Medical Properties Trust Inc Q1 FY2020 Earnings Call

Good morning, and welcome to the Q1 2020 Medical Properties Trust Earnings Conference Call. It is my pleasure to turn today's call over to Charles Lambert, Treasurer and Managing Director. Mr. Lambert, the floor is yours.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our first quarter 2020 financial results. With me today are Edward Aldag, Jr., Chairman, President and Chief Executive Officer of the company; and Steven Hamner, Executive Vice President and Chief Financial Officer. Our press release was distributed yesterday and furnished on Form 8-K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our website at www.medicalpropertiestrust.com in the Investor Relations section. Additionally, we're hosting a live webcast of today's call, which you can access in that same section. During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed and/or underlying such forward-looking statements. We refer you to the company's reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company's actual results or future events to differ materially from those expressed in this call. The information being provided today is as of this date only, and except as required by the federal securities laws, the company does not undertake a duty to update any such information. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to, and not in lieu of, comparable GAAP financial measures. Please note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations. I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Thank you, Charles. Good morning, and thank all of you for joining us today for our first quarter earnings call. I want to address our portfolio and the coronavirus, COVID-19, but first allow me to acknowledge the incredible work and sacrifices the health care workers all over the world have made to keep the rest of us healthy and safe. Many of these workers risk their own lives to save others. In fact, in places like Italy, where we have eight hospitals, many of these healthcare workers became victims of the virus themselves. I'd like to offer our sincere gratitude to these workers and sympathy to all of their families. This pandemic has brought an unprecedented focus on healthcare access and delivery, and in particular, hospitals. Never has it been more apparent than it is today the importance of hospitals worldwide. Our hearts have been broken by the tragic stories, pictures and videos of the devastating repercussions of this deadly virus. And our hearts have been warmed as we have seen the good in mankind as individuals, businesses and governments have come together to assist those impacted physically, financially and mentally by this terrible disease. We are so proud of all the healthcare providers and workers, not only across the nearly 400 MPT-owned hospitals, but also throughout the world as they battle this pandemic and sometimes sacrifice their own lives. Our portfolio of hospitals and hospital operators remain financially strong. They continue to meet their financial obligations. For April, MPT collected more than 96% of our rental revenue, and based on the reports from our operators and information we've been able to review, we expect this trend to continue. Across our portfolio, our hospitals have treated thousands of COVID-19 patients. Following government directives, all hospitals, including those in MPT's portfolio, stopped most, if not all, elective procedures. Please keep in mind that elective procedures do not mean they are medically unnecessary; they are medically necessary procedures that can be delayed. These procedures will still need to be performed. Our operators across the globe expect that there will be a large backlog of surgeries that will need to be done once we all come out of the pandemic crisis. Our operators have been able to rightsize their staffs and operations to account for this temporary deferral. Both internationally and domestically, we have seen our post-acute care providers step up to assist acute care hospitals by offering their value-add capabilities to provide for the transfer of certain patients from acute care settings, thereby creating additional capacity for COVID-19 patients in the acute care facilities. We have also seen operators work in close alignment with their respective federal and local authorities to ensure appropriate coordination in the provision of healthcare services during this time of crisis. One example of this has been in England, where private health care providers like MPT portfolio operators, Circle, BMI and Ramsay have reached a temporary agreement with the National Health Service to fully align operations in both the public and private sector in order to ensure that capacity needs are met. With this alliance, England can arrange for the appropriate allocation of resources, both human and material, to the desired points of care. MPT is absolutely supportive of this extraordinary cooperation agreement. As a part of this agreement, the NHS has assured that operating costs of the hospitals are met, including, but not limited to, facility rent. This same scenario is being played out with our operators in Spain, Italy and Australia. Another example is in the hard-hit northern region of Italy, where MPT's portfolio operator, PdM, and other private and public hospital systems have been working together to meet the high demand for patient care. These collaborative efforts will be compensated as the Italian government issued a decree law indicating the possibility for Italian regions to increase reimbursement for all healthcare operators, including private ones that cared for COVID-19 patients or non-COVID-19 patients, or simply made their beds available by delaying non-life-threatening procedures at the request of the government. These increases would be exempt from the limits on health care costs set by regulators previously issued. In Australia, Healthscope continues to work with the Commonwealth, states and territory governments to secure arrangements for providing health care services to respond to COVID-19. In Switzerland, our operator, The Swiss Medical Network, worked very closely with the federal government and each canton to develop and implement a plan for dealing with this virus. They expect to be back to full operations in late May or early June. In Germany, our largest German operation, Median, has performed superbly. Median expects their overall operations to remain strong throughout the year. Andre and his team at Median have done an outstanding job adjusting to COVID-19. During the height of the crisis, I was in daily contact with the CEOs of all of our largest operators. I cannot stress enough how proud I am of each of them on how they've handled this pandemic and the cooperation that they offer to MPT and to me personally. As most of you know, on April 10, 2020, Health and Human Services announced the immediate release of $30 billion of the $100 billion Public Health Emergency Fund provided for by the CARES Act. The fund reimburses eligible healthcare providers for expenses and lost revenue directly attributable to COVID-19. These funds are being released in tranches. The initial $30 billion in immediate relief funds have been delivered to all facilities and providers that received Medicare fee-for-service reimbursements in 2019. To date, our top five operators have received almost $400 million in stimulus funds. Additionally, they received almost $2.2 billion in Medicare advances. Plans have been announced to distribute a portion of the remaining $70 billion. However, operators do not yet know the amount of funding that they will receive from this round of stimulus. Additionally, Congress and the President have recently agreed to another $75 billion of funding to providers. Let me now provide a quick update on the lease coverage for our portfolio for the fourth quarter. Remember that we report one quarter in arrears, so these numbers represent the quarter ending 12/31/19. We added a net of one additional facility to our same-store portfolio. Our same-store portfolio EBITDARM coverage for the trailing 12 months Q4 2019 is essentially flat at 2.7x. Same-store acute care EBITDARM coverage is 2.93x, which represents a slight decline year-over-year. IRF EBITDARM coverage is 2.06x, which represents a 4% increase year-over-year. LTACH EBITDARM coverage is 1.93x, which represents a 19% increase year-over-year. The lease coverages for the first quarter 2020 will be somewhat irrelevant when they are reported. We will obviously look for other ways to show how our portfolio and, hopefully, the world is back up and running. Remember what I said earlier: all of the elective surgeries and procedures that have been postponed are stacking up. These are procedures that are still medically necessary and need to be done. The volume and more will be there when the world is able to focus on providing health care without the threat of COVID-19. In January of this year, we announced the completion of our largest single investment to date of almost $2 billion in 30 U.K. hospitals with Circle BMI. As a part of the review and approval process of the U.K.'s Competition and Markets Authority, Circle is expected to divest its Bath and Birmingham hospital operations. Both of these hospitals are in new state-of-the-art facilities that MPT owned prior to the BMI acquisition, and we are confident in the ability to find suitable replacement operators. We continue to have a large active pipeline of projects we are working. As a part of the COVID-19 crisis, several new opportunities have come to light. We are confident that we'll be able to act on these opportunities, but at this time do not believe it would be prudent to try to predict when these will occur. We remain very bullish on MPT and hospitals throughout the world. As the first and only pure-play hospital REIT, MPT has always seen and understood the importance that hospitals play as the keystone and foundation of healthcare delivery systems throughout the world. I've always said it is impossible to imagine our healthcare systems without hospitals. At times like this, I don't think anyone can. At this time, I'll let Steve go over the specifics of our financial performance and our very strong balance sheet. Steve?

Thank you, Ed. I want to take most of our time to focus on our future outlook and expectations concerning rent collections, liquidity, capital expenditures and growth opportunities. But first, let me briefly review a few matters that are part of our historical quarterly results. Last night, we reported normalized FFO of $0.37 per diluted share for the first quarter of 2020. As you're all aware, we do not provide calendar earnings guidance, but rather run rate annualized estimates of normalized FFO, generally based on in-place assets and a normalized capital structure. The $0.37 per share we reported last night is consistent with our estimated range of $1.65 to $1.68, taking into account, among other reconciling items that follow it. First, as Ed just mentioned, we closed a $2 billion Circle BMI transaction in early January, subject to the lease agreement that was in place immediately prior to the closing of the transaction. We had agreed with Circle BMI to amendments to terms of that lease agreement that will become effective upon the approval of the transaction by the U.K. Competition and Markets Authority. That amendment increases the GAAP lease rate, and we will begin recognizing rent based on the newer higher rate. Had these new terms been in effect for the entire quarter, including all of January, our $0.37 per share normalized FFO would have been $0.024 per share higher, all else equal. By the way, and again, as Ed has mentioned, the CMA has concluded that only two markets in the U.K. will require Circle to dispose of any operating subsidiaries. This will have no impact on MPT's pro forma run rate because we're not required to dispose of the related real estate assets. So unless we elect to sell the underlying real estate or otherwise amend those leases, any new operator will assume the leases with their existing terms. Second, because of our extraordinary financial performance and market-leading shareholder returns in 2019, which, by the way, delivered a sector-leading 39% total return to shareholders and also strong 3-, 5- and 10-year results, we are now required to assume similar outperformance with respect to the performance hurdles in our share-based compensation estimates, even in the face of the potential impact that the COVID crisis may create. These mandated assumptions result in increased expense accruals over the next three years even though there is no assurance that we will continue to generate the levels of operating performance and total shareholder return that will result in that maximum payout. For example, if our actual performance is at only the threshold rather than the maximum outperformance level, the quarterly FFO would increase by approximately another $0.01 per diluted share. In general, as a result of effectively doubling the size of the company in 2019 and growing FFO per share by more than 25% in 2020, our 2020 share-based compensation expense is expected to increase by approximately $2.5 million per quarter in excess of the 2019 accruals. Finally, I will point out a few other items in the quarter that are notable, even though they do not affect normalized FFO. Almost two years ago, we disclosed that we would no longer include rental revenue from a relatively small relationship in our pro forma run rate, and we simultaneously recorded impairment charges related to the respective real estate, a facility that the operator ceased operating and closed last year. The impact of the COVID situation has resulted in our decision now to offer to give this facility to the local municipality, resulting in a charge in the first quarter of approximately $9 million. Again, this has no impact on any previously recognized revenue or on our run rate normalized FFO estimates. Similarly, the COVID impact on traffic at freestanding emergency facilities around the country led us to reevaluate certain of the freestanding ERs that remain leased to affiliates of Adeptus, and we have recorded an impairment on those remaining facilities of approximately another $9 million. We simultaneously wrote off an aggregate of about $7.7 million of accrued straight-line rent related to these facilities. As a reminder and a summary of Adeptus, when a debt was filed for bankruptcy in August 2017, we had committed to approximately $415 million of investment in about 60 facilities. Today, after almost three years post-bankruptcy, we believe the current value of those facilities that we retain, along with proceeds from sales in the interim, is at least $450 million. And while we have no current plans to dispose of them, even in today's pandemic conditions, we are confident that there is a deep and vibrant market for such facilities that are leased to investment-grade, locally-dominant healthcare systems, such as the University of Colorado Health, CommonSpirit Health (formerly Dignity and Catholic Health Initiatives), and Ochsner Clinic. Finally, we recorded an approximate $10 million noncash unrealized loss in our common equity investment in AEVIS, which, as most of you will recall, is the parent company of our large Swiss hospital operator, Swiss Medical Network, the second largest private operator in Switzerland. Swiss Medical is fully paid up on its rental obligations, but because AEVIS's primary businesses are hospitals and luxury resort hotels, we are not surprised that as a relatively thinly traded public company, its equity value has suffered along with other healthcare and hospitality companies worldwide. While we, of course, cannot provide absolute assurance, we are hopeful that as conditions return to normal with respect to Swiss healthcare and luxury travel, the value of our AEVIS stock will also return to normalcy. Moving on to the future. As we disclosed last night in our press release and based on these limited exceptional items, our first quarter results are right in line with our expectations, and we are able to reaffirm our annualized run rate guidance at its previous range of $1.65 to $1.68 per diluted share. This range could change, possibly materially, if the impact of the COVID pandemic causes our hospital operator tenants to be unable to pay their rental obligations, a risk we described in the April 8, 2020 8-K we filed with the SEC and is also subject to risks described in last night's press release and in the other risk factors described in our most recently filed 10-K. But at present, our expectation is that we will collect materially all of the rent and interest currently called for under our lease and other financing contracts. We base this confidence on, among other information, the following: we collected 99% of all payments due for the first quarter; in April, in the depths of the pandemic, we collected 96% of all payments due; we continue to expect to collect all of the rent and interest that is due pursuant to our existing lease and loan agreements. These payments, by the way, were made by our tenants even before the receipt of the government grants and advances that Ed mentioned. Our largest five U.S. operators, who comprise 65% of our global monthly cash expectations, received in April alone approximately $2.6 billion in grants and Medicare advances. By way of perspective, this represents more than 10% of their combined 2019 net revenue. And again, as Ed mentioned, in the most recent tranche of additional government COVID stimulus, hospitals were allocated another $75 billion in support. In each other country where we have hospital investments, the respective governments have offered support to compensate our operators for lost revenue so that these hospitals will be available for COVID patients. But even if after all of this immediate and liquid and future support, certain operators are nonetheless faced with temporary cash flow pressures that result in delayed rent and interest payments, we believe these operators will be able to recover over a relatively short time and catch up on their payments. It should be clear by now that as we appear to be moving into the back half of this once-in-a-century global crisis, we are very optimistic about the outlook for hospitals in MPT's areas of the world. Most of you have heard us say many times that if MPT people do their jobs and underwrite hospitals that serve a true need in their communities, those facilities are like infrastructure. If they were to close or for any reason could not treat the citizens in their areas, healthcare suffers, people suffer. Our view remains that communities, governments, providers, payers and investors will join us in that belief more strongly than ever. And that even if in the near term, financial pressures on hospital operators become greater than we presently expect, MPT is extraordinarily well-positioned to transition through any such pressures and take unique advantage of what we expect will be newfound support to maintain overall hospital facilities to be prepared for future challenges to the world's acute health care needs. Even over the past several years as we have invested to deliver unmatched growth, those investments have been well underwritten, prudently financed and, as evidenced by our results in the first quarter, have contributed great strength to our platform. That strength includes that we have more than $1.8 billion in immediately available cash and liquidity, with no debt maturities for two years and only minimal ordinary course required capital expenditures. Our largest single exposure to any hospital represents less than 3% of our total investments, and the great majority of our facilities around the world are part of master leases that produce the strength that comes with diversity in multiple unconnected markets. Most reassuring, if we needed proof, it has been abundantly provided that in the countries that MPT invests in, people will not be turned away from hospitals, regardless of cost and regardless of ability to pay. Even more than the statutory support provided by the governments of these countries, it is their citizenry, their people, who for generations have demanded and been willing to pay to assure that hospitals are available when needed, even if that need occurs only once in 100 years. And with that, I will turn the call back to the operator for any questions.

Please stand by for instructions. And your first question is from the line of Derek Johnston with Deutsche Bank.

We'd like to know as much as possible about the international impacts and what funds are available outside the U.S. to assist hospitals and operators going through similar circumstances as we see here in the U.S.? Essentially, any forms of CARES Act international version or other assistance for your international operators that you could walk us through?

Sure, Derek. From the international standpoint, keep in mind that for the most part, they were a month or more ahead of us in this crisis, so we were able to see what their reactions were going to be and what the overall effects were going to be on the various hospitals. As Steve mentioned earlier, in every single location that we're in, the government has stepped up to assist hospitals, understanding the very important need of all of them and providing care to their citizens. It's been very different from location to location, but it has all been extremely supportive. As I mentioned earlier, in the U.K., as an example, the NHS reached an agreement with the top five largest private operators whereby they would, in essence, control those hospital beds to make them available not so much for the COVID-19 patients but for the non-COVID-19 patients. And in return for that, they agreed to make all of the operating costs of those operators, which includes their rental payments. So very, very safe and secure there. In Germany, it's been two different things. Our post-acute care operator, which is our largest operator in Germany, has performed exceptionally well. The government recognized the need for post-acute care providers to be able to take patients from the acute care hospitals to allow the acute care hospitals to have beds available for COVID-19. And that worked very, very well. Our hospitals in the post-acute care sector in Germany were able to adjust in as little as two weeks. They actually project that they will do better in 2020 than they did in 2019 for the same period. Obviously, Germany has just recently reopened, so we'll see how the virus and reopening interact. From the standpoint of the acute care providers, our largest acute care provider there is ATOS, and they remain very financially strong. They, like the rest of the world, have not seen the number of COVID patients that I think we all expected in the acute care hospital settings. But they have a very, very strong balance sheet, have a tremendous amount of cash and have also been protected with what they refer to as an umbrella over the beds that they've made available to the government. In some of the other states like Switzerland and Italy and Australia, it's more fragmented because it's more state-involved than it is federal government-involved. But in each case, they have gotten assurances or actual payments from the local governments to compensate them for making their beds available for either COVID-19 or for the non-COVID-19 patients moving out of the public hospitals. They are doing very well financially there, even in Italy, where they've been hit the hardest. In Spain, our two most recent hospitals there are primarily cancer-based hospitals. The government has transferred all of their cancer patients from their public hospitals into those hospitals. Their financial situation also remains very strong. So we feel very good about our international hospitals as well as our domestic hospitals here in the U.S.

Okay. Great. And just one more for me. So back to the U.S. So the CARES Act set aside over $100 billion, now it seems to be $175 billion to assist hospitals in the form of grants, and I believe these are largely with no repayment. So as the capital flows through the hospitals in the U.S., as some has already, I guess the question is, how much will these grants assist your hospital operators in getting through this tough time? And ultimately, is it enough?

So Derek, I want to reiterate the point that Steve made at the tail end of his presentation because I think it's very important for everybody to hear and understand. Long before the CARES Act, long before any of our domestic hospitals here in the U.S. received any funding, our hospitals were all in good financial shape, and they all paid their April rent. They were in good shape due to strong balance sheets and their ability to rightsize operations. They were able to move very quickly and adjust their expense levels. So even before any of them received the first-dollar funding from the CARES Act, they believed they were going to continue to be in good shape from their strong balance sheets and ability to rightsize operations. Now I don't think we yet know exactly how much of the funding they'll be able to keep long term. Obviously, there are grants, but then there are also the Medicare advances. At this point, the Medicare advances that they received are a far larger number than the grants. The repayment schedule for that is set, but there has been some talk about extending that as well. But I want us all to remember that as we go through the finalization of those particular payments, our hospitals were doing well before they received those payments.

Your next question is from the line of Steven Valiquette of Barclays.

So a couple of questions. First of all, because we followed the hospital sector, I think we got a pretty good view that the federal grant money, I think, for the most part, will be treated as revenue and EBITDA or let's call it EBITDAR. So I think when you're sort of calculating your coverage ratios going forward, that will be in there. So I guess we'll see how that plays out. But is there any color you can provide? Do you have any insights on where some of those coverage ratios are shaking out right now that you can share in terms of how much that might have moved just across the overall portfolio? Or is it just too premature to give any numbers around that?

Yes, it's really too premature, Steve. And remember that of the $2.6 billion that our top five hospital operators have received to date, only $400 million of that represents the grants. The rest of it are Medicare advances that are still a little up in the air exactly how that will be treated in the long run. But if you look just overall across the board, hospital operations are probably down 30% to 40%. That's from everything: surgeries, ER visits and everything. Obviously, the numbers vary by region. For instance, the Northeast has been hit much harder than the rest of the country. We've got places where some of our hospital operators haven't had any COVID-19 patients, so they've been sitting there with a much reduced staff. So it's hard to say what the coverages are going to be, but we have focused for the last 30 to 60 days on the cash balances and their ability to pay rent without this additional revenue, and it's all very strong. As we've pointed out, we don't expect anybody to miss their rental payments on a substantial basis. And we haven't had anybody ask for rent abatement. The roughly 4% in rental payments that haven't been collected, we still expect those will be collected. They've just been deferred or delayed.

That was going to be the follow-up, actually. It was for that 4%, how much of that is maybe officially deferred under some sort of signed agreement versus just kind of more of a handshake of, 'hey, don't worry, it will still be paid'?

Yes. I see the vast majority of it — 99.9% — is from tenants saying, 'we can't make the full payment right now, but we'll make it up.' It was much more of a handshake. We haven't had anybody ask for formal requests other than some very, very small tenants. As an example, in the Portugal facility that we acquired last year, we have two small tenants — one's a dentist and I can't remember what the other is — but other than that, there hasn't been any formal request.

Your next question is from the line of Michael Carroll with RBC.

Yes. Ed or Steve, I know in the press release that you guys put out last night, there was some commentary on the strength of your investment pipeline and how that continues to grow. What's your stance right now on new investments? I mean how aggressive are you willing to be? Has that been delayed here in the near term? Or is that something that you're still pursuing right now?

Well, Mike, I think much of it has been delayed. We certainly haven't lost anything. We continue to work on it. But as the COVID crisis really got hot and heavy, even the people on the other side have delayed their timelines as well. But as I mentioned in my prepared remarks, we've had a couple of things come up post the COVID crisis that we believe are great opportunities. They are not large in size. Some of those opportunistic acquisitions we can take advantage of because they aren't large from our liquidity standpoint.

And do you think that this current environment has changed private market valuations a little bit to allow you to pursue deals earlier than you would have previously expected? Or is it holding in there on the valuation, holding in there better than you thought?

Mike, I'm not sure anyone knows exactly what effect this is going to have long term on valuations. I certainly don't have any pushback. We haven't been working hard on transactions to the point of closing, so I can't give you exact numbers on cap rates. If I had to guess right now, I think cap rates will be slightly higher than where they are today. What I do think we'll see, and what we are seeing, is that some one-off operators don't have the ability to handle situations like this, and some of our larger operators see great opportunities for further consolidation in those areas.

Okay. And then, Steve, can you provide some commentary on the G&A expense uptick in 1Q 2020? I know you kind of mentioned this in your prepared remarks — is that mostly due to the equity compensation, and is that a good run rate we should expect going forward given the performance the company has delivered over the past few years?

Yes. The answers are yes and yes. It is mostly due to the increased accrual of the performance-based share grants, which is driven, again as I mentioned, by our past history when our accountants estimate a wide range of potential outcomes for share issuance in the compensation plans. We're now in a position where we have to assume that we're going to continue this extraordinary performance that we've seen over the last several years. Again, last year we delivered 39% total return to shareholders and doubled the size of the company. We are positioned now such that our guidance is that per-share FFO will increase by upwards of 25%. Whether that is sustainable long term, we do not know. If we continue to perform strongly, then the accruals will be appropriate. If not, these accruals won't be paid out. Regrettably, under accounting rules, we can't reverse those accruals. Nonetheless, you are absolutely right: that's the primary reason for the increase and it is a new run rate to consider.

Your next question is from the line of Joshua Dennerlein of Bank of America.

Just curious if you could give some more color on the 4% of the portfolio that didn't pay rent. Was that one specific tenant? Was it more than one tenant? And then is there any color you can provide on geographic commonalities across operators or hospitals that didn't pay rent?

Josh, it's less than a handful of operators. It's generally situations where they didn't pay all of the rent but have assured us that they will catch up shortly. As I mentioned earlier, there isn't anyone that's asked for an abatement. There isn't anyone we've had to do lease amendments with. Based on cash positions, many of those that have deferred some rent continue to have a tremendous amount of cash on their balance sheets. They have just been hoarding cash due to uncertainty about the duration of the pandemic.

Your next question is from the line of Jordan Sadler with KeyBanc.

Just wanted to follow-up on the G&A part and also on getting to the run rate guidance, Steve. Maybe you could walk us from the almost $0.40-or-so of FFO in the quarter. If you add back the $0.024 number to the $0.41 to $0.42-or-so embedded in the run rate per quarter, embedded in the run rate guidance. Because it sounds like the G&A is going to stay at the same level. So what else is expected to happen to drive that run rate higher sequentially?

The precision lies in the capital structure. Three months ago when we initially put out the $1.65 to $1.68 range, we were in a more normalized environment. Today it's not normalized. Certain markets may be open, but we're not in a position where we need to go into the markets when we don't think we would get fair pricing. So there's cushion and wiggle room and uncertainty around that. Other issues include developments that come online and are marginally additive to the run rate when they do. We have the Idaho hospital, the Birmingham hospital in England, and a couple of others that will together make up another $0.01 or $0.02. So that's really it. The range leaves room for flexibility. We've said we want to get leverage down to around 5.5x again. When that happens, and depending on equity valuation at that time, that's another lever. But yes, your arithmetic is roughly right: starting with the $0.40 plus a couple more cents comes from those items.

So just to be clear, there would have been an expectation of potentially lower interest expense as a result of going into the markets, but now it's just you wouldn't necessarily do that today. So that $0.01 or $0.02 of upside you could see once things normalize — is that the right way to think about it?

Yes. With respect to capital, both the leverage level itself and the interest cost going into the market today are different from what they were a few weeks ago. But we do hope and expect opportunities for upside on the revenue side. So your arithmetic is reasonable: the incremental cents come from the combination of revenue additions and capital structure improvements once markets normalize.

Was there any bad debt reserve or expense taken in the quarter, just as a cautious measure, just reflecting the fact that 4% wasn't collected in April? Or no?

No, there was not. I'll also note that there is a new accounting provision that many had to implement this quarter for certain credit losses, but that was a prior period adjustment to equity and did not impact our earnings in the period of implementation. It was roughly around an $8 million to $8.5 million charge recorded to retained earnings, but it had no impact on period earnings. No bad debt reserve was taken specifically related to the 4% uncollected April rents.

Was there a particular lease that that pertained to? Or is that just across the board in aggregate?

It's not leases, but across the board of everything that's not a straight operating lease. To the extent we have loans, mortgages and similar instruments, we reviewed those and estimated expected credit losses. It's a very small percentage of our total exposure, which is more than $1 billion.

Okay. And then on the top operators, I appreciate that Ed mentioned the total amounts received. Can you parse this a little bit more for us? Not asking who received what per se, but qualitatively, which of these top five are having the most difficulty in terms of COVID relative to payments? And have any of these folks been a source of the discussions referred to in the 8-K earlier in the quarter?

Let me reference the 8-K first: it was a typical risk disclosure and not related to any particular tenant. Our top five tenants are Steward, Prospect Medical, LifePoint, Prime and Ernest Health. All of those operators continue to perform very well. Many of them, like Steward, LifePoint and Prospect Medical, reduced elective surgeries and, like others, did not have huge numbers of COVID-19 patients. As an example, Steward has roughly 7,000 to 8,000 hospital beds and had roughly 1,000 hospitalized COVID-19 patients. Those are roughly similar percentages to other operators. All of those I mentioned are performing well. They moved quickly to rightsize operations and obtain PPE; ventilators were not an issue. Ernest Health is a non-acute care operator; their rehab portion has operated very well and their LTAC operations, as reflected in coverages earlier, have also performed well. None of our top five U.S. operators are ones we're worried about. These are organizations I spoke to frequently during the height of the crisis, and I remain confident in their operations.

Your next question is from the line of Connor Siversky of Berenberg.

Hope all is well. Taking a bit of a long-term view on the situation, I'm wondering if there's any dichotomy in performance for your larger and smaller operator tenants. And then is there any possibility that the fallout from this period would usher in some M&A activity with those operators?

Yes. I think there will be a good amount of M&A activity. The larger operators are generally in strong financial positions with good cash reserves and liquidity. Early on they recognized there would be winners and losers in this and have been looking at potential acquisition targets. We think targets will primarily be one-off operators that don't have the ability to handle crises as well as larger, more diversified operators. So yes, we expect consolidation opportunities.

Okay. Thanks. Another one on ventilator capacity: working under the assumption that in states like New Jersey we never actually reached ventilator capacity, if we see a resurgence of the virus in colder months, would there be a need to cut back on elective procedures again, or could we keep those volumes rolling?

Connor, nobody knows exactly where we'll be with the virus or when a vaccine becomes available. The good news is that if we have a resurgence in the fall or winter, we'll have more experience and a better handle on operating under these conditions. From our operators' standpoint, I think they would be in a good position should we have any resurgence. Let's hope we don't, for the entire economy's sake.

One more for me on construction side: any developing narratives that hospitals and carriers would need to be refitted to mitigate the spread of respiratory illnesses in the future?

I don't think so in a major way. Most hospitals already have isolation rooms and wards. There has been academic discussion about making rooms larger to convert single occupancy rooms to doubles, and those are things to study. Private hospitals tend to be in better shape than older public hospitals that may be less well-capitalized. The CEOs I've spoken with generally are not concerned about where their hospitals stand. You may recall Steward designated certain hospitals for COVID patients early on, which is a good approach for multi-facility operators because some facilities are better equipped than others.

Your next question is from the line of Tayo Okusanya with Mizuho.

Hope everyone is keeping safe and healthy. Gentlemen, when we think about a world where, hopefully, COVID is behind us and elective procedures start to come back, how should we think about profitability of hospital systems going forward, especially given high unemployment? You probably have a lot of people who would have been paying commercial insurance who cannot pay commercial anymore. When you think about tenant credit risk, does that change your outlook?

Tayo, good question. In Europe, where they're reopening sooner, reimbursement systems are different. Switzerland, for example, plans to be fully operational in late May or early June and expects high volumes; they plan to operate six days a week to catch up. Governments in many European countries are planning catch-up reimbursement through the remainder of the year. In the U.S., we hope unemployment will decline as the economy reopens and people return to work quickly. If they don't, and if people lose commercial coverage, there remain reimbursement pathways such as Medicaid or other mechanisms. We still believe that when operations return to normal, hospitals will continue to be profitable. Remember we were dealing with coverages in the 3.5x range before the crisis, so there's significant cushion.

Following that, many Medicare advances must be repaid within months. What confidence do you have that elective procedures will have come back enough by then so tenants can repay advances, pay interest obligations and continue to pay rent? Could the repayment timing put stress on cash flows?

That's a good question, Tayo, and no one knows the exact outcome. Two points: one, before our hospital operators received any of those advances or grants, they told us and our analysis showed that they had sufficient cash to continue paying rent. If operations haven't returned enough to make planned repayments, it's likely that repayment plans will be adjusted; the U.S. government would not want to put hospitals out of business. Second, operators could use cash on hand to make repayments if needed. So while repayment timing could be a stressor, we expect mechanisms to be adjusted to avoid distress that would impair hospital availability.

One more: you mentioned you're not actively closing transactions today, but are you underwriting new deals today? If a deal showed up, what would you need to be comfortable to pull the trigger?

Let me clarify: we are actively underwriting opportunities, but not actively preparing to close transactions, except for a few small opportunistic investments related to COVID that won't materially affect liquidity. Underwriting is done as if COVID did not change the fundamental need: is the hospital needed in the community, is it infrastructure, what happens if it closes, and especially the strength of the operator. Over recent years we've underwritten growth with strong operators and sound financing, and we'll continue that approach.

Do your international operations see the same level of drop-off in admissions as in the U.S.? For example, U.K., Germany, Australia — down 50%, 60%, 70%?

Yes and no — it varies. Australia saw similar drops to the U.S. but hasn't had as many COVID patients. Switzerland had an initial drop, then saw public patients moved into private hospitals, which replaced volumes. Germany was different: largely post-acute providers adjusted and took patients from acute settings. They saw about a 30% drop initially but have recovered. The U.K. is different because the NHS is managing bed access, so it's harder to analyze. But in general, initial drops were common, and in some markets, volumes recovered via public-private cooperation.

Your next question is from the line of Mike Mueller with JP Morgan.

Just a quick one. Can you talk a little bit about what you're seeing in terms of debt availability for the different regions around the globe that you operate in and estimated capital cost for those?

We haven't been planning to need debt markets at the moment. Early on in high-yield and some credit markets, things froze up and spreads widened. New-issue premiums have increased. From our perspective, we're thankful to have upwards of $2 billion in liquidity and we don't need to access debt markets now. We hope that as conditions normalize, pricing will return to prior levels.

Your next question is from the line of Todd Stender with Wells Fargo.

I hope you guys are well.

We are. Todd, thanks for asking.

Elective surgeries are top of mind. How is your geographic footprint in the U.S. weighted toward states that look to be reopening sooner than later?

Most of where we are is weighted toward states reopening sooner rather than later. We don't have anything in New York and not much in the Northeast. Massachusetts may be one of the last to reopen among states where we have operations. But Florida, Alabama and much of the West expect to reopen more quickly. The question will be how the first reopeners fare and whether there's a resurgence. We had a lot of hospital capacity sitting unused waiting for COVID patients that didn't materialize as much as expected, so I think we'll see many of those surgeries return in May and June.

The patients moved out of hospitals — have many gone to post-acute, such as rehab, LTAC, or skilled nursing?

Or home. Many patients have been discharged home or to post-acute settings.

Do you see a rising appetite from you guys for post-acute, given health care migrating to lower-cost settings?

We may see some opportunities in Europe for post-acute. In the U.S., we have remained strong in inpatient rehabilitation and like the LTAC business — though the market hasn't favored LTACs recently, they have proven valuable in this environment. The real constraint for post-acute in the U.S. for us is scale: there just isn't that much volume, so even doubling would not be a huge impact relative to our overall portfolio.

At this time, there are no further questions. I'll turn the call back over to Ed Aldag to close the call.

Thank you, Stephanie. And again, all of you, we appreciate you being on the call today. We appreciate your questions. If you have any further questions, please don't hesitate to contact any one of us. Prayers to all of your families and hope you all remain safe. Thank you very much.

Thank you. This concludes today's meeting. You may now disconnect.