Medical Properties Trust, Inc. common stock

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2021 Medical Properties Trust Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to turn the conference over to your host today, Charles Lambert. Thank you. Please go ahead.

Thank you. Good morning and welcome to the Medical Properties Trust conference call to discuss our third quarter 2021 financial results. With me today are Edward K. Aldag Jr., Chairman, President, and Chief Executive Officer of the company, and Stephen Hamner, Executive Vice President and Chief Financial Officer. Our press release was distributed this morning and furnished on form 8K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our website at medicalpropertystrust.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 discussion of the factors that could cause the company's actual results or future events to differ materially from those expressed in this call. The information being provided today is as of this date only and except as required by the federal securities laws, the company does not undertake a duty to update any such information. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at MedicalPropertiesTrust.com for the most directly comparable financial measures and related reconciliations. I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Thank you, Charles, and thank all of you for listening in today for our third quarter 2021 earnings call. During the month of September, we made two announcements that are significant milestones for NPT. Steve will go over each of these in detail in a few moments, but it is important for me to put them in context. The first one was a partnership with Macquarie Infrastructure Partners 5 for eight Steward hospitals in Massachusetts. These transactions alone reflect a number of very strong points. NBC has always referred to and thought of our hospitals as important parts of any community's infrastructure. As part of our underwriting, we investigate the importance of each facility to that specific community. As most of you know, Macquarie is one of the world's leading infrastructure investors. They too believe the premise that most hospitals are an important part of a community's infrastructure. When Macquarie researched the world's leading experts in hospital investing, they turned to MBT. In the words of one of their executives, NBC is the clear leader, and there really isn't a number two. When we purchased the Massachusetts hospitals five years ago, the cap rate on these leases was in the mid-7% range and has escalated since then. The value of these hospitals that we agreed with Macquarie was based on a market cap rate in the mid-5% range. Reflecting our unique underwriting expertise, stewards' operating skills, and a market for hospital real estate that is rapidly attracting sophisticated private investors. These conditions establish a whole new value for our entire portfolio, not just the Massachusetts hospitals. We are excited about this relationship with Macquarie, and we hope to be able to grow it together. And while we're not making any additional announcements today, we are encouraged about opportunities we have seen for similar relationships with other institutional investors in other markets. The next announcement is the pending acquisition by HCA of the operations of the Stewart, Utah hospitals. Stewart acquired these hospitals in an NPT-financed acquisition as a part of its acquisition of IASIS in 2017. Over the last four years, Stewart has done an outstanding job of growing the top and bottom lines for these facilities. As a part of its transaction with Stewart, HCA has agreed to enter into a new master lease with NPT for these facilities paying the same rent and annual escalators for the real estate as Stewart is currently paying. Like the Macquarie transaction, this transaction provided reinforcement on the value of NPT's real estate by sophisticated third parties along with the validation of the strong performance of these Stewart hospitals. Upon the closing of these two transactions, stewards' concentration for NPT will have been reduced to approximately 18%. More importantly, no standalone steward regional market will represent more than 6%, and no single steward-operated property will represent more than 2% of our pro forma assets. Our largest single investment, approximating 3% of our assets, will then be operated by HCA. In 2019, the last year before the pandemic, NVT's acquisitions totaled approximately $4.5 billion. In 2020, during the heart of the pandemic, NVT's acquisitions totaled approximately $3.6 billion. And year-to-date, in 2021, we have acquired approximately $3.7 billion of additional investments. We have done this with the strategic use of JV capital, common equity through underwritten offerings in the ATM, selective dispositions, funds received from opportunistic debt repayments to MPT, debt offerings with historic low interest rates, and retention of earnings by the virtue of a very prudent AFFO dividend payout ratio. We continue to have a robust pipeline. that we will execute selectively while effectively utilizing the most efficient sources of capital. Before speaking to the operator performance, I'd like to mention a special award that speaks to the importance of NPT places on corporate culture. As we announced in late September, NPT ranked as the fifth best place to work for millennials according to Modern Healthcare's Best Places to Work 2021. This was based on an employee survey conducted by an independent third party in which our overall employee engagement score of 98% was recorded, and in which particularly strong marks related to employee satisfaction and confidence in management were communicated by our employees across the board. Our most important asset is our people, and we are proud that our employee base is satisfied across multiple measures of our internal social responsibility. As NVT has grown over the years, we have attempted to show the performance of our portfolio in a number of ways. Many years back, we instituted a same-store analysis. When we were growing so fast and our total assets were much smaller than they are now, this approach made more sense. It was structured to show performance without undue influence from the newly acquired facilities. As we've gotten much larger, both in terms of total assets in dollars and in number of facilities, the accumulation of additional properties in any one period no longer creates the spikes up or down that could be misleading. We have therefore decided from this point forward that we will report total portfolio without regard to when facilities are acquired. But these statistics will still exclude facilities where A, no detailed individual hospital operating statistics are required under the lease. Now, it's important to point out that each of these leases do provide overall information on the parent company or aggregated hospital performance. This can include leases we inherited or master leases guaranteed or master or guaranteed leases with investment grade tenants such as UC Health, Ochsner, Ramsey, and a few others. There are approximately 80 facilities in this category. Or B, our facilities that are so new to our portfolio, their reporting requirements have not yet begun, like Priory and SpringStomp. There are approximately 70 facilities in this category. Or C, facilities that are under development. There are currently only two facilities in this category. Our attendance results for the past 12 months are very strong. These results include the grants but not the advances that were received by our hospital operators. For the past 12 months, our acute care hospital portfolio generated an EBITDarm coverage of slightly more than three times. The LTCH segment generated an EBITDarm coverage of more than three and a quarter times, and the IRF coverage for the trailing 12 months was approximately 2.15 times. Now, some specific updates on some of our largest operators. Circle, which represents 11% of our portfolio, continues to show strong coverages. Their coverages for the second quarter in 2021 was substantially more than it was in the fourth quarter of 2020, which was also a strong quarter. Circle continues to have a strong liquidity position. And as a reminder, the American insurance company Centene which already owed an interest in Circle, is now the 100% owner of Circle. Earnest, which represents 3% of our portfolio, continues to perform at the very top of the market. Their coverages for both their IRFs and LTACs are approaching three times. Like Circle, they too have a very strong liquidity position. Healthscope, which represents 5% of our portfolio, is seeing some of its best EBITDARM coverages since our acquisition of these facilities in June of 2019. LifePoint, which represents 5% of our portfolio, continues to outperform. Their EBITDARM coverages continue to be one of the highest in our portfolio and grew significantly from the first quarter to the second quarter on a trailing 12-month basis. LifePoint has a very strong liquidity position. And as a side note for LifePoint, some of you may have seen their announcement this week that after the Kindred acquisition, LifePoint will split the company into two separate companies. We will have facilities with both companies, and we have worked very close with LifePoint to ensure that NPT will retain its strong position within both of these companies. Median, which represents 5% of our portfolio, continues its rock-steady performance. Median performed superbly throughout the pandemic and continues along that path today. Their liquidity position also remains very strong. Prime, which represents 5% of our portfolio, continues its stellar performance. Their EBITDARM coverage is at the very top of our portfolio. Prime is one of the strongest liquidity positions of any of our operators. On a very important additional note, St. Michael's Hospital in Newark, New Jersey, operated by Prime Healthcare, was rated the number two most socially responsible hospital in America by Loan Institute Hospitals Index based on measures related to health outcomes, value, and equity. This is in addition to Prime itself, being ranked as the fifth most socially responsible hospital operator in the U.S. We are proud of what our facilities and our operators mean to the communities they serve. Priory, which represents 5% of our portfolio, reports that their operations continue to improve from 2020. They have experienced some labor issues in a few of their locations, but it is not a company-wide issue. Our underwriting showed a 2020 EBITDA coverage of approximately two times Management reports thus far indicated a coverage for 2021 generally in line with this number. We'll begin getting detailed reports from Priory in the near future. Prospect, which represents 7% of our portfolio, is showing its best EBITDARM coverage to date. Their liquidity, too, remains very strong. Steward... which pro forma represents 8% of our portfolio, is generating its strongest EBITDARM coverages to date, well in excess of two and a half times. I would also like to point out, Steward received recognition for ranking first in membership, tied for first in quality, and earned the second highest shared savings payout of 513 participants in the CMS Medicare Shared Savings Program. As the nation's largest physician-led healthcare network and accountable care organization, Steward generated more than $68 million in total 2020 Medicare cost savings while receiving a perfect 100% quality rating amid the challenges of the COVID-19 global pandemic. All across the board, our operators continue to perform with outstanding results. In some general news regarding operations across our various regions, our domestic operators saw volumes rebound in the first half of 2020 to 2019 numbers. In Europe, private hospital systems are increasingly viewed as solutions for backlogs of elective procedures caused by the pandemic. Patient volumes continue to normalize there as operations continue to perform well. In Australia, 70% of eligible citizens are now fully vaccinated, triggering Phase 2 of Australia's reopening. Most of Australia expects to be fully open by the end of this year. Most hospitals are currently operating at normal levels. In Colombia, occupancy rates remain high, and surgeries have increased substantially over the last several months. The moratorium on high complexity and elective surgeries in Bogota ended in July. At this time, I'll ask Steve to go over the details of our financial results. Steve?

Thank you, Ed. This morning, we reported normalized FFO of 44 cents per diluted share for the third quarter of 2021, along with adjusted FFO per share of 34 cents. From the end of 2019 through 2021 year-to-date, MPT is among a very small handful of large-cap REITs that continue to deliver double-digit growth on a per-share basis. When considered along with our low 80% AFFO payout ratio, our access to abundant, attractively priced capital and growing acquisition opportunities in virtually all of our markets MPT offers near and long-term, immediately accretive asset, revenue, and dividend growth that is not available for most REITs. And that's exactly what the activities of the third quarter so abundantly demonstrated. Before I discuss these activities, I will point out a few minor items that impacted our reported results. First, as is the case every quarter, we recognized a change in the market value of our investment in the securities of EVUS, the parent of our tenant, Swiss Medical Network, an $800,000 gain for this quarter. Second, we wrote off $3.6 million in straight line rent and other costs related to properties that were sold during the quarter for an aggregate of about $42 million. Aside from these routine reporting adjustments, we realized gains on these transactions of about $9.3 million. As we have previously explained, GAAP requires us to present as MPT expenses certain costs even though they are contractual obligations of and we are reimbursed by our tenants. These charges amounted to approximately $4 million for the quarter. and we included this amount in property-related expenses and offsetting revenue of a similar amount in our income statement. Finally, again as required by GAAP, we have reclassified the book value of the Massachusetts hospitals that are pending contribution to our joint venture with Macquarie to real estate held for sale on the balance sheet. So beginning with the July completion of our five-hospital, $900 million expansion into South Florida, I'll highlight the near and long-term importance of our recent transactions, which for the most part we have previously announced. The primary appeal of these South Florida hospitals is their long-standing historical and future importance to very densely populated and growing communities with significant barriers to new development and alternative healthcare facilities. Looking forward, we are excited about Steward's plans to raise the bar for care in these facilities and improve their financial results to position them for long-term success. Importantly, as part of our agreements with Steward concerning these hospitals, Steward made early elections to extend our master lease agreement for all Steward hospitals by 10 years to the year 2041. it is important to view this exciting new acquisition in conjunction with the $1.78 billion Massachusetts joint venture with Macquarie and the $1.2 billion HCA retenanting of Stewards Utah Hospitals. Upon completion of these transactions, and completion is not assured, MPT will have access to approximately $1.3 billion in attractively priced capital. greatly diversified its tenant mix, introduced HCA as a top five tenant in the NPT portfolio of world-class hospital operators, and accretively recycled JV proceeds into these irreplaceable hospital facilities in the country's seventh largest metropolitan area. I'll take a few minutes to review details of these two transactions, and I'll be happy to take questions in just a few minutes. On September 1, we announced an agreement by which a 50-50 partnership formed with the subsidiary of Macquarie Infrastructure Partners will purchase from NPT eight Massachusetts-based general acute hospitals operated by Steward for approximately $1.78 billion. This is a portfolio that, from being on the verge of closing in 2010, is now a coherent network of award-winning hospitals that has proven remarkably resilient in its delivery of care and its financial performance throughout our period of investment. MPT recognized in its underwriting prior to our initial investment in 2016 that the community served truly depended on these particular hospitals and that Stewart's operating model was likely to drive substantial value creations. And, five years later, after a substantial independent diligence process, Macquarie recognized this same dynamic, both in terms of the value of the real estate and in what Stewart has created. Coincidentally, and later in September, we announced an agreement to lease five hospitals in Utah, currently operated by Stewart, to HCA Healthcare upon the closing of Stewart's related planned sale to HCA of the hospital's operations. In a manner similar to MPT's investment in the Massachusetts hospitals, in 2017 we underwrote these Utah hospitals to their full potential in the context of Stewart's model. Actual cash flow not only created strong rent coverage but facilitated MPT's ability to refinance its initial mortgage loan investment with a larger and much preferable sale-leaseback structure reflective of full market real estate value without compromising coverage. Fast forward to today. HCA Healthcare, one of the premier hospital operators in the world, has agreed to rental payments and purchase obligations that validate the real estate values that MPT previously underwrote. Just a relevant reminder, since 2016, we have underwritten and invested $4.4 billion in 40 hospitals leased to Steward in six major and independent market areas. Over that period, we have been paid more than $1.2 billion in rent and interest, and our shareholders have been rewarded with growing dividends and share values. The size, credit characteristics, and market diversification of this assembled portfolio is what allowed us during the third quarter to orchestrate the tremendous value enhancement represented by the Massachusetts and Utah transactions and the recycling into the Florida hospitals. So just to wrap up our recent activities, last week we closed on our acquisition of 18 inpatient behavioral hospitals master leased to Springstone across several US states for a total of $760 million. These facilities are purpose-built behavioral hospitals in carefully selected communities and very well run, a unique portfolio that we have been observing for several years. We also invested $190 million to own a 49% interest in the operator. Similar but infrequent OPCO investments we have made in the past have been extraordinarily successful. Because the level of investment is typically relatively small, the benefits are sometimes more about having competitive advantages in a process being run to sell an operator whose assets are heavily weighted toward hospital real estate than simply a nominal return. Nonetheless, our results are almost uniformly strongly profitable. Many of you will remember our double-digit IRRs from Earnest Health, Capella, now LifePoint, and others. And just this month, we realized similar returns from the sale of our equity interest in Median Kliniken and separately in German acute care operator Atos Clinics. While our investment in these operators were not material amounts, we realized very attractive gains. More importantly, only because we were willing to underwrite and make these investments years ago were we in a position to then acquire more than 1.5 billion euros in high quality hospital real estate that we still own. When it comes to our investments in Steward and Swiss Medical, among others, and now Springstone, which collectively represent a very small percentage of our overall investment base, we gain a great deal of alignment and insight. But an expectation for future capital gains is always part of our equation. I should also mention that we closed in late October on an 18 million euro cancer treatment center in Portugal, leased to an affiliate of Atris Health. This complements our inaugural investment in Portugal in late 2019 and adds to our foothold in that nation's growing private healthcare market. And we remain active in and enthusiastic about continental Europe, the United Kingdom, Australia, and South America. Finally, I will comment on both our current and pro forma balance sheets. Funding for the Steward South Florida and Springstone investments was sourced with a combination of existing cash as well as short-term borrowing resources, including a $1 billion interim line of credit, which we expect will be repaid in full upon completion of the announced Macquarie partnership. The resulting net debt to EBITDA ratio, taking all of this into account, is expected to be 6.3 times, As we think about this ratio relative to our historical five to six times range, which has not changed, we remind investors that more than half of our investing activity since the end of 2018 has been outside of the U.S., and that in order to cost efficiently and naturally hedge most of our related currency exposure and to take advantage of very attractive international debt markets, we have funded more than 75% of these international investments with non-U.S. dollar long-term unsecured debt at low rates, as is evidenced by our recent 500 million euro unsecured notes offering at a coupon of less than 1%. Because of this, and with no detriment to current liquidity, our net debt to EBITDA has temporarily and predictably fluctuated to levels outside our long-term targets. Acquisitions in 2021 have been more heavily weighted to high-quality U.S. facilities, for which our history has generally been heavier use of equity funding. So we expect to see continued reduction in our leverage ratio. But in stark contrast to prior years where follow-on equity was sometimes the only way to accomplish this, We now have more flexibility today with the vibrant and growing direct investment market for infrastructure-like hospitals, with our ATM use, with the $22 billion balance sheet that provides opportunities for selective property sales, and with earnings retained over and above our low AFFO payout ratio. As a reminder, our run rate guidance of $1.81 to $1.85 per diluted share is an estimate of the expected annual FFO for our in-place assets as of today, plus other assets that are either under development or subject to bonding acquisition agreements that are obviously not included in third quarter results. These items, in addition to the impact of the announced Macquarie partnership and additional assumptions related to reducing leverage to near six times, underpin our current guidance range. Beyond this, we assume no other investments or capital markets transactions and will plan to update the market in the future as they occur. The bedrock of our history of total shareholder return outperformance is the compounded effect of a well-covered dividend, as well as growth in per share cash earnings, all within certain self-imposed and long-term parameters that keep our leverage very much in line with other healthcare REITs. With that, I'll turn the call back to the operator for questions. Erica?

At this time, if you'd like to ask a question, please press star 1 on your telephone. Again, that's star 1 to ask a question. Your first question comes from Jonathan Hughes with Raymond Jane.

Hey, good morning. Thanks for the time. Good morning. I know you are limited a bit in what you can say about but could you share some high-level commentary on the soon-to-be HCA Utah facilities and the option for you to sell them to HCA? I mean, could those effectively become like an ATM vehicle where if for some reason in the future the public market doesn't provide you with an attractive or appropriate cost of equity capital, you could sell those to HCA to generate capital for other investments?

So that's a very good perspective, and it – actually is the way, if we were to so elect, that it could work. I think in our announcement we actually disclosed there's a put option that we have. We haven't disclosed the total details of it, but at a minimum. that we can put the properties to HCA at no less than fair value. There's actually a floor that we're unable to disclose, but it's a very attractive option for us and provides us the liquidity flexibility that you just described.

Okay. And I assume that put option here is a unique feature to this deal because you don't have a meaningful equity stake in the operator unlike some of the other large relationships you have.

Well, the put option is not normally something we have in our leases. I'm not sure that's necessarily related to, you know, less than 10% equity stakes in certain of our operators. But you're absolutely correct in that it is something of a unique feature.

Okay. And then one more for me. Looking at, you know, the other funding source, the debt side, Your run rate, net death EBITDA assumes six turns, but I think the pandemic and some recent actions proved your underwriting as well as the stability and safety of hospitals. And Steve, I realize you did talk about the leverage target in your prepared remarks, but have you considered running leverage maybe a little higher, like closer to seven turns, since it does seem like your hospitals could handle it? You know, you can raise international debt at pretty low rates, So it just seems like an interesting way to lower your overall cost of capital and drive further accretion from investments. Just curious to hear your thoughts on that front.

So, again, it's a fair observation. I mean, it's just arithmetic from that perspective. At this point, though, and, you know, for the long-term future, we think we'll retain that five to six times target, and there are good reasons for that. We're still growing very rapidly. We want to be able to react quickly to potential acquisitions. Sometimes these are very large acquisitions, and if we're already running up toward the top you know, what is, what is a prudent leverage range, then sometimes we don't have the flexibility to react quickly. So that's just one reason why we think the five to six times range is appropriate. Another is we are a public company. There is a calculus. I'm not sure it can be precisely expressed, but there is a calculus between share value and leverage, and we think another reason for that five to six times is that's that's probably the fulcrum for keeping our equity valuation at a point where we think it's appropriate.

Okay. Well, I appreciate the caller, and thanks for the time.

Your next question comes from Jordan Sadler with KeyBank Capital Markets.

Hey, this is Arthur Porto on for Jordan. My first question is on the investment pipeline for 2022. If you could just provide some color on geography, asset type, and pricing, and maybe the overall scale of the pipeline.

Sure. The pipeline remains extremely strong. We continue to work a pipeline in the $3 to $5 billion range. That doesn't mean we have $3 to $5 billion of acquisitions to make, but it's an active pipeline. But having said that, we haven't given any sort of indications of what we think will close for the remainder of the year. We've done $3.7 billion so far this year. We're very happy with where we are right now. The vast majority of that property, of that pipeline, is General Acute Care Hospitals. It's located all throughout our existing markets. We've got some additional things that we know that we're working on with some of our existing operators that will certainly come to fruition in the next couple of quarters. So that's where we are right now.

Great, thanks. I just have a follow-up question. This is on lease escalators. So your leases are typically tied to CPI escalators. If you could just please quantify the size of the increase that we might expect to see in 2022, that would be great. Thanks.

They are. Roughly half of the properties have some sort of collar with a minimum floor and a maximum CPI. And then the rest of them are essentially unlimited CPI. So obviously it'll depend with where inflation ends up. And it will, whatever it is, it will probably be within the cap, I mean the collar for the 50%. So somewhere in the range of actual CPI. All right.

Thanks a lot, Ed.

Your next question comes from Mike Mueller with JP Morgan.

Yeah, hi. Ed, I knew you said the proceeds weren't all that material from the German operator sales, but can you give us just a ballpark rough range of what's the amount of proceeds?

It's really immaterial. I mean, just in a range, we're talking less than 20 million euros.

Got it. Okay. And then thinking about the Macquarie transaction with Stewart and that J.P., How close, if we're thinking about what the next bidder was relative to the five, six cap cash rate, can you give us a sense as to just how close number two came to number one?

It was a very competitive process. There were multiple indications of interest. We're not able to rank them publicly, of course, but had we not come to an agreement quickly with Macquarie, we would have had alternatives.

Some of the offers or some of the interested parties were above and below, but it was the relationship and our thoughts that Macquarie would move very quickly and work well with us.

Got it. Okay. That was it. Thank you.

Your next question comes from John Polosky with Green Street.

Great. Thanks for taking the question. Maybe just a few follow-up questions on the state of the transaction market following the Macquarie deal. Cap rates seem to be compressing across real estate with anything with a durable cash flow profile. So curious these next few years where you think you'll have to be acquiring assets on a one-off basis given the state of the transaction market.

Well, a great question that I certainly can't answer with any precision, other than to point to the most recent history, and that is we continue to be able to make acquisitions at very attractive cap rates, certainly significantly above the valuation that we got on the Massachusetts transaction and The last big joint venture we did with Primonial in Germany, we continue to be able to harvest these gains. Part of that is because we're... We're the foundation of this market. We don't have a lot of competition. Now, that's growing as more and more investors and investment managers see the opportunities here, but we still are able to acquire, to assemble, to season a portfolio and then take it to the market selectively as we've done.

Okay, great. And just so I understand the nature of the bidding tense, to your point, you're a big player or often B player in the market. Deals you'd like to acquire that fit your quality criteria for just general acute care hospitals, and you bid on, what percentage of the deals do you lose? And in those rare instances, who are the type of entities that can outbid you?

Well, that's a good question. We rarely lose deals that we won't. The most recent, and that's not very recent, would be a European transaction in a specific country where the investor was a local investor that was willing to pay substantially more than we were willing to pay with some government funding involved in their access as well. So we truly very, very seldom lose a transaction that we want. And it's not just on price. It is on our knowledge of hospitals and the operators, very excited and interested in working with someone that actually understands their business.

Okay, understood. Thank you for the time.

Your next question comes from Joshua Deniling with Bank of America.

Yeah, hey, everyone. Hope everyone's having a good day. Um, I guess kind of two followups here, one on the inflation front. Um, I just want to double check which CPI CPI index should we watch? Is it total CPI? Is it like a specialty index related to healthcare? Um, and then also what's kind of the lag for when the increase in inflation would flow through your financials or your leases?

So it's total CPI. And the vast majority of our leases all readjusted the first of the year. So you'd see the rent increases in January.

Okay. Okay, great. And then on the HCA transaction, I wanted to follow up on that put option. And I believe they also have the right to buy the assets back from you. Is that something we should expect more of in future acquisitions? Or is this kind of unique to the HCA transaction?

No, that's contrary to what I said about our put option. That's relatively common to have some type of preemptive option at the end of a lease term. where an operator can assure itself that at the end of the lease term that operator is not going to lose its hospital because obviously hospitals, you know, they can't just pick up and move down the street. Licenses are specific to specific locations. And so there has always been in many, if not most of our leases, some type of preemption at the end of a term. And that is almost always based on the greater of the then fair value or our gross investment. So even before considering depreciation, we would not take a loss if the operator typically would exercise that repurchase option.

Oh, okay, okay. I didn't quite realize that. Appreciate that. Thank you.

Again, if you wish to ask a question... please press star, then the number one on your telephone keypad. Your next question comes from the line of David Toti with Collier's Securities.

My questions have been answered. Thank you.

Your next question comes from the line of Jason Iodine with RBC Capital Markets.

Hey, you guys have done a good job of reducing the steward concentration of Just wondering what the outlook is for that relationship and if you plan to continue reducing it naturally over time or kind of where we go from here.

Yeah, Jason, we do plan on continuing to reduce it over time just as part of the natural progression. Those of you that have been with us a long time may recall that Prime Healthcare at one time was our largest tenant. We continue to do business with Prime, but we also continue to add additional properties and different operators. So Prime now is way down in their total percentage of our portfolio. We expect that to be the same thing with Seward. We will continue to do additional business with them, but as a percent of our overall portfolio, we expect that to continue to decline.

Okay. And then just thinking about funding, so what would be the plan to fund future investments? I guess, is there a preference for either a JV transaction or equity issuance?

No, there's no preconceived preference for any particular as yet unidentified acquisition. What we've announced both in our prepared remarks and the press release has been really to describe the options that we now have that as a smaller, you know, younger company we didn't always have. We do have, as you point out, you know, joint venture opportunities. The ATM is a much more efficient way of raising, you know, common equity than perhaps what we had in the past. But we still have those opportunities also if there's a big transaction and we need to fill in, you know, the holes with, you know, an overnight underwritten offering. We can do that given market conditions. their sale proceeds, as we've talked about. Our first question pointed out something that, again, I thought was perceptive about this unique structure of the HCA lease. It gives us total flexibility on that. So we have lots of options. And at the time we begin looking at an acquisition that we have some confidence is going to close, then we'll decide what's the best, most efficient way to fund any particular transaction. Okay, thanks.

At this time, there are no further questions. I'll turn the call to Ed Aldag for closing remarks.

Thank you, Operator, and we greatly appreciate everybody listening in today. We always appreciate your interest. If you have any additional questions, please don't hesitate to reach out to us later in the day. Thank you very much.

Thank you for participating. You may disconnect at this time.