Medical Properties Trust, Inc. common stock

Good afternoon, my name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Medical Properties Trust second quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Charles Lambert, Vice President. Please go ahead.

Good afternoon. Welcome to the Medical Properties Trust conference call to discuss our second quarter 2022 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 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 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 medicalpropertystrust.com for the most directly comparable financial measures and related reconciliations. I will now turn the call over to our Chief Executive Officer, Ed Aldack.

Thank you, Charles, and thank all of you for listening in today to our second quarter earnings call for 2022. You all will recall that the public reporting hospital operators reported Q1 2022 results, reflecting the issues with the Omicron surge in December, January, and part of February. As we predicted last quarter, since we report coverages one quarter in arrears, The results we reported from our operators today show that same softening. Furthermore, just as we predicted with the public health systems like HCA and Tenet, who have both published their Q2 results, the positive trends that we are seeing in March and April have accelerated into May and June. There are several points that we believe are important for us to address today. First, we underwrite every investment at the facility level. We believe reporting coverages at the facility level is the appropriate metric. Whether we acquire a large portfolio of hospitals or a single hospital, we underwrite that acquisition at the facility level, understanding the competition, market, the physician referral sources, and the operator. We must be right on the market and the referral sources, but long-term collection of our rent does not depend on the financial results of a particular operator. In the few times that we've had to transition from one operator to another, we have been successful in attracting high, capable, and qualified operators because we had acquired hospital real estate that was essential to the community and in the right hands could be operated profitably. And as a reminder, our rent typically represents approximately five to seven percent of a hospital's net revenue. Two, rarely is an operator's real estate subject to an NPT lease. Rarely is 100% of an operator's real estate subject to an NPT lease. In many cases, NPT does not even own the majority of an operator's real estate. And three, hospitals can and do exist without corporate offices. However, corporate offices and their functions would not exist without the hospitals they support. Another item that is sometimes confusing to investors is the repair and maintenance numbers in coverage. The repair and maintenance is expensed on the income statement and represents the bulk of non-discretionary spending required to maintain the hospital real estate. The hospital's capitalized expenditures then fall into two primary categories, equipment-related and building-related. In both cases, the entire amount of the expense does not represent an immediate cash outlay. The overwhelming majority of these costs are financed and repaid over the terms agreed to by lenders or vendors. For larger, true real estate capital expenditures, like a new hospital tower, a new parking deck, or roof replacement, NPT has always been supportive of continued investment in our hospital real estate to the extent that a project meets our underwriting criteria. Sometimes MBT is asked to finance these investments, in which case they are generally added to our lease base. Moving on now to discuss our operators and the portfolio lease coverages. You all may recall that historically we provided coverages at the EBITDA level. Over the years, many shareholders and analysts suggested that we provide EBITDA coverages to be consistent with other REITs. Internally, we use a conservative 5% of net revenues across the board with our tenants to approximate the management cost of operators. Most of our operators' actual cost is significantly less than the 5%. The actual cost usually approximates between 3% and 4%, and some even less. We use the 5% internally to help show us direction and early warning signs. Let me give you some specific examples. Using our tenant's actual numbers and not the 5% number we use internally across the board, LifePoint's actual EBITDA coverage for the trailing 12 months ending March the 31st, 2022 was 1.38 times. Scion Health was 1.17 times. Priory was 1.75 times. Pipeline was 1.0 times and so on. Whether we use the 5% or the numbers provided by the tenant, This is an art and not a science. Also remember that as announced during the last earnings call and as previewed by HCA, Tenet, and others, the first quarter of 2022 was a difficult quarter for everyone. Our operators have returned to more normal metrics since then. Our total portfolio EBITDARM coverage for the trailing 12-month period ending 3-31-2022 was 2.4 times This compares to the trailing 12-month period ending 12-31-21 of approximately 2.7 times. The trailing coverage for last year's first quarter results was also 2.4 times. Using the surrogate number of 5% of net revenue for management fee, EBIDAR total portfolio coverage for the trailing 12-month period ending 3-31-2022 was 1.7 times. The details of our EBITDARM and EBITDARM coverages using the 5% number by operator are shown in our supplement report we filed this morning. Now, let me take a few moments to provide some high-level updates on some of our larger tenants. Steward. Steward operations continue to make dramatic improvements from 2020. In 2020, Steward's unadjusted EBITDAR was approximately $209 million. In 2021, based on current unaudited numbers, Steward generated an unadjusted EBITDA of more than $450 million. This reflects a more than $240 million improvement. Based on the most recent two months, Steward's internal unadjusted EBITDA shows a run rate of more than $800 million. The Utah and Miami markets alone continue to perform very strong and make up approximately $350 million of that $800 million. By the end of September, Steward will have paid back all of its MAP requirement, excluding the small amount associated with the hospital in Massachusetts that was hit by a flood two years ago. The exhaustion of the payback of the MAP money in September And the termination of the tenant management agreement will mean approximately $50 million additional cash dollars per month available to Steward. Volumes at Steward are up 11% over the volumes in February and up more than 20% than the same time last year. And very importantly, the quality of these volumes is strong. Current labor costs at Steward are currently 9% lower than they were in January. Circle continues to reflect steady operations and coverages. Self-pay admissions continue to trend upwards, which is a good thing in the UK, as growing NHS backlogs are driving substantial wait times in the public sector. And overall volumes are approximating pre-pandemic levels. Circle also continues to report that they are not experiencing any significant issues with staffing or inflation impacts. Prospect has not rebounded where we hoped they would at this point post the third COVID cycle and staffing changes. In talking with management, they are still bullish on California and believe that Pennsylvania has turned the corner after an enterprise system conversion. Prospect is actively involved in ongoing negotiations with the would-be acquirers for their Connecticut and Pennsylvania markets. To date, we have not been involved in any of these negotiations. Swiss Medical Network continues to perform as well as they have in the past. They continue to outperform the prior year from a revenue growth standpoint and expect to continue that trend as they onboard their most recent acquisitions. Median's operations and coverage remain steady as they have throughout the pandemic. Average occupancy through May has trended up from the prior year and additional increases are expected during the remainder of 2022. Personnel costs through May 2022 have been managed below budget and are up only 6% year over year. Median expects to be able to effectively manage in alignment with expectations during the remainder of 2022. Priory saw an increase in coverage in Q1 2022 and remains near two times coverage since the transaction last year. Occupancy remains strong and the remainder of 2022 is currently expected to be in alignment with expectations. Health scope at the end of 2021 during the early months of 2022. Australia continued to institute periodic restrictions on elective surgeries due to the COVID pandemic. HelpScope continues to work towards completion of multiple capital improvement projects at a number of our facilities. Prime continued its strong coverage performance in Q1 2022. Fifteen of our 22 facilities posted EBITDARM coverage of over three times, with seven of our facilities covering over four times. Volumes during Q1 2022 were almost even with Q1 2021, and their cash position is strong. Dr. Prem Reddy, the founder and CEO of Prime Healthcare, was recently recognized by the Los Angeles Business Journal as one of the 500 most influential leaders and executives in Los Angeles. This was the third consecutive year that Dr. Reddy has been recognized on this prestigious list. And Dr. Kavita Bahata, President and Chair of the Prime Healthcare Foundation, was also named to that list. Lastly, before I turn the call over to Steve, I'd like to provide a quick update on some of our recent activity on the acquisition front. with locations across Spain, the UK, Australia, and the United States. Our second Spanish transaction is a development agreement with one of our current operators, IMED. Recall back in 2015, we agreed to a similar deal with IMED to develop a brand new state-of-the-art hospital in Valencia, Spain. That facility, which has graced the cover of our annual report on multiple occasions, was completed in 2017 and has successfully served as their flagship hospital. The facility is now matured and IMED is ready to begin the next phase of their growth strategy with the development of the three new acute care hospitals across the Mediterranean coast of Spain. The estimated combined budget of these three development projects is 121 million euros. Each facility has a separate construction timeline but with all expected to be completed between the second half of 2023 and the second half of 2024. We are excited to grow our investments and relationship with the team at IMED. Early in the third quarter, we closed on a $26 million acquisition of another hospital in Columbia operated by a new tenant to MBT named FCV. They are a pioneer in Columbia and Latin American healthcare. excellence as the first to receive JCI accreditation in Columbia. Also during the quarter, NPT acquired from separate third parties two facilities located in Arizona and Florida and leased to Stewart for a combined $80 million. The Arizona facility, which will operate as a combined ambulatory surgery center, imaging center, and freestanding emergency department, is expected to drive additional volume to the nearby Mountain Vista Medical Center in Mesa, which is a Steward facility. The Florida General Acute Care Facility provides Steward an economical way to expand within the same services area as their Coral Gables Hospital, and it's expected to commence operations in January 2023. And with that, I'll turn the call over to Steve.