Medical Properties Trust Inc Q4 FY2022 Earnings Call

Good morning everyone and welcome to the Q4 2022 Medical Properties Trust's Earnings Conference Call. All participants will be in a listen-only mode. Operator instructions: Please also note, today's event is being recorded. At this time, I would now like to turn the floor over to Charles Lambert, Vice President. Sir, please go ahead.

Thank you. Good morning and welcome to the Medical Properties Trust conference call to discuss our fourth quarter and full year 2022 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 in 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 financial measures in accordance with Reg G requirements. You can also refer to our website at 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 and thank you all for listening in today on our fourth quarter earnings call. As one of the largest publicly traded owners of hospitals in the world across 10 different countries on four continents, we find the outlook for our tenants extremely encouraging on all fronts. Recent public comments from U.S. operators confirm the optimism about the industry. Staffing costs are dramatically improved going into 2023, and access to qualified patient care staff is improving. Our tenants are implementing innovative means to develop and retain employees. Contract labor costs peaked last March and have come down approximately 33%. Our operators continue to take advantage of advances in technology to increase efficiencies, deliver quality patient care and reduce cost on a per-patient basis. My point being that simply because an inflation index is high, it doesn't mean that our operators do not have arrows in their quiver to reduce structural costs, transform procedures, et cetera. Hospitals have been for decades required to continually improve processes, procedures, treatments and optimize charges to maintain equilibrium with a rapidly growing demand for patient treatment. As we move into 2023, the prognosis for generalized margin improvement across the entire industry on increasing volume is encouraging. Our operators are experiencing low- to mid-single-digit comparable revenue increases, depending on the diagnosis, acuity and payer, which, along with improving volumes and expanding reimbursement programs across the scale, are expected to generate an attractive 2023 for MPT's tenants. We've been very busy during all of 2022, maintaining relationships, building new ones and keeping our sights on our abundant opportunities throughout the world. We continue to see tremendous opportunities and are prepared to act on them as soon as the world settles down on the new normal for interest rates. We continue to have a strong pipeline in our current markets like the United States, Europe, and South America, but we also continue to explore new markets across the NAFTA and Asian business corridors. Our portfolio continues to produce operating results in line with our original underwriting standards. Like the results posted by the publicly reporting hospital operators, our operators continue to see vast improvements to the labor issues that affected the market this time last year. In December of 2022, we acquired approximately £230 million of additional properties. This addition of six Priory hospitals purchased from a third party will be added to our master lease with Priory and improve the already strong Priory portfolio. As you all know, we recently completed the Springstone transaction with Apollo. Springstone will be added to the LifePoint portfolio. This is another good example of our acquiring a holding company, spinning out the operating piece to a third party for profit and retaining the real estate. I'll spend a few minutes reviewing Prospect due to its relevance this quarter. Prospect continues to make progress with their East Coast divestitures in Rhode Island and Connecticut. The transaction in Connecticut with Yale New Haven Health System is still tracking for a midyear close, while the non-MPT facilities in Rhode Island are expected to close in the latter part of 2023. On an extremely encouraging note, interested third parties have valued Prospect's managed care business at around $1 billion. With our security interest in this managed care business, our share of proceeds from the Yale sale and the excess value in the California properties, we believe we have more than sufficient collateral even without regard to the value of the Pennsylvania properties to realize the full return of our investment in Prospect, including any deferred rent. In addition to multiple initiatives at their hospitals, Prospect management is focused on aggressive cost-cutting measures that should enable them to return the Pennsylvania market to profitability in approximately 12 to 18 months. The California facilities are currently generating a coverage of 1.2 times on a trailing 12-month basis as of the end of the third quarter 2022. That being said, given the elongated timing of the Pennsylvania recovery, we felt it prudent to write off previously recorded straight-line rent and write down the Pennsylvania facilities. Last week, Steward and CommonSpirit announced a definitive agreement for Steward to sell the operations of their Utah facilities to Catholic Health Initiatives, a CommonSpirit subsidiary. The purchase price will be used by Steward to pay down debt obligations, including the loan MPT made to Steward last summer, and provide Steward with a good amount of liquidity. We announced our agreement to lease our entire Steward Utah hospital portfolio to Catholic Health Initiatives. This will be the second transaction we've done with CommonSpirit, and we are excited to expand this relationship. As you know, CommonSpirit, with a credit rating of A, is one of the country's largest and most respected not-for-profit health care providers. The announcement made last week regarding Steward's pending sale of its Utah facilities, once again validates the MPT model of underwriting and further validates the value of our entire portfolio. Our track record of underwriting hospital real estate where the demand for the operations, and hence, the value of the underlying real estate far outlasts the operator itself has a 20-year outstanding history. I want to close this part of our earnings call to make a few comments about one of mine and Steve's co-founders, Emmett McLean. Today, we will announce Emmett's retirement from MPT effective on September 1, 2023. Emmett, Steve and I met in 2003 and have worked closely with each other ever since. It has been a remarkable collaboration of different streams. I want to take this time to publicly thank Emmett for his work and dedication for the past 20 years. Emmett, we know that you and Catherine, your children and those precious grandchildren will cherish your much-earned retirement. Congratulations. We will issue a press release and an 8-K later today on Emmett's retirement. Steve?

Thank you, Ed. This morning, we reported normalized FFO of $0.43 and $1.82 per diluted share for the fourth quarter and full year 2022, respectively, in line with our prior expectations. We also introduced our estimate of 2023 calendar net income and normalized FFO, which I will reconcile to the fourth quarter's results momentarily. First, I'll just mention a change we made to our supplemental reporting around our concentration metrics. In prior quarters, we had based operator concentration on an adjusted gross asset basis. That is a non-GAAP basis. Starting this quarter, we are using GAAP numbers. That's because in December 2022, the SEC published updates to its non-GAAP financial measure guidance and stated that non-GAAP disclosures in charts, tables, and graphs need to display the related GAAP measure in equal or greater prominence. In order to avoid duplicative disclosures of these charts, tables and graphs, we chose to provide the GAAP-related charts, tables and graphs to reduce confusion. However, we did provide our historical non-GAAP concentration metric on our key operators in the footnote to page 11 of our supplemental for comparative purposes to the prior quarters. As described in the press release and Ed's earlier comments, included in the determination of fourth quarter normalized FFO were our adjustments to reserve Prospect's straight-line rent and the carrying value of our Pennsylvania Prospect facilities. In conjunction with Prospect's continuing progress in improving its East Coast operations and strategies, we have decided to fully exit our non-California Prospect investments and reallocate that capital to new investments. At the end of this period of transition, we expect that we will have recovered and have available for reinvestment most or all of our original investment plus any interim deferrals of rent. As we have alluded to in recent months, Prospect owns a valuable managed care business that we believe, based on third-party offers, negotiations and independent valuations, is currently worth about $1 billion. More immediately, we continue to expect the pending sale to the Yale New Haven Health System of our Connecticut hospitals to close by late next quarter. We also anticipate that as hospital operations and financial results improve over the next several quarters, our Pennsylvania hospitals will become increasingly attractive acquisition targets. Proceeds from their future sale will provide additional resources for reinvestment. The accounting adjustment in the fourth quarter to recognize an impairment acknowledges the possibility that such proceeds may be less than our original investment. However, we expect the value of the managed care business will significantly exceed the aggregate amount of the fourth quarter impairment. Any investment unrecovered from cash proceeds from the sale of Connecticut and the non-real-estate loan that we originally extended to Prospect in 2019 could be covered by the managed care proceeds. During this transaction period, and as Ed earlier mentioned that it is likely to extend beyond calendar 2023, we are considering providing rent and interest deferral options to Prospect and expect to account for rental income from our non-California Prospect investments, along with any interest from our $115 million non-real-estate loan, on a cash basis. Our 2023 guidance estimates take into account the range of our expectations about rent and interest that may not be paid during that period. So, today, we are providing our estimate of calendar 2023 normalized FFO. The following may help investors bridge from our fourth quarter 2022 normalized FFO annualized run rate of about $1.71 to our guidance range of approximately $1.50 to $1.65 for normalized FFO on a calendar basis. Starting with the $1.71: contractual rent escalations will add about $0.05 a share and the impact of rent and interest income from acquisitions and dispositions and the CommonSpirit Utah transaction, their related cash proceeds and interest expense with respect to transactions in the fourth quarter and through today, is an aggregate pro forma of another $0.03 a share. So those estimates on their own would yield a guidance estimate of approximately $1.79 of normalized FFO on a Prospect-neutral basis. That is as if Prospect paid all its 2023 rent and interest obligations. Our estimates of potential outcomes regarding Prospect range from a worst-case scenario, in which case we would recognize no rent or interest, to our more reasonably expected likely outcome that we recognize most of our California and Connecticut rent, but nothing from the Pennsylvania investment. The per-share range of these scenarios would be 2023 normalized FFO of between $1.50 and $1.65 and that is what we reported in this morning's press release. Even at the $1.65 high end of our 2023 guidance, it does not consider incremental FFO that would be created by the recycling of our current investment in our Prospect East Coast investment, assuming the successful restructuring and monetization of Prospect's managed care business. With that, we have time for a few questions, and I'll turn the call back to the operator.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. Operator instructions: Please mute your phones unless asking a question. Our first question today comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead with your question.

Hey, good morning everybody and thanks for the time here. I just want to — Steve, I want to hit on that — the guidance and sort of the buildup that you provided. So it sounds like when all is said and done, that $1.79 captures all of the announced activity that you've announced over the last six-plus months and would be maybe a reasonable jumping-off point once we think about sort of you reinvesting proceeds into any future activity once you've buttoned up the Prospect deal. Is that a fair way to think about it? I'm just trying to understand what sort of the exit rate or run rate is on a go-forward basis once accounting for Prospect?

I think that's generally correct. And again, it assumes generally that we will replace the Prospect income with income from new investments, again, assuming the recycling of that capital.

And then I was hoping that you could maybe share with us how to think about the monetization of the managed care. Do you expect to receive proceeds from the sale of their managed care business, or could you end up in some scenario with just a partial investment in that business down the line that maybe takes longer to monetize and ultimately reinvest the proceeds? Is there any timeline you can give us on when you expect to receive that investment or proceeds from that investment?

Yes, I think it's the 12 to 18 months that Ed mentioned earlier. That business, as probably many on this call are aware, is very vibrant and very attractive right now. We just saw recently Amazon closing a transaction with a similar business model. It is an up-and-running and currently profitable business for Prospect now. To try to anticipate beyond a 12- to 18-month sale process, which could involve any number of alternatives, is difficult to be precise about. Our expectation is that we hope not to end up with a long-term equity-type investment, and we don't think that's the likely outcome. We think it's more likely there will be a sale or a recapitalization that will recover at least and possibly more than our investment in the East Coast properties.

You're absolutely right. It is our intent as we work through this to push forward sales sooner rather than later, but there are other issues that have to work through.

Understood. And can you just remind us what the total dollar investment is in those four Eastern Pennsylvania hospitals? And then what the contractual annual cash rent is from those buildings?

So, the Pennsylvania hospitals have an aggregate gross investment of about $420 million, yes, before impairment.

Before impairment. And then we should just describe sort of a high-single, low-double-digit type yield on that to get to an annual cash rent from those facilities?

Well, that would be right. But just to point out that even at the high end of our range of $1.65, we're not counting on rent from Pennsylvania.

Got it. Understood. Just trying to understand what you'll need to reinvest just to recapture that earned rent. That’s all for me. I'll hop back into the queue. Thank you.

Our next question comes from Vikram Malhotra from Mizuho. Please go ahead with your question.

Thanks for taking the questions. Maybe first on Steward post the Utah transaction, can you provide any update on your view on underlying cash flow projections as we look at 2023 or other ins and outs? And then second, for the remaining non-Utah assets, would you give us a sense of the underlying health of those businesses' rent coverage?

Sure, Vikram. The expectations for 2023 continue to be in excess of $350 million, including the Utah facilities. Utah facilities represent approximately $80 million of that. So somewhere in the $300 million annualized range for 2023 post the Utah transaction. I think there is a public misnomer thinking that the Utah properties are the most profitable properties in the Steward portfolio. Actually, that is not the case. When the Utah property transaction closes, their overall coverage will actually increase. So, it's an opportunity for them to take proceeds from a mature market and redeploy into markets where they have the ability to grow even more. As we've stated before, the Florida properties, in particular, continue to outperform our original underwriting, and Steward still believes there's tremendous growth there.

Okay, that's helpful. On the disclosure based on the new GAAP guidance or SEC guidance, it seems like a sizable change. Would you mind giving us an example, such as Steward Florida or Circle Health, to explain what changed in the disclosure? It would be helpful if you could provide pro forma versus what changed. I didn't see other REITs having to make this change in their supplements.

So, the biggest change, I'll address generally, and we can absolutely supplement our supplement with our prior disclosures. The big changes were, for example, the treatment of accumulated depreciation, which affects the denominator of concentration calculations. In our prior pro forma examples, we would pro forma binding contracts for transactions that had not yet closed. To give a brief example: if you look at the Steward Health care aggregate on a GAAP basis shown in the supplement on page 11, it is 24.2%. Had we presented this on the old method, as the footnote says, it would have been 19.8%. Instead of going through line by line on the call, we'll provide a supplemental bridge that details the differences.

Okay. That would be helpful. If you can bridge the two with all the gaps like you said—depreciation because I felt both were net, but maybe I'm reading it incorrectly—and any pro forma adjustments. Just to make it crystal clear. Just last question: any update on Australian assets or other assets you may be monetizing to shore up cash flow and reduce leverage? What is the underlying appetite for hospital real estate today?

We don't have anything to report on Australia at this time. We continue to see strong appetite across geographies, indicated by unsolicited but fairly frequent inquiries about our assets across Western Europe. Although we've never publicly confirmed an Australian sale process, we don't deny interest, but we have nothing to report at this time.

Our next question comes from Steven Valiquette from Barclays. Please go ahead with your question.

Great. Thanks. Good morning. Appreciate the extra color on Prospect Medical. Maybe provide some additional updated color around their underlying operations within the Pennsylvania hospitals. What are the key variables to improve profitability of the operations? I recall there was some conjecture to potentially repurpose some of those Pennsylvania assets into alternative uses, such as behavioral health, but that may have hit some roadblocks. Can you give us an update on those dynamics and the path to improvement for the Pennsylvania hospitals based on what you know now? Thanks.

Sure Steve. As we've discussed previously, that particular area was hit harder with COVID than a lot of other areas in the United States, and that's not just from a patient standpoint but worse from a staffing standpoint. The rules we used to have to go by—if you tested positive for COVID or even tested for COVID—most hospitals don't even test for COVID anymore, so many of those issues have been resolved. You're right that when they originally bought these facilities, they had a plan for repurposing a number of the facilities. The problem is you have facilities that are very close to each other providing the same services. We believe they had a good plan for repositioning what services were provided in each individual facility. What we did not fully account for was the political fallout that would cause various politicians to object to taking services away from local hospitals. That's been much harder than any of us realized. I think as Prospect has gone through this, the politicians have been much easier to work with recently, so we have hope that they can execute their original plan to repurpose some of those facilities. I don't want to make a plan based on the last two and a half months, but their operating statistics look dramatically better than they did this time last year. They are clearly making progress, but two and a half months don't make a complete recovery plan at this point.

Okay, appreciate the color. Thanks.

Our next question comes from Michael Carroll from RBC Capital Markets. Please go ahead with your question.

Thanks. I wanted to stay on Prospect. Steve, you made some comments that you might provide Prospect with potential rent options. What do those options include, and has Prospect decided what they want to do with those options?

No, to be clear, we're considering that and we expect that we will provide some significant rent deferral options. Again, it's at least a 12- to 18-month process, which is why we gave a worst-case scenario in guidance where we recognized no rent or interest during 2023. That's truly a worst-case scenario. We do expect to provide Prospect some alternatives to manage its cash flow across the quarters, but we have not finalized those alternatives yet. Presenting a worst-case scenario of collecting no rent is not to imply that's what we intend to offer Prospect.

Under what scenario would you defer all your rent? If they ask for it, would you necessarily provide that to them?

We're a long way from that decision. There are many parties involved in the Prospect strategies and negotiations. We've simply said that, along with other parties, we are willing to consider contributing to Prospect's 2023 cash needs, primarily through potential rent concessions or rent deferrals.

Did Prospect pay their full rent in January and February?

No.

Did they pay any rent in January and February?

We haven't disclosed the precise amounts, but they did not pay their full rent.

Under what scenario do you think this will be completed? The press release highlighted 12 to 18 months, but you also indicated you expect some recoveries in the second half of the year. What's the give and take with that potential outcome?

It's the Yale sale in Connecticut, the improvement of the overall operations in the facilities, and an ultimate conclusion of a restructuring for them that are the primary drivers.

What has taken so long? You expected something by the fourth quarter of 2022, so why is it being pushed further into 2023 or potentially 2024?

We did expect progress in the fourth quarter and into January. Prospect was negotiating with a potential financial partner that would have begun the monetization process of the managed care business and provided immediate liquidity. Those negotiations went deep, and only in mid-January did it become apparent that the particular party would not continue to move forward. That was the major change that caused us to make the accounting decisions we took in the fourth quarter.

Our next question comes from Michael Mueller from JPMorgan. Please go ahead with your question.

So, first, after the Connecticut assets are sold, are you anticipating a rent cut on the Pennsylvania and California assets on a go-forward basis? Is any of that baked into that $0.15 cash recovery?

No. The primary difference between the $1.50 worst-case scenario—which assumes no rent at all from any Prospect properties—and the $1.65 is primarily the collection of the Connecticut rent and collection of the California rent and interest. The $1.65 assumes collection of those amounts; we are not assuming Pennsylvania rent in either scenario.

But on a go-forward basis, are you assuming any Pennsylvania rent? Or are you assuming the operating situation will need to be improved for those assets to generate rent?

At any point along the $1.50 to $1.65 range, there is no Pennsylvania rent assumed. Ideally, we'd like to see Pennsylvania improve and become an acquisition target. You may recall this time last year there was a non-binding offer from an investment-grade rated not-for-profit, so it is an attractive set of facilities for operators. Our preference would be for a buyer to acquire the real estate and for us to recover the impaired value.

Michael, those hospitals aren't going away, as seen in the political fight about potential closures. People and politicians want those hospitals to stay open. We believe this will take longer than anticipated, and we don't know exactly how quickly Pennsylvania can be resolved, but it is not a zero outcome.

On the managed care side, the $1 billion appraised value—how should we think about how much of that you're entitled to under your security interests? It sounds like you think that if it's $1 billion as a base case, you should be entitled to at least enough to cover the $170 million you wrote down on the PA assets. Is that a reasonable way to think about it?

A different way to look at it is that we believe we're entitled to enough of the managed care proceeds to get all of our money back, including what we expect from Connecticut and what we believe the value of the California assets will be.

Our next question comes from Tayo Okusanya from Credit Suisse. Please go ahead with your question.

Good morning. A couple from me. On Prospect, since you moved to cash basis, I'm curious if from an auditor's perspective Prospect has any issues around being a going concern. If it does, how do you think about potential bankruptcies as a plan B for getting a new operator for those assets?

We haven't had anyone raise going-concern concerns publicly at this point. We believe we're in a similar position whether the outcome is a bankruptcy or a cooperative restructuring. If it's a bankruptcy, it may take longer, but we still believe we're in a good position to recover our investments, including deferred rent.

Okay, that's helpful. Second, moving to Priory: could you talk about the economics of that transaction—the cap rates and seller financing interest rates assumed or funded?

Yes, these six properties we announced this morning were not owned by Priory when we bought the original transaction; they were owned by a third party who put them up for sale last summer. We believe they are some of the very best assets for Priory and will be added to the master lease under the same terms. We believe this will further improve an already strong coverage and collateral base for Priory.

But in regard to actual cap rates and the funding cost on the seller financing and assumed debt, is that something you can provide?

No, Tayo, we normally don't give specific cap rates. What we can say is that it is attractive and accretive, and even on a cash basis with the seller financing it is cash flow accretive. It is included in the guidance we provided: roughly $0.03 net accretion to normalized FFO from the transactions we announced this morning.

Okay, great. Then can we move to current leverage? Looking at the balance sheet, some items contributed toward higher leverage with the line of credit going up a decent amount. Accounts receivables increased and there's an additional mortgage loan increase of about $60 million. Talk about the items that contributed to higher use of the line and higher net debt.

Sure. The calculation we showed this morning at 6.4x—up from 5.8x last quarter—is due primarily to the effect of the range of Prospect assumptions. Secondly, our acquisition of the Priory assets in the fourth quarter was funded with seller financing, and currency movements also had an impact. The $60 million you mentioned was a European investment we made in the fourth quarter. Those are the main items.

Accounts receivable being up about $50 million—any notable items there or a slower collection dynamic?

Prospect is a big piece of unpaid billed rent, which contributes materially to the receivables increase.

From an accounting perspective, since you changed presentation to GAAP-related metrics, we can't see gross investments as easily. Since you did the $250 million of investments to Steward and Prospect, were there any additional investments to those two operators since that time?

No, other than routine development funding. For example, there's Norwood construction projects with Steward. There is no development funding with Prospect.

Got you. One final comment: the EBITDA rent coverages were useful metrics. It would be great to see a return of those metrics in the next supplemental in 1Q 2023. Thank you very much.

Thanks, Tayo.

Our next question comes from John Pawlowski from Green Street Advisors. Please go ahead with your question.

Thanks for the time. Maybe a follow-up to Tayo's question. Did you provide any operators at all financial support in the fourth quarter through rent deferrals, loans, or equity stakes? Or do you expect to have to, in the coming quarters, outside of Prospect?

Aside from Prospect, no, we don't expect to provide additional financial support.

Maybe on the Prospect restructuring: you expect to collect most of the California rents. Can you step back—what percent of the total Prospect relationship's annual cash payments owed do you expect to collect this year? A range would be helpful.

I think we've given the range in guidance. We don't expect the worst-case. The $1.65 assumes collection of the California rent and roughly six months of Connecticut rent, assuming the Connecticut sale at the end of the six months. That is the more optimistic scenario. The $1.50 assumes no collection from Prospect during 2023. We did not provide a precise percentage of total owed but those two scenarios frame the range of expected cash collections.

So is it right to interpret there may be a shortfall in California rent collection as well?

That's quite possible.

Very little of January and February rent has been paid across Prospect properties, including California.

Last one: I assume the repayment of the upsized mortgage loans didn't occur in the fourth quarter. Can you give us a sense for when you expect that mortgage loan to be repaid on the California properties?

That will be considered alongside the recovery from the managed care sale, though there are other restructuring options. The facility is mortgaged now. We are considering a number of options which could include acquisition of the facility for the mortgage balance, but there's nothing definitive or binding at this time.

Okay. Thank you.

Our next question comes from Andrew Rosivach from Wolfe Research. Please go ahead with your question.

Hey, good morning guys. How are you?

Hey Andrew, fine. Thank you.

I was thinking something that might help: would you be able to translate your FFO guidance into an AFFO guidance? I'm guessing some of the puts and takes related to Prospect are related to cash basis versus straight-line accounting, and investors are trying to back into dividend coverage.

If you take the worst-case scenario at $1.50 and make necessary adjustments for AFFO, we're at about $1.29.

Got it. Thanks. One more nerdy question: your schedule for tenant disclosures used to have EBITDAR and EBITDARM; you now have EBITDA. Why did you go to one column?

We stopped reporting EBITDAR some time ago because it required subjective assumptions about management fees and other adjustments. If you look at the supplement, many operators' EBITDARM and EBITDAR are the same. When we tried to estimate EBITDAR historically, we often used arbitrary assumptions that could be misleading. For some operators who prefer not to be named, we own only a small piece of their portfolio, making it difficult to scale to EBITDAR. What you see now is consistent and reduces subjectivity. You can still look at trends in the reported metric and see that most operators are trending in a positive direction.

So EBITDARM is an actual number you are receiving from operators rather than you making an assumption as a percentage of revenue?

That's correct.

Terrific. Thanks a lot, guys.

A follow-up from Vikram Malhotra from Mizuho. Please go ahead with your follow-up.

Two quick follow-ups. First, can you clarify the Utah sale to CommonSpirit? My quick calculation suggests the new rent is about 10% lower on a cash basis. Can you clarify, was there a rent change with CommonSpirit?

Yes, there was a rent change. On a cash basis, they're paying roughly 7.8% on the approximately $1.22 billion of investment. That's a reduction from what Steward paid in 2022 by a little more than $6 million. Some of that $6 million will be recovered through reallocation of that rent back to other Steward facilities. All of that is built into our guidance numbers.

Okay, helpful. Second, can you give more color on guidance components: what's the straight-line rent baked into the guide on either end of the range, and what's the G&A range?

We will probably have to get back to you on that. I don't think anyone on this call has the immediate answers for straight-line rent adjustments and G&A detail beyond referring to the recent run rates.

A follow-up from John Pawlowski from Green Street Advisors. Please go ahead with your follow-up.

Thanks. What level of leverage on a debt-to-EBITDA basis do you expect to be running at this time next year? Ed's opening remarks mentioned a strong pipeline, but there are many moving pieces including potential dispositions. What level of leverage can shareholders expect next year?

Let me make the point about acquisitions: we have a great pipeline, but until we get a new norm for worldwide interest rates, we won't be very active on acquisitions. As we've said, we will support existing customers and make strategic moves like the Priory addition we announced today. But other than that, we are awaiting clarity on the cost of debt and equity capital before making material acquisition decisions.

We don't expect to leverage up to take advantage of marginally accretive transactions. Our strategy is to maintain long-term leverage in the five- to six-times range that we had been working toward. To do that while making accretive acquisitions, we need certainty on the cost of debt and some rationality from sellers about the impact of higher cost of capital. Until then, we won't make significant acquisitions if it increases leverage.

So you expect leverage to remain essentially unchanged?

Yes, our expectation is to remain in that five- to six-times range over the medium term, subject to the dynamics we discussed.

We will end today's question-and-answer session. I'd like to turn the floor back over to Ed Aldag for any closing remarks.

Jamie, thank you very much. As always, we appreciate you listening in and your interest. If you have any follow-up questions, please don't hesitate to give us a call. Thank you very much.

Ladies and gentlemen, with that, we'll be closing today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.