Medical Properties Trust Inc Q3 FY2025 Earnings Call

Thank you for waiting. My name is Kayla, and I will be your conference operator today. I would like to welcome everyone to the Medical Properties Trust Third Quarter 2025 Earnings Conference Call. I will now turn the call over to Charles Lambert, Senior Vice President. Please proceed.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our third quarter 2025 financial results. With me today are Edward K. Aldag, Jr., Chairman, President and Chief Executive Officer of the company; Steven Hamner, Executive Vice President and Chief Financial Officer; Kevin Hanna, Senior Vice President, Controller and Chief Accounting Officer; Rosa Williams, Senior Vice President of Operations and Secretary; and Jason Frey, Managing Director, Asset Management and Underwriting. 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 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 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 thanks to all of you for joining us this morning on our third quarter 2025 earnings call. Before you hear from the rest of the team, I'll spend a few minutes discussing recent strategic updates, including a few notable developments during the quarter in the Prospect bankruptcy process. First, across all asset types, our tenants are delivering exceptional performance. General acute care operators reported a more than $200 million increase in EBITDARM year-over-year with tenants such as LifePoint Health and ScionHealth delivering double-digit percentage revenue increases during the quarter. Post-acute operators reported a $50 million EBITDARM increase versus the same quarter last year. That includes Ernest Health, up 17%, Vibra up 33% and MEDIAN up 7%. Finally, in our behavioral health portfolio, EBITDARM increased $10 million year-over-year. Rosa will share more details on this performance trends across our portfolio shortly. In August, NOR Healthcare Systems in California was named the successful bidder for Prospect's 6 California facilities. We promptly agreed to a new lease agreement with NOR, the terms of which are broadly similar to those agreed to with other operators in our transitional portfolio. All rent will be deferred for the first 6 months, ramping to 50% for an additional 6 months and then reaching total stabilized annual rent of $45 million per year thereafter. More recently, we reached a settlement agreement with Yale New Haven and Prospect, whereby Prospect will receive $45 million from Yale. This payment from Yale will be additive to the ultimate proceeds that Prospect receives for these properties. Prospect has already entered into an agreement to sell 2 of its Connecticut facilities to another operator and is actively engaged in negotiation with buyers around the third hospital. Finally, our portfolio of new tenants continues to ramp monthly rent on schedule. With a few exceptions mentioned in our press release. We have collected all rent due from these operators through October, including 100% of rent from HSA. In August, we sold 2 facilities from this portfolio in Phoenix, Arizona to a tenant for approximately $50 million pursuant to a purchase option in the lease. We continue to own approximately 15 acres of land in the area. We are increasingly confident in our ability to generate total annualized cash rent of more than $1 billion by year-end 2026. Notably, this $1 billion target does not reflect any rent contributions from any of the California Prospect properties. Reflecting this confidence as well as our strong belief that our share price remains significantly undervalued, our Board of Directors has authorized a new $150 million share repurchase program that we intend to deploy opportunistically. Furthermore, I want to call your attention to a comprehensive reaffirmation of our business model presentation posted to our website earlier this week. In this presentation, we directly address a range of false narratives that critics have been spreading about our business model. We believe it is important that shareholders, operators, journalists, and lawmakers all have a complete understanding of the truth around MPT. There remains a dynamic macro policy environment, making the permanent and flexible capital solutions that MPT offers more important now than ever.

Thank you, Ed. As always, I will cover some highlights from the quarter across our diverse global portfolio beginning with Europe. As a reminder, international operators comprise approximately 50% of our total portfolio, and we continue to be pleased with the consistency of coverages exceeding 2x across this portfolio. This performance reflects these operators' strategic focus on high-quality patient care as well as continuous expansion of access to care within their communities. In the U.K., Circle repeatedly ranks among the highest of all health care operators in patient satisfaction, maintaining a reputation score well above its next closest competitor. Circle continues to make significant investments in advanced technologies, including AI and robotics, strengthening its competitive advantages and reinforcing its position as one of the leading healthcare providers in the U.K. market. Our Sulis Hospital Bath in the U.K. is the first independent hospital to receive accreditation as an elective surgical hub deemed by the NHS and the Royal College of Surgeons of England. This recognition highlights the hospital's high standards in clinical performance, operational efficiency, and patient care. With coverage consistently above 2x, Priory has demonstrated its ability to adapt its service lines to the needs of each market, allowing for flexibility as the NHS' mental health model evolves. Priory continues to explore technological opportunities such as its partnership with Psyomics to launch an innovative digital pathway that aims to revolutionize access to personalized mental health care. In Germany, MEDIAN continues to report strong negotiated reimbursement rates and occupancy trends, enabling them to meaningfully outperform prior year revenue and earnings. In Switzerland, Swiss Medical has launched integrated care models in each of the French, German, and Italian-speaking regions. With these new platforms successfully supplementing Swiss Medical's strong organic growth, EBITDAR grew more than 10% trailing 12 months year-over-year. In Spain, IMED continues to progress construction on new hospitals in Alicante and Barcelona with scheduled openings during 2026 with over 70% of construction completed. Turning to our U.S. portfolio. Ernest Health has continued increasing consolidated coverage every quarter over the past year with legacy IRFs reporting strong results and new developments rapidly ramping. As such, consolidated EBITDARM coverage is now approaching 2.4x. LifePoint Health continues to deliver high-margin growth at a steady, stable rate versus the rapid acceleration observed in 2024. Conemaugh Memorial continues to be the most significant growth driver within LifePoint's portfolio with trailing 12-month admissions increasing 15% year-over-year. Surgery Partners' 3 facilities delivered another quarter of strong performance with consolidated EBITDARM coverage above 6x. Our hospital in Wisconsin recently completed a much-anticipated expansion to their operating suite to accommodate additional surgeons wanting to bring cases to this respective facility. HSA continues to improve operations and staffing across markets with Q2 and Q3 EBITDARM coverage approaching 1x on fully ramped rent, which, as a reminder, does not fully ramp until September of 2026. Summer seasonality drove softer volumes in the third quarter, but revenue remained strong due to a higher patient acuity mix. MPT has committed to funding approximately $40 million over the next 2 years for necessary infrastructure and other capital improvement projects, including HVAC and elevator replacements. The vast majority of this amount is for a newly constructed 7-story parking deck. These costs will be added to the lease space upon which the tenants will owe rent. HonorHealth launched its rebranding in Arizona by renaming Mountain Vista to Four Peaks Medical Center. In addition, Honor remains focused on physician recruitment, executing its self-funded CapEx strategy, and upgrading facilities ahead of anticipated volume recovery. Quorum Health's Odessa facility continues to improve performance with stronger-than-expected admissions and surgical volumes. In August, Odessa Regional announced that it achieved Silver certification as a Cribs for Kids National Safe Sleep Hospital, demonstrating adherence to rigorous guidelines established by the Cribs for Kids National Safe Sleep Hospital Certification program. Insight Health reopened ER services at Trumbull, Ohio earlier this month with plans to slowly open more services as volumes come back along with physicians and staff. Prime Healthcare's MPT facilities continue to show improved performance with EBITDARM coverage over 2x as volumes and ER conversion rates have increased across the portfolio. Prime received credit rating upgrades from Fitch, Moody's, and S&P during the third quarter. Pipeline Health continues to demonstrate growth with EBITDARM coverage over 2x. Additionally, they are opening new service lines for patients at all 4 hospitals. In summary, we are very encouraged by performance trends across our portfolio. Our portfolio of new tenants continues to ramp monthly rent payments, and we remain well positioned to generate significant cash flow from our 388 properties and approximately 39,000 licensed beds around the world, enabling us to create value for shareholders moving forward.

Thank you, Rosa. Today, we reported normalized FFO of $0.13 per share for the third quarter of 2025. The normalized FFO result would have been $0.01 higher if not for the payment of September rent by cash basis HSA on October 1. These results fully reflect the full quarter dilutive impact of not only our first quarter secured bonds, the second quarter MEDIAN joint venture refinancing. Higher G&A expense versus the second quarter also impacted GAAP results, primarily driven by higher stock compensation expense resulting from the change in the fair market value of 2024 and 2025 performance-based equity compensation, of which no shares have been earned or vested as of September 30, 2025. Our earnings from equity interest were higher in the quarter as changes in German tax policy resulted in a net deferred tax benefit to our German JV and as the value of the underlying real estate in the CommonSpirit joint venture continues to adjust upwards. Neither of these items are included in our normalized FFO results. We recorded approximately $82 million in net impairments, the majority of which related to Prospect and the decline in expected proceeds of certain Pennsylvania and Rhode Island assets. We continue to expect that cash proceeds from both the settlement with Yale and Connecticut and the sale of the Connecticut facilities will be more than sufficient to repay MPT's outstanding DIP loan balances. Despite this expectation, accounting rules require that we record impairments to our Prospect carrying values. There are other immaterial adjustments to carrying values during the quarter, including routine adjustments to marketable securities that were disclosed as non-cash fair value adjustments in our reporting. I will now hand the call over to Steve to discuss our liquidity and capital strategy moving forward.

Thank you, Kevin. I'll wrap up quickly with just a few points, none of which will be surprising, and then we can take any questions. First, a quick summary of the strategies we have been executing for repaying and otherwise addressing future maturities. We've sold at significant gains and financed at above book values many billions of dollars in highly attractive hospital assets. Almost without exception, these transactions have provided clear validation of our underwriting rigor and the resulting asset values. Access to these values has given us the assurance and flexibility to repay and refinance several billion dollars of debt in 2025 alone. The secured notes we issued in February are now trading at significant premiums. And our most recent transaction financed more than $2 billion of German rehabilitation hospitals at a 5.1% coupon. This access to capital has also given us the ability to re-tenant and begin collecting what is now scheduled to be an incremental $200 million plus in annual cash rent from new operators, resolve the issues around Prospect bankruptcies and address debt maturing in 2027 and beyond, all of which we are doing successfully. Along with our clear visibility into rent ramping to a scheduled incremental $200 plus million, the upcoming 2026 annual escalations, cash payment of our roughly $100 million DIP loan and periodic asset sales similar to what we have reported in the last few quarters, we also have reason to expect even more liquidity. Specifically, and while there is no certainty, Prospect is expected to generate proceeds in excess of the $100 million balance of our DIP loan. A substantial majority of any such proceeds will flow to MPT. We are evaluating the sale or lease of several assets, which are not currently yielding meaningful returns. And we also continue to evaluate sales of earning assets and portfolios for attractive gains. For example, Aevis Victoria, our co-owner of Infracore and the parent of Infracore's Swiss Medical Network lessee, is currently exploring various strategic options for its affiliates, including Infracore, to support their long-term development. Infracore is considering various opportunities to open up its capital or even list on a stock market in order to meet the growing demand for sale and leaseback solutions in the public and private hospital market in Switzerland. As this and other market indicators demonstrate, demand for hospital real estate is strong across virtually all geographies. Our cost of capital is still higher than we expect it will be. But as we have previously said, we may make modest acquisitions when strategically important. But as Ed pointed out, repurchasing our own common stock is among our very best and most accretive uses of capital. And for that reason, we announced this morning that we have implemented a $150 million strategic stock repurchase plan that will make available some of this expected growing liquidity to capture that permanent value. This announcement demonstrates our conviction that recent prices of our common stock do not reflect our assets' underlying value, and we have, therefore, not issued any shares under our recently implemented at-the-market offering program. We reestablished that program and the long-term opportunistic flexibility it provides us in August, shortly after the effectiveness of our new 3-year shelf registration statement. Importantly, some of our unsecured notes outstanding still trade at discounts in today's markets. And nothing we may consider with respect to share repurchase or ATM programs rules out continuation of possible debt refinancing or redemption strategies. We've conclusively demonstrated that we have the asset values to accomplish these strategies. Moreover, as you would expect, we carefully monitor and plan for the maintenance of all debt covenants as we look into possible future capital transactions. We consciously designed and negotiated these covenants to provide us the opportunistic flexibility to execute these strategies, and we are confident that we will do so. And with that, I will turn the call back to the operator to queue any questions.

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

I guess on the buyback, the question here. I mean, how do you weigh looking at a buyback versus using the capital to either pay down debt, buy back other debt, just given where the leverage level is today and even on a pro forma basis, where it will be? And I guess the follow-up to that is in terms of funding a buyback, would you only use asset sales? Or would you use cash on hand or tap the credit line? Can you just put that whole buyback into perspective for us?

Sure, Mike. First, we have several opportunities, which we've discussed over the past few quarters. We're looking to reinvest in the business and strategically acquire new assets, even on a limited basis. We acknowledge the trading volumes of some unsecured bonds that might present favorable chances for tendering or repurchasing, whether on a small or large scale. We also believe our shares are significantly undervalued. Therefore, we have multiple options available. We will continue to assess the opportunities, the timing, and the sources of capital. I don't think we'll need to borrow additional money for the buyback. We've mentioned some potential increases in cash resources, including assets that aren't currently generating much income and some well-performing assets from our recent billion-dollar asset sales. We anticipate that any future asset sales will also yield attractive profits. Everything is on the table, and as we've been doing for years, we constantly evaluate the best use of the capital we have available.

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

I want to follow up on Mike's questions about the buyback. Can you clarify when some of these purchases might take place? I understand you have a significant debt maturity in 2027 and are still drawing from the line of credit to meet debt covenants. It seems like you're cash flow negative, at least based on some recent investments. Do you need to resolve these issues before starting to buy back stock, or are you open to doing that soon?

Yes, Mike, I think you should assume it will start immediately.

Okay. Ed, can you give us an update on HSA? I know you had some positive comments about their progress and the ramp-up they've been doing. Could you provide details on what led to the late September rent payment? Is that a concern for you regarding their ability to pay the increased rent over time? Can you elaborate on this?

Sure. They continue to perform very well. The biggest improvements in Florida come from bringing back the doctors to the facilities who left during the Steward situation. They have also been extremely successful in Texas, likely exceeding our expectations. Regarding their cash delay in October, it was actually in September; we believe it was the final steps of getting everything in order, including repaying the lender for the DIP money in Florida, and we do not anticipate any further issues.

And I'll just point out one last thing. And you remember, September, the rent actually doubled. And so they paid twice in September, actually on October 1 and what they had been paying. And again, I think we made clear in the press release, they've already paid October rent.

And your next question comes from the line of Farrell Granath with Bank of America.

I was just wondering if you could add a little commentary around the Yale New Haven hospitals. I saw the update with having at least 2 with greater line of sight of a potential close. Is there anything else that you can share and also the potential third if there's any further interest?

So Farrell, I think you're going to need to repeat that. No one around the table heard the first part of your question.

So sorry about that. I was just asking about the Yale New Haven hospitals and the progress on having those either re-leased or sold under the binding agreements? Or is that involved as well as the third property?

Yes, sure. So the 2 facilities are under binding agreement. We expect those to close hopefully before year-end, if not shortly thereafter. The other one, we hope to have a binding agreement imminently with another buyer.

Okay. And also, I saw a little bit of commentary on the NHS restructuring and its impact on referrals to behavioral providers. Does that grant you any concern on the future health of that sector for Priory for their EBITDARM coverage? Or does that maybe add a little target if that could be something to dispose of and use for capital funding?

We discussed this in the last quarter and possibly in the one before that. The NHS, similar to their approach with acute care a few years ago, aims to keep as many patients as possible within their own hospitals, and they are now implementing a similar strategy for behavioral health. We believe that over time, they will recognize the advantages of utilizing independent hospitals for treating some of these patients, as the independent sector has the necessary resources to handle the patient volume. We view this as a short-term situation that will eventually improve. In the meantime, Priory has demonstrated through their twice-covered performance that they have successfully implemented operational measures to continue performing strongly.

The operator there does not expect to see a significant decrease in their coverage.

And your next question comes from the line of Omotayo Okusanya with Deutsche Bank.

In terms of the rent collections in the quarter, I think in the press release, you did mention that there was maybe not as much collection as you expected in Pennsylvania and Ohio. Curious if that relates to Insight in particular? And if you could just kind of give us an update on that asset transition.

Yes. Tayo, it's primarily the Ohio facility. As you might know, there were delays in reopening it, but it is now operational. Senator Moreno has been very supportive in this process, so we anticipate improvements. We have postponed the date when we expect full rent payments to begin, which is now set for January. In Pennsylvania, the amount involved is very small. The facility is progressing, but I'm not certain when it will start generating rent payments.

That's a $30,000 a month rent payment, Tayo.

Got you. Okay. That's helpful. And then just kind of looking through the sub, it looks like there was some additional about $20 million of new loans in the quarter. Just kind of curious if you could kind of talk us through who that was to, if it's to any of the kind of operators of the assets in transition?

There were 2 loans to operators, one being Insight, and that was for CapEx and for reopening costs. And then there was a loan to the facility in Pennsylvania, Tenor, and that too was for CapEx.

Got you. That's helpful. And then another one for me. The 8 assets, I mean, you took about 23 assets, 15 were leased, 8 were kind of out there and you kind of were looking at what to ultimately do with those 8 assets, including some other developments. Could you just walk us through kind of the status of those 8 and kind of what's happening?

Tayo, I'm not sure exactly the 8. I guess the 2 big ones would be the one in Massachusetts in Norwood and then the other one in Texas in Texarkana. Both of those facilities remain under construction. And other than about all I can say at this particular point because of various NDAs, we are in negotiations with people about those facilities.

I will now turn the call back over to Ed Aldag for closing remarks.

Thank you very much, and thank you all for joining us. As always, if you have any questions, please don't hesitate to reach out to Drew, and we'll get back with you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.