Medical Properties Trust, Inc. common stock

Good day, and welcome to the third quarter 2022 Medical Properties Trust Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Today's call will last one hour, and after today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference back over to Charles Lambert. Please go ahead.

Good morning. Good morning. Welcome to the Medical Properties Trust conference call to discuss our third 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 www.medicalpropertytrust.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 gap measures in accordance with Reg G requirements. You can also refer to our website at www.medicalpropertytrust.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.

Ed Aldag Thank you, Charles, and thanks to all of you for joining today on our third quarter 2022 earnings call. While economic uncertainty and inflationary pressures continue to weigh on investors and businesses worldwide, we're seeing some positive trends over the last couple of months within the healthcare sector that are worth noting. Volumes have fluctuated throughout 2022, but August saw increasing volumes, which have provided a good boost in revenues. So while our trailing 12-month coverages may see marginal declines as grant funds roll out of the prior periods, we're seeing positive trends in quarter-over-quarter and August-over-July discrete coverages. As we have previously discussed, our operators, especially the general acute care facilities, have experienced the same general conditions and environments as have all hospital systems, including HCA, Tennant, and others. Our operators have been executed on initiatives to reduce contract labor utilization and at the same time negotiate more favorable pricing for contract labor that remains in place due to short staffing. In February of this year, our operators experienced the highest level of contract labor, but have subsequently seen a decline through the month of August. A similar decline has occurred in overall salaries, wages, and benefits. I want to take a moment to remind everyone the nature of reimbursement for hospitals. Generally speaking, hospitals are paid after services are rendered, and more notably, these rates are adjusted at various intervals based on prior year's data. What this means is that reimbursement rates are not currently reflective of the increase in cost of care for patients that hospitals have incurred over the last year or two. CMS will catch up. Remember, historically, Medicare rates have, on a whole, outpaced inflation. It is also important to note that our operators contract with and are reimbursed by numerous distinct payers. The terms of these contracts generally range from one to three years. Our operators are actively negotiating new contracts with their payers and expect to be successful in negotiating increased reimbursement rates that are even greater than CMS increases. It may not be immediate and all at once, but it is coming and in an escalating manner. As our operators effectively work to bring down cost and as reimbursement rates increase, we expect to continue to see coverages improving within our portfolio. As our operators adjust and adapt, we are confident they will continue to be successful. This is a long-term investment, and while we focus, along with our operators, on the month-to-month, quarter-to-quarter metrics, we are more focused with the long-term strength of our portfolio of assets. It can become too easy to lose the forest through the trees by myopically focusing on a monthly spike in contract labor or coverages quarter after quarter. Our underwriting and managing of these assets are not done in a vacuum, nor on a quarter to quarter time span. We see the forest. We've seen our portfolio go through numerous cycles over the years. Hospitals have always adapted to whatever the new norm, and then they do it again. Earlier this month, Pipeline announced that it had filed for a petition for reorganization relief under Chapter 11 protection. Many of the financial challenges for the Pipeline organization involved their hospitals in Chicago. As a reminder, NPT does not own or lease those hospitals to Pipeline. We own Pipeline's four Los Angeles hospitals. We remain confident in pipeline as an operator, especially considering the value of our hospital properties that serve a vital need in their respective LA communities. We understand the decision to restructure as it will provide the flexibility and implement sustainable strategies for the corporation going forward. We fully expect that our risk will continue to be paid and our hospitals will continue to serve their respective communities during the duration of the bankruptcy process. Over the past couple of decades, MBT has successfully underwritten tens of billions of dollars in healthcare real estate. And in that time, we've had very few operators go through the bankruptcy process. Our success rate is not perfect, but it's pretty darn close. Last quarter, we provided an investor update report on our website that details some of these occurrences where we've had needed to replace or transition operators. not all of which were the result of bankruptcy. In almost all of these situations, there was no interruption of services provided to the communities by these essential assets, rent continued to be paid, and we were successfully able to transition the in-place lease agreements to new tenants. Regarding coverages for the 12 months ending June the 30th of this year, we continue to see the impact of the COVID grant monies rolling off the trailing 12-month period. However, as I stated earlier, we are seeing positive increases in quarter over quarter coverages. This is being bolstered by increased volumes and decreases in contract labor and overall salary, wages and benefits. Our lease coverages amounts are spelled out in detail in our supplement file this morning with our earnings release. But there are a few points that I'd like to highlight. we are almost at the point where no COVID grants will be included in the trailing 12 months. The EBITDARM coverage for the trailing 12 months ending June the 30th with or without grants is only seven basis points apart. Another very important point to note is that the coverages for our total portfolio and each separate category of hospitals saw an increase in coverage during the second quarter over the first quarter. The total portfolio was up 40 basis points, up 60 basis points for acute care, up 10 basis points for inpatient rehabs, up 20 basis points for behavioral health, and up 90 basis points for our long-term acute care facilities. And before turning the call over to Steve, let me outline the strong operating performance that Stuart is reporting to us. Unadjusted EBITDA for the second quarter was approximately $51 million. The third quarter is expected to be more than $30 million. Fiscal year 22 unadjusted EBITDA is projected to be between $50 and $80 million. Contract labor in Q3 fiscal year 22 has decreased 30% from Q1 FY22 run rate and is expected to decline an incremental 20% in Q4. resulting in a 50% decline since the first quarter of this year. Stewart is also forecasting unadjusted EBITDA of more than $350 million for fiscal year 23. Steve? Thank you, Ed.

This morning we reported normalized FFO of 45 cents per diluted share, in line with our prior expectations, including slight dilution relative to our previously announced use of capital recycling proceeds to continue our reduction in leverage. As this morning's press release noted, we have refined our 2022 calendar year estimate to a range of $1.80 to $1.82 per share, simply narrowing the previous range to the higher end. Implied fourth quarter results primarily consider a full quarter impact of the third quarter recycling activity and higher interest rates. Adjustments to normalize FFO are routine and immaterial individually and in the aggregate, but I will be happy to address any questions you have about this during our Q&A. Let's review MPT's reliable, sustainable, and inflation-protected cash-based business model. Year to date, as of September 30, MPT had collected 99% of contractual rents. In the interest of accuracy and transparency, however, I will point out the following definitional considerations. First, as we reported last quarter, MPT supported steward and prospect with loan facilities, and I will review these momentarily. Second, in earlier quarters of 2022, we allowed one non-U.S. tenant relationship to defer $7 million of rent over four months. That tenant is now back to paying 100% of rent and will repay the amounts deferred with interest over 12 months starting in January. And finally, many U.S. states have so-called supplemental Medicaid programs. that basically collect an assessment or a tax on all hospitals in the state. This aggregate assessment is often matched by the federal government and then is periodically allocated to the state's hospitals based on each hospital's relative provision of services to eligible patients. There is frequently a long gap between payment into the fund and receipt of distributions from the fund, often in excess of a year or more. And for some hospitals, this represents a meaningful portion of periodic reimbursement. Some of our leases are negotiated with these timing gaps in mind by allowing limited deferral of rents based on the specific statutory provisions of each element of the supplemental program in that state, in which case the deferred rent is paid to the landlord when the state distributes the supplemental funds. As of the end of the third quarter, $24 million of such deferred rent has been recorded. This will be satisfied over the next nine quarters. Just as important as MPT's historical rent collection performance is the likelihood that we will sustain that collection performance in the future. And we currently expect that we will continue that level of collection performance over the long term. I'll make a few tenant-specific comments that we hope will relay to you our own confidence in our continued collection of rents, including rents from some of the real estate that has attracted attention in recent periods. And we'll start with Stuart. Stuart has faced the same operational, staffing, COVID-related revenue, inflationary, and other pressures that the overall U.S. hospital environment has dealt with for well over two years. As we discussed in detail on last quarter's call, during this time, Stewart's cash flow has been burdened by having to repay to CMS the vast majority of MAP advances approximating $450 million, delayed Medicaid reimbursement in Texas of about $70 million, the revenue impact of state of Massachusetts mandated elected procedure restrictions earlier this year, And finally, Steward's $300 million-plus cash investments in and working capital support for the five acute care hospitals in South Florida acquired about a year ago. When we reported to you three months ago, Steward was in the middle of managing its cash flow to satisfy these cash requirements. Since then, and again with some assistance from NPT, Steward has weathered this cash strain And it's now on the flip side of these circumstances and expects to be strongly cash flow positive, starting with the fourth quarter of 2022. i'll call out a few additional indicators of stewards long term capacity, which we hope will make even more clear why our second quarter loan to steward was a prudent and profitable investment. Remember that HCA valued Steward's Utah operations and solely the Utah operations at $850 million. This transaction ultimately did not occur, but only because of the antitrust position of the FTC. But the value of Steward's Utah operations did not suddenly go away just because one particular operator faced antitrust issues. Steward, of course, still owns these valuable assets. and has the option to continue to operate Utah on its own and generate strong after-rent cash flow as it is doing now, or to explore monetization of the Utah operations by selling to other prospective purchasers who would not face the level of antitrust scrutiny that HCA often attracts. Under either scenario, and whoever is the operator in Utah, the community infrastructure-like characteristics of MPT's Utah real estate assets should result in profitability and cash flow to pay MPT's rent at attractive coverage levels. Similarly, earlier this year, MPT sold a 50% joint venture interest in our Massachusetts real estate that is leased to Stewart. The JV simultaneously placed secure debt on that real estate, and MPT recognized an approximate $600 million gain on the sale and received an aggregate of $1.3 billion in cash. The self-evident point to be made is that two very sophisticated institutional investors, the infrastructure fund and the lender, did substantial diligence on the operations, cash flow, and value of Stewards Massachusetts operations and concluded that MPT's contractual rents on its real estate were well supported. Again, the value of those operations has not suddenly gone away. NPT also owns nine hospitals in Florida that are leased to Stewart, where operations since last year, when Stewart acquired five of these hospitals from Tenet, have continued to improve. And by the way, performance was very attractive even from the time of acquisition. These three markets, Utah, Massachusetts, and Florida, comprise nearly 75% of Stewart's total annualized rental obligations. On a weighted average basis, Stewart's EBITDARM coverage in these markets has ranged from 2.7 times for the trailing 12 months into June 30, 2022, to an excess of three times, preliminarily, for a standalone August. With these coverages, Stewart appears well able to continue paying MPT rent. And that, of course, is the cornerstone principle behind MPT's very long-term track record of buying hospital real estate that needs to continue operating in order to serve the critical healthcare needs of people in its community. It is by identifying those physical and market characteristics in the real estate we invest in that has led to MPT avoiding renegotiation of rents, or other impairments over our almost 19-year history. And this is why, during the earlier part of this year when Steward was working out the issues I just described, that MPT elected to fund a loan to Steward rather than require Steward to borrow from another lender. Another lender would have required MPT to relinquish our existing and powerful security position in the value of Steward's best operations a position we have by virtue of our master lease, security agreements, and inter-creditor agreements. We elected instead to retain this key position and value for ourselves for relatively little incremental exposure, all while earning an attractive return for doing so. A brief update on PROSPECT. First, we announced a few weeks ago that the Yale New Haven Health System has agreed to acquire PROSPECT's Connecticut facility. including our real estate, which we expect to sell for approximately $457 million, of which cash proceeds from Yale are expected to compromise a substantial majority. That is equivalent to the original investment we made about three years ago. In addition to the expected recovery of our original investment, since that acquisition three years ago, Prospect has paid us cash rents of about $104 million. Some analysts and investors have opined that our Prospect investments are not among our stronger assets. And while we will not comment on that observation this morning, if it is true, then the Yale transactions will be an especially notable financial result for our shareholders and for our underwriting. That is, an investment considered weaker nonetheless generates a strong, unlevered cash return and recovery of the original investment, all during the worst economic and health crisis in over a century. Yale's attraction to these facilities is a good example of why we think hospital real estate should not be valued based solely or even primarily on the financial performance of any particular operator during any particular time period, and why we monitor and report on lease coverage ratios only for directional indications. It is critical for a successful investor in hospital real estate to understand the value that a specific facility has to the healthcare needs of the community it serves. And just because the goals and periodic performance of one particular operator are not met in a certain location, does not at all mean that the performance of other operators cannot satisfy their own goals, resulting in a real estate investor enjoying attractive, well-underwritten returns. On our second quarter earnings call, we said that, while we were unable to discuss certain potential and confidential prospect transactions, that we had reason to believe that such transactions would result in MPT's avoidance of material impairment or loss with respect to prospect. We continue to be prohibited from disclosures about confidential discussions, but we remain cautiously optimistic about repayment in the relatively near term of the related second quarter $100 million increase in our original 2019 first lien mortgage loan. Of course, there is no assurance that any pending transactions, including possible repayments of mortgage loans in the near term, will occur. Let's briefly review our strong capital and liquidity position. Our quarter-end cash and revolver capacity provides about $1.5 billion in immediately available liquidity. Recall that earlier this year, in recognition of inevitable inflationary and interest rate pressures, MPT restated and amended our $2 billion revolving credit facility and extended its term to mature with extension options to June of 2026. In addition to the $1.5 billion, we have, of course, announced expected proceeds in 2023's first half from pending transactions, that is, Springstone and Yale, of up to another $650 million. Our earliest debt maturity is more than a year in the future when our 400 million pound sterling issue comes due in December 2023. Next in sequence to mature in 2024 is our approximately U.S. dollar equivalent $750 million term loan, the proceeds of which were used in 2019 to fund our acquisition of the HealthScope portfolio in Australia. Beyond that is a well-laddered maturity schedule of our various unsecured notes, which is detailed in our third quarter supplemental package. Looking forward to possible uses of our liquidity, it is evident that capital costs are not generally favorable for significant investments in today's global economic environment, and our situation is not different than other investors'. Year to date, we have invested, subject to foreign currency fluctuations, about $750 million. And most of these investments were made early this year. For the foreseeable future, any additional acquisitions will require compelling economics, limited use of liquidity, and strategic support of opportunities presented to us by our strong operator relationships. Other evident uses may include reduction of debt, and repurchase of our very attractively priced common shares. But even without use of capital for new investments, our inflation-linked lease revenue should result in substantial internal and highly accretive rent growth, especially given recent global inflation. We continue to selectively explore additional opportunities to recycle invested capital through specific one-off asset sales and larger portfolio transactions. although we are not prepared to make any announcements this morning. Finally, MPT's longstanding, consistent, and successful business model has always been to invest in hospital real estate that, regardless of the operator, is underwritten to generate sustainable, long-term cash rental revenue. The key investment criteria for this success is our acquisition of real estate that is critical to the delivery of hospital services in any particular community. We considered it a mistake for real estate investors or analysts to assess hospital value based primarily on periodically volatile operating results instead of the important characteristics of the underlying real estate. Our unequaled results in rent collections through many years of operating volatility related to disruptive regulatory changes, the 2008 financial crisis, reimbursement uncertainties, and evolving payment methodologies. Obamacare, the Affordable Care Act, and its continuing disruptions, uncertainties, and after effects. Three years of an unprecedented global pandemic that included virtually closing many hospitals for months. and most recently, previously unseen disruptions to hospital employment and compensation, along with generationally high spikes in inflation and disconnect between reimbursement and cost levels. Our unequaled results validate our skill in investing in the kind of hospital real estate that maximize our likelihood of continued long-term success. With that, we have time for a few questions, and I turn the call back over to the operator.

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Vikram Malhotra from Mizuho. Please go ahead.

Thanks so much for taking the questions. Maybe just want to start off with Stuart. You referenced the value that was described for the real estate. You also referenced the unadjusted EBITDA improving for potentially 2023. So given all of that, I'm just wondering two things. One, Any sense or any update you can give on your own thoughts on them getting the permanent ABL extension? And then second, given the improvement in the value, can you just give us a sense of like other parties that may be wanting to buy certain select steward operations? How close is that something on the table or is it just highly envisioned right now?

Thanks, Vikram. On the ABL, what Stuart announced a few weeks ago was that they had an extension until the middle of December. during which time they expected to complete documentation requirements to presumably extend that for a full year beyond the time they delivered those documentation requirements. It's our understanding that the primary documentation is delivery of the 2021 Audit to Financial Statements, and it's our further understanding, although we don't have direct influence is that Steward, its auditors, and the lender group is well on its way to successfully delivering that documentation.

And Vercom, just on your second part of your question there, as you recall on the Utah HCA transaction, Stewart did not do a process. They didn't have the property, those particular hospitals up for sale. HCA came knocking on their door. But it's often the case when people learn that somebody might have an inside track to buying something, you can imagine that a lot of other people have called as well. We're certainly not privy to those conversations and where they may be in any of that. But we certainly are aware of other people that have an interest, not only in the Utah facilities, but some of the one-off facilities as well. But we don't have any direct knowledge of where they may be in any of those discussions.

Okay, that's helpful. And then just on prospect, you know, obviously you now included additional assets in that calculation of coverage. So we're seeing the negative coverage is there. But can you just help us understand all the sources of capital that prospect has and, you know, kind of your rent is current today? What's your confidence around that rent being current going forward?

So that's a good question. So we included Pennsylvania in the coverage this time and It's important to note that the California facilities continue to perform at acceptable levels. The Pennsylvania facilities are not where we would like them to be, certainly disappointed in where they are. I think that the changes or some of the changes that PROSPECT has going on at Pennsylvania is certainly in the right direction. Having borne the fruit that we certainly would hope that they would at this particular time, But remember, they've got the managed care business, which is extremely profitable, that generates strong cash flow for them. And as Steve pointed out earlier, there are potential transactions out there that we're not in a position where we can comment any further than that on that gives us comfort at this particular time. And we've remained comfortable in the California facilities.

Okay, great. And then just last one. Can you just clarify or provide us an update at this point where we are in the cycle? Just look what's happening to hospitals broadly, the improvements you referenced. Do you anticipate a need to provide any additional loans to any of your tenants?

So that's a good point about the hospitals and a point that sometimes we take for granted that we probably should spell out more. Remember that these coverages that we present are on a trailing 12-month basis. So they're a look back, and on top of that, we report a quarter in arrears. So this is really second quarter trailing 12-month information. So it includes one of the worst quarters that hospitals have had in a very long time, the first quarter of this year. And as I pointed out in my prepared remarks, It includes trailing off of the COVID grant in some of those earlier parts of the 12 months. So it's important to note that if you look at second quarter to third quarter, the preview, we don't have all of the numbers in from all of our hospitals at this point, but what we've seen so far is that there is an improvement over the second quarter from first quarter, and there's also a continued improvement in hospitals in the months of July and August. So we expect that to continue to improve. Just like most of the publicly reporting companies, our operators have made great strides with their labor costs, and so we expect that to continue to improve as well. Their volumes are also up now. Obviously, August is always a slow month in the hospital business. It seems to be the month that everybody takes vacation. So we'll see what the third quarter presents just from that particular aspect. But we expect that all of the operators will see better continued going forward coverage. We do not have any knowledge or need, foreseeable need that we would need to loan any money to any of our tenants for any rent needs.

Thank you so much.

The next question comes from Jonathan Hughes from Raymond James. Please go ahead. Hey, good morning.

I'd like to just focus on corporate governance. What steps has the board taken beyond the announced dispositions and the stock buyback plan given the dislocation and the heightened focus on the company this year? Have there been any changes to committee members or plans to further refresh the board? Has there been a special committee created to address the real-time concerns that have negatively impacted the company all year? Have there been any discussions, actions taken to help improve communication and our messaging to help us in the investment community better understand MPD? You know, I think a lot of people Listening to this call, definitely want to hear that the board outside of U2Ed and Steve is aware of what's going on and are taking steps to address these issues and govern the company.

Jonathan, as you probably know, there were changes to committee members and composition this year, as is often the case in most years, and those were published following the annual meeting. We also added an additional board member, as you know, as well. Emily Murphy joined our board recently as well. Our board is very, very involved. We have a risk committee that meets on a regular basis that reviews all aspects of the company, potential risk and obviously current market conditions. The board meets regularly, obviously on a quarterly basis in person. We also have very often phone calls, meetings, and we go over everything in great detail. They are not only informed from Ed and Steve, but they're also very informed from our outside advisors.

Okay. Yeah, I didn't know about the changes. I don't think I knew about the committee changes earlier this year. I knew about the addition of the board. I guess maybe going back to kind of communication and how the board, you know, relays that, you know, to you and obviously us in the investor community. But with regards to pipeline, you know, I think we all found out about that from Bloomberg and peers, 8K versus a filing from you. And I know it's a small part of your portfolio. And you did talk about what's going on there in your prepared remarks, but That just seems like it would have been an easy way to improve this communication that has been an issue among investors for years, and then your defense has gotten better. But maybe going forward, could we expect a little bit more forthcoming and disclosure on those type of events if they do happen in the future?

So pipeline – is a very small piece of our portfolio. Biclon is fully paid cash rent, virtually all of their obligations as of the end of the quarter, which was when they filed for bankruptcy. We fully expect that this, again, relatively small relationship will continue to pay rent, will come out of bankruptcy either under current ownership or another ownership, with our leases intact. As of today, we have about $13 million in deposits and reserves on the pipeline relationship, in addition, of course, as I say, to what we think is adequate assurance right now for continuing to get paid. And so I'm not sure how we would have reacted differently, you know, the We did not have advance notice on Sunday night that they planned to file bankruptcy. So I'm not sure what we would have done differently, frankly, once the news was out.

I mean, maybe an 8K or a press release would have been helpful, but I do understand that you didn't have any previous knowledge of it, so that's a fair answer. I guess just one more for me then on bankruptcy. capital allocation and external growth and dispositions. But how do you view other avenues to create or prove value outside of monetizing real estate? Like with the Springstone operating company transaction in August, is there any interest in packaging some of those opco investments with real estate in an effort to maybe create more incentive or upside for potential partners? Or is it going to be more just a focus on looking at potential real estate deals?

The SpringStone transaction, that whole series of transaction going back 18 months now, is just a really, really good example of how we use our RIDEA-type investments. SpringStone was a platform, a well-developed, well-managed, private equity-owned platform that was developed over many years. And even though it was developed over many years, the real estate was relatively newly developed, state-of-the-art behavioral hospitals. It was 18 hospitals worth about $750 million that we have had our eyes on for many years, frankly. in order to capture that very attractive real estate, which is now already grown, as we thought it would as Springstone continues to grow its business across the country. In order to capture that, when the private equity firm was ready to exit, Like most private equity firms and like several other transactions I could describe with similar examples, the seller's not willing to bifurcate real estate and OPCO and make two separate sales. So in order for us to capture the real estate, which is what we wanted, and which was 75% or 80% of the total value, we had to be willing and capable, frankly, of acquiring the whole company. And that's what we did a little over a year ago. And even before we closed that transaction, we have multiple parties interested in approaching us in acquiring the OPCO. which while we are absolutely capable of managing along with our management team partner, that's not our business. That's not what we want to do long term. And so within six months, we had agreed with Apollo and LifePoint for them to acquire a majority interest in the operating platform for a very significant gain on our part. And now we have, or we will have, presuming closing that's expected, but certainly not guaranteed, early in 2023. Now we will have what we wanted from the beginning, which is a very, very good portfolio of well-developed, specifically behavioral health care real estate. So I think it worked out. Again, I know it worked out very, very attractively for us. We are proud that we've developed the skill to underwrite operating companies because it gives us a tremendous competitive advantage when we do have opportunities to look at companies that are for sale, the total enterprise is for sale, and there's a significant portion of real estate. And again, I won't go through it all in detail, but this is what we did with Earnest, very, very profitably over a five or six-year hold period. We did it with a similarly short hold period with Capella back in 2015. And on smaller scales, we've captured significant gains. on our equity interest, for example, in Median, in ATOS, two German platforms that we have, and, excuse me, again, on smaller scales in others. So, SpringStone worked out exactly like we like it to work out, and we would hope that it would work out like that in the future on additional transactions. Sorry I went kind of long-winded on that.

That's fine. I mean, I understand the SpringStone rationale and Totally get it. That's my question, Mark. So would you look at potentially selling part of your equity stake in Steward Opco with real estate to get a deal done? I realize you own 10% of Steward today. You have to sell 5% or so and package that with real estate. Is that something that could be considered?

Well, that's not an unfair observation, I think, because there is a level, a high level of interest there. You already saw it, of course, with Macquarie earlier this year on the Massachusetts portfolio. There's a similar level of interest from other infrastructure and other funds that may be willing actually to consider something that you've just described. Again, we don't have anything to announce or even hint at this morning. But it's not an unfair observation, Jonathan.

Okay. All right. Thank you for the time. The next question comes from Michael Carroll from RBC Capital Markets. Please go ahead.

Yeah, thanks. Steve, regarding the potential prospect deals that you kind of highlighted in your prepared remarks, and I know you don't want to provide too many details on that, but can you highlight the potential timing of those transactions? I mean, how far along are those discussions and And does the changing interest rate environment put those deals at risk at all?

Well, that's a very good question also. I think anything that depends today on a high level of debt, any type of transaction, I don't think anybody should assert any certainty, maybe with the exception tomorrow of the Twitter thing. It looks like it will get done. But leverage lending right now is pretty volatile. And while you're right, you know, it's not that I don't want to comment. It's really we're just legally prohibited from comment. Just as a general observation, you know, the capital markets, including maybe even especially the leverage lending market, is particularly volatile in our view right now.

Okay. Does the changing in the industry environment, does that impact those potential deals, or you just can't comment on that right now?

We just can't comment on it right now. Okay.

And then with regard to the sale, the Connecticut sale to Yale, I guess what type of regulatory hurdles still needs to be clear there? Is there any concern that there's risks to that?

Well, there is risk to that. There's no question there's risk to that anytime you have the regulators involved. Primarily, the biggest hurdle is the transaction does require a certificate of need approval. Now, given the circumstances, given the financial, the political, the other influence and power and benefits of bringing Yale to these hospitals, One would think that the regulators would prefer to see, you know, Yale come in and stabilize these facilities. And so, again, one would think maybe the risk is mitigated. But that is the risk, and we do understand that it's not going to be an overnight decision.

Okay, great. And then just last one for me. I know you kind of highlighted that there are several, I guess, portfolios that you're looking to sell within your portfolio currently, and I know that there is reports that NPW might be willing to sell the HealthScope properties. I'm not sure if you can provide any color on potential transactions outside of what's already announced, but maybe can you provide some color on private market valuations and and how those have been impacted by the current interest rates? I mean, is it reasonable to expect that you can get some of those larger transactions completed in the current environment?

Well, we think so. That's a really interesting answer to your interesting question, because as, you know, I just made the comment that the debt capital markets, you know, are pretty volatile. There are investors, primarily sovereigns, pension funds, and others, who are still assessing a pretty attractive, at least preliminarily, based on what we see in the market, pretty attractive cap rates on well-underwritten hospital real estate. And so while we shouldn't kid ourselves that if interest rates were up a couple hundred basis points, then that's not going to affect pricing, it's not affecting our early indications as much as if we were trying to sell to a private equity firm, for example. So it's not a very clear answer, I understand, other than to say that there's still a high level of of infrastructure-like cash flows that have the kind of inflation protection that many hospital leases have.

Okay, great.

Thank you. The next question comes from John Pawelski from Green Street. Please go ahead.

Thanks for the time. Ed, I may have missed the number in the beginning, but can you just let us know what's driving the difference between what sounds like a $350 million EBITDA projection for Steward next year versus the $800 million run rate disclosed last quarter?

Well, the $800 million is an EBITDA number, and the $350 million is an EBITDA number.

Okay. But then could you share kind of how you bridge the, I guess, 50 to 80 million EBITDA figure for 22 up to the 350 million for next year?

Going from the projections of the fiscal year this year being the 50 to 80 million to the 350 next year? Is that the question?

Yeah, how do you get there?

Most of that is continued improvement in the operations, but the biggest number of that is the full effect of the cost savings that will be in effect in 23.

Okay. Final question from me. Could you just give us a sense, just in terms of your broader, just all your hospitals, what percentage roughly, in order of magnitude, what percentage of CapEx projects have been deferred the last few years as as hospitals have had bigger priorities and just strands on liquidity. I'm just trying to get a sense for the wave of deferred CapEx that we could expect over the next few years.

John, I suppose you're talking about the CapEx that is funded directly by our operators, not the capital additions that we fund. And if that is the right question, I've been doing this for almost 38 years, and it has It has been a nice thing to see that hospitals generally do a very good job of keeping their hospital CapEx up to date. If they don't, then they certainly will see declines in their operations. To date, we do not have any facilities that we have seen substantial and material deferments of CapEx. And we have teams here in the company that go out to every single property every year and review each one of those specific aspects for every property.

I'll just add a final comment on that, John, particularly in Europe and even in Australia. because of the nature of the reimbursement, which comes from employers and employer-related pension funds, our facilities are inspected frequently by these reimbursement payors, specifically for quality of the physical plan for the capital expenditures. And as Ed just alluded to, if they're not totally up to date, then revenue reimbursement is penalized. So it does no good for a hospital, even if they were so inclined in those circumstances to cut back on CapEx.

Okay. Thanks for the time. The next question comes from Stephen Valliquette from Barclays. Please go ahead.

Great, thanks. Good morning, everybody. Good morning. A couple questions here interrelated on Stewart. First, my understanding was that another use of cash within Stewart over the past year was capital expenditures on the Florida hospitals that Stewart acquired from Tenant Healthcare. So I'm wondering if the payoff in those investments is a big part of the expected EBITDA improvement at Stewart in 23 versus 22. And that does kind of really tie into my bigger question is, With that, EBITDA projected to be 50 to 80 million for Stewart this year, then going to 350 next year. We think about that just in the context of the breakdown of the Stewart facilities geographically that you guys always show on page 11 of your supplement between Utah, Florida, Texas, Arizona, et cetera. Are you able to discuss just at a very high level which of those geographies may have the biggest improvement year over year? So just thinking about it geographically as well might be helpful. Thanks.

Yeah, I think without a doubt the biggest improvement is indeed Florida. Florida is way exceeding our original underwriting expectations. It may even be exceeding stewards. I don't know for a fact, but I do know that those particular facilities have done exceptionally well. But all of their markets continue to perform well. There's the Ohio, Pennsylvania area that is probably the least performing, but none of them are negative. They all are performing very well.

Okay. That certainly helps for context. Thanks.

The next question comes from Mike Moeller from J.P. Morgan. Please go ahead.

Yeah, hi. I have two questions and just want to check some math. So first, can you break down this $650 million of proceeds that you're expecting for next year along with a blended yield? And then second, can you talk about the different geographies where you see your 10-year financing rates at this point? And then the math I wanted to check was, if the steward is expecting $350 of EBITDA next year, I think your cash rent payments are around $375. So does that imply about a 1.9 times coverage?

The quick answer to that last question is yes.

Okay, great.

The quick answer to the first question is the 650 is comprised of an estimated $200 million that we expect to receive in first half of 2023 from proceeds for the Springstone transaction. and then roughly another $450 million from the Yale transaction, and that comprises the 650. And I'm sorry, I forgot the middle question.

Oh, yeah, just financing rates in the different geographies.

Yeah, high. and extraordinarily high in a couple of cases, primarily the U.K., where you've just seen kind of an incredible social, political situation that spiked interest rates and currency transactions. But just order of magnitude, Mike, if we're talking about the U.S., where the last – issuance we did was three years ago, that we issued 10-year unsecured at 3.5%. I think we would feel very fortunate if we had to do that today, which of course we do not, but if we issue 10-year U.S. dollars today, it's probably going to be 8-plus percent.

Okay. Any similar commentary on Euros, pounds, Australia?

Well, we certainly don't have any plans, especially in Australia. Remember, the only debt we have down there, it's Australian dollar debt, is the term loan that we borrowed from the banks in order to buy a health scope three years ago. That still has two years left on it. And that's a very, very attractive transaction that we did. We are well, well into the money on the swap that we executed for that loan. On the U.K., which is our earliest maturity in a little over a year, I think it's December of 2023, That was a relatively short-term issue, and I don't know what that would be today even, but my guess, and maybe it's a bit of a hope, is again because of the political situation in the U.K., that rate will come back to something more normalized, which nonetheless would be much higher than I think we're paying about 2.5% on that right now.

Got it.

Okay. That's helpful. Thank you. The next question comes from Joshua Dennerlein from Bank of America. Please go ahead.

Hey, guys. You commented in the press release you expect rent growth of 4% to 5% next year. How does that compare to potential rate increases for your operators that they might be getting from the payers?

Well, that's a great question. Obviously, CMS has already announced what their rate increase will be. I think it was 4.5% in that range. Very interestingly, we've just recently learned that Germany is going to be somewhere in the neighborhood of 6%, I believe. And so you're seeing those types of rates on a go-forward basis.

I think the conceptual thing to remember, Josh, is with respect to rents, to the landlord rents, especially on acute care hospitals, it's a relatively small piece of net revenue, generally around 5%. So when it comes to inflation pressures, hospitals aren't focused on paying a little bit higher rent on 5%. They're certainly much more focused, as Ed described a little earlier, on getting down the the inflationary escalations on salaries, wages, and benefits, and other supply chain issues. And then again, over time, going all the way back to, you know, when records first started being kept for Medicare, over time, which doesn't mean from quarter to quarter, obviously, but revenue reimbursement has always kept up and, in fact, exceeded inflation.

Can you maybe walk us through that a bit more, like what kind of lag there is with the payers and the inflationary pressures? And are there certain times a year where we should look for announcements from the payers?

So CMS is every year. And then the commercial insurance payers will vary because people enter into contracts that vary in length from one year to three years. And it's different for every single one of their payers. Some states like Alabama only has one basically commercial insurer, but states like Texas have a lot. So you'll have hospital operators having 50%, 40% to 50% of their revenue coming from a lot of different commercial insurers, and those are being negotiated all throughout the year.

Okay. Thanks, guys.

The next question comes from Tayo Okusana from Credit Suisse. Please go ahead.

Yes. Good morning, everyone. Just a couple of quick ones on Steward. First of all, and I may have missed it because I did get on the call a little late, but the delay in the Texas development by about a year and a half. Could you just talk a little bit about how that decision was made? And also notice that Steward rents were kind of down this quarter from like to $117 million from $125 million before. Just curious if you could help us reconcile that difference.

So Stuart commenced active pre-development for the Wadley Hospital about this time last year, sometime in mid to late 2021. And then later that year, NPT made an initial advance funding. And then in 2022, Stuart accelerated trying to line up and pre-fund or at least pre-identify in recognition of supply constraints, materials costs, and lining up contractors and general contractors. Anyway, that was the process through 2022, the early part of 2022, at which time Stuart decided to change the general contractor. And so that change disrupted the timing, and it's our understanding now that we're very close to new agreements with a new general contractor, and construction will restart late this year or very early next.

Okay. That's helpful. And then the lower rents, the difference?

So remember a few years ago, the auditing rules makers made us recognized as an NPT expense. Let's just say, for example, we paid an insurance premium. Sometimes insurance premiums, and frankly in this case, are very large on an annual basis, say $7 million. We have to recognize that even though we turn around and the next day or the very same day we collect a check back from the tenants because tenants, of course, under triple net lease are responsible for paying insurances. So there's a timing issue that you're referring to in recognition of an NPT expense in one period, and then in the same or a different period of the next year, you'll see that expense is turned around into income or vice versa.

Gotcha. Okay, that's helpful. And then last one for me, the big change in the straight-line rents as well during the quarter is kind of help us better understand what created that?

Well, the biggest issue on straight-line rent was just writing off the accrued straight-line rent with respect to those prime assets. You remember we sold $360-plus million of prime assets, which had been accruing straight-line rent for many years, and so that's just a non-cash write-off.

Great.

Thank you very much.

Our last question is a follow-up from Stephen Valliquette from Barclays. Please go ahead.

Thanks. Just one quick clarification question. I think on Stewart you mentioned it was roughly $50 million of EBITDA in 2Q, and you said it was expected to be $30 million or maybe $30 million plus in the third quarter. I wasn't sure if that was for the full third quarter or or just quarter-to-date or something like that, or maybe a couple months, but also if that is the full quarter, maybe just any quick color on why that was sort of stepping down sequentially, if I heard those numbers correct.

Thanks. It is for the full quarter, Stephen, and I don't have the detail on why the step-down.

Okay. So we can follow up maybe offline later on that.

Okay.

Okay. All right.

Thanks. Absolutely.

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

Thank you very much. And again, I appreciate everyone's interest today and appreciate all of the questions. And please don't hesitate to call us with any additional questions. Thank you very much.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.