Medical Properties Trust, Inc. common stock

Good morning, and welcome to the first quarter 2023 Medical Properties Trust Earnings Conference Call. All participants will be in a listen-only mode for a 60-minute duration. And should you need any assistance during that time, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw your question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Charles Lambert, Vice President. Please go ahead, sir.

Thank you. Good morning, and welcome to the Medical Properties Trust conference call to discuss our first quarter 2023 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 can 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 thanks to all of you for joining us this morning for our earnings call. The overall preliminary results from our operators for the first quarter of 2023 are following in the same positive trends we have recently seen from other publicly reporting hospital operators. Remember, we report a quarter in arrears, so today's results are from the quarter ending 12-31-22. On the volume side, our domestic operators, same-store admissions across our portfolio, are positive with admissions steadily increasing over the last few months, including January 2023. Surgical volumes look even better. On a same-store basis, surgeries are up year over year, trailing 12 months, Q4 2022 versus trailing 12 months Q3 2022. We're also seeing good momentum on a discrete quarter basis with quarter four up 3% over quarter three. The number of ER visits have been steadily rising since the beginning of 2022, topping off in December with the highest ER volumes our portfolio saw in all of 2022. Internationally, we are seeing particularly strong demand, both from an admissions and surgical perspective, in the Spanish market. Recall that we're currently developing three ground-up general acute care hospitals along the Mediterranean coast of Spain with IMED. It's great to see the demand in this market continuing to grow at such a high rate with our IMED Valencia Hospital seeing admissions up 8% year-over-year and surgical volumes up 11% during the same period. The German and UK markets are also experiencing continued improvement, with the German occupancy up 6% year over year through February 2023. In the UK, circles admissions and outpatient volumes continue to increase, with overall volumes exceeding pre-pandemic levels. In Colombia, 2022 admissions and surgeries were up over 20% year over year. You can refer to our supplement file this morning for more information on our EBITDARM coverages, but some points I'd like to highlight for you. We're getting close to the point where CARES Act grants will no longer impact the trailing 12-month coverages. General acute, inpatient rehab, and behavioral health were all flat for the trailing 12 months, quarter three over quarter four. Long-term acute care coverages declined from 2.3 to 1.9 times, Remember that LTACs represent only 1.4% of our total portfolio, and the 1.9 times coverage is more in line with historical coverages. I know that people are specifically interested in Steward Hospital's performance, so excluding grants, Steward Hospital's 2022 coverage increased to almost 2.5 times from approximately 2.2 times in 2021. Coverage has increased another 18 points for the trailing 12 months ending February of 2023. Also relating to Stuart, the transaction with Common Spirit is still scheduled to close next week. We look forward to expanding our relationship with Common Spirit and the liquidity this transaction brings to Stuart. On Prospect, we've seen some positive events, which Steve will go over in more detail in a few moments, but just briefly for me. On the Yale sale, this continues to move along positively, This week, one of the biggest unions came out to support this sale. The California operations continue to see improvements with volumes near historic levels. Additional capitation agreements have been signed by the hospitals, which will allow those volumes to continue to grow. Labor calls to continue to hold down the trailing 12-month coverages, but they've seen good improvement in that over the last few months. The managed care business continues to grow its membership and its profits. It continues to exceed budgets. We remain confident that our overall investment and prospect will be fully realizable from that investment. Our recent announcement to sell our Australian investments operated by HealthScope is a testament to the steady demand of hospitals. Anticipated cash proceeds from this divestiture will result in sufficient liquidity to repay the term loan used to fund the acquisition back in 2019. Our well-laddered debt maturity schedule, along with our inflation-protected long-term leases, allows for our cash flow to continue to increase without adding additional properties. Until the global markets stabilize, we do not anticipate making any significant acquisitions. However, our relationships with our operators create numerous organic growth opportunities. We will continue to analyze these opportunities as they come in, and make prudent decisions about the use of our capital. We announced this morning an acquisition with Priory for five behavioral hospitals for 44 million pounds. This closed in the second quarter. Additionally, we closed on the purchase of two median rehabilitation hospitals in Germany for 47 million euros, with a third expected to close later this quarter for 23 million euros. Speaking of growing relationships, it was announced earlier this month that Intermountain Health, based in Utah, has acquired a minority op co-interest in both of our Idaho Falls Community Hospital and Mountain View Hospital. This partnership will provide these two hospitals with additional access to highly trained specialists and vast resources as a result of collaborating with one of the region's largest and most successful health systems. While the financial terms of the investment have not been disclosed, we can say that they are an impressive valuation resulting from this equity investment, which once again proves the essential nature of our hospital real estate. Steve?

Thank you, Ed. This morning, we reported net income and normalized FFO of 5 cents and 37 cents per diluted share, respectively, for the first quarter of 2023. There are a few components of these reported results that I will point out. First, this includes no rent or interest income related to prospect. As we reported last quarter, we are currently recognizing prospect rental income only as cash is received and prospect paid no rent or interest during the quarter. I will have a little further information on our prospect investment in just a few minutes. Second, there are two transactions that we expect will generate more than $900 million in cash proceeds that we plan to use to repay debt. About $830 million will come from the previously announced binding agreements to sell our Australian assets. And just this morning, we announced that Prime Healthcare has elected to exercise its option to repurchase three general acute care hospitals for $100 million in cash. Because both transactions are binding and considered probable, accounting principles mandate that we recognize their estimated earnings impact, even though neither has closed yet. Accordingly, we adjusted normalized FFO for the non-cash real estate impairment and other charges of approximately $90 million as follows. About $11 million is related to unbilled straight-line rent on the three prime hospitals, and I'll come back to prime in just a minute. And about $79 million in charges relates to the Hellscope sale. That's further broken down as follows. Of the total $79 million, these are U.S. dollars, by the way, approximately $37 million is unbilled straight-line rent. Then there are $8 million in fees and costs to sell to hospitals. $13 million is the recognition of previously capitalized currency exchange rate deferrals. And finally, there is a net $20 million difference between the contractual purchase price and our current carrying value, offset by the value of our related interest rate swap agreement. And we will continue to earn rent until closing of both of these transactions, and we'll report that in future quarters as earned. Finally, we do not include in normalized FFO $7.7 million in direct costs and expenses incurred to respond to the defamatory statements published by certain parties, including those who are defendants in the lawsuit we filed late last month. So upon closing of the health scope and prime transactions, receipt of the $900 million plus in cash and the reduction of debt with those proceeds, we have refined our 2023 calendar normalized FFO estimate to a range of between $1.50 and $1.61 per share. This also adjusts for the acquisitions in England and Germany that Ed mentioned and our estimates of revenue from prospect during the year. With respect to prospect, during the first quarter, we agreed, as part of an expected series of additional agreements, to invest $50 million in a convertible loan issued by Prospect's managed care entities. Subsequent to quarter end, Prospect received a binding commitment from several third-party lenders for financing which should provide Prospect with significant liquidity. Importantly, a portion of the proceeds of this anticipated financing will be used to pay off Prospect's existing receivables-backed loan arrangement the result of which will be that PROSPECT will face no near-term debt maturities. In conjunction with these commitments, we and PROSPECT agreed to pursue certain follow-on transactions at the closing of which MPT's investments in PROSPECT assets will be comprised of the following. A master lease covering six California hospitals. MPT purchased these hospitals in 2019 for about $500 million. The current contractual cash rental rate is roughly 8.25% and escalates annually, reference to inflation. We presently expect to recommence collection of a portion of the contractual monthly rent in September of this year. Secondly, a first lien mortgage on the Pennsylvania real estate. Third, up to $75 million in a loan secured by first liens on prospects' accounts receivables. This amount, which the receivables will be fully unencumbered, is well below the existing ABL arrangements borrowing base. And finally, a significant non-controlling ownership interest in Prospect's managed care business that will have an agreed value closely tied to the remainder of MPT's recorded investments, which will include unpaid rent and interest. The managed care business has continued to perform well, and we think that is evidenced by the commitment letters for attractive new financing that Prospect has received. As our press release noted, and in light of continuing global inflationary banking and other economic conditions, we made limited investments during the quarter. In fact, we continue to emphasize transactions that generate return of capital to us and liquidity for debt reductions. With liquidity at quarter end of approximately $1 billion, plus the more than $900 million from sales that I just mentioned, along with additional cash expectations from the sale of Connecticut to Yale, repayment of steward loans, and other transactions, we will be well able to satisfy all of our roughly $1.4 billion in 2023 and 2024 debt maturities. Just a couple of comments back to the prime expected repurchase. This is not a bargain purchase option. Prime is required to pay us the amount that we originally bought the properties for 10-plus years ago. The vast majority of our leases that have repurchase options provide for a repurchase price of the greater of fair value and our original investments. In fact, this $100 million portfolio is the last of the prime master leases that is at that fixed original price. We were satisfied with these terms at the time we completed the original transactions because of the very attractive lease rate that we negotiated in return. And that will make the sale back to prime FFO dilutive, albeit a relatively small impact. because of the high rents we have earned until recently. But the benefits of recycling this capital in the greater liquidity and lower leverage offset that slight dilution. Shortly after quarter end, we closed or committed to acquire a total of eight behavioral and rehabilitation hospitals in England and Germany for up to an approximate $150 million investment. Similar to our limited late 2022 acquisitions, These acquisitions selectively add to certain existing relationships in ways that strategically strengthen the respective portfolios. At present, there are no other scheduled or expected near-term acquisitions. We have virtually completed our new build hospital for Ernest in Stockton, California, and it will come online and begin paying rent during this second quarter. The Ernest new build in South Carolina is still underdeveloped. We continued development of a new state-of-the-art behavioral hospital in Texas for Springstone, now a part of LifePoint. And we continued construction of the three general acute care hospitals for our premier Spanish-tenant IMED. In conjunction with the redevelopment of Stewards Norwood Hospital, which you may remember was made unusable by storms and floods during COVID, We advance $50 million that is secured by, among other things, proceeds from stewards' insurance claims well in excess of the advance. This development is well underway. Finally, we have already noted the prospect convertible debt of $50 million we funded in conjunction with the binding funding commitments from third-party lenders to prospect. Also as noted in this morning's press release, Our board has declared a quarterly dividend unchanged at 29 cents per share and will be paid on July 13 to stockholders of record on June 15. After a virtually unchanged business model since we started the company almost 20 years ago, I thought I would make a few comments that are relevant to analysis of that model's sustainability. At the highest level, one might say that the product MPT sells to its lessees is capital. And capital, of course, has a cost. Our business plan has always recognized that we do not control the cost of that capital, particularly with respect to debt cost. And this is true for most REITs and other real estate investors. That is why all of our long-term debt is at fixed rates. It is also why we carefully plan on staggered maturities. Both of those cornerstone strategies are consciously designed to help avoid a situation that might otherwise arise if interest rates spike upward and significant amounts of debt mature simultaneously. But critically, our model has always anticipated the likelihood of rising interest rates and the need for our contractual rental rates to increase with the inflationary pressures that result in higher interest rates. Hospital leases typically do not have provision for periodic market rent resets. There are good reasons for that, but beyond the scope of this morning's discussion. Instead, virtually every one of MPT's leases provide for annual contractual rental increases that are tied to inflation. Moreover, even in recent years when inflation has been minimal, and in some cases even negative, our cash rent has continued to escalate each year. Based on these annual contractual increases in our cash rent and under almost any reasonable and historically normalized assumptions, rents from our existing portfolio only are expected to increase at rates at least comparable to interest rate increases in our maturing debt issues. My point, of course, is that our model is designed to anticipate normal course volatility in interest rates and other macroeconomic conditions. And moreover, analyzing a straw man scenario that any REIT might be forced to immediately refinance all of its debt at shock interest rates, even though that debt matures over many years in the future, is probably not a good use of anyone's time. Finally, we did point out in this morning's press release that recent transactions have supported the values of our leased assets. We think it important to point that out because it demonstrates that sophisticated investors and operators recognize and are willing to invest billions of dollars based on the long-term sustainability of our model, particularly our receipt of annually increasing rental payments that are generated from local hospital operations. With that, we have time for a few questions, and I'll turn the call back over to the operator.

We will now begin the question and answer session. Again, to ask a question, you may press star, then 1 on your telephone keypad. And if you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will take our first question, which will come from Connor Seversky with Wells Fargo. Please go ahead with your question.

Good morning out there. Thank you for having me back on the call.

Hey, Connor.

Yeah, quickly on prospect, you can see you removed the East Coast assets from the rent coverage calculation, leaving coverage at one times. I mean, is there any indication or any color as to what you think that number could look like towards the end of the year and in consideration of the comments that the operating environment in general is improving?

Yeah, I don't know what it will be, obviously, by the end of the year. But just based on what we've seen in the early part of 2023, the volumes continue to skyrocket from where they were in the early part of 2022. Labor costs are higher there than they are anywhere else. A little disappointed to still see what those were in the fourth quarter. But those numbers do appear to be going down. Prospect feels really good about it. So we think that California could get back by the end of the year to close to what it was maybe pre-pandemic levels.

Okay. Thanks for that. And then just want to jump back to guidance. Mentioned on the last earnings call that the range would be impacted by timing of planned asset sales, timing of prospect revenues, and so on. So on balance, just in consideration of the $0.04 reduction at the top end, how are those factors affecting the change? I mean, what is contributing to that reduction of $0.04 at the top end?

It's primarily, almost exclusively, the sale transactions between Healthscope and in prime.

Okay, thank you. And then one more for me, just broadly speaking. Look, I think we can all appreciate the challenges inherent in hospital real estate. And these are magnified in the fallout of COVID and a tough labor environment. And MPT is really the only public REIT that is underwriting these assets. So in the context of the new lease with Common Spirit in Utah, some of the challenges we've seen related to hospital closures, I mean, when we look out to future acquisitions or portfolio transitions, should we be assuming that the operator market will be looking for lower rents than may have been initially contemplated, say, over the balance of the last five years?

Yeah, Connor, I don't think that's a fair assessment at all. I think when you look at common spirit versus steward, that was entirely based on the financial strength of common spirit versus the financial strength of steward. So if you look at all things being equal, from the same financial strength of different operators, I don't think you're going to see any change in the interest rates, I mean, sorry, in the cap rates, other than cap rates are obviously higher today overall than they were more than a year ago. So I don't think that that's the right assessment. The assessment is if we get stronger operators, you're going to see lower cap rates. But as we've pointed out in the whole common spirit Utah thing, With common spirit being the tenant, it makes those properties more valuable even at the lower rate.

Got it. Understood. I'll leave it there. Thank you for the time.

And our next question will come from Michael Carroll with RBC Capital Markets. Please go ahead with your question.

Yeah, thanks. Steve, I just wanted to touch on your comments related to the pending prospect agreement. What has to happen for that deal to close? I mean, does Prospect need to complete the Connecticut sale and maybe the Rhode Island sale for that to close? Or what are the stumbling blocks that's still ahead of them?

Yeah, so we're still a little bit constrained on what we can say other than I'll reiterate we have binding, Prospect has binding commitments for the financing that we mentioned. And I can say that those commitments are not conditioned on a sale of Connecticut or of Rhode Island.

Okay. Are there any material differences in this agreement versus the prior agreement that fell through in mid-January?

Well, there are differences. There are. Frankly, we're very satisfied with this agreement. Remember what has all happened, you know, since late in the fourth quarter, even early in the fourth quarter, the market disruptions, the credit facility disruptions, the inflationary pressures, then we had the banking panic. And yet, through all of that, we're very satisfied with what we expect the outcome to be and the fact that, although unnamed, these lenders will be very recognizable when the transaction closes and announcements are made. So my point there is these lenders are willing to commit. meaningful amounts to a business that last quarter we indicated our view was, you know, based on some pretty good evidence, we thought that was worth at least a billion dollars. And I think our view is that that is even further validated by virtue of the commitments we have.

And then just last one for me is, I guess, what's the reason for the $50 million loan that you provided prospect in the first quarter? And is there an expected timing of when these transactions can close?

The reason is just to continue to advance this process that has been going on, as you know, for well over a year, has been through at least two earlier iterations. And I forget the second part of your timing. Yeah, we're not making any announcement on timing. We're just not making any further announcement on that now.

But it shouldn't change any from what we announced last quarter in the 12 to 18 months for all of this to work through.

That's right. If that was your question, that's absolutely right. I thought you were talking about timing of closing of the loan transactions, but Ed is absolutely correct. It will not affect our expectation on the ultimate outcome.

So does the ultimate outcome include this transaction being completed, or does the ultimate outcome including this transaction and other stuff being completed? I mean, could this deal close in the beginning of 2024?

Well, we're both not sure which deal you're talking about, so let me drive through that. So the deal that Steve just was talking about should close soon, yeah. And then resolution of the entire transaction Primarily, we'll deal on a monetization of the managed care business.

Okay, perfect. Thank you. And our next question will come from Jonathan Hughes with Raymond James. Please go ahead with your question.

Hey, good morning. Could you remind us just of the timing of HealthScope meeting cash changing hands? I think that's a phased transaction, and then maybe the timing and the expected disposition yield on the prime purchase options.

So on Hellscope, you're correct. It is a phase two, basically two phase transaction. The first and most significant part of the exchange will be, we think, in this second quarter. And the second phase could be second quarter, but more likely third quarter. On prime, ultimate closing probably is mid to late third quarter.

Okay, and then you'd mentioned that's one of the last kind of fixed purchase options or fixed purchase prices. Can you share the yield, or can we assume maybe a similar disposition yield as the purchase options from late last year?

No, if you take our 2023 passing rent, it's low double-digit yield on that $100 million.

Okay, so similar to the one last year. Okay, and then, you know, sticking somewhat with capital allocation, you know, you will have invested over, I think, $400 million in prior year median and median, you know, since the start of the fourth quarter of last year. yet the stock is traded well above an 8% cash cap rate and your debt's yielded double digits that entire time. I understand that repurchasing stock would not help lower leverage, which is the main priority today, but investing in the company, buying back stock or buying back debt comes with zero underwriting uncertainty. So my question is, why not buy back some of your long-term debt? It would be creative, help with deleveraging, and also send a message of confidence in NPW's outlook beyond your comments and obviously what you gave us earlier on the call, but it would send that message of confidence, you know, to the market versus going out there and investing externally.

No, it's not an unfair comment at all, especially, you know, just considered from the total mathematical perspective and it's not off the table.

Okay. I guess, you know, how deep is that discussion gone up to the board level? And then, you know, maybe also relay related to that, you know, about the dividend. I think it's, you've made it clear it's covered, but nonetheless, the market seems to be giving very little credit to it today, you know, yielding north of 14%. So has a, has a cut also been considered by the board and, you know, wouldn't that perhaps be, you know, another good capital allocation decision and use those potential retained funds to, shore up the balance sheet even faster and pay down debt.

Yeah, well, we're very satisfied. As you can tell, we made an announcement that we declared the dividend this morning. We're satisfied with where we are on the foreseeable future. But all of those are levers that any company has to pull, whether it's dividend or property sales or share repurchases or debt tenders. Thankfully, we're in a very, very strong position liquidity-wise, the value of our assets. the growth in the NOI of our assets. And, again, none of those considerations are off the table, as any company would do. We, and it starts at the board level, frankly, you know, continue to... to observe all those conditions.

Jonathan, these are detailed conversations the Board has on a regular basis, and the Board makes decisions based on the long-term health of this company, not short-term, and we're very comfortable with the decisions that we've made.

All right, thanks for the time.

And our next question will come from Stephen Veliquette with Barclays. Please go ahead with your question.

Great, thanks.

Good morning, everybody.

My question here is also kind of regarding the potential monetization of the prospect medical managed care business. I'm also just trying to better understand this new binding commitment from a third-party lender versus the potential managed care transaction that was under negotiation previously that was the third party that stalled out back in January that you kind of mentioned in the last quarterly call. I'm hoping not to base on this, but I thought maybe the old one might involve a third-party lender taking more ownership of that. But now it's something under this new binding commitment. NPW would have more direct ownership of that managed care business in the interim than maybe you monetize that somewhere later down the road. So I don't know if that is true or not true on the difference between the two, but just trying to understand your level of comfort, I guess, if you're going to own part of this managed care business before it maybe gets monetized to some other third party later. versus what might have been considered previously. Hopefully the question makes sense. Just trying to get more color around all that. Thanks.

Yeah, well, rather than trying to reconcile back to a deal that's kind of long been dead, maybe I'll just reiterate what we expect at, let's say, phase next, which would be execution on these commitment letters. which would provide Prospect with, as I mentioned, a significant amount of liquidity, take that pressure off of its operations, of its management team, and provide even a better platform for growth of the managed care business while at the same time, as Ed mentioned, presumably California continues to improve. And so we would end up with a roughly $500 million investment in the California assets that under normalized circumstances, and, again, that includes not draining cash out of California for the East Coast. That includes having management, you know, have attention to pay to the California operations and so forth. So $500 million in a performing master lease. We commented earlier on the continuing prospects, pardon the pun, of the Yale cell that will provide significant amount of cash returned to us. And then the interest that we're talking about would be security interest, pledges, and collateral interest in the equity of the managed care company. The monetization of managed care has always been been the key to the timing of our recovery of our investment. And that really hasn't changed between at least the potential transaction that was being considered during the and the one that we now expect to execute.

Steve, if I understand your question correctly, the big picture hasn't changed at all. That's the same contemplation all along, even before we thought we had a deal back in January. Just a little bit of the change in the details, but the big picture is the same.

Okay, that's helpful. Maybe I'll just follow up offline with you guys later with a few follow-ups on that, but thanks for the cover. Thanks.

And our next question will come from Austin Werschmidt with KeyBank Capital Markets. Please go ahead with your question. Great.

Thanks, everybody. So, Steve, when you kind of wrap everything up of what's assumed in guidance, you know, can you just give us that, like you did last quarter, a little bit of additional detail of now what's assumed kind of at the high and low end of the range? And, you know, with the collection of prospects rent in California beginning in September, you know, how is that factored into the range now? And what's sort of the probability that you could end up within the higher end of the range, just given the better visibility around some of the moving pieces within guidance?

Well, probably wouldn't handicap what's the most likely pinpoint result. I think it is fair to say that the difference is represented primarily by what may happen with prospect. And, look, we're hopeful that, you know, in the next, you know, reasonably short period, we'll have more detail about, as I described it earlier, prospect step next. And maybe that will help both us and analysts and investors better handicap that.

Is any potential sale of the Eastern PA portfolio on the table today, or has that been sort of sideline for the near term?

Well, no. I mean, we've got a binding purchase agreement. Again, Prospect has a binding purchase agreement for the East Coast as it relates to Yale, and They are making progress, is our understanding, on a sale of Rhode Island, which only leaves Pennsylvania. And we're not aware, and I think we would be, we're not aware of any advanced negotiations for any particular seller about Pennsylvania. But the other two markets, absolutely, yeah.

And then just the last one for me, I guess, you know, As you and the board kind of discuss capital allocation and balance sheet management, in your eyes, what are the next steps to bring leverage down to levels that are more consistent with the company's longer-term average?

Well, as Steve pointed out earlier, we will have all of the maturities coming due through 24 taken care of in short order. And then we feel very comfortable about where the remaining maturities are and where they're laddered. And we're obviously not going to make any knee-jerk reactions. We've got good cash flow that well covers the dividend on a growing basis. And so, again, just not going to make knee-jerk reactions.

And just to be clear, point something out, I know it's obvious, but if you look in our supplemental, you know, leverage page, which we've adjusted a little bit for this quarter, it's highly dependent upon any particular three-month period EBITDA. And in the last two three-month period EBITDA, where we're not including prospect income, it really disproportionately impacts that kind of number, whether it's our 7.2 or another way to look at it was I think it's 6.5. Look, all of that, what we want to do by changing that page this quarter is give analysts and investors the inputs they need, and then they can make their own assumptions. about, well, how much EBITDA is really depressed right now, and should we really be saying, well, you know, NPT is levered, you know, seven plus times, but that's only because they're not recognizing anything from prospect, and that could change very quick. So, again, I'm stating the obvious. but it's really kind of a soft objection to being over-leveraged. Only if you use that in a particular period, we're not reporting all of the revenue that we think ultimately we will based on the in-place existing portfolio.

No, that's definitely a fair comment, trying to understand the moving pieces and I guess how you guys are thinking about the balance sheet in the kind of near to medium term. But I appreciate all the comments here.

It's a good point. Let me just reiterate that, you know, your question, thinking about the balance sheet, we've got no pressing maturities now for two years. And again, by kind of pointing to the transactional values that we've executed with sophisticated third parties in recent weeks, even during this global panic, hadn't seen anything like this, at least since the financial crisis. And even during all of that, our underwriting and our values have been validated. And I think I described upwards of two plus billion dollars in anticipated liquidity in the very near term. And then even more than that on transactions we expect to have. And so then no unaddressed maturities for the next two years. And during that two years, My personal opinion is things will normalize like they always do after a panic. Things will normalize. We'll see a more normal debt market. Hopefully, and I believe this firmly, we're not going to be looking at implied double-digit bond rates for us. And at the same time, we'll continue to work through the prospect situation. So all that's a long-winded way of saying we have a lot of liquidity. We have a lot of value. We have a lot of levers to pull. And we don't even have to be thinking about really what's next, not that we're not thinking about it, but there's nothing pressing until 2025. And I'm not even saying that's pressing. I'm just saying we have to address some coming maturities at that time.

No, none of that's lost on us, but appreciate the comments. Thanks, Steve.

And our next question will come from Vikram Malhotra with Mizuho. Please go ahead with your question.

Thanks for taking the questions. Maybe if you could just clarify, just to be crystal clear, so in the guidance, you know, prospects, rent through September, is that sort of the high end? And could you just translate that guide like you did last time into what a rough AFFO or FAD range would be?

You broke up, Vikram.

I think the question was kind of a repeat of Austin's.

No, I just wanted to make sure I knew at the high end of the range, it was a prospect rent through September. Is that the high end, essentially? I may have missed it, but could you just translate that? the guide, the FFO guide into kind of the, you know, as you see it today, what the FAD guide would be, just thinking kind of dividend coverage at both ends of the range.

Yeah, so again, instead of trying to pinpoint exactly, you know, what we expect from admittedly a number of moving parts on prospect, the range, the 50 to 61 range is not exclusively, but significantly But the great majority of that range varies on your prospect assumptions. And the low end, I can't say the low end does include what prospect, even under the pending contractual payment starting in September, it does include that amount. Other than that, again, you know, the rest of the range just depends. And, yeah, I think that was... Okay, makes sense.

Can you just remind us sort of a run rate, roughly what is the bump if we look sort of 12 months forward? What is the bump on an annual basis, I should say, a bump from inflation given the CPI-linked escalators?

Well, it varies across every one of our lease arrangements. If I understand the question, I think I do. Typically, almost all of our leases have a floor, and let's just say that has a weighted average floor of 2%. So we've been realizing those cash bumps even recently when inflation has been less than 2%. And then the ceiling, which almost all of our leases have some type of a high end. That high end could be unlimited inflation, which some of our leases have. And some of our leases have a ceiling on that. And let's just say that's on average. If there's a ceiling, let's call it 4%. If you weighed all of our leases you'll probably come up with a portfolio number of a ceiling, I mean, a floor of two and a ceiling probably in the five range.

Okay, that makes sense. I'm assuming sort of on a run rate basis kind of embedded in guidance is that number towards the higher end, just given where inflation's played out recently.

Well, yeah, right. It's been actual inflation, yes, is embedded in that, right. Right, because remember, most of our leases reset on January 1, regardless of when the lease starts. Most of our leases reset on January 1, so we know as of January 1 what the cash rent, to a great extent, we know what it's going to be for the calendar year.

If I understand what you're asking, Vikram, the run rate is not a – we haven't projected what inflation is going to be. It's actual increases in what the leases have been.

Okay. That's helpful. Yeah. I, I, I just, I didn't realize all of the, I like the whole, the reset was basically like Jan one. I thought it might've been staggered through the year, but the vast majority are January. Okay. And then just last one, are you thinking about, you mentioned capital availability, you mentioned transaction, the values being validated. So just two things, can you clarify, you know, you know, on values being validated, how do we think, how do we translate all of these transactions into a, whether it's a range of cap rates or a per foot value or replacement cost value, would you venture to say sort of versus, say, the original Macquarie transaction, where are you seeing those cap rates, number one? And then number two, from a capital availability standpoint, given, say, broader real estate capital is very thin, how does that translate into, say, doing a new receipt or ABL loan for hospitals in terms of just the hospital's access to capital?

So the first part of that, let me try and I'll just give you the history. Going back a year ago, we did, as you point out, the Macquarie transaction. That was basically a 5.6% capitalization rate. And that's measurable. That's objective. And so, again, that was before the panic that we got in recently. The Australian deal, again, we signed that deal at the very peak of the banking panic a few weeks ago. And that's about a 5.7%. And then if you look at other recent transactions we've done that we can point to, with sophisticated third parties, there's Springstone. Now, that wasn't a real estate deal, but that transaction was valued based on our Springstone investment. Very, very attractive financing. We generated a very strong return on our Springstone investment that we then sold to LifePointe. The fact that Yale is willing to pay what it's willing to pay for that hospital And then again, Prime. Prime has a fixed re-purchase, but they're willing to pay what the hospitals were on our books for. All of these are the indications. And then there are other transactions that we're not involved with. For example, there was a recent transaction in France for a very, very significant kind of unique portfolio whose characteristics in their hospitals are not nearly as strong as ours. which went for a low five handle cap rate. So all of those are the reasons we pointed out this morning and we continue to say that our values, our underwritten values have been sustained Even in this market, this global kind of economic market that we've suffered with recently, our values have seemingly been sustained. And we think the reason is obviously it's not because the public markets are giving us credit, but sophisticated private investors are, whether it be, you know, the Macquarie transaction, whether it be an operator, sophisticated operator like Common Spirit, whether it be, you know, Apollo-backed LifePoint. And then others. Look, because these were competitive transactions. And I can tell you we continue to get a high level of interest in doing similar transactions. And I think that's available to us if, in fact, we decide, you know, we want or need to do that at some time. I'm sorry that went on on that, Vikram.

I think the second part of your question were regarding banks, I'm sorry, hospitals and their access to capital. We don't have any operators that have expressed concerns to us about their refinancing of any ABLs that may or may not be coming due. Obviously, we've had a specific example with Prospect where they had a number of choices to refinance their ABL. So even in that strange situation, there certainly were avenues out there. I'm not aware of any of our operators that had any issues with some of the West Coast banks that went through the issues in the last couple of months. So everything seems to be operable out there right now.

Thank you.

And our next question will come from Josh Dennerlein with Bank of America. Please go ahead with your question.

Hello, this is Dan Bion, dialing in for Josh Dennerlein. Could you provide a little bit more details on the terms of that $50 million loan? $50 million loan that you provided to Prospect?

The convert? Yeah, the convert that we need. Yeah. Well, it's a convertible loan, and we're not disclosing the terms right now. They're very attractive to us, the point being that we have the right to convert it into what we think is the much more valuable managed care equity.

Got it. Now, that makes sense. And then I guess to just kind of follow up on that, how does a third-party lender commitment impact your prospect financing? And what are your thoughts on providing prospect additional support from here on?

You broke up on that last part, but the third-party commitment is to the managed care company. And what it really, really does for us, very attractively, A, it frees up all of the locked-up collateral that is presently under the current ABL. That gets repaid, totally unencumbers the prospect receivables, and gives them liquidity to continue to operate and invest in their hospitals. And ultimately, as we've said, we expect beginning of September to pay our rent

Got it. And then I didn't catch that last part on the second part of my question about what your thoughts were on providing more potentially additional support for prospects.

Well, we may. We may. I think we said, at least in my prepared remarks, we said that part of the outcome of this, that's the reason I mentioned the receivables, is we may advance another up to $75 million, which would be secured by the receivables balance, which is well in excess of the $75 million. And this is why Ed mentioned a minute ago that operators really don't have you know, issues accessing ABL-type financing because it's very, very well collateralized with government and insurance receivables. And, again, just assume a current kind of apples-to-apples borrowing base for a prospect of $175 million, and we may advance up to $75 million and earn a very attractive rental rate on that, by the way. and that helps facilitate the next steps for ultimately monetizing managed care and be stabilizing and improving the California hospitals.

Got it. Thank you. Really appreciate the color here.

And our next question will come from Michael Mueller with J.P. Morgan. Please go ahead with your question.

Yeah, hi. Ed, you talked a little bit about Steward before and was wondering, you know, back, I guess, on the prior conference calls at the end of last year, you put out some benchmarks for where you thought their EBITDA ramp was going to for 2023. And just can you give us an update there in terms of what's changed, what hasn't changed?

Mike, I really don't have an update other than to say that the January numbers, which isn't much to go on, but the January numbers year over year are close to $100 million.

Got it. Okay. You know, that's it. Thank you.

And our next question will come from John Pawlowski with Green Street Advisors. Please go ahead with your question.

Thanks for the time. I have a follow-up on just the aggregate amount you expect to invest with Prospect and these additional commitments. And so a $50 million loan and then up to $75 million in ABL financing, are you contemplating additional support for Prospect above those amounts?

No, other, John, than deferral of rent. So no further cash investments, for lack of a better term. Our plans with the prospect, and we mentioned this last quarter also, It includes some deferral of rent. That rent deferral, whatever it may be, goes into our interest in the managed care company. So the expectation, you know, based on our valuations is that we would recover that.

Okay. And then turning to Steward, could you just confirm for me there was another roughly $25 million in loans provided late last year to Steward that And then do you expect additional cash to go to Steward this year outside of the, I guess, the insurance recoveries prepayment?

The last question is no. We do not expect any further cash. Again, I'll term it operating support, liquidity support for Stewart, other than what you've just described in redevelopment costs. On the late 2022, there was another $28 million that we advanced. This was because Stuart had, as many of our operators do, they participate in what are known as supplemental programs. So Stuart had the opportunity to participate in a meaningful supplemental program. they didn't have to spend this, it ended up being $28 million, but had they not contributed, this is called the tax, that was the tax part, was to pay a tax of $28 million to particular programs. In return for that, then the operators are reallocated, some are beneficiaries and some are not, of additional government reimbursement. Because Steward's business plan really serves to a great extent lower income, patients in some areas. Steward is always a beneficiary. So by paying this $28 million, steward has received and will receive in the near future multiples of that $28 million by virtue of the reallocation. And so we elected to go ahead and fund that because otherwise it was just leaving money on the table.

Understood. I guess I'm struggling with last quarter on this call. I asked you directly, have you extended Steward additional capital, and you said no, and so I guess why wasn't that disclosed verbally on the call?

I don't remember that question, John. I do remember you asked a question that carved out prospect and Steward, but if you had asked a direct question like that, the answer should have been yes. I would have given you the same answer that I just did.

Okay, last one for me, the 30 cents on adjusted funds from operations in the quarter, can you just give us a sense how much of non-cash or deferred rent and interest is in that 30 cents figure in the quarter?

I don't have that off the top of my head.

Yeah, sorry. Okay, thanks for the time.

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

Thank you, operator. And as always, if you have any follow-up questions, don't hesitate to call Drew or Tim. Thank you very much.

The conference is now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.