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Edited Transcript of MPW earnings conference call or presentation 8-Feb-18 4:00pm GMT

Q4 2017 Medical Properties Trust Inc Earnings Call

Birmingham Feb 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Medical Properties Trust Inc earnings conference call or presentation Thursday, February 8, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Lambert

Medical Properties Trust, Inc. - MD

* Edward K. Aldag

Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President

* R. Steven Hamner

Medical Properties Trust, Inc. - Executive VP & CFO

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Conference Call Participants

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* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Eric Joseph Fleming

SunTrust Robinson Humphrey, Inc., Research Division - VP

* Jordan Sadler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Karin Ann Ford

MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst

* Michael Albert Carroll

RBC Capital Markets, LLC, Research Division - Analyst

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

* Vincent Chao

Deutsche Bank AG, Research Division - VP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q4 2017 Medical Properties Trust Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to turn the call over to Mr. Charles Lambert. Sir, you may begin.

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Charles Lambert, Medical Properties Trust, Inc. - MD [2]

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Thank you. Good morning, everyone, welcome to the Medical Properties Trust conference call to discuss our fourth quarter and full-year 2017 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 www.medicalpropertiestrust.com in the Investor Relations section. Additionally, we are hosting a live webcast of today's call, which you can access in that same section.

During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed and/or underlying such forward-looking statements. We refer you to the company's reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company's actual results or future events to differ materially from those expressed in this call. The information being provided today is as of this date only, and except as required by the federal securities laws, the company does not undertake a duty to update any such information.

In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release, Medical Properties Trust has reconciled our non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations.

I will now turn the call over to our Chief Executive Officer, Ed Aldag.

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [3]

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Thank you, Charles, and thank all of you listening in, for joining us today for our fourth quarter 2017 earnings call.

By all measures, 2017 was a monumental year for Medical Properties Trust. We exceeded our original 2017 acquisitions guidance with our largest single year acquisitions of $2.2 billion, bringing our total portfolio to $9.5 billion. Our success and hospital expertise continues to attract preeminent health care institutions. One of the many grand achievements we had in 2017 was the addition of 2 nationally recognized academic not-for-profit health systems to our portfolio of operators. We are delighted to have Ochsner Clinic Foundation and UCHealth in Colorado on our tenant list.

As I often say, you cannot paint a picture of a society without hospitals. Hospitals not only maintain a community's physical and mental well-being, but they also serve as a vital economic resource. While hospitals will remain essential to the U.S. health care system, external and internal pressures will continue to influence hospital margins. We expect our portfolio hospitals to align with those overall health care trends. As they always have, hospitals will adapt to the changing industry norms through innovative strategies, enhanced analytic capabilities and collaborative partnerships in order to maintain and enhance viability. Ultimately, hospitals will be the galvanizing force behind the U.S. health system's transformation to value-based care.

You will recall that we reported EBITDAR and EBITDARM coverages 1 quarter behind. Therefore, we note that the numbers we are reporting today do not include the increases we are generally seeing for this past December and January. The record flu season has produced mixed results. In some hospitals, while admission have been up, surgeries have been down due to lack of available beds. This has affected all 48 of the contiguous U.S. states. There will be more updates on this the next quarter.

Due to the large number of hospital acquisitions, we have made over the last 4 to 5 years, our same-store facilities will be changing significantly for the near future. This quarter, we added 21 properties in same-store reporting. 13 of these facilities are German rehabilitation facilities, which are generally underwritten at 2x coverage. The remaining 8 facilities are acute care hospitals with lower coverages than most of our more seasoned facilities. Notwithstanding this impact, for our total portfolio coverage, EBITDARM coverage quarter-over-quarter remained strong and essentially flat at 2.9x. Looking at total portfolio EBITDAR coverage, quarter-over-quarter, there was a small decline from 2.3x to 2.2x.

Turning to the acute-care portion alone, EBITDARM coverage declined slightly from 3.7x to 3.6x. This decline is primarily driven by several of the Prime facilities in our portfolio. Prime continues to implement the revenue cycle initiatives resulting from their 2016 audit. We have launched the Prime portfolio carefully including several on-site visits with the management team. Prime same-store cash EBITDARM coverage is currently over 3x. EBITDAR coverage quarter-over-quarter for the acute-care portion of the portfolio for -- declined slightly from 2.8 to 2.7x.

In total, including Europe, IRFs and LTACHs represent 21% and 7%, respectively, of our portfolio. EBITDARM coverage for both sectors remained relatively flat quarter-over-quarter with IRFs at 1.8x and coverage in LTACHs at 1.9x coverage. As a reminder, U.S. IRFs represent less than 6% and U.S. LTACHs less than 4% of our total portfolio.

As we have previously mentioned, our German facilities continue to perform well but have been impacted by a countrywide nursing shortage. Strategies that were implemented in 2017 will help alleviate this issue in 2018. We are pleased with the overall portfolio. We believe that, on a whole, it is not only positioned to do well in this new environment, but to thrive. Steve will go over the financial results for 2017 in detail with you in just a few minutes, but I wanted to be sure to highlight just how well we've done.

As previously noted, we acquired an additional $2.2 billion properties in 2017. Moreover, and very importantly, these were strong and instantly accretive acquisitions. As a result, 2017 resulted in an MPT historical record high FFO per share. Our balance sheet remains strong. We have ample amounts of liquidity and we continue to see good opportunities in the marketplace, both in the U.S. and abroad.

You all know that we've been working this past year on joint venturing 2 specific portfolios with the intended consequences of lowering our leverage well below our normal operating ranges and to greatly lower our concentration with Steward Health. After running a process on both these portfolios, we have selected 2 different parties to work with, one for each portfolio. While we cannot, at this point, be assured of either closing, we are excited about where we are in the prospects of a successful closing. I know that you will understand, when we get to the Q&A portion of this call, we will be very limited about the questions that we can answer at this time.

Speaking of concentrations, after taking into account the announcements made this morning, and assuming the development transactions are fully funded, Steward remains our largest tenant at approximately 36% after the acquisition of IASIS. MEDIAN follows at 13% and Prime at 11.8%. Our 3 larger states are Massachusetts, Texas and Utah at 13.7%, 13.3% and 10.09%, respectively. Domestically, acute care hospitals represent a little more than 78% of our overall portfolio.

2018 represents the 15th year since MPT's inception. We're looking forward to the next 15 years. Steve?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [4]

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Thank you, Ed. This morning, we reported normalized FFO of $0.37 per diluted share for the fourth quarter of 2017. As Ed mentioned, that is a record result for MPT and on a nominal basis represents quarterly normalized FFO of almost $135 million. That's $540 million annualized and at our currently quarter dividend rate of $0.24 per share reflects a sector-leading payout ratio of less than 65%. And that is based on the foundation of an outstanding balance sheet, with limited near-term obligations, moderate leverage and multiple options for liquidity. We are truly in the strongest financial position for the long term as we have ever been.

We'll come back to our outlook in just a few minutes. But first, let me describe a few items that we include in this quarter's normalized FFO. As we have previously disclosed, we will over the next roughly 6 quarters sever leases on certain Adeptus facilities and either sell or re-lease them to other operators. Accordingly, we are accelerating the amortization of the straight-line rent accrual that accumulated in the early years of these particular facilities. For the quarter, this amounted to $4.2 million, and it is added back to normalized FFO. That will leave a balance of about $6 million in straight-line rent related to these facilities, and we expect to similarly accelerate the amortization of that balance over the next 6 quarters.

We incurred about $9.1 million in cost directly related to acquisitions, the majority of which was for German real estate transfer taxes related to the 3 hospitals we acquired during the quarter. This treatment is consistent with our history in Europe, and even though GAAP mandates this treatment as an expense, we certainly take into account this tax when we negotiate our lease rates. And going forward, new GAAP rules will, starting in 2018, provide that such taxes be considered as part of the purchase price. For any other old-timers listening, this will be back to the way it used to be done for many years.

Finally, we redeemed $350 million in unsecured notes that had a coupon of 6 3/8% with proceeds from an offering of notes that had a 5% coupon. The present value of the interest savings far exceeds the $13.8 million early redemption fee that we incurred and added back to normalized FFO.

On this call last year, we announced that we expected to complete between $500 million and $1 billion in 2017 acquisitions. We were coming off our most successful year ever with, similar to today, an outstanding balance sheet. And we predicted that if we achieved the $1 billion high end of that range, we would close 2017 with about 5.5x leverage. In reality, though, we invested $2.2 billion in immediately and strongly accretive hospital real estate, greatly exceeding the record prior year results and nonetheless managed our balance sheet such that we have only modestly higher leverage at today's 5.8x. And while that is well within the range of prudence for our long-term predictable cash flow expectations, we reiterate this morning our plans to reduce leverage, diversify our operator-level concentration, access new avenues of affordable capital and demonstrate the inherent values of our assets.

We expect to achieve that primarily through the joint venture arrangements that we had previously described. As Ed mentioned earlier, we began exploring this early last year, expecting that the process would be the primary focus of our investment efforts in 2017. Of course, that focus shifted as we created the record-setting acquisition activity during the year, so it was only in the last quarter of 2017 that we were able to determine the size and structures of the proposed arrangement and turn our complete attention to this process. As Ed said, we are now far down the road with respect to negotiating definitive documentation with serious, well-qualified parties completing financial tax and physical diligence and arranging secured financing for the respective portfolios. And although I'll repeat that there are no assurances that any [transaction] will ultimately close, we are optimistic about the likelihood that we will have binding agreements signed during the earlier part of 2018.

We expect any such closings will result in proceeds that will be used to reduce debt and accretively reinvest in additional hospital facilities, the opportunities for which remained very attractive. Depending on the timing of any such reinvestment, there could be temporary dilution of FFO, although we would at the same time benefit from greater diversification, lower leverage, additional liquidity and access to attractively priced new sources of capital.

So we continue to expect normalized FFO in 2018 of between $1.42 and $1.46 per share. This is based primarily on our currently stable portfolio and this morning's announced results of $0.37 per share, also taking into consideration certain new GAAP accounting provisions effective in 2018 along with our expectations about interest rates, currency markets and other assumptions. Our estimates of future normalized FFO do not include the impact that will result from any of the possible JV transactions, which as mentioned, may include reduction of rental income and changes to interest expense and other capital cost along with possible additional investment income from reinvestment of JV proceeds.

And with that, we'll be happy to take questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Jordan Sadler from KeyBanc Capital.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [2]

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Thanks for the update on the progress with the JVs. I guess just one follow-up, hopefully, it's not -- I'm not prying too much here, but are the (inaudible) substantially consistent with what you've laid out? And then in terms of timing foreclosure, would -- if we were rough guessing midyear, would that be fair?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [3]

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I think that's fair. To answer both parts of your question. The terms will achieve those goals that we've described. I'd point, particularly, to proving the value of our portfolio assets, and we do expect that will be closed by midyear.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [4]

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Okay. And then the ATM. Have you guys accessed or utilized the ATM at all yet? And what is -- what do you anticipate in terms of how you expect to use it?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [5]

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Well our practice is to make that disclosure during the quarterly filings. But I'll just describe generally that we have no reason to have accessed the ATM recently, and even if we had reason, it would be painful to do so given the market value of our shares, along with the rest of the market. So we have plenty of available liquidity, absent using equity from any source at this time.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [6]

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Well, I guess, is it safe to assume that you would wait to close on the JVs before buying additional assets or investing additional assets or not necessarily? (inaudible)

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [7]

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I think that is a generally -- that's a generally safe assumption. You're absolutely right.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [8]

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Okay. And just -- I guess, lastly on coverage. Was there -- interested in the sequential change, and you did mention Prime as a factor in the decline. And I was just kind of curious, was there -- what did you see ex-Prime in the portfolio sequentially? Was there any benefit in acute care hospitals or otherwise related to the season's flu in terms of admissions? I know it's a smaller number, but I feel like it's been driving up hospital admissions.

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [9]

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Remember, Jordan, that we report one quarter behind. So the flu hasn't shown up yet. And the flu is going to be mixed, depending on the severity of the flu in various hospitals. Obviously, just a normal case of the flu taking up a bed is not as profitable as a surgery taking up a bed -- a surgery -- a bed being taken up by surgery. So what we're seeing in December and January thus far has been slightly positive, mixed results across the nation, but slightly positive. Overall, on the general acute care hospitals, they really have been relatively flat. When you look at the same-store additions, we had 5 additional Prime properties. And you remember that when Prime makes acquisitions, they're usually doing so and buying properties that are underperforming. So the Prime properties are, particularly theirs -- in any case, but particularly theirs, when they come into the same-store for the first time, they are typically running at a coverage that is slightly less than our more seasoned properties. Now having said that, if you take out the additional acute care hospitals, it still was essentially flat. Now it's very important to note on Prime, listening to my coverages, they've done a outstanding job of repositioning themselves and taking care of their cash collections. They actually collected more than 100% of their revenue and cash collections during the last quarter reporting, and obviously, the reason being is that they had those large write-offs and they actually had been able to collect some of those amounts. So they've done an outstanding job, and we feel like 2018 is going to be a good year for them.

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Operator [10]

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And our next question comes from the line of Tayo Okusanya from Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [11]

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Following up on my good friend Jordan's questions, again I know you're still trying to wrap up the JVs, but I don't -- can you share any information about how large these 2 individual JVs will be?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [12]

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I think we've disclosed in the past that the JV that we're focusing on to -- on Steward would be roughly between 40% and 50% of what we call the legacy Steward portfolio and that's the original $1.2 billion, which covers the Massachusetts properties. We haven't made any disclosure about the other portfolio in so far as size or how much we're selling.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [13]

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Okay, that's a good start. And then second of all, again, just given again your same-store pool is going to be changing so much over the course of the year. Could you just talk, again, about turning your outlook for same-store just given the potential to change in the pool? Like is the stuff you're bringing on going forward, is it going to be pressuring the pool, is it going to be helping the pool? Just kind of give us some clarity on that.

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [14]

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So it's a little bit more confusing when you include international and domestic. So let me focus just on domestic for a moment. If you look at what we foresee -- what we think are going to be the changes based on additions to same-store, we think that the same-store that's coming on are going to be good, strong properties. So they, we think, will be a positive going forward to the overall. As an example, a lot of the same-store is going to be Steward properties. Steward is doing a fantastic job with the integration of not only the original CHS acquisition or the second CHS acquisition, but also with the IASIS acquisition. And we expect that their growth is going to be somewhere in the 3% to 4% range in their EBITDAR this year. So when we start adding some of those additional properties, we think it's a positive. The biggest negative from a same-store basis would be adding international properties, and it's not a negative, it's just that, generally speaking, the international coverages are lower than the U.S. coverages are. For example, the 13 properties that we added in the -- rehab properties in Germany this most recent quarter, they are considerably lower in coverage than their U.S. counterparts are. The U.S. IRFs for -- just the U.S. IRFs for this last quarter was roughly a 2.5x EBITDARM coverage. So that just gives you some significance of the difference.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [15]

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Got you. And the pool kind of -- and the pool changes when? When the asset -- when you own the assets for a year or -- when does that -- like how often...

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [16]

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It's actually 24 months, Tayo. When they've been in our portfolio for 24 months.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [17]

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Got you. Okay and then just one more for me then I'll yield the floor. The 2018 acquisition outlook again, you don't put acquisitions in your guidance. You're talking about probably not a lot of deal activity until the JV is closed, which makes perfect sense to me. But how do we kind of think about, you've been gangbusters the past few years doing over $1 billion of deals, and if the gun's going to go off maybe this year, are you expecting to do the same amount? Or is this a year of more integration and less acquisition?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [18]

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Well putting the joint venture aside for a moment, if we were just trying to guess what we thought acquisitions would be this year without regard to the joint venturing, I think, we'd use the same guidance that we've used in the last couple of years, between $500 million to $1 billion in total acquisitions. We have good opportunities both here and abroad. But Steve mentioned earlier, we really want to get these joint ventures complete before we start doing any major acquisitions. There will be some minor acquisitions with our existing customers, but nothing on the scale that we did so far in 2017.

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Operator [19]

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And our next question comes from the line of Vincent Chao from Deutsche Bank.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [20]

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Just wondered if we could stick with the opportunity set here. I know it will be a little bit delayed just given the timing of the JVs, but following tax reform and the repeal of the individual mandate from ACA, which I know doesn't go in effect until 2019, I'm just curious if you've seen any change in the market as a result of those 2 events?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [21]

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None yet, Vincent, and I really don't expect any.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [22]

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Okay. Is there any additional concern about further health care reform? It seems like that is still something that is a work in progress, but is there anything else on the horizon that we should be watching out for? And I guess...

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [23]

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No, as you've heard me say before, there is always going to be some sort of reform pending, just the nature of the beast in the U.S, But there is nothing out there -- should they actually agree on something together, there's nothing out there that gives us any pause.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [24]

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Okay, and then maybe one question just on the 15 leases that are expiring, which I think they're all the Adeptus leases that we talked about. How was that -- what assumptions are embedded into the outlook for those leases? Should we sort of expect those to be sold pro rata over the course of the year? Or is there any assumption about how those leases are being treated?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [25]

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About half of them, Vincent, we expect to transition to another operator. And then almost the remainder of the other half we expect will be sold. These truly are orphans. They really don't fit in any systems' -- we don't think they fit in any systems' network. And then there is a single hospital that we actually are uncertain as to how that will go. My sense is we'll end up re-leasing it because it's an outstanding hospital. And we have 2 years, basically, 2 years of lease remaining on that.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [26]

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Okay, so we should be modeling this as half of those 15 get renewed and then half sold, that's what's embedded in the guidance range?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [27]

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That's right.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [28]

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Okay, and maybe one last question just on the Surgery Partners development project. Can you just give it a color about that market, how this new hospital will fit into the competitive landscape and things like that?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [29]

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Sure. It's an outstanding market for us and has been since we made the original acquisition. There is really one other hospital in the market. It's literally across the street. It's actually supportive of this facility and this expansion. We believe that the coverages on the new facility will continue to be outstanding. They truly -- it is truly one of the best performing hospitals that we have in our portfolio.

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Operator [30]

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And our next line -- and our next question comes from the line of Drew Babin from Robert W. Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

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Quick question on Steward IASAS. When the deal was first announced, there was some pretty specific kind of guidelines put out for how Steward's coverage ratios would potentially track through 2019. And I guess that 2.3x number, obviously, tough to forecast at the time it was announced. But I guess can you talk generally about how that portfolio is tracking, and, I guess, as Steward approaches 2018, what are the challenges they're facing and what are the opportunities that potentially take advantage of as they kind of operate through the year?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [32]

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Sure, I think, generally speaking, the IASIS acquisition has been as good or better than everybody had expected. We, obviously, knew that entire portfolio very well. We believe that the old management team has done a good job operating those hospitals, and they continued to perform at or above expectations. The CHS hospitals were slower in what we believe to be their turnaround. But we believe that Steward's management has a good handle on that, and those are beginning to track where we thought they would track, albeit, just slightly longer to get there than it did. Overall, we've been extremely pleased with the overall integration of the companies, and we've been very pleased with some additional staff hirings that Ralph and his team have made. And we believe that they're focus on 2018, certainly in the first half, we'll be completing those integration processes and we believe they really have done a very good job.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33]

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And in Europe, I guess, it sounds like in the past there's been an openness to potentially upping Europe as kind of an overall weight in the overall portfolio. But it sounds like JV with MEDIAN or some type of sale involving MEDIAN, something that's possible. I guess to offset that, where are you seeing the best opportunities? And would something like with Circle health potentially provide some kind of runway for additional growth in Europe?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [34]

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Well we've got that one hospital, that additional hospital in Circle that's under construction now in Birmingham, England. Not sure that, that particular company in 2018 is going to be a big growth area for us. But we've got a lot of other opportunities in other European countries that we've been sourcing and working now for a while. So we think that we've got good opportunities to put some of that potential joint venture money back to work in Europe. We think that Europe will -- putting again aside the joint venture, our overall investment in Europe will increase but obviously, percentage-wise will go down with the joint venture for a short period of time.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [35]

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One last one, which is maybe kind of a stepping back kind of conceptual question. It seems like many of the U.S. health care REITs are turning towards, I guess I'll call maybe more an NAV growth story, where they're being more aggressive about capital recycling, portfolio improvement, things like that and it's, obviously, very much coming at the expense of cash flow growth. I guess, should stock prices remain roughly where they are, is that the type of strategy that MPW would consider adopting? And if not, I guess why wouldn't you? What are the reasons why or the reasons that will prevent you from being that aggressive churning the portfolio?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [36]

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Well, Drew, the short answer is, we certainly hope the stock price doesn't stay where it is. Obviously some of that is completely out of our control with the macro things are going on in the overall economy. But more importantly, as Steve pointed out earlier, with some of the joint ventures, we believe that there are going to be some very impressive validations of what we have been saying the value of this portfolio is. And so we believe that we should see some increase in our multiples from that on our stock price. Obviously, as Steve also said earlier, we have no appetite to sell stock into this type of market. We do have other assets for whatever various reasons that may be advantageous for us to sell, but our intentions on those are all to recycle it, not to just hoard it away. So we hope that any effect on cash flow will be very minimal.

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Operator [37]

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And our next question comes from the line of Michael Mueller from JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [38]

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Couple of questions. I guess when Vin was asking one a minute ago, just talking about the Adeptus leases and what was going to be sold, and asked if that was embedded in guidance and you said yes. I was under the impression that guidance didn't have any asset sales in there. Were those in there or are they not?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [39]

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It's an immaterial impact on what might be sold.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [40]

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Got it, okay. And along that same lines, any of the JV stuff is not reflected in the guidance either, correct?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [41]

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That's correct.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [42]

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Okay. And then just 2 follow-ups. Can you put rough dollar range around those Adeptus assets that can be sold, first of all?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [43]

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So the 8 assets, we are confident we will actually re-lease, roughly $40 million. The 7 or 8-ish assets we think will ultimately be sold, less than $35 million. And then the single asset, I mentioned, the hospital that will take more time and we have more time with given credit for some minor adjustments to our deal with Deerfield/Adeptus, that will reflect about a $30 million investment for us.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [44]

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Got it okay. And then the last question, considering deleveraging is a goal in addition to diversification as you think about the JVs, do you think you're likely to be a net seller in 2018? Or do you think that won't happen?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [45]

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Well if your question is, do you think we'll 100% replace what we might sell in the JVs, I think that would be a long shot.

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Operator [46]

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And our next question comes from the line of Michael Carroll from RBC Markets.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [47]

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Ed or Steve, can you talk a little bit about your international investment strategy? How many countries do you -- are you looking at right now, and how many are actually viable for you to deploy capital into?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [48]

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Well we have 4 countries over there now. We are looking at a lot more since we opened up our office in Luxembourg last -- this past year. We have opportunities in, probably, active opportunities in probably 3 or 4 countries that we're not currently in over there.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [49]

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And then what are some of the key characteristics of the deals that you're pursuing over today? Are there any large portfolios that you're looking at? And are these with new or existing relationships?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [50]

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Yes, there actually are a couple of larger portfolios that would go a long ways to replacing what we might sell over there. There are also smaller multifacility portfolios. But when I say multi, you know, 2 or 3 or 4 in addition to at least one very significant portfolio that we're looking at.

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [51]

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And, Mike, most of those are new customers.

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [52]

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Absolutely, yes.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [53]

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Okay, and then would you buys these assets outright or would you have a joint venture like you did in Spain and Italy?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [54]

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Well it could be either, because for a couple of reasons: one, they could be very big tickets; and two, we may have opportunities to leverage our capital with the goals of some of these very large institutions that have expressed strong interest in acquiring our types of assets. So it could be either. But the point would be, we would remain in control of whatever portfolio, however we acquire it, either directly or through a joint venture.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [55]

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Okay, and then just last question. Can you give us an update on your thoughts with Ernest right now? Where are those coverage ratios? And are you comfortable with that tenant given the outlook on some of the post-acute care facilities?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [56]

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So we are, and in real general terms, their rehab coverages have continued to slightly increase, but they are performing very strongly. The LTACH coverages have essentially stabilized there. We hope to have something very soon to announce publicly in Boise, and that's really the only troubled property there.

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Operator [57]

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And our next question comes from the line of Eric Fleming from SunTrust.

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Eric Joseph Fleming, SunTrust Robinson Humphrey, Inc., Research Division - VP [58]

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Mike just stole all of my questions, so I'm good.

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Operator [59]

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All right, and our next question comes from the line of Karin Ford from MUFG Securities.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [60]

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Just a quick clarification on the guidance. The guidance does assume that the $830 million balance on your line stays outstanding for the entire year, correct?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [61]

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That's right.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [62]

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Okay. Second question is, how is bad debt trending at your facilities? And are you expecting to see any impact from increasing restrictions on Medicaid in some states?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [63]

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Well the bad debt overall in our facilities has been essentially flat as a percentage. And I'm sorry what was the second part of the question?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [64]

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Managed Medicaid impact.

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [65]

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Yes, so that has been an impact, not really an impact on dollar amount paid, but in delay in getting paid. It seems that across the nation in all of our facilities, it seems that roughly 40% of every managed-care bill is initially denied. But they eventually are getting paid, it's just a delay in that process, but it hasn't been a decline in cash collections, just a delay in cash collections.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [66]

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Great. Last one for me. Have you seen any change in cap rates or is there any change to your required return levels given the move in rates?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [67]

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Well we haven't done anything significant since the IASIS deal, and we haven't seen much movement in the market from our competitors either. So it's hard to answer that, other than generally, we would expect to see cap rates begin to move higher as we see everybody's cost of capital move higher. And of course, that's yet to be proved by negotiating a real deal. But just historically, remember cap rates move not directly and not immediately, like they may do with other types of real estate. But again, to generally answer your question, yes, we would expect to see some backing up on cap rates.

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Operator [68]

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And our next question comes from the line of Juan Sanabria from Bank of America.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [69]

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Just following up on Karin's question. What ranges are you guys looking at or targeting for acute care hospitals in the U.S. and for European opportunities as well as EBITDAR coverage ratios?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [70]

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So the first part of the question, Juan, are you talking about cap rates or talking about percentage of our portfolio?

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [71]

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Cap rates, please.

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [72]

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Yes, so it continues to be a wide range. I would say that we're still probably in a very low of our range in the mid-to high 7s, going up probably to maybe a 10 or so depending on the specific nuances. On the coverages, we're still for acute care hospitals, still liking to look at it going in cash coverage of something like a 2.75. Now that is a guidance. Obviously, in some hospitals, they're turnaround facilities, so you're not going to see that initially. But if we can see to that point in the very new future, that's generally where we are liking to see. Now you notice that, that's slightly down from where we've been in the past, we've been at 3x. And may be in the new environment, that may come down slightly more, but that's where we are today.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [73]

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And any sense of what those numbers would be for European opportunities?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [74]

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So for acute care coverage in Europe, it's certainly in the 2-plus range, probably not as high as what we're seeing here in the U.S., and the rehab coverage is still in the 1.5-plus range.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [75]

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Okay, and cap rates similar?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [76]

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Yes.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [77]

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Okay. And then just on Adeptus, on the portion that you expect to renew. Is there any loss in the current revenue stream that we should be assuming or that assume the lease is kind of as is, no change in rents flowing through to MPW?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [78]

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It's the latter, Juan. There would be very little if any change in revenue expectations.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [79]

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Okay. And then just on Prime, you kind of ripped through the numbers there in your intro. Just hoping you could repeat what you said the coverages were and if that was EBITDAR or EBITDARM, and what your expectations are for 2018 for Prime?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [80]

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Well I gave it a couple of ways, Juan. The most important one is from a cash-coverage basis, and I gave that in an EBITDARM basis. And for a cash collections, because that's what we were focusing on the last time, it's over 3x, and we expect that to continue for 2018.

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Operator [81]

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And our next question comes from the line of Todd Stender from Wells Fargo.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [82]

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I guess this goes back to Karin's question, Steve. Just a clarification, your FFO estimated range, that assumes the line balance does not get termed out at some point this year?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [83]

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That's correct.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [84]

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As you guys fund new development, I guess I assume you used the line to fund your development spend, which I would suspect the balance edges higher. How do you weigh the prospects of there being an equity overhang on your stock as your balance gets higher, just because it's over $800 million at this point?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [85]

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Todd, don't forget our 65% payout ratio on the dividend. So we're generating a pretty high level of retained earning -- cash earnings now. We have a very limited amount of development, the largest being the Idaho facility. So if there's any increase in the line, and, frankly, that may be built into the model, somewhat, but it will be -- the impact will be immaterial to our guidance.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [86]

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Okay. And I guess turning to the Idaho hospital, can you talk about your expected initial lease yield on that, maybe the coverage and then just talk about how the lease was structured, any escalators, that kind of stuff?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [87]

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Yes, the lease is structured very similar to all of our leases with the typical escalators that we have in them. The cap rate going in is a strong cap rate, we -- as you know, we don't announce exactly what they are, it is lower than what we did on the original hospital, but still higher than the bottom range that I quoted a little while earlier. And the coverages for this facility is well above our normal coverages.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [88]

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Is it a credit issue? It's a stronger credit, which brings the yield down a little bit?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [89]

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Well, when we originally did the hospital, the coverages were nowhere near what they are today. So it's a success, it's a -- the hospital has way outperformed our expectations, has generated a tremendous amount of profitability and cash flow, so it's a different facility today than it was when we bought it years ago.

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Operator [90]

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And our next question comes from the line of Chad Vanacore from Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [91]

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Just a couple of quick ones to wrap this up. On the acquisitions, last call, I think you alluded to expecting more European acquisitions, so what's the split between foreign and domestic that we should expect? And are those opportunities more on the acute care or the rehab side?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [92]

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Well let me answer the end of that first, because that's easier. It's more on the acute care side. Again, you have to ignore the joint ventures, but ignoring the joint ventures, we expect that our overall percentage in the European investments would actually increase in 2018.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [93]

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All right. And then just on other potential JVs, are you thinking about multiple different partners? And then what type of potential partner types are we looking at, strategic or purely financial?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [94]

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It's totally financial. It's advised money typically coming from large asset managers who are advising primarily pension funds, public and private sovereign and that type of an investor. And it's one with each. It's not multiple investors in each facility -- in each arrangement.

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Operator [95]

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And our follow-up question come from the line of Tayo Okusanya from Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [96]

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I just wanted to go back to the questioning around the line of credit and it not being termed out this year. I guess, I was assuming that some of the proceeds from the JV probably will be used to do that. Am I wrong in that assumption?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP & CFO [97]

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No, you're not wrong in that assumption. But the assumption is, in the guidance, it's a snapshot of today's balance sheet. So we're not assuming, because you're absolutely right, the first thing we'll do with joint ventures proceeds is pay down the line. And possibly as other notes come due, we might have an opportunity to prepay some of that. But yes, that's the #1 goal of these joint ventures is to lower the leverage.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [98]

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Got you, excellent. And the second question from my end, there's been a couple of press clippings about Steward expanding outside of the U.S. to kind of smaller countries like Malta. Just wondering, again, is this something that you'd be interested in working with them on? Or are you guys kind of just being really domestic with your Steward investment? Or does the JV even kind of end up changing that?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [99]

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Well, Tayo, I think you're referring to their Malta management agreement. And that's exactly that, it's a management agreement, and we are not involved in it at all. We had not had any discussions about doing any specific transactions with them at this point. We certainly want to continue to grow with Steward, but I don't think that any of that would happen anytime soon.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [100]

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Got you. Then last one for me. Appreciate you indulging me. Development, again, you have a decent amount in the pipeline now. It's been quite a while since your development pipeline has been that large. Just curious, is this: one, what kind of yields are you expecting in the development? Two, are you doing more development now because the acquisitions are getting tougher or is this just kind of all opportunistic based on the health care systems?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [101]

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Yes, it's just opportunistic, Tayo. If you look at what we have under development, the big ones, the Birmingham project in England has been a project that's been in the works for a very long time. It's kind of like other states here, they just take a long time through the process. The Ernest facility that's under construction is -- was a part of the original business plan and then this particular facility in Idaho being the largest development project that we have currently. They really were just bursting at the seams, and we felt this was a great opportunity. It is much -- it's very similar to the project that we did in Wisconsin, where we built a replacement facility there. This is more of an expansion-type facility here, but it's not a greenfield development project.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [102]

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Okay, and expected cap rate? Or development yield, sorry.

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [103]

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Well on the -- we don't have any additional development projects in the pipeline, so it's really hard for me to give you a specific answer to that because the 3 projects that I mentioned were all very specific, and the cap rates for those projects were very dependent on the projects themselves, and very different, all 3 of them.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [104]

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For modeling purposes, can we get some type of average for the ongoing projects, though?

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [105]

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For what, Tayo, for the dollar amount?

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [106]

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No, the dollar amount I think we have, but an expected development yield for the 3 projects today.

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [107]

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I'll have to get back with you on that, Tayo.

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Operator [108]

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And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Ed Aldag for any closing remarks.

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Edward K. Aldag, Medical Properties Trust, Inc. - Co-Founder, Chairman, CEO and President [109]

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Thank you, operator, and thank all of you for listening in today. And we greatly appreciate your questions. If you have any additional questions after the call, please don't hesitate to let us hear from you. Thank you very much.

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Operator [110]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.