Earnings Call Transcript - MPT Q1 2023

Operator, Operator

Good morning, and welcome to the First Quarter 2023 Medical Properties Trust Earnings Conference Call. I would now like to turn the conference over to Charles Lambert, Vice President. Please go ahead, sir.

Charles Lambert, Vice President, Investor Relations

Thank you. Good morning, and welcome to the Medical Properties Trust conference call to discuss our first quarter 2023 financial results. With me today are Edward 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 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.

Edward Aldag, Chairman, President and Chief Executive Officer

Thank you, Charles, and thanks to all of you for joining us this morning for our earnings call. The overall preliminary results from our operators for the first quarter of 2023 are following in the same positive trends we have recently seen from other publicly reporting hospital operators. Remember, we report a quarter in arrears, so today's results are from the quarter ending 12/31/22. On the volume side, our domestic operators' same-store metrics across our portfolio are positive with admissions steadily increasing over the last few months, including January 2023. Surgical volumes look even better. On a same-store basis, surgeries are up year-over-year trailing 12 months Q4 2022 versus trailing 12 months Q3 2022. We're also seeing good momentum on a discrete quarter basis with quarter 4 up 3% over quarter 3. The number of ER visits have been steadily rising since the beginning of 2022, topping off in December with the highest ER volumes our portfolio saw in all of 2022. Internationally, we are seeing particularly strong demand both from an admissions and surgical perspective in the Spanish market. Recall that we're currently developing three ground-up general acute care hospitals along the Mediterranean coast of Spain with IMED. It's great to see the demand in this market continuing to grow at such a high rate with our IMED Valencia Hospital seeing admissions up 8% year-over-year and surgical volumes up 11% during the same period. The German and UK markets are also experiencing continued improvement with the German occupancy up 6% year-over-year through February 2023. In the UK, Circle's admissions and outpatient volumes continue to increase with overall volumes exceeding pre-pandemic levels. In Colombia, 2022 admissions and surgeries were up over 20% year-over-year. You can refer to our supplement filed this morning for more information on our EBITDARM coverages, but some points I'd like to highlight for you. We're getting close to the point where CARES Act grants will no longer impact the trailing 12-month coverages. General acute, inpatient rehab and behavioral health were all flat for the trailing 12 months quarter 3 over quarter 4. Long-term acute care coverages declined from 2.3x to 1.9x. Remember that LTACHs represent only 1.4% of our total portfolio, and the 1.9x coverage is more in line with historical coverages. I know that people are specifically interested in Steward's performance. So excluding grants, Steward hospitals' 2022 coverage increased to almost 2.5x from approximately 2.2x in 2021. Coverage has increased another 18 points for the trailing 12 months ending February of 2023. Also relating to Steward, the transaction with CommonSpirit is still scheduled to close next week. We look forward to expanding our relationship with CommonSpirit and the liquidity this transaction brings to Steward. On Prospect, we've seen some positive events, which Steve will go over in more detail in a few moments, but just briefly for me: on the Yale sale, this continues to move along positively. This week, one of the biggest unions came out to support the sale. The California operations continue to see improvements with volumes near historic levels. Additional capitation agreements have been signed by the hospitals, which will allow those volumes to continue to grow. Labor costs continue to hold down the trailing 12-month coverages, but they've seen good improvement in that over the last few months. The managed care business continues to grow its membership and its profits. It continues to exceed budgets. We remain confident that our overall investment in Prospect will be fully realizable from that investment. Our recent announcement to sell our Australian investments operated by Healthscope is a testament to the steady demand for hospitals. Anticipated cash proceeds from this divestiture will result in sufficient liquidity to repay the term loan used to fund the acquisition back in 2019. Our well-laddered debt maturity schedule, along with our inflation-protected long-term leases, allows for our cash flow to continue to increase without adding additional properties. Until the global markets stabilize, we do not anticipate making any significant acquisitions. However, our relationships with our operators create numerous organic growth opportunities. We will continue to analyze these opportunities as they come in and make prudent decisions about the use of our capital. We announced this morning an acquisition with Priory for five behavioral hospitals for 44 million pounds. This closed in the second quarter. Additionally, we closed on the purchase of two medium rehabilitation hospitals in Germany for EUR 47 million, with the third expected to close later this quarter for EUR 23 million. Speaking of growing relationships, it was announced earlier this month that Intermountain Health, based in Utah, has acquired a minority operating company interest in both of our Idaho Falls Community Hospital and Mountain View Hospital. This partnership will provide these two hospitals with additional access to highly trained specialists and vast resources as a result of collaborating with one of the region's largest and most successful health systems. While the financial terms of the investment have not been disclosed, we can say that they are an impressive valuation resulting from this equity investment, which once again proves the essential nature of our hospital real estate. Steve?

Steven Hamner, Executive Vice President and Chief Financial Officer

Thank you, Ed. This morning, we reported net income and normalized FFO of $0.05 and $0.37 per diluted share, respectively, for the first quarter of 2023. There are a few components of these reported results that I will point out. First, this includes no rent or interest income related to Prospect. As we reported last quarter, we are currently recognizing Prospect rental income only as cash is received and Prospect paid no rent or interest during the quarter. I will have a little further information on our Prospect investment in just a few minutes. Second, there are two transactions that we expect will generate more than $900 million in cash proceeds that we plan to use to repay debt. About $830 million will come from the previously announced binding agreements to sell our Australian assets. And just this morning, we announced that Prime Healthcare has elected to exercise its option to repurchase three general acute care hospitals for $100 million in cash. Because both transactions are binding and considered probable, accounting principles mandate that we recognize their estimated earnings impact even though neither has closed yet. Accordingly, we adjusted normalized FFO for non-cash real estate impairment and other charges of approximately $90 million as follows: about $11 million is related to unbilled straight-line rent on the three Prime hospitals, and I'll come back to Prime in just a minute. And about $79 million in charges relates to the Healthscope sale. That's further broken down as follows: of the total $79 million, these are U.S. dollars, approximately $37 million is unbilled straight-line rent. Then there are $8 million in fees and costs to sell the hospitals. $13 million is the recognition of previously capitalized currency exchange rate deferrals. And finally, there is a net $20 million difference between the contractual purchase price and our current carrying value, offset by the value of our related interest rate swap agreement. We will continue to earn rent until closing of both of these transactions, and we'll report that in future quarters as earned. Finally, we do not include in normalized FFO the direct costs and expenses incurred to respond to the defamatory statements published by certain parties, including those who are dependent in the lawsuit we filed late last month. Upon closing of the Healthscope and Prime transactions, receipt of the $900 million plus in cash and the reduction of debt with those proceeds, we have refined our 2023 calendar normalized FFO estimate to a range of between $1.50 and $1.61 per share. This also adjusts for the acquisitions in England and Germany that Ed mentioned and our estimates of revenue from Prospect during the year. With respect to Prospect, during the first quarter, we agreed as part of an expected series of additional agreements to invest $50 million in a convertible loan issued by Prospect’s managed care entities. Subsequent to quarter end, Prospect received a binding commitment from several third-party lenders for financing, which should provide Prospect with significant liquidity. Importantly, a portion of the proceeds of this anticipated financing will be used to pay off Prospect's existing receivables-backed loan arrangement, the result of which will be that Prospect will face no near-term debt maturities. In conjunction with these commitments, we and Prospect agreed to pursue certain follow-on transactions at the closing of which MPT's investments in Prospect assets will be comprised of the following: a master lease covering six California hospitals. MPT purchased these hospitals in 2019 for about $500 million. The current contractual cash rental rate is roughly 8.25% and escalates annually with reference to inflation. We presently expect to recommence collection of a portion of the contractual monthly rent in September of this year. Secondly, a first lien mortgage on the Pennsylvania real estate. Third, up to $75 million in a loan secured by first liens on Prospect’s accounts receivable. This amount, which will be fully secured, is well below the existing ABL arrangement's borrowing base. And finally, a significant noncontrolling ownership interest in Prospect’s managed care business that will have an agreed value closely tied to the remainder of MPT's recorded investments, which will include unpaid rent and interest. The managed care business has continued to perform well, and we think that is evidenced by the commitment letters for attractive new financing that Prospect has received. As our press release noted, and in light of continuing global inflationary, banking and other economic conditions, we made limited investments during the quarter. In fact, we continue to emphasize transactions that generate return of capital to us and liquidity for debt reduction. With liquidity at quarter end of approximately $1 billion, plus the more than $900 million from sales that I just mentioned, along with additional cash expectations from the sale of Connecticut to Gale, repayment of Steward loans and other transactions, we will be well able to satisfy all of our roughly $1.4 billion in 2023 and 2024 debt maturities. A couple of comments back to the Prime expected repurchase. This is not a bargain purchase option. Prime is required to pay us the amount that we originally bought the properties for 10-plus years ago. The vast majority of our leases that have repurchase options provide for a repurchase price of the greater of fair value and our original investment. In fact, this $100 million portfolio is the last of the Prime master leases that is at that fixed original price. We were satisfied with these terms at the time we completed the original transactions because of the very attractive lease rate that we negotiated in return. That will make the sale back to Prime FFO dilutive, albeit a relatively small impact because of the high rents we have earned until recently, but the benefits of recycling this capital into greater liquidity and lower leverage offset that slight dilution. Shortly after quarter end, we closed or committed to acquire a total of behavioral and rehabilitation hospitals in England and Germany up to an approximate $150 million investment. Similar to our limited late 2022 acquisitions, these acquisitions selectively add to certain existing relationships in ways that strategically strengthen the respective portfolios. At present, there are no other scheduled or expected near-term acquisitions. We have virtually completed our new build hospital for Ernest in Turlock, California, and it will come online and begin paying rent during the second quarter. The Ernest new build in South Carolina is still under development. We continue development of a new state-of-the-art behavioral hospital in Texas for Springstone, now a part of LifePoint. We continued construction of the three general acute care hospitals for our premier Spanish tenant IMED. In conjunction with the redevelopment of Steward's Norwood Hospital, which was made unusable by storms and floods during COVID, we advanced $50 million that is secured by, among other things, proceeds from Steward's insurance claims well in excess of the advance. This development is well underway. Finally, we have already noted the Prospect convertible debt of $50 million we funded in conjunction with the binding funding commitments from third-party lenders to Prospect. Also, as noted in this morning's press release, our Board has declared a quarterly dividend unchanged at $0.29 per share and it will be paid on July 13 to stockholders of record on June 15. After a virtually unchanged business model since we started the company almost 20 years ago, I thought I would make a few comments that are relevant to analysis of that model's sustainability. At the highest level, one might say that the product MPT sells to its lessees is capital. And capital, of course, has a cost. Our business plan has always recognized that we do not control the cost of that capital particularly with respect to debt cost. And this is true for most REITs and other real estate investors. That is why all of our long-term debt is at fixed rates. It is also why we carefully plan on staggered maturities; both of those cornerstone strategies are consciously designed to help avoid a situation that might otherwise arise if interest rates spike upward and significant amounts of debt mature simultaneously. But critically, our model has always anticipated the likelihood of rising interest rates and the need for our contractual rental rates to increase with the inflationary pressures that result in higher interest rates. Hospital leases typically do not have provisions for periodic market rent resets. There are good reasons for that, but beyond the scope of this morning's discussion. Instead, virtually every one of MPT's leases provides for annual contractual rental increases that are tied to inflation. Moreover, even in recent years when inflation has been minimal, and in some cases even negative, our cash rent has continued to escalate each year. Based on these annual contractual increases in our cash rent, and under almost any reasonable and historically normalized assumptions, rents from our existing portfolio only are expected to increase at rates at least comparable to interest rate increases in our maturing debt issues. My point, of course, is that our model is designed to anticipate normal course volatility in interest rates and other macroeconomic conditions. And moreover, analyzing a straw man scenario that any REIT might be forced to immediately refinance all of its debt at shock interest rates, even though that debt matures over many years in the future, is probably not a good use of anyone's time. Finally, we did point out in this morning's press release that recent transactions have supported the values of our leased assets. We think it important to point that out because it demonstrates that sophisticated investors and operators recognize and are willing to invest billions of dollars based on the long-term sustainability of our model, particularly our receipt of annually increasing rental payments that are generated from local hospital operations. With that, we have time for a few questions, and I'll turn the call back over to the operator.

Operator, Operator

At this time, we will take our first question, which will come from Connor Siversky with Wells Fargo.

Connor Siversky, Analyst, Wells Fargo

Quickly on Prospect, you can see you remove the East Coast assets from the rent coverage calculation, leaving coverage at 1x. Is there any indication or any color as to what you think that number could look like towards the end of the year, in consideration of the comments that the operating environment in general is improving?

Edward Aldag, Chairman, President and Chief Executive Officer

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

Connor Siversky, Analyst, Wells Fargo

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

Steven Hamner, Executive Vice President and Chief Financial Officer

It's primarily almost exclusively the sale transactions between Healthscope and Prime.

Connor Siversky, Analyst, Wells Fargo

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

Edward Aldag, Chairman, President and Chief Executive Officer

Connor, I don't think that's a fair assessment at all. When you look at CommonSpirit versus Steward, that was entirely based on the financial strength of CommonSpirit versus the financial strength of Steward. If you look at all things being equal, from the same financial strength of different operators, I don't think you're going to see any change in cap rates other than cap rates are obviously higher today overall than they were more than a year ago. So I don't think that's the right assessment. The assessment is if we've got stronger operators, you're going to see lower cap rates. As we've pointed out in the CommonSpirit Utah transaction, with CommonSpirit being the tenant, that makes those properties more valuable even at a lower rate.

Operator, Operator

And our next question will come from Michael Carroll with RBC Capital Markets.

Michael Carroll, Analyst, RBC Capital Markets

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

Steven Hamner, Executive Vice President and Chief Financial Officer

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

Michael Carroll, Analyst, RBC Capital Markets

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

Steven Hamner, Executive Vice President and Chief Financial Officer

There are differences, and frankly, we're very satisfied with this agreement. Remember what has happened since late in the fourth quarter: market disruptions, credit facility disruptions, inflationary pressures, then we had the banking panic. Yet through all of that, we're very satisfied with what we expect the outcome to be. Although we cannot name these lenders at this time, they will be recognizable when the transaction closes and announcements are made. These lenders are willing to commit meaningful amounts to a business that last quarter we indicated our view was worth at least $1 billion. Our view is further validated by virtue of the commitments we have.

Michael Carroll, Analyst, RBC Capital Markets

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

Steven Hamner, Executive Vice President and Chief Financial Officer

The reason is just to continue to advance this process that has been going on for well over a year and has been through at least two earlier iterations. We're not making any announcement on timing. We are not making any further announcement on that now.

Edward Aldag, Chairman, President and Chief Executive Officer

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

Steven Hamner, Executive Vice President and Chief Financial Officer

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

Michael Carroll, Analyst, RBC Capital Markets

So does the ultimate outcome include this transaction being completed? Or does the ultimate outcome include this transaction and other items being completed? Could this deal close in the beginning of 2024?

Edward Aldag, Chairman, President and Chief Executive Officer

Well, we're both not sure which deal you're referring to. The field that Steve just was talking about should close. And then resolution of the entire transaction will primarily build on a monetization of the managed care business.

Operator, Operator

Our next question will come from Jonathan Hughes with Raymond James.

Jonathan Hughes, Analyst, Raymond James

Could you remind us the timing of Healthscope meeting cash changing hands? I think that's a phased transaction and then maybe the timing and the expected disposition yield on the Prime purchase options?

Steven Hamner, Executive Vice President and Chief Financial Officer

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

Jonathan Hughes, Analyst, Raymond James

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

Steven Hamner, Executive Vice President and Chief Financial Officer

If you take our passing rent, it's a low double-digit yield on that $100 million.

Jonathan Hughes, Analyst, Raymond James

Okay. Similar to the one last year. Taken with capital allocation, you will have invested over, I think, about $400 million since the start of the fourth quarter of last year, yet the stock has traded well above an 8% cash cap rate and your debt yielded double digits that entire time. I understand that repurchasing stock would not help lower leverage, which is the main priority today. But investing in the company by buying back stock or buying back debt comes with zero underwriting uncertainty. So my question is, why not buy back some of your long-term debt? It would be accretive, help with deleveraging and also send a message of confidence in MPT's outlook.

Steven Hamner, Executive Vice President and Chief Financial Officer

It's not an unfair comment, especially just considered from the total mathematical perspective, and it's not off the table.

Jonathan Hughes, Analyst, Raymond James

How deep is that discussion going up to the board level and then maybe also related to that, about the dividend. Has a cut been considered by the Board? Wouldn't that perhaps be another good capital allocation decision and use those potential retained funds to shore up the balance sheet even faster and pay down debt?

Steven Hamner, Executive Vice President and Chief Financial Officer

We're very satisfied. We declared the dividend this morning. We're satisfied with where we are in the foreseeable future. All of those are levers that any company has to pull, whether it's dividend or property sales or share repurchases or debt tenders. Thankfully, we're in a very strong position, liquidity-wise, the value of our assets, the growth in the NOI of our assets. None of those considerations are off the table. Those discussions start at the board level, and we continue to observe all those conditions.

Edward Aldag, Chairman, President and Chief Executive Officer

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

Operator, Operator

Our next question will come from Steven Valiquette with Barclays.

Steven Valiquette, Analyst, Barclays

My question here is regarding the potential monetization of the Prospect managed care business. I'm trying to better understand the new binding commitment from a third-party lender versus the potential managed care transaction that was under negotiation previously. It seemed the old one might involve a third party taking more ownership. Now it seems MPT would have more direct ownership of that managed care business in the interim and perhaps monetize later. Is that true? I'm trying to get more color around that.

Steven Hamner, Executive Vice President and Chief Financial Officer

Rather than trying to reconcile back to a deal that's long been dead, I'll reiterate what we expect at the next phase, which would be execution on these commitment letters. They would provide Prospect with a significant amount of liquidity, take pressure off its operations and management team, and provide a better platform for growth of the managed care business. At the same time, presumably California continues to improve. We would end up with a roughly $500 million investment in the California assets under a performing master lease. That includes not draining cash out of California for the East Coast. We have commented on the Yale sale which will provide a significant amount of cash return to us. The interests we're talking about would be security interests, pledges and collateral interests in the equity of the managed care company. The monetization of managed care has always been the key to the timing of our recovery of our investment, and that really hasn't changed between the potential transaction considered earlier and the one we now expect to execute.

Edward Aldag, Chairman, President and Chief Executive Officer

If I understand your question correctly, the big picture hasn't changed at all. It's the same contemplation all along; it's just the details that have changed.

Operator, Operator

And our next question will come from Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt, Analyst, KeyBanc Capital Markets

Steve, when you wrap everything up of what's assumed in guidance, can you give us a little bit of additional detail of what's assumed at the high and low end of the range? With the collection of Prospect’s rent in California beginning in September, how is that factored into the range? What is the probability of ending up within the higher end of the range given the better visibility around some of the moving pieces within guidance?

Steven Hamner, Executive Vice President and Chief Financial Officer

I wouldn't handicap the most likely pinpoint result. It is fair to say that the difference in the range is primarily represented by what may happen with Prospect. We're hopeful that in the reasonably short term we'll have more detail about Prospect's next steps which may help analysts and investors better handicap our guidance.

Austin Wurschmidt, Analyst, KeyBanc Capital Markets

Is any potential sale of the Eastern portfolio on the table today? Or has that been sidelined for the near term?

Steven Hamner, Executive Vice President and Chief Financial Officer

We have a binding purchase agreement for Yale. We understand they are making progress on the sale of Rhode Island, which only leaves Pennsylvania. We're not aware of any advanced negotiations for Pennsylvania, but the other two markets are active.

Austin Wurschmidt, Analyst, KeyBanc Capital Markets

As you and the Board discuss capital allocation and balance sheet management, what are the next steps to bring leverage down to levels more consistent with the company's longer-term average?

Edward Aldag, Chairman, President and Chief Executive Officer

As Steve pointed out earlier, we will have the maturities coming due through 2024 taken care of in short order. We feel very comfortable about where the remaining maturities are and where they're laddered. We're not going to make knee-jerk reactions. We have good cash flow that well covers the dividend on a growing basis, so again, we won't make knee-jerk reactions.

Steven Hamner, Executive Vice President and Chief Financial Officer

To be clear, our supplemental leverage page depends heavily on any particular three-month period EBITDA. In the last two, three-month period EBITDA where we're not including Prospect income, it disproportionately impacts that leverage number. We adjusted the page this quarter to give analysts and investors the inputs they need so they can make their own assumptions about depressed EBITDA right now versus ultimate performance. We have no pressing maturities for two years. We pointed to transactional values we've executed with sophisticated third parties even during the recent panic. We described upwards of $2-plus billion in anticipated liquidity in the very near term, and then even more on transactions we expect. So we have a lot of liquidity, value, and levers to pull. There's nothing pressing until 2025, and even that is not necessarily pressing.

Austin Wurschmidt, Analyst, KeyBanc Capital Markets

None of that's lost on us, but I appreciate the comments.

Operator, Operator

And our next question will come from Vikram Malhotra with Mizuho.

Vikram Malhotra, Analyst, Mizuho

To be crystal clear, in the guidance, Prospect's rent through September is that the high end? And could you translate the FFO guide into a rough AFFO or FAD range for dividend coverage at both ends of the range?

Steven Hamner, Executive Vice President and Chief Financial Officer

The 1.50 to 1.61 range is not exclusively, but the great majority of that range varies on Prospect assumptions. The low end does include Prospect under the pending contractual payments starting in September. The rest of the range depends on other variables.

Vikram Malhotra, Analyst, Mizuho

Makes sense. Can you remind us the run rate bump on an annual basis from inflation given the CPI-linked escalators?

Steven Hamner, Executive Vice President and Chief Financial Officer

It varies across our lease arrangements. Most of our leases have a floor and let's say the weighted average floor is 2%, so we've been realizing those cash bumps even when inflation has been less than 2%. The ceiling, if present, could be unlimited in some leases or a cap in others; where there is a cap, the average might be in the 4% range. Weighted across the portfolio, you'd probably come up with a floor of about 2% and a ceiling in the 5% range.

Vikram Malhotra, Analyst, Mizuho

On a run rate basis, is that number towards the higher end embedded in guidance given where inflation has played out recently?

Steven Hamner, Executive Vice President and Chief Financial Officer

Yes, actual inflation is embedded because most of our leases reset on January 1. So to a great extent, as of January 1 we know what the cash rent will be for the calendar year.

Edward Aldag, Chairman, President and Chief Executive Officer

If I understand the question, the run rate is actual increases from the leases. We haven't projected future inflation beyond that; it's the actual increases in cash rent from the leases.

Vikram Malhotra, Analyst, Mizuho

That's helpful. I didn't realize most of the resets were January 1; I thought they might have been staggered.

Edward Aldag, Chairman, President and Chief Executive Officer

The vast majority are January.

Vikram Malhotra, Analyst, Mizuho

One last: regarding values being validated, how do we translate these transactions into a range of cap rates or valuation metrics? Versus the Macquarie transaction, where are you seeing those cap rates now? And from a capital availability standpoint, given that broader real estate capital is thin, how does that translate into doing new ABL loans or refinancing hospitals in terms of access to capital?

Steven Hamner, Executive Vice President and Chief Financial Officer

Going back a year ago, the Macquarie transaction was about a 5.6% capitalization rate. The Australian deal we signed recently was at a similar mid-5% handle. Other transactions we can point to include Springstone, and Yale's willingness to pay what it's willing to pay for that hospital. There was a recent transaction in France for a unique portfolio that went for a low-5% cap rate. All of these indicate that our underwritten values have been sustained. Regarding banks and hospitals' access to capital, we haven't had any operators express concerns to us about their ability to refinance ABL facilities that may come due. Prospect had choices to refinance its ABL. Even in that strained situation, there were avenues out there. I'm not aware of our operators having issues with the banks that had recent troubles. Everything seems operable right now.

Operator, Operator

And our next question will come from Josh Dennerlein with Bank of America.

Joshua Dennerlein (Dan filling in), Analyst, Bank of America (substitute)

Could you provide more details on the terms of the $50 million convertible loan that you provided to Prospect?

Steven Hamner, Executive Vice President and Chief Financial Officer

It's a convertible loan. We're not disclosing the terms right now. The terms are attractive to us, and we have the right to convert it into what we believe is more valuable managed care equity.

Joshua Dennerlein (Dan filling in), Analyst, Bank of America (substitute)

How does the third-party lender commitment impact Prospect's financing, and what are your thoughts on providing Prospect additional support from here?

Steven Hamner, Executive Vice President and Chief Financial Officer

The third-party commitment is to the managed care company and it unencumbers Prospect's receivables that are presently under the current ABL. That repayment totally unencumbers the receivables and gives Prospect liquidity to continue to operate and invest in their hospitals. Ultimately, we expect beginning in September that Prospect will pay some rent. We may advance another up to $75 million secured by the receivables balance, which is well in excess of the $75 million. That would earn an attractive run rate and help facilitate steps toward monetizing managed care and stabilizing and improving the California hospitals.

Operator, Operator

And our next question will come from Michael Mueller with JPMorgan.

Michael Mueller, Analyst, JPMorgan

Ed, you talked a little bit about Steward before. On prior conference calls at the end of last year, you put out some benchmarks for where you thought Steward's EBITDA ramp was going to be for 2023. Can you give us an update on what's changed or not changed?

Edward Aldag, Chairman, President and Chief Executive Officer

I really don't have an update other than to say that the January numbers, which are limited data, year-over-year are close to $100 million.

Operator, Operator

And our next question will come from John Pawlowski with Green Street Advisors.

John Pawlowski, Analyst, Green Street Advisors

Follow-up on the aggregate amount you expect to invest with Prospect and these additional commitments: a $50 million convertible and then up to $75 million in ABL financing. Are you contemplating additional support for Prospect above those amounts this year?

Steven Hamner, Executive Vice President and Chief Financial Officer

No, other than deferral of rent. No further cash investments are planned. Any rent deferral would be converted into our interest in the managed care company with the expectation based on our valuation that we would recover that.

John Pawlowski, Analyst, Green Street Advisors

Turning to Steward: could you confirm there was another roughly $25 million in loans provided late last year to Steward, and do you expect additional cash to go to Steward this year outside of the insurance recoveries and prepayment?

Steven Hamner, Executive Vice President and Chief Financial Officer

No, we do not expect any further operating liquidity support for Steward other than the insurance-related advances described for the Norwood redevelopment. In late 2022, there was another $28 million that we advanced. Steward participated in supplemental programs which required a tax-type payment of $28 million. By contributing that, Steward will receive multiples of that amount in reallocated government reimbursement. We elected to fund that because otherwise it was leaving money on the table.

John Pawlowski, Analyst, Green Street Advisors

Understood. I asked last quarter if you extended Steward additional capital and you said no. Why wasn't that disclosed verbally on the call then?

Steven Hamner, Executive Vice President and Chief Financial Officer

I don't remember that question, John. If you had asked a direct question like that, the answer should have been the same as I just gave you.

John Pawlowski, Analyst, Green Street Advisors

Last one: the $0.30 in adjusted funds from operations in the quarter, can you give a sense how much of noncash or deferred rent and interest is in that $0.30 figure in the quarter?

Steven Hamner, Executive Vice President and Chief Financial Officer

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

Operator, Operator

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

Edward Aldag, Chairman, President and Chief Executive Officer

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

Operator, Operator

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