Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Medical Properties Trust Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Charles Lambert, Vice President. Thank you. Please go ahead.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our third quarter 2020 financial results. With me today are Edward K. Aldag, Jr., Chairman, President and Chief Executive Officer of the company; and Steven Hamner, Executive Vice President and Chief Financial Officer. Our press release was distributed this morning and furnished on Form 8-K with the Securities and Exchange Commission. If you did not receive a copy, it is available on our website at www.medicalpropertiestrust.com in the Investor Relations section. Additionally, we're hosting a live webcast of today's call, which you can access in that same section. During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed in or underlying such forward-looking statements. We refer you to the company's reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company's actual results or future events to differ materially from those expressed in this call. The information being provided today is as of this date only, and except as required by the federal securities laws, the company does not undertake a duty to update any such information. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at www.medicalpropertiestrust.com for the most directly comparable financial results and related reconciliations. I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Thank you, Charles, and thank you, everyone, for listening in today to our 2020 third quarter earnings call. We always appreciate your interest in MPT. As I prepared for today's call and made my presentation to the Board earlier in this week, I realized that I have never been more excited about our performance and the future of MPT. In really simple, but important terms, for years, we have been steadily executing on the MPT strategy and business plan. While the COVID pandemic has been a worldwide tragedy, it has absolutely further validated our model. Hospitals are the center point of the health care delivery system all over the world, and civilizations will do whatever they have to, to ensure their populations have access to hospitals. During one of the worst pandemics the world has seen, MPT has delivered a year-over-year increase in our FFO of 24%. Our operators are performing beautifully across the world. They have strong liquidity, strong operations and none of them are suffering from any capacity issues or lack of supplies. We have been able to acquire more than $3 billion of new investments in this new world of Zoom and limited travel. Our offices in Europe and Australia have proven invaluable and our historical performance and reputation among operators have served us well. Our pipeline remains strong and manageable. We have no need to do any traditional equity offerings to meet our needs in the near term. Steve and our internal capital markets and finance teams have done a great job of managing our needs in a way that keeps several efficient funding options on the table. I can end my update at this point because it is truly that simple and that strong. But let me continue with more detail. Our hospitals are all…

Thank you, Ed. This morning, we reported normalized FFO of $0.41 per diluted share for the third quarter of 2020. As Ed has pointed out, this is a 24% increase over 2019's third quarter and is consistent with the run rate guidance of $1.68 to $1.71, which we affirmed in this morning's press release, and a midpoint of which is a 31% increase over 2019's actual annual results. When considering the full quarter timing of transactions closed during the third quarter, our annualized normalized FFO was well within our guidance range. And moreover, we are not yet recognizing revenue at our 2 active development projects or from our significant number of expansion and renovation projects, which, in the aggregate, contribute meaningfully to our earnings growth. Just as a quarterly reminder, due to the magnitude of our external growth over the past several years and the unpredictable timing of these acquisitions, we have historically provided estimates of run rate normalized FFO instead of attempting to predict with precision when particular acquisitions will actually close. Our guidance represents the stabilized earnings of our in-place portfolio, additional transactions closed or under binding agreement, ongoing development and renovation projects and expected recycling transactions. For example, we will sometimes receive payment for mortgages or repurchases that are expected to be reinvested with the same operator in the foreseeable future. As Ed mentioned earlier, we are collecting virtually all rent contractually due and fully expect to collect roughly $12.5 million in rent deferred in the earlier parts of the year. That is with interest, by the way. While the contractual collectibility of these amounts justified their full inclusion in our earnings, we conservatively excluded $5.4 million of these amounts from adjusted funds from operations in the third quarter, down from $7.2 million in the second quarter.…

[Operator Instructions] Your first question comes from the line of Steven Valiquette with Barclays.

A couple of questions here. I guess just looking at some of the September quarter results from publicly traded hospital operators like HCA and Tenet over the last week or 2, in my sense is we're probably back to maybe 90% of pre-COVID hospital patient volumes at the end of the third quarter. You're seeing that number drop to, call it, around 50% for the industry maybe back in the June quarter. So just curious if you generally agree with that broad characterization for your portfolio of the U.S. operators without agreeing to those exact numbers, but just generally speaking, whether it makes sense to use those publicly traded comps as a proxy of your underlying portfolio in the U.S.

Steve, hope you're doing well. Two answers to that question. First of all, our portfolio is generally on a volume basis doing better than that. We have some operators that are well over 100% of where they were in 2019. We have some that are as low as in the low 90s, 92%, 93%, but the average is much closer to 100%. But keep in mind that just looking at the volumes is not a good measure. I think that if you look at the community health systems report, they did yesterday or the day before. When this first hit, all hospital operators, particularly our portfolio, some of the publicly reported ones that we've seen thus far, did an incredible job of cost cutting and getting their costs under control. So I think that if you look at that and you look specifically at the results that you saw in community in their reporting this week, our hospitals are doing exceptionally well. So if you look at the volume and it says 95% of what they were doing in 2019, doesn't necessarily mean that they're only generating 95% of what they generated in EBITDA in 2019. Our hospitals across the board, in Europe, Australia and here in the U.S. are doing very well. And every one of them, certainly all of the big ones are looking for opportunities and have opportunities to grow. So we feel very good. Listen, we told everybody back at when COVID first hit and the governments around the world, I'm not putting fingers at anyone because you can't sit here and look at it in hindsight. We didn't know what this was going to do. We didn't know what COVID was going to look like. The models were showing a tremendous number of patients and…

Yes. That's great. Yes. I appreciate that color. And yes, you're right. I mean the acuity mix is leading to EBITDA results that are maybe even slightly better than some of the volume trends. So yes, that's not lost upon us as well. So I appreciate that color, too.

Absolutely.

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

Steve, can you provide some color on the potential JV opportunities that you mentioned in your prepared remarks? I guess, what type of opportunities are you looking at your portfolio today? And are you pursuing those deals or trying to find partners to pursue those deals? Or is that just still kind of in theory right now?

Well, no, it's not a theory, by any means. I'll just remind everyone on the call that may not know our whole history. We have basically half a dozen JV arrangements right now. The largest being the transaction we did, I guess, we closed about 2 years ago in Germany where an institutional investor -- very large institutional investor, in this case, an insurance and asset manager called Primonial in France bought half of our German portfolio at very, very attractive and compressed cap rates versus what we had originated those leases to be. Since then, not only in Europe but in Australia and increasingly in the U.S., we're seeing more interest from similar type institutions and others, including sovereigns and other private equity, public pension funds, similar institutions as Primonial and AXA with whom we've done other joint ventures. So we are working conceptually around more than one potential transactions that would look similar to what we did with Primonial basically selling a portion of a discrete portfolio, very, very attractive pricing, especially compared to pricing in the public equity markets today. But there is nothing specific to report at this time.

And then I remember when you were pursuing the German portfolio JV, the lead time or the timing to get that transaction done was pretty long. I guess, if you do elect to do a JV, how long do you expect it will take? Is this something that could be announced in the beginning of 2021 to help fund some of your 2021 investments that you have planned that Ed kind of mentioned that the pipeline is pretty strong? Or what's the thought process around that?

So we wouldn't expect it to take us long. A lot of things have changed since then, including the rapid increase in interest from institutional and other passive investors for this type of product. The other big issue being we've been through it now. We have -- we're much bigger. When we started those negotiations, it was actually more than 3 years ago. Since then, I'd have to look, but we've added many billions of dollars in assets to our own ownership. So we have a number of alternatives and opportunities to slice and dice. And again, given the continuing search by these institutions for yield, we think, we could accelerate the underwriting and closing process. We certainly wouldn't enter into negotiations if we didn't think that. Insofar as timing, we've got nothing to announce now and no prediction of when that may happen.

Your next question comes from the line of Connor Siversky with Berenberg.

A quick one for me. Could you touch on portfolio vacancy at all? And then any opportunities to lease any available space in the near term? Or any color on what impact that could have looking forward?

It's a very good question. And there's very limited portfolio vacancy. Obviously, most, if not all, our buildings are single tenant occupancy. So when something is vacant -- is not generating any earnings, of the very limited amount of facilities and mostly they are the old Adeptus facilities that we've discussed in recent quarters, there is no inclusion of any potential re-leasing of those facilities in our guidance. So -- but on the other hand, if we were to re-lease 100% of them tomorrow, it's just not going to move the needle that much on guidance because all in, Adeptus has been very, very successful, and what we end up with now are really the kind of the bottom tier. And there's just not that much of it. There are opportunities, and I mentioned it very briefly in my prepared remarks about potential sales that would generate additional liquidity and basically free capital because they would be nondilutive there. In addition to those old Adeptus facilities I just mentioned, there are way less than a handful, a couple or so other facilities that were not recognizing any income on and yet have, we believe, a fairly substantial value, relatively speaking, which we are hopeful of. I think we have reason to be hopeful that we could generate upwards of another $100 million plus or minus dollars in the near term in potential sale proceeds.

And Connor, I'll add to that just briefly, while Steve is absolutely right, it's a very small number. Very interestingly, as people have gotten comfortable with where we are post COVID, we have -- actually have a number of people negotiating with us for these facilities. So it -- while it won't move the needle, it's nice to have all the interest.

Your next question comes from the line of Joshua Dennerlein with Bank of America.

Two, really for me. I guess, just globally, where are you seeing the most opportunities as far as acquisitions go? And then how are you guys thinking about health systems and maybe how they might consolidate or change post-COVID, and how that might impact your opportunities?

So Josh, the pipeline continues to be split in the 60-40 range, 60% in the U.S., 40% outside of the U.S. It's primarily in the 9 countries that we're currently in, which includes the U.S. There are some small opportunities in some of the smaller countries in Europe, but it's primarily where we are. And it is mostly with new operators, and it is almost entirely, maybe 90% general acute care hospitals from a dollar standpoint. From an opportunity standpoint with systems, we continue to see a lot of interest in the for profits, buying some of the not-for-profits entities. We see a lot of continued interest, particularly post COVID -- post nightmare COVID, I guess, from the not-for-profits that really need to have more than just one facility that are willing to sell at this particular time. So we continue to see good opportunities. I think everybody when COVID first hit, obviously everybody put everything on hold, and we were scared to where this was going to go. But as I said in my prepared remarks, it is amazing how everybody we are working with is looking for opportunities right now.

Your next question comes from the line of Sarah Tan with JPMorgan.

This is Sarah Tan on for Mike Mueller. Just 2 questions for me. The first one is on coverages. And where do you expect them to trend given the aid. And secondly, do you expect to add on to your development pipeline even that there's just 2 projects in there right now.

So Sarah, I hope you're doing well. On the first part of the question, we expect them to continue to trend up. As you saw from the remarks earlier, even without any federal grants and a 2.5-month shutdown, our general acute care hospital still generated more than a 2x coverage. Our LTACHs and inpatient rehabilitation hospitals actually increased. The LTACHs increased significantly. The rehabilitation hospitals increased some. In Germany, where we have the largest number of rehabilitation hospitals, those hospitals did exceptionally well all throughout the COVID crisis, and we expect that to continue. We really don't see the situation of having hospitals shut down again. Again, I'm not pointing fingers at anyone. I think that in hindsight, that's probably all we could do because we didn't know, although we know now. We know how to treat these patients. We're literally are not treating them with any additional drugs, but we've cut the mortality rate by 85% and we've cut the number of people staying in hospitals for a very long time. There are varying numbers all across the board because people look at it very differently. And I know some of you may have seen the reports from Dr. Fauci yesterday that he estimated that 40% of all patients in the hospital back in the early days of this crisis were COVID. Well, yes, that's probably true because they got rid of all the other patients. I'm on the board of a not-for-profit hospital that has over 300 beds, and we averaged 3 patients for 2.5 months. So it doesn't take many of those 3 patients to be COVID patients to make those numbers look skewed. So you've to be very careful with what you're looking at. But our hospitals are in good liquidity positions. The volumes have come back very strong, and we expect the coverage will still continue. I think the second part of your question was on developments. We will continue to see development activity. But from a dollar standpoint or a percentage standpoint of our portfolio, it will never decrease just because we've grown so very big. I think that any given year, we'll probably have less than 10 total development projects, but that just won't be a large percentage.

Your next question comes from the line of Jon Petersen with Jefferies.

I'm curious if you've seen, I guess, any incremental interest from kind of the nonprofit hospitals. I know in the past, you've talked about that as a big opportunity that you're trying to break into. I don't know if anything has changed there with COVID in terms of any other situations that have opened up opportunities. And then maybe just to ask another way, more broadly, are there any different types of hospital owners or property types or regions, where COVID has kind of changed the conversation and opened more opportunities for acquisitions in the future?

So from a not-for-profit standpoint, I would certainly like to see more not-for-profit activity. I think that just given the way that their structure is, their leadership structure, we just haven't seen that. What we have continued to see is the not-for-profits really moving toward the selling as opposed to these types of routes. We will still push that avenue. We like -- there are a lot of not-for-profits out there we'd like to do business with, and we'll continue to push that. But it just hasn't been what I thought it would be 20 years ago when we started this company. From other opportunities because of COVID, I think the opportunities really align the fact that those that have really figured out that they can operate in this environment that they continue to do well. It wasn't the disaster that we all feared in March for hospitals. And so the opportunities are that there are good people out there that we know, know very well. I've been in this business for 35 years. I know just about everybody and those everybody either know me or somebody that we've done business with. And I get a lot more phone calls today. I probably in the last 3 months, I've gotten a lot of phone calls from old friends that I've done business with that are interested in doing something else. So yes, I think from that standpoint, there are lots of opportunities out there.

All right. And then the election is less than a week away. I guess if we wake up next Wednesday morning or in a month from now, whoever we figure out and Biden is President, should MPW stock go up or down the next day?

Well, I think that as Steve and I have literally said since we started this company because you remember, when we first started it, there were discussions about all the various changes to health care and there are probably 6 or 7 different health care reforms floating around before Obama finally got elected and we all settled on the ACA. It really doesn't matter for MPT. If you look back at all of those various forms of health care reform, the total number of dollars in the bucket didn't change at all. What did change is the payer mix and how that number of dollars were allocated. But the hospitals continue to be paid. They continue to get roughly the same amount of dollars depending on what states you're in, was how it was allocated differently. But from an overall truly nonpartisan standpoint, it really doesn't matter who gets elected long term. Obviously, short term, there may be a boost just because people think that the ACA is this wonderful thing for hospitals. And without Trump, it probably won't go away. But we think that it really doesn't matter whether it's a Trump election or a Biden election from that standpoint.

Your next question comes from the line of Michael Lewis with Truist.

So I certainly understand the enthusiasm, the portfolio weathering a pandemic and doing well. Now that it looks like we're headed toward a higher number of COVID cases. In wave one, I suppose, maybe the risk was holding beds. It sounds like you think we won't do that again. What's the risk in wave 2 if the cases continue to go up? Do you feel like we've kind of figured this out and can handle it now? Or what are some things we should look for if the cases continue to trend up like this?

Mike, that's a fair question. And clearly, if you look at the numbers, they are indeed trending up. I don't think any of us know at this particular point, how much of that is related to the fact that we've got a lot more test that are out there and people are being tested more often. But clearly, they're going up. I think the good news from an overall world standpoint is this. If you look at our hospitals in the Southern Hemisphere, I think Australia has 130 patients left right now of COVID patients. That's in a fairly large country, and it's kind of isolated obviously. But we've done -- we -- they have done a very good job from it -- from that standpoint. If you look at the people that are -- the number of people that are getting COVID, very few of them are ending up in the hospital like they did originally back in March, April, May and even June. And most importantly, I think as what I reported earlier or what everybody has reported, what I commented on earlier is the lower mortality rates. And that's with not any real additional drugs. That's truly just with hospitals understanding how to treat patients better. You have to be very, very careful of what you listen to on our 24-hour news cycles because they report snippets, obviously. Let me give you an example. When COVID first hit, every hospital that we own greatly increased the size of their ICUs. They all have the ability to adjust bed configuration. It's one of the reasons why we've done so well in business from the early days on, is that we understand how to run hospitals. The number of the people here, including myself, actually ran hospitals, originally. And…

Okay. Great. And then I had just a quick one for Steve. On the tax rate change, you mentioned it was onetime. So a tax rate change sounds to me like maybe that would be a permanent change, but there's nothing going forward here that should impact into a higher tax rate going forward?

No, it's a good question. The increase in rate does go forward. The big hit we took this quarter was to account basically a purchase accounting adjustment was the biggest piece of it related to, if you remember, we did the $2 billion acquisition in January. And there were some tax liabilities that we basically had to reprice as of that acquisition date. Going forward, it will have a miniscule impact on our yield.

Okay. That makes a lot of sense. And then just lastly for me. I wanted to ask about the upsized Colombia investment. Did the yield change on that? In other words, are you earning a return on that -- on the incremental amount? And then just yields in general in the pipeline, right? The low financing might make you think that yields could come in, but then we've got -- maybe there's a perceived risk premium. Are you seeing yields in the pipeline in general move at all?

I would answer that very marginally. If you compare what we've done recently and what we think the most near-term transactions will be, we're certainly, in our view, with minimal exception, not seeing any further cap rate compression. So the cap rates we've talked about starting last year to this year, U.S. versus international, we are -- we continue to get at least those rates, and as I say marginally, it's upwards rather than downwards.

Okay. And on Colombia specifically, to the yield change with the incremental investment?

The yield didn't change. But to answer your question, we are getting that yield on that incremental $35 million.

There are no further questions at this time. And I would now like to turn the call back over to Mr. Aldag for closing remarks.

Wendy, thank you very much, and I appreciate all of your interest today. I appreciate your questions. If you have any additional questions for us, please don't hesitate to reach out to Drew or Tim, and we'll get back to you as quickly as we can. Again, these are great times for MPT. I couldn't be more excited about where we are and more excited about the future of MPT. Thank you very much.

This concludes today's conference call. You may now disconnect.