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Edited Transcript of MPW earnings conference call or presentation 2-Aug-18 3:00pm GMT

Q2 2018 Medical Properties Trust Inc Earnings Call

Birmingham Sep 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Medical Properties Trust Inc earnings conference call or presentation Thursday, August 2, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles R. Lambert

Medical Properties Trust, Inc. - Treasurer & MD of Capital Markets

* Edward K. Aldag

Medical Properties Trust, Inc. - Chairman, President & CEO

* R. Steven Hamner

Medical Properties Trust, Inc. - Executive VP, CFO & Director

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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 - Senior Analyst

* Eric Joseph Fleming

SunTrust Robinson Humphrey, Inc., Research Division - VP

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Karin Ann Ford

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

* Kathleen Noel Morgan

KeyBanc Capital Markets Inc., Research Division - Associate

* Michael Albert Carroll

RBC Capital Markets, LLC, Research Division - Analyst

* Omotayo Tejamude Okusanya

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Medical Properties Trust Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn the conference over to Mr. Charles Lambert, Treasurer and Managing Director. Sir, you may begin.

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Charles R. Lambert, Medical Properties Trust, Inc. - Treasurer & MD of Capital Markets [2]

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Thank you. Good morning. Welcome to the Medical Properties Trust conference call to discuss our second quarter 2018 financial results. With me today are Edward K. Aldag Jr, Chairman, President and Chief Executive Officer of the company; and Steven Hamner, Executive Vice President and Chief Financial Officer. Our press release was distributed this morning and furnished on Form 8-K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our website at www.medicalpropertiestrust.com in the Investor Relations section. Additionally, we're hosting a live webcast of today's call, which you can access in that same section.

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

Please note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.medicalpropertiestrust.com for the directly -- 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. - Chairman, President & CEO [3]

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Thank you, Charles, and thank all of you for listening in today for our 2018 second quarter earnings call. During the second quarter, we have announced or completed transactions that have or will generate more than $600 million of value over and above our net investment. Through these transactions and others previously executed, we continue to demonstrate the strength and value of our portfolio. We recently announced the pending formation of a joint venture with Primonial Group, one of Europe's leading asset and wealth managers, with over EUR 23 billion under management. Primonial will acquire a 50% interest in a portfolio of 71 post-acute care hospitals throughout Germany, while MPT retains a 50% interest. MPT will continue the role of asset manager. Our strategic vision to expand beyond the U.S. continues to be very beneficial to MPT, as highly regarded investors throughout the world are choosing to partner with us. The establishment of this partnership also demonstrates a credible endorsement of the works of our portfolio, as this transaction alone is valued at more than EUR 1.6 billion, of which we expect to recognize a gain of approximately EUR 500 million upon closing.

In another recent announcement, MPT will sell our equity interest in the opco of Ernest Health to the private equity firm One Equity Partners, a 2015 spinout of J.P. Morgan, with approximately $7 billion of assets under management. Upon closing, MPT expects our portion of the proceeds to be $175 million, which represents an approximate 13% unlevered IRR on our original $96 million investment. The culmination of this transaction will allow MPT to recognize the value from an investment I'm not sure the market ever fully recognized. Additionally, MPT will continue to own the real state of these 25 post-acute hospitals and benefit from the strong returns they generate. We expect to continue to grow with this relationship.

We also completed the sale of 3 LTACHs to Vibra Healthcare for $73.1 million, resulting in a $24.2 million gain on the sale of real estate and a 12.8% unlevered internal rate of return. MPT, once again, has demonstrated the successful recycling of mature assets for double-digit returns to our shareholders. This transaction brings our total investment in LTACHs down to approximately 3% of our total portfolio.

Additionally, this quarter brought a new prominent not-for-profit hospital operator into our portfolio, following the successful transition of the Arizona Adeptus Properties to Dignity Health. The transaction again proves the value of the MPT freestanding emergency room model to hospitals and health systems across the nation.

Just last week, it was announced that one of our operators, Apollo-backed RCCH, will acquire LifePoint Health to create an even stronger health care provider, with combined pro forma revenues of over $8 billion, approximately 60,000 employees and 12,000 licensed beds at 84 acute hospitals. This merger continues to enhance the strength of our already robust portfolio of hospital operators.

Given our relationship with RCCH and their equity partner Apollo, we fully expect to be able to continue to grow our assets with this new company.

Last quarter, Prime signed a memorandum of understanding with the Department of Justice to resolve all claims. Prime has already started the execution process, which includes a settlement agreement and a corporate integrity agreement. Prime expects to issue a press release in the near future, and they have indicated they are pleased with the final terms of this settlement. Prime Healthcare continues to perform well. Prime's EBITDARM coverage for the trailing 12 months, ending first quarter of 2018, was over 4.5x. Prime's cash collections continue to track with net revenues.

Steward, our largest tenant, continues to perform well, and we expect that they will achieve a record year in 2018. The 2017 acquisitions by Steward, which are still in process of integration, mainly in the Texas and Utah markets, are on track. Steward's EBITDARM coverage for the trailing 12 months ending first quarter of 2018 was approximately 2.25x.

With this quarter's reporting, we removed a net of 3 properties from our same-store reporting. As noted previously, this quarter, we sold 3 Vibra long-term acute care hospitals and transitioned operators on 1 long-term acute care hospital, and 1 inpatient rehabilitation facility was added to same-store reporting.

The trailing 12 months across our portfolio have shown strong results. Our same-store total portfolio EBITDARM coverage for trailing 12 months, Q1 2018, is approximately 3.3x, which represents a 9% increase year-over-year and a 1% increase quarter-over-quarter. Within our same-store acute care portfolio year-over-year, EBITDARM coverage improved approximately 13% from 3.7x to 4.2x. LTACH EBITDARM coverage was flat at 1.65x. IRF EBITDARM coverage also remained relatively flat at 1.9x. LTACHs represent, as I previously said, approximately 3% of our portfolio, and U.S. IRFs represents 5.6% of our portfolio. The United States represents 80% of our total portfolio. Over the next year or so, we'd like to see the European portion increase back up to the 30% plus or minus range. Acute care hospitals continue to make up the bulk of our investments domestically at 79%. This is right in line with our target range.

Our top 3 tenants are Steward at 37%, Median at 12.5% and Prime at 11.7%. As you know, we believe the most important concentration number is on a property-by-property basis because each facility is underwritten on its own merits. Currently, no property represents more than approximately 3.5% of our total portfolio. Over the last 12 months, we have invested or committed to invest approximately $300 million in new investments with our existing tenants. We expect this number will continue to increase annually as we continue to grow. Having strong relationships with our valued customers allows us to have built-in growth over and above new business. We also have a significant number of projects we are working on, both here in the U.S. and in Europe.

It is too early on all of them to predict which will close this year. However, it is important to note that we are currently actively working on projects valued at approximately EUR 3 billion in Europe and more than $2 billion here in the U.S. We will update these projects once we have signed commitments.

I want to take a moment to comment on a very important story. 11 years ago, we invested in the Shasta Hospital in Redding, California. This hospital has been a large success story for us here at MPT. This success has been due in large part to the fabulous people in Redding and the surrounding areas that work at this hospital. Many of you have probably seen on the news the devastating Carr Fire that literally destroyed much of the area and has even threatened our own hospital and the downtown area of Redding. The operation of the hospital has been vital to not only the people of Redding but also the firefighters and volunteers fighting the fire. Without the dedicated employees and doctors of the hospital, Shasta Regional Medical Center could have never stayed open.

At least 32 health care workers reported to work last week despite losing their homes and everything they had to the fires. I want to take this opportunity to thank them for their dedication to their fellow residents of Redding and for reminding us all about the good things of humanity. This hospital is a Prime-run hospital, and I want to commend their management team throughout the organization, especially those on-site and ready, for the work they did in serving the patients and residents in this very dangerous and fast-moving fire. Steve?

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

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Thank you, Ed. This morning, we reported normalized FFO of $0.36 per diluted share for the second quarter of 2018, consistent with our own and market expectations. There are just a couple of items this quarter that reconciled NAREIT to normalized FFO. Virtually all of the adjustments to arrive at normalized FFO this quarter related to straight-line rent and the aggregate amount of $7.2 million. Of this, fully $5.1 million was to write off unbilled straight-line rent related to our sale of the 3 LTACHs to Vibra, on which we recognized a gain of $24.2 million. The remainder primarily relates to the acceleration of straight-line rent on certain of the Adeptus facilities that we expect to sell or re-lease in the near term. You may recall that we've described these adjustments on the last 2 quarterly earnings calls. There now remains a balance of about $2.7 million that we expect will be written off over the next few quarters as we finally resolve the last of the Adeptus facilities. One final point I want to bring to your attention regarding our balance sheet presentation is the classification of about $1.25 billion as assets held for sale. This represents the net book value of the assets that will form the previously announced joint venture with Primonial. Post closing, we will report our 50% interest in the JV as equity investment in unconsolidated subsidiaries and recognize our portion of the JV's net income as earnings from equity investment in unconsolidated subsidiaries. The secured debt will be recorded on the books of the JV.

To summarize this transaction again, we are selling to affiliates of Primonial a 50% interest in this newly formed JV for approximately EUR 816 million or, at yesterday's exchange rate, $955 million, which along with the recognized increase in value of our remaining 50% interest, results in an expected gain on sale of approximately EUR 500 million, again, at yesterday's exchange rate, equivalent to about $600 million. Our gross undepreciated investment in these hospitals, including transfer and other taxes that were expensed at the time of acquisition, aggregate about $1.4 billion, resulting in an unlevered IRR of more than 15%. From any measurement perspective, this clearly is a tremendous outcome for MPT, and just as importantly, an objective and independent indication of the future outstanding shareholder value that may be created by the recycling reinvestment of our $1.5 billion in cash resulting from recent transactions.

Most of you are aware that we have also been exploring a potential similar structure for some of our U.S. acute assets in order to diversify our exposure to any single operator. With the other capital recycling successes, such as the Primonial JV, the Ernest transactions, the Vibra sales and other unannounced but expected opportunities, we certainly do not need additional capital for delevering or reinvestment. So we have decided to sell or re-tenant certain of the Steward hospitals rather than continue to take the additional time necessary to create a joint venture.

As a result, we have entered negotiations with 2 new operators to buy or lease certain Steward hospitals, the impact of which is expected to be very similar to our previous expectations about a JV. Moreover, we also are improving the Steward portfolio by purchasing certain of the mortgage properties over the next few quarters. By converting these mortgages to owned properties, this makes the portfolio that much more valuable and attractive to potential partners for when and if we do decide to remarket the portfolio. And in any case, the expected reinvestment of proceeds from the Primonial JV and other transactions will much more rapidly diversify our portfolio away from any single operator than a single joint-venture arrangement. Ed has already mentioned our sale of 3 Vibra LTACHs back to Vibra, so I will simply reiterate that this transaction not only reduced our LTACH exposure to approximately 3%, but provided outstanding profit and IRR results for these investments along with about $53 million in cash proceeds.

Regarding Adeptus. Since our last quarterly call in May, we signed a new long-term master lease for 8 Phoenix area facilities with Dignity Health, a large, investment-grade rated, not-for-profit system. Economic terms of the leases are substantially consistent with the terms of the previous Adeptus lease. We also have agreed to resolution of 8 of the 16 Adeptus facilities that we agreed to sever as part of the bankruptcy plan. These facilities, with a book value of approximately $36 million, are expected to be leased to 2 operators, one of which is new to MPT, at economic terms substantially consistent with the previous Adeptus terms. We have engaged a financial advisor to market for sale or lease another 7 facilities with a book value of approximately $34 million, and we continue to consider alternatives for the 8th facility, with a book value of about $33 million, as it remains subject to the Adeptus master lease.

With regard to full year 2018 normalized FFO, we plan to reinstate our estimated guidance shortly after closing of the JV and Ernest transactions. We believe both of these will close prior to the end of this third quarter.

At that time, we will be able to determine the impact of these transactions on net income, rental and other revenue and interest expense for the remainder of the year. After using proceeds to fully repay our revolving credit facility, with a June 30 balance of approximately $820 million, we expect our net debt to EBITDA multiple will be approximately 4.7x and we will have cash on hand of approximately $800 million. This puts MPW in a uniquely attractive position among many REITs today. We will have a pristine balance sheet, liquidity of more than $2 billion, while maintaining prudent leverage and a broad and diverse pipeline of acquisition opportunities that Ed just described.

On a pro forma basis for full reinvestment of such cash, along with maintenance of sector-leading leverage levels, annualized normalized FFO is expected to range between $1.46 and $1.50 per diluted share. To be clear, we are not, at this time, establishing a guidance range but merely pointing out that the end result of the recent transactions is expected to be increased FFO per share, substantially reduced leverage ratios and significant operator diversification. We are among the very few REITs that offer substantial near-term and accretive growth opportunities, and we have consistently demonstrated our ability to generate outstanding unlevered IRRs for our investors. We are excited about continuing to execute that plan. And with that, I will turn it over for 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 will come from the line of Michael Carroll with RBC Capital Markets.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Steve, can you provide some additional details regarding this -- the potential Steward transaction? How many of these assets do you want to sell? And when you say re-lease some of those facilities, does Steward want to exit the ones that they recently bought? Or how should we think about that?

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

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Today, Mike, we are in significant negotiations for 2. One of those would be a sale to a different operator and the other would be a re-lease of a facility that Steward has actually negotiated an exit with a different operator.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [4]

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So there's plan on stopping operating these 2?

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

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Well, Steward will exit them, yes. Steward will exit both. They will both continue to be operated, just by different operators.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Okay. And then how -- can you quantify these sales and how much will this reduce your exposure to Steward?

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

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No, we can't at this time. But it is very similar in volume to what we were expecting from the joint venture's transaction. So point being, we're achieving the same result, generally. We're just doing it quicker and without a lot of friction that comes with establishing a joint venture. Now we may go back to that. Again, you can tell by what we did with Primonial that, notwithstanding that there is friction in bringing on partners, but the results that we got and the future that it indicates for us with having significant new avenues of very affordable capital is very well worth that. Now once we finish rationalizing the Steward portfolio, and by that, I mean, basically, converting certain of the mortgages to owned real estate, that makes the portfolio much more attractive to joint venture partners, and we may well elect to reopen those discussions sometime in the future.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [8]

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Okay. And then can you talk a little bit about the investments that you're looking at right now? What type of deals are of interest to you? And I know you highlighted that there's about $5 billion that you're currently tracking. What's a reasonable number to expect is going to be the close rate on those deals, and how does that compare to the deals you attract historically?

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

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Ed. Mike, they are almost all acute care hospitals. Some rehab spattered in there with -- primarily in the German market. But for the most part, European and U.S., they're all general acute care hospitals. It's hard to give you an exact number because the size of some of these portfolios are large. But I think that it would be very reasonable to expect the number -- the success rate on the number in Europe to be at least $1 billion and the success rate in the U.S. to be somewhere around $750 million.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [10]

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Okay. A question, the German acquisitions, would that be put joint venture or you're going to be doing that by yourself?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [11]

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We'd be doing that by ourselves.

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Operator [12]

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And the next question will come from the line of Drew Babin with Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [13]

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A question on the dispositions and redeployment. Would the proceeds from the Median promoting out JV for any formal reason need to be redeployed directly within Europe from a repatriation standpoint?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP, CFO & Director [14]

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No. That's our expectation. But obviously, we'll bring a significant amount of that back home to repay the dollar-based revolver. And the rest of it is available to bring back home, subject to currency risk. But we do expect is, as Ed just described, to be able to reinvest euros in euro-denominated assets.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [15]

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Okay. And then as far as the redeployment pipeline, I was hoping you could talk some, and obviously, in a very general context, about potential gap in cash redeployment yields in the U.S. and Europe, and how they've trended over the last 12 months or so?

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

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They've stayed relatively flat, haven't had much change in the last -- certainly, in the last 6 months. In the last 12 months, there's probably been a slight uptick but not much in the last 6 months.

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP, CFO & Director [17]

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So certainly, in Europe, where they're not seeing the rising rate environment that we are here, it's -- we haven't seen much increase. I would tell you, the estimate we gave you for a run rate post full reinvestment is a very modest GAAP rate, lower than what's our average on the books today, and frankly, we hope lower than what we're actually able to put it to work at.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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Okay. And then one last question. I guess, as it pertains to your prior guidance range and just your general expectations going into the year, was the re-leasing of the Adeptus facilities to Dignity, was that ahead of your expectations? Was there some kind of a loss of rent relative to what Adeptus was paying built in the guidance for the year, or was that the outcome you expected from the beginning?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP, CFO & Director [19]

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We expected that from the beginning. The same as I think last quarter we were able to announce the Colorado transaction of the similar size. I think, they were both about 8 facilities. And from the beginning, we had every right to demand what was in the Adeptus master lease. After all, they -- those properties, those 16 properties, were leased to a joint venture between Adeptus and the respective hospital systems. So from the beginning, we expected not to lose any revenue on the transition.

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Operator [20]

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And the next question comes from line of Jordan Sadler with KeyBanc Capital Markets.

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Kathleen Noel Morgan, KeyBanc Capital Markets Inc., Research Division - Associate [21]

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This is Katie on for Jordan. You guys touched upon this in your prepared remarks about the recent LifePoint merger with RCCH and Apollo. Could you guys comment about your interest or appetite in participating in the financing the transaction by buying the real estate?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [22]

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Katie, I think the short answer is that we are very interested. We have a long relationship with Apollo. It's been a very pleasant and good working relationship, and we certainly expect to be -- to continue to be working with them in the future.

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Kathleen Noel Morgan, KeyBanc Capital Markets Inc., Research Division - Associate [23]

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And then just a quick one. Could you guys give -- did you guys give the cap rate on the disposition for the 3 LTACHs you used on the quarter?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP, CFO & Director [24]

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We did not. But obviously, at a roughly 13% IRR, it was a very attractive transaction for us.

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [25]

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And a $24 million gain, Katie.

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Operator [26]

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And the next question will come from the line of Tayo Okusanya with Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [27]

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I'm just trying to understand the Steward situation a little bit better in regards to your statement earlier on that, despite a different structure, you're basically kind of getting the same thing you were looking for but in a more efficient way. So I guess what I'm trying to figure out is, if you re-lease or if there was one hospital under the new operator in it and then they actually sell the other assets, I'm not quite sure I understand how proceeds from that scenario equate to the proceeds you'd have gotten out of a JV.

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [28]

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Tayo, remember that the real object of any joint venture or process that we did with the Steward portfolio was not necessarily proceeds, as Steve pointed out earlier. We have substantial liquidity and proceeds available to reinvest. The primary objective was further diversification. So doing it through this method still provides us with the same diversification that we would've gotten through the potential joint venture of the limited portfolio we were discussing previously.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [29]

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Okay, that makes perfect sense. So it's more of a diversification goal that's still pretty much the same?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [30]

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That's correct.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [31]

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Excellent. Okay, I got that now, that's helpful. And then second of all, on the LTACH side, the -- post the sale to Vibra, the coverage is about 1x on everything you kind of have left. I'm assuming that's the -- all the -- is that the Ernest LTACH stuff left or kind of what's that stuff -- the low coverage, how do you kind of think about that?

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

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Sure. Tayo, it is almost exclusively the Ernest facilities. There are approximately 3 other facilities that are not related to Ernest. But remember that the EBITDAR coverage that we present is an artificial number, because we have always penalized ourselves in adding a 5% management fee to that number. So, I think, the easier number to look at or the better number to look at is what the EBITDARM coverage is, and it continues to be in the 1.65 range, which is roughly what it was in the last quarter as well. And also, remember that in the Ernest LTACHs, there are 8 Ernest LTACHs and they're all cross-defaulted with the rehabilitation hospitals which continue to perform very well. And just yesterday, I got some additional information about the performance of the Ernest portfolio and they have -- remember, we report all of these coverages in one quarter in arrears, and the operational numbers that I got yesterday bode very well for the future of the Ernest facilities.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [33]

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Got you. Is there a number you can provide just again with all of the cross-collateralization with the other Ernest assets, what's kind of the overall "fixed charge coverage," or whatever kind of terminology you want to use, for that coverage number? That's across the master lease rather than just...

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

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So for Ernest, including all of their facilities, their coverage is in excess of 2x.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [35]

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Okay, that's helpful. And that's all, again, cross-collateralized; it's all one master lease?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP, CFO & Director [36]

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It's all master leased with the exception of 4 facilities, and frankly, I'm not sure if any of those were LTACHs that are mortgaged. But the mortgages are crossed to the master lease.

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Operator [37]

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And the next question will come from the line of Karin Ford with MUFG Securities.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [38]

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Just wanted to follow up on the LifePoint-RCCH deal. I know that LifePoint hospitals are a little bit more rural than your current portfolio. Are you interested in more rural assets and do you think there should be a cap rate premium on a rural hospital versus an urban one?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [39]

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Well, Karin, as you and I have discussed for at least the last 10 years, my definition of rural may be different than some people because I grew up in a really rural town in South Alabama. But generally speaking, no, we're not generally interested in rural hospitals that are in very, very small communities with no growth potential. But LifePoint has a number of hospitals that we would be very interested in.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [40]

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Got it. And you definitely saw nice improvement in acute care coverage. Can you just give us more color as to what you think drove that?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [41]

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Well, I don't think it's much different than what you're seeing in healthy operators across the country. We all saw what HCA's reporting was this past week. You look at the Prime hospitals, which probably makes up the bulk of the improvement, but some of the improvement is also from the Steward integration. But it is certainly Prime's efforts that they've made over the last 18 months in focusing on their collections and their operations rather than their growth.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [42]

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I wanted to ask you about the increasing interest from health care systems and vertical integration with skilled nursing and senior care, ProMedica, Ascension, et cetera. Do you think that's the future, and would MPW like to participate and own senior housing operated by one of its customers?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [43]

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Well, the short answer to the last question is no, that we are very comfortable with our mix of properties and what we know. From a vertical integration, I really think it depends on each one of the operators. I'm not going to talk specifically about some of the opportunities that have happened out there that are outside of our portfolio, which have been very large transactions. But obviously, some of our operators currently have skilled nursing facilities in their portfolio. They have some that are a part of our hospitals, which we do own. But they're very, very small in nature and not a total integration like, I think, the portfolio that you're probably referring to.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [44]

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Great. And just one last one on the modeling side. There was almost a $2 million sequential pickup in G&A from 1Q to 2Q. Is $19.5 million the right run rate going forward?

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

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No, it's not. That spike is a timing issue related to quarterly catch-up of certain estimated expenses. So Q1 was slightly lower than it should have been; Q2 is slightly higher than it should have been, so.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [46]

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Okay. So roughly an average between the 2?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP, CFO & Director [47]

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That's right.

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Operator [48]

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

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Eric Joseph Fleming, SunTrust Robinson Humphrey, Inc., Research Division - VP [49]

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Is there any update on the RCCH Pasco hospital? Any progress there?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [50]

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One day.

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Eric Joseph Fleming, SunTrust Robinson Humphrey, Inc., Research Division - VP [51]

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All right. So they're still working through all the fun out there in Oregon -- or Eastern Washington?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [52]

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Yes.

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Operator [53]

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The next question comes from the line of Chad Vanacore with Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [54]

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So I'm going to backtrack a little bit just because I had a little phone issues towards the end of Steve's commentary and Michael's question. But that $1.46, $1.50 FFO guide, am I right that that's run rate post reinvestment of proceeds from these JV transactions you expect in the third quarter?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP, CFO & Director [55]

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That's correct.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [56]

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Okay. And then, Steve, does that include contemplated Steward acquisitions, or that's not in that number?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP, CFO & Director [57]

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Oh, the Steward transactions we mentioned? No, that's not in there, yes. But remember, one of those we expect will simply be an assignment of the lease. So there'll be no impact from that one in any case.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [58]

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All right. And then just re-tenanting or sale of properties, are these mostly the IASIS hospitals or what we consider legacy Steward, which is kind of a little bit harder to get at, seeing as they've grown so much. And then who is driving that? Is this Steward consolidating their core portfolio or is it MPW just wanting to redistribute its risk amongst the operators?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [59]

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No, it's primarily Steward having people approach them and want a certain asset because they think it fits their specific portfolio, and Steward's okay with the offer that they've been given and the exiting of that particular area. And then the other one is, it's just Steward readjusting from some of their original plans.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [60]

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Okay. And then just one last one. You're contemplating new guidance at the end of third quarter after a lot of these transactions are closed. What are the some of the moving pieces that keep you from releasing that guidance now?

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

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Primarily timing, and again, primarily then on Primonial. The fewer months we have left in the year, the more sensitive the results get. And so it's primarily timing simply all front. yes.

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Operator [62]

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

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [63]

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Just on Chad's question on the guidance. So the $1.46 to $1.50 run rate, that's not an '18 number, that's kind of maybe a '19 number to start ex any incremental acquisitions or dispositions. Is that a fair way to think about it?

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

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No, I don't think so because, Juan, that would imply that on January 1, we reinvest 100% of our proceeds, and we're not at all saying that. We're just trying to get some indication of the strategic reason and the results and the opportunity for when we do reinvest. Now what Ed's described, with $5 billion worth of potential pipeline, we could reinvest that earlier than expected. But at this point, we're not ready to handicap when and how much that will be reinvested.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [65]

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Okay. So it sounds like you have a huge pipeline but it may not be reinvested by the time January 1 rolls around, is what you're trying to say?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [66]

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It certainly won't be, Juan.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [67]

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And then I was just hoping you could touch on Prime. You talked about kind of an agreement or MOU with the DOJ. Is there any dollar number you could share if there's any sort of penalty that they have agreed to? And with the corporate integrity agreement, any thoughts on what that incremental cost could mean to coverage and how you guys are thinking about that as a risk of on a go-forward basis?

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Edward K. Aldag, Medical Properties Trust, Inc. - Chairman, President & CEO [68]

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Yes, Juan, we, along with Prime, think that this is great news, just to have it behind them. They are going to issue a press release in the very near future which will outline all of this in detail. The -- there certainly will be a dollar payment as there always is with these things. But the most important aspect of it is the corporate integrity agreement, and Prime doesn't think that there will be any material negative impact on their operations from the corporate integrity agreement, and that's the most exciting good news.

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

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Okay. And then lastly, to Karen's question on G&A, you guys have grown assets fairly significantly over the last several years. How do you guys think about benchmarking that as a percentage of assets or rents as -- and what's the goal in terms of efficiency, and when do you think you can get there?

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP, CFO & Director [70]

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Well, I think, we're pretty satisfied with what we reported last year and kind of the 9%-ish, low 9%-ish that we are now, given the portfolio today as we continue to grow. Presumably, we expect that to continue to come down modestly. But once again, at $10 billion, it's harder to bring it down by virtue of volume than it was back when we were $2 billion. But point being, we've got a very attractive G&A burden. We expect it to continue to come down modestly with our growth, notwithstanding the timing spike that you might get from period to period.

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

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And the low 9s is what number, sorry?

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

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You want from a dollar standpoint, Juan?

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

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You mentioned a low 9. I don't know if that was a percentage...

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R. Steven Hamner, Medical Properties Trust, Inc. - Executive VP, CFO & Director [74]

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9% of revenue, yes, that's a 9% of revenue, I'm sorry.

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Operator [75]

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That does conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Ed Aldag for closing remarks.

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

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Thank you, Sabrina, and again, thank all of you for listening in today and thank you for your questions. If you have any additional questions once the call has ended, please don't hesitate to give us a call. Thank you very much.

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Operator [77]

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