Good day, and thank you for standing by. Welcome to the Q2 2021 Medical Properties Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Charles Lambert. Please go ahead.

Thank you. Good morning. Welcome to the Medical Properties Trust conference call to discuss our Second Quarter 2021 Financial Results. With me today are Edward K. 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 this morning 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'll now turn the call over to our Chief Executive Officer, Ed Aldag.

Thank you, Charles and thank all of you for listening in today. By now most if not all of you have seen the reports from the likes of HCA, Tenet and Universal. Their positive reports may have surprised some of the street but they certainly didn't surprise us. Our tenants are continuing the positive trends with very favorable operating results. But first let me discuss the growth of MPT. We're very excited to discuss another major push forward in our accreted growth strategy, investing more than $3.6 billion year-to-date, and more than $7 billion at the beginning of 2020 and yet growth for the sake of growth is not consistent with the way we've built MPT.

Thank you, Ed. This morning we reported normalized FFO of $0.43 per diluted share for the second quarter of 2021, a 13.2% increase versus last year's second quarter result, which itself was a 23% increase over the comparable 2019 period. Importantly, our AFFO per share increased by a similar 13.3% versus the second quarter of 2020, which along with our already attractive dividend payout ratio of only 82% continues to create capacity for sustained dividend growth. Adjusted for all mid quarter transactions, including in particular the closing of the Priory sale leaseback as if they all occurred on April 1, normalized FFO for the second quarter would have been $0.44 or an annualized $1.76 per share. The high end of our estimated normalized FFO annualized run rate.

Your first question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Thank you and good morning, everyone.

Good morning, Jordan.

Can you provide a little bit more insights surrounding the financing strategies, Steve? I heard your commentary, it sounds like you've got a lot going on. But the piece I'm struggling with a little bit is the relative attractiveness of the cost of equity. And I know that the company issued equity below these levels, maybe $1 below, $0.75 below current levels earlier in the year for the Priory transaction and some other stuff that was going on. So the stock is up. And I'm kind of curious why you would not have taken the opportunity to avail yourself of the ATM proceeds kind of we discussed on the last call, given all of the investment activity that appears to be already identified, not even speaking to the stuff that may be in the pipeline. Thanks.

So I think, Jordan, if you allow me, I'll rephrase the question as, why would we wait and let the joint venture and perhaps some other strategies play out over a period of time versus immediately tap the underwritten equity markets at today's pricing? And the answer is, we have both available. The difference in cost, overall long-term cost of equity of the so-called private option, the JV option, versus selling it at today's price, which is not today's price, as you know, there would be a significant discount, there's a significant cost. Our view is we can come back to that if necessary. We're hopeful and don't think it will be necessary in any significant way. So why not accomplish a number of things with the joint venture strategy. The first of those, the only one we talked about so far today is the cost advantage, it is a significant cost advantage. Secondly, it allows us to manage to a certain meaningful extent the concentration questions that some have about the portfolio. And then thirdly based again on the pricing that we expect to achieve, it validates very significantly the underlying inherent value that we've created since initially acquiring certain assets, very similar to what we did three years ago with the very similar Primonial transaction, where at that time, we were earning eight-plus percent on our investment. And because of management of the portfolio, seasoning of the operator, further strategic steps that we have taken, that cap rate had come in by 25%. So we were able to sell the MEDIAN exposure for 6%. The numbers are not exactly lined up, equivalent to 8% versus 6%, but they're very similar for the transactions we're expecting in the joint ventures.

Well, Jordan let me say just slightly differently. It's the same thing. We certainly aren't the first management to think their stock is undervalued. We certainly do, as a lot of you on this call have written about, when we announced the acquisitions, many people were waiting for us to do an equity offering. We believe that the stock has been artificially pressured in that regard. We have access to other capital we had planned on; it's much cheaper than raising capital through what we believe is current underpriced stock. So we'll take advantage of that. And as we have already planned, we won't have to do an equity offering in the near future.

Our third here?

So all else equal and in a vacuum, yes if we add $900 million in Miami investments to our existing Steward exposures, then that's going to increase, obviously that arithmetical percentage. We do have strategies, none are binding and we're not making any predictions this morning. But we do expect to see over coming quarters the Steward exposure continued to decline, as it has over the last couple of years. Perhaps not quite as dramatically as it has, but again, over the next two to three quarters, plus or minus we expect Steward exposure to decline.

Great, thanks.

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

Yes, good morning, guys. Hope everyone's doing well. Maybe just kind of follow-up on the funding question there, curious do you guys have ever thought about using forwards whether it's ATM or overnight to kind of mock funding?

Yes, we do. But again the first question to ask if you're talking about forwards to do a forward, obviously, I know everybody knows you do an offering. And just based on what we've said this morning already, we don't think we're in a position where doing a significantly sized underwritten overnight or otherwise offering is the best thing for our shareholders. But every time in the recent past, going back a couple of years that we have done an underwritten offering, we absolutely do consider the advantages of having some type of forward component to it. And it hasn't been, the benefits have not been helpful to us, primarily because we had an immediate use of proceeds for 100% of the offered amount.

Okay, thanks. And for the acquisition market, I guess what are you guys seeing out there for the second half this year, I'm curious what your pipeline looks like?

Yes, Josh, it still is active. It's still robust. We obviously didn't make any additional announcements about that today. We've got a lot on our plate right now. And we'll finish this up. But it is still a very, very strong market.

Okay. And have cap rates changed at all? It sounded like last time we kind of spoke there was just like more interest in the U.S. market. So curious if those are coming down at all?

Yes, they really haven't changed, Josh. It's not that we have more interest in the U.S. as we have said over the years, these things generally seem to take a long time to put together, we obviously can see further in the future than everybody else in this regard. And so we knew that these U.S. acquisitions were coming along; it wasn't that we were just specifically looking for a U.S. deal, we just knew from a timing and placement standpoint that the U.S. acquisitions were falling in place right now.

Got it, thanks Ed, thanks Steve. Appreciate it.

Your next question comes from the line of Connor Siversky with Berenberg.

Good morning, everybody. Thank you for having me on the call.

Good morning.

Just starting on a high level, I know in the recent investment presentation, it was stated that Steward was seeing virtually a full recovery of patient traffic. And now that we have the Delta Variant spreading, you're seeing the curve go parabolic. There's some narrative out there now that some of the hospitals down in Louisiana and Florida are cutting back on electives. I'm just wondering if this is permeating through the operating base, what is the strategy to handle a sustained spike in infections? And if you could extrapolate that out into what it could possibly look in rank coverage, that would be very helpful.

Yes, sure. Absolutely, Connor. So if you look at our entire portfolio all across the world, not just in the U.S., we're not having any issues in any of our facilities with the Delta variant in any gross exaggeration of additional patients in the hospital. I actually had conversations with every one of our major operators within the last couple of weeks. And that just isn't the case. Obviously, some of you may have seen Scott Godlip's interview yesterday in which he talked a lot about the Delta Variant and while it is an increased infection primarily among the unvaccinated, it is currently not any more dangerous than the original COVID was. We've come a long way since this time last year in learning how to treat patients and so it is not an issue from an operating standpoint in any of our hospitals anywhere around the world.

Okay, that's helpful. And then moving on to behavioral health, you had mentioned in the prepared remarks that there's this growing need within the United States in particular, and I'm wondering what the competition base looks like right now, if you're starting to see more eyes turn to those assets. And whether or not those we could expect those 9% yields or so to come down in the years ahead?

Well, Connor particularly here in the U.S., there's not much supply out there. We wanted to be very involved in behavioral health for a long time, particularly since the ACA was passed. But it just hasn't been available to us, there have been one-offs, but just not worth the time. So on this particular very strong portfolio, there was a lot of competition for this particular portfolio, we expect that there will continue to be; there just aren't portfolios of this size out there. So we're very delighted to have been able to win this particular process.

Okay, and last one for me, just on the sale of Capella Medical Center, apologies if I missed this, any sense of what the pricing was on that deal or what it could look like?

We're selling the real estate, the fee interest in the real estate, and we did disclose its $135 million sale price cash proceeds. It's conditioned only on obtaining an approval in Washington, which we're hopeful to have. We have good reason to be hopeful it is almost a pro forma approval because it is only real estate. The same buyer bought the operations earlier in the year.

Okay, that clarifies, thank you.

Your next question comes from the line of Mike Mueller with JPMorgan.

Yes, hi. I'm just curious how deep is the pool of investors that you're talking to for the various JVs on the Steward assets?

It is very big, frankly. And not only for the equity piece very deep including mostly in fact, global institutions, whether they be infrastructure funds, sovereign wealth funds, large public and private advised pension funds from truly across the globe. We see the same level of interest. And this is really interesting, helpful. From our perspective, we see the same level of interest from traditional lenders, who I say traditional with respect to the typical big groups for real estate investing that in the past have not been participating in hospital real estate. And so we have literally dozens of interested potential lenders for secured financing on this real estate.

Got it. Okay, that was it. I appreciate it.

Your next question comes from the line of Michael Carroll with RBC Capital Markets.

Yes, thanks. Just after Mike's question, I want to talk a little bit about the JVs. I know MPW has been working on this for the past year, year plus or so. I mean, is this taking longer than you expected? I mean, are these deals more complex than for these making—taking time for these parties to work through or is this by design as MPW just wanting to get these deals done by the end of the year. So I mean, this is kind of what you always thought in the first place.

So Mike, it really hasn't. Remember we went through the pandemic last year, and everybody put the entire world on hold. So if you actually look at the time period when the world opened back up and our direction on this, it has been much quicker than the Primonial transaction.

Okay. And then going back to, I guess some of the recent deals. Can you talk a little bit about the DLA-type transactions which you completed, I think Steve or Ed, I think you mentioned that these were hospitals really to serve the population that doesn't get a lot of access to healthcare? Can you kind of explain that and how these buildings are different from some other general acute care hospitals?

Absolutely, and you stated it correctly. These are hospitals—and not to be pejorative—but inner-city LA basically, without these particular facilities, very many hundreds of thousands of the population around these facilities would have very limited alternatives. The alternatives would be to try to access the competing hospitals, particularly the teaching hospitals, USC and UCLA and others in the area, which are already running at very, very high capacity. So we look at this real estate, when you consider a good real estate investment as the absolute highest and best long-term use for this real estate is operating as hospitals. And similar to what we described with Prospect a couple of years ago, and why we would invest with an operator that has a relatively higher level of exposure, for example to Medicaid—Pipeline Health has developed a strategy and operational abilities over the last several years that can operate and have operated these hospitals very, very profitably. So we think the downside to these types of investments is very, very limited, because there are operators, including Pipeline and others who can and have operated very profitably, with very high margins and coverages for us, and the community truly cannot do without these hospitals.

Mike, we spend a lot of time on these particular facilities; they came to us before COVID obviously and with COVID everybody stopped. But we spend a lot of time underwriting these facilities. They're obviously not the big beautiful shiny neighborhoods, but the neighborhoods are clean, the people that live in the neighborhoods, their houses are very well kept and they're very, very proud of these hospitals and the healthcare that they're able to get. They're very important to these communities.

Okay, and then I guess taking a—taking that broader view, I mean, is there other types of deals like this out there that you're looking at? I mean is this a segment that you can grow with this specific operator and I know that they have some assets outside of LA in Illinois, is that something that you're interested in, too?

So that's a very good question, Mike. And while they certainly do have other assets, they haven't been made available to us, we haven't spent any time underwriting those particular ones. But we do like our relationship with them and believe that is one that we can grow.

Okay, great. Thank you.

Your next question comes from the line of Lukas Hartwich with Green Street.

Thanks, good morning.

Good morning, Lukas.

In terms of continued financial support from the government for the healthcare industry, how important is that for MPW today?

Yes, it's not at all. Lukas, it is—I know you're new to the story—so you may not have listened to some of the previous earnings calls that we've had about this particular issue. But our hospitals are performing exceptionally well. We have a number of operators that actually gave back not only the advances, but some of the grants that they received; our hospitals are in great financial situation. As we said back in April and May of last year, we knew that the patients would all come back as soon as the governments reopened hospitals. While the world called them elective surgeries, that only meant that if you didn't have them done, you wouldn't die the next day. But these were all medically necessary procedures. And so we're back at volumes of pre-COVID levels; there are lines out the door. And so we feel very good about where all the operators are.

That's really helpful. And then my second question is just in terms of MPW's tenant base such as heavily concentrated in for-profit providers, I was just hoping you could talk about the opportunity set on the nonprofit side of things?

Yes, if you look back to the history of founding this company, probably one of the biggest surprises to me personally has been that we haven't had as big an impact with the not-for-profits. Now that has changed in recent years. And we've got a fairly decent sized number of not-for-profit operators now. And they recognize that it's a great piece of their overall capital stack. We hope that we can continue to increase that certainly, because of the portfolio that we have now. It gives us a better entree into some of the other not-for-profits. But they do move at a different pace than the for-profits do. They're generally much slower in the entire process. They generally have larger boards and getting all of them on board takes time. So it is something that we think is an avenue for us. But it won't grow as fast as we've grown elsewhere.

Thanks and do you have a rough split between profit versus nonprofit for the MPW portfolio?

Yes, it's a very small percentage in not-for-profit; I think in total we've got about seven not-for-profit operators.

Great, thank you so much.

Your next question comes from the line of Michael Lewis with Truist Securities.

Great, thank you. I wanted to follow-up on something you just kind of talked about, about given the grants back, I noticed in your supplemental, your EBITDARM coverage went up sequentially to three times from two and a half; that 4Q 2.5 coverage last quarter in the supplemental that showed us 3.1 times. I'm guessing the difference there is that maybe some grants were returned, and you went back and adjusted that number, is that what happened or is there something else going on there?

Yes, so it's a little bit of all of the above. It's recognizing some of the COVID expenses, the extraordinary COVID expenses, and operators giving back some of the grants.

Okay, that makes sense. I wanted to ask too, I don't know if you touched on this about the tax rate change charge during the quarter. It was backed out in the normalized FFO. But I was just wondering about that. Was there any portion of that that was a tax charge this quarter or is it adjusting for how you maybe booked expenses in the past and I'm just wondering if this is kind of a one-time thing or if you have any additional tax risk or any kind of risk in that line item?

No, this is the U.K. attempting to find every dollar it can to pay for COVID, which they have spent upwards of $100 billion on. So they increased their corporate tax rate from, a couple of quarters ago, 17% they bumped it up to 19% and then during this last quarter, they bumped it all the way up to 25%. The $43 million increase, the charge that we took reflects all else equal what we would pay, if we tomorrow for example sold all of our assets at the asset level in the U.K. for basically what we paid for them. So what that says is there's built-in gains to what we paid. And so the $43 million represents that tax differential on such presumed capital gain. So because A, we don't expect to sell the properties at all and B, if we did, we would structure the sales in a much more tax advantaged method, which would include selling the equity of the owner, not the assets themselves and continue to defer that tax. That's why I said earlier, we don't see any foreseeable, near-term or long-term, cash impact from the tax rate change.

Okay, got it. That's clear. All my other questions have been answered. Thank you very much.

Thanks, Mike.

There are no additional questions on the phone line. I would now like to turn the call back over to Mr. Ed Aldag for closing remarks.

Thank you, Susanne and again thank all of you for listening in today, thank you for your questions, if anything comes up post the call, please don't hesitate to reach out to us. Thank you very much.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.