, there were meaningful changes in what the Board is incentivizing management to do. There is 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 will see a continued evolution towards fixing, assuring a good strong balance sheet and a return to access to affordable capital because the market we are 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-à-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 are 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.

Vikram Malhotra: Great. Thank you.

Operator: The next question comes from Jonathan Hughes of Raymond James. Please go ahead.

Jonathan Hughes: Hi there. Good morning. 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 timeline that you could share?

Steven Hamner: 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.

Jonathan Hughes: Okay. I just want to make sure that was still the case. And then maybe turning to the seven 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, and can you share expected yield on that sale?

Edward Aldag: 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 are 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 will do that. So, that’s where that came from.

Jonathan Hughes: 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?

Edward Aldag: 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.

Jonathan Hughes: Okay. And then maybe switching to another part of the portfolio, I realize it’s – 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?

Edward Aldag: Well, you are 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 are also right that they have 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.

Steven Hamner: I will also point out, Jonathan, most of them are part of larger portfolios that are master leased and it’s not just LTACHs in those portfolios. So, they are well covered at a master lease level.

Jonathan Hughes: Okay. Last one for me, 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 have noticed that G&A is already down kind of mid-teens year-to-date already. So, there has been good progress there, but just curious how much more savings we can expect over the next 12 months or so? Thanks.

Steven Hamner: 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 are looking at and you are 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.

Jonathan Hughes: Yes. Alright. Thanks for that. Appreciate it.

Steven Hamner: Thank you.

Operator: The next question comes from Mike Mueller of JPMorgan. Please go ahead.

Mike Mueller: Yes. Hi. I guess first, given the comments about having ample liquidity to address near-term maturities. Just curious why you are considering tapping secured debt?

Steven Hamner: Well, the reason would be because of the credit environment that we are 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 are 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 are paying interest right now in any case.

Mike Mueller: 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 two?

Steven Hamner: 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 would be able to predict.

Mike Mueller: Okay. And maybe last one here if I could sneak one more in. Any high-level commentary on what you are seeing, expecting, thinking about cap rates on asset sales given the current environment that you are evaluating?

Steven Hamner: Well, nothing specific other than to absolutely acknowledge that cap rates are elevated vis-à-vis where they were even six 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.

Mike Mueller: Got it. Okay. Thank you.

Operator: The next question comes from Connor Siversky of Wells Fargo. Please go ahead.

Connor Siversky: Hi everybody. Thanks for having me on the call. Just another one on Steward, looking at the rent coverage, but the figures represented look to be at the facility level. I am just trying to get any indication of what those numbers could look like coverage at the corporate level.

Edward Aldag: 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.

Connor Siversky: 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?

Steven Hamner: We – I mean we don’t have anything we are 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’s earlier questions, how much is secured debt, how much is sales, you should not look at that $2 billion as being a collateral value.

Connor Siversky: 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?

Steven Hamner: No. I think that’s – first of all, I don’t know. And secondly, I think that’s more for Steward, but…

Connor Siversky: Okay. Understood. Thank you for the time.

Steven Hamner: Thank you.

Operator: The next question comes from Tayo Okusanya of Deutsche Bank. Please go ahead.

Tayo Okusanya: Hey. Good morning everyone.

Edward Aldag: Welcome back Tayo.

Steven Hamner: Welcome back Tayo.

Tayo Okusanya: Thank you very much guys. I appreciate that. 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 am 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, investments you have in your operators or even investments you may have in the markets where the average investor may not be as knowledgeable about that market like Colombia or Spain or somewhere like that.

Edward Aldag: Well, Tayo, I think we actually have interest in every single one of the things you just said with maybe not as much excitement about the LTACH 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.

Tayo Okusanya: Got it. But do you see value in maybe, again, focusing on selling some of those things you don’t get credit for? So, the story becomes simpler and easier in many ways for investors to kind of calculate what the true value is.

Edward Aldag: 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.

Tayo Okusanya: Got it. Okay. That’s helpful. And then just another quick question just around Steward as well, I think you did mention that you will 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?

Edward Aldag: Yes. We are very comfortable with our management team, and I suppose the two that you are 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 are 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.

Tayo Okusanya: Great. Thank you.

Operator: Our last question comes from Josh Dennerlein of Bank of America/Merrill Lynch. Please go ahead.

Josh Dennerlein: Hey guys.

Edward Aldag: Hey Josh.

Josh Dennerlein: One follow-up on the secured financing. Yes, how should we think about the rates that you could potentially achieve on secured financing versus maybe just like unsecured market right now?

Steven Hamner: Well, I don’t think the unsecured market is available to us right now. So, it’s probably at best an apples-and-oranges comparison.

Josh Dennerlein: Okay. But what about the rate on a secured note today?

Steven Hamner: 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, so.

Edward Aldag: Other than to maybe say way below what the implied rate…

Steven Hamner: Yes, that makes – yes. Exactly.

Josh Dennerlein: Okay. That’s helpful. And then the seven facilities that I guess you are 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…

Edward Aldag: I have said that we would not only get the deferred rent back, but we would also going be made whole on our investment.

Steven Hamner: We did say it’s about 1% of the total. So, you could probably do that arithmetic.

Josh Dennerlein: Okay. Alright. Thanks guys.

Steven Hamner: Thanks very much.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Ed Aldag for any closing remarks.

Edward Aldag: 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 will get the right person with you. Thank you very much.

Operator: The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.