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.