ABOUT THE EPISODE
Interview Transcript
BRAD THOMAS: Hello everyone. This is Brad Thomas with iREIT, and we're back again with another Round Table. Today, we're going to be talking with Drew Babin. Drew is Senior Managing Director at Medical Properties Trust. The ticker symbol is, of course, (MPW). Drew, thanks for having us today.
DREW BABIN: Thank you, Brad. Happy to be here.
BRAD THOMAS: Great. Well, Drew, first off, before the call here, I looked back at the history - and my first article on Medical Properties Trust was on November 12, 2012, so almost eight years now. So we've watched this company evolve quite a bit, over this timeframe - by the way, the title to that article is "Medical Properties Trust: Diagnosis For More Dividends." So that was my diagnosis, back in 2012 - we were pretty bullish on the company. Just looking back at the timeframe - and again, we've been covering this company now for about eight years, you've really evolved now into a much, much larger REIT - now ventured over into Europe with a lot of growth there. So at a very high level, Drew, can you tell us about the platform today?
DREW BABIN: Sure. Today we own 390 properties. We're now in nine different countries, over 42,000 beds. Lots of operators. I know in the early days of the company, Prime was a large tenant for us, and at a certain point, a very large tenant. Now, we don't have a tenant that's over 25% of the portfolio, and we have 45 different relationships. So I think that's one area where we've definitely grown. At this point we're the second largest Hospital owner in the U.S., so scale definitely has its advantages here.
You mentioned Europe. I mean, we were involved initially in the German in-patient rehab market, but since we've done some large transactions where we also own General Acute Hospitals, primarily in the U.K., but also in Switzerland, and then, obviously continuing in Germany. But still, about two thirds of our business is U.S.-based, at the moment. But still a similar model, in terms of lease structure: long-term triple net leases, no maintenance CapEx: the operator handles all the capital expenditures. Very predictable cash flows, long duration leases - and that's how we like it - very predictable, very supportive of dividend growth, and predictability of cashflow. But that's in a nutshell, what we currently are.
BRAD THOMAS: Great. And since Medical Properties Trust is really the only pure play Hospital REIT - we cover Ventas (VTR) and a number of these indirect peers, but they're really no direct peers. So how does that provide your company with a competitive advantage, in terms of your business model? And if you could address as well - how Hospitals have performed during COVID-19, and currently?
DREW BABIN: Sure. I'll start with the last point. Our operators especially have performed very well during COVID. I think if you had to come up with the perfect gauntlet to test the U.S. Hospital system, it would have been COVID, and the initial response to it. I think what's more challenging than the ongoing impact of the pandemic, is the government shutdown of elective procedures. Late March, April, early May, was really where things got - were really at the worst. And at that point in time, many of our facilities were in areas that were not seeing the outbreak of COVID and were basically ordered to stop operations - and really were not getting many COVID cases in the door. So frankly, that's where we probably saw the most, just, operating turbulence.
But that said, the government stepped in - in a major way - and frankly, way beyond our wildest dreams, in terms of the support that they lent, not only in Medicare advances to operators that need them, but also just in the form of grants - that do not need to be paid back.
In fact, our top U.S. operators - we’re proud to report, didn't even use the Medicare advances - and therefore owe nothing back. But the grant money was exceptionally helpful in filling that hole in the second quarter. But we're happy to report that today, utilization levels at the facilities are back in the mid to upper 90% range, and some Hospitals over 100%.
And we echo the same numbers, globally. And frankly, in some economies in Europe, things have come back even faster - where in the U.S., it's kinda taken ‘til right now - to really get back to that level. Lots of elective procedures that were delayed - I think "elective" is a word that's misrepresented - a lot of elective procedures are definitely medically necessary, and are surgeries that extend people's lives and livelihoods, certainly. And they can't be put off forever. They need to be done at a certain point - and more and more people are comfortable coming back to Hospitals to getting these procedures done. And obviously that's very important for the profitability of our operators.
So we're happy that our operators are back in a place where they're not relying on government funding - the grants plugged the hole they were intended to plug. And from here on out, our operators - our top five U.S. operators have over $5 billion in immediate liquidity, in terms of their own cash, revolver capacity, and grants, and other Medicare advances - there, on their balance sheet - of which they're not using. But that liquidity is there if they need it. And so, you feel very good about not only the way our tenants are operating right now, but also the liquidity position they're in. And certainly the levels of operations that they're back to here. You remind me what your first question was?
BRAD THOMAS: Really just differentiating from some of the peers, and you really addressed that.
While you were speaking, I was just thinking about the fact that Hospitals are - these are large assets. Typically what I've heard is around $100 million dollars to build a Hospital. So it's not easy to build one. They're a “very high barrier to entry” structures. And then you compare that with Malls, which also cost around $100 million dollars to build, but obviously there's been a massive overbuilding of Mall space in the U.S. but not so much in the Hospital sector. So can you just talk a little bit about just - at a high level - the value proposition for owning a Hospital asset?
DREW BABIN: Sure. Well, obviously with COVID, I think we all understand a little better now - and we've been saying it for a while - but I think it's cemented: the way Europeans think about Hospitals is that it's mission critical infrastructure - the community needs it. If it was not there, the community would have a problem. And we just saw what that looks like, in certain areas, where we ran out of Hospital space. So, relative to Malls, we know people are always going to need healthcare. We know that there's certain healthcare services that will never be provided in people's homes. The most acute lifesaving procedures occur at Hospitals. And a lot of surgeries that don't occur at the Hospitals themselves - and occur in an outpatient setting - are directed through the Hospital. And they’re all part of the same system: Discharges, to Skilled Nursing - LTACs, Rehabs, other facilities - it all goes through the Hospital.
And certainly without that Hospital anchor - where a lot of the administration, the research, the education occurs - the system would fall apart. We have a stat, I think: the 2018 U.S. healthcare spending, as a percentage of GDP, was about 18%. Hospitals were about a third of that. And so a lot of healthcare spending goes through Hospitals. We expect that to continue under any political regime. They need to be there - they're anchors, and we own the ones that need to be open, that the communities need.
Because we understand the Hospital operating business - we have many people at our company that have been Hospital Administrators - of course, Ed Aldag, Steve Hamner been investing in Hospitals for a very long time - over 30 years - they're very familiar with the way Hospitals work - they understand the businesses. This is why large sources of capital outside of the public REIT space - you don't really see them competing for a lot of our assets, especially domestically. It takes special relationships, special skillsets, and special understanding of how the business works. Globally, there are some other funds that we do compete with, but unlike some other property types, we're not in these heavily marketed auctions for deals - where pricing gets super robust. We're in a position of relatively strong leverage, where we can work with the tenant to come up with something that's mutually beneficial, that's going to work for a long period of time.
And I think being public, as well, helps the operators really feel aligned with us - that we are going to be here - as a public company - existing for the entire, fully extended term of the lease. That's important as well. We don't have an exit strategy. We're not looking at the next five years: because lives are at stake - the Hospital's operations need to be fluid, they need to be predictable. And they need to know that the landlord is going to be there for them. And the rent is a relatively small part of their operating cost structure. And it's frankly the most important for keeping the facility running. So, it's something that's repeatable, and something we've been doing for a while - that we really believe in. And frankly, the opportunity set that we see globally, is only increasing.
BRAD THOMAS: Well, that was my next point actually - is global expansion. Drew, I was a little skeptical to be honest - back, I don't know, five, six years ago - whenever you started to pivot into Europe. Germany, I think was the first one - if I recall - but you've really proved the model out, and I give your company, and your management team, a lot of credit for being able to navigate global expansion. Can you touch on that a little bit?
DREW BABIN: Sure. Obviously investing in other countries around the world has its own unique challenges with - every country has its own healthcare system, their own way of doing things, different degrees to which medicine's socialized. Germany: the initial opportunity we saw was really on the in-patient rehab side. Culturally, rehab Hospitals are very important in Germany. People take pride in working for a long period of time. They don't retire early, and the concept of a rehab - where somebody can get back out on their feet, and get out - it's very utilized and it's very important and we've frankly, the way that those facilities have performed, is excellent. And as you know, we sold a joint venture interest in those a couple of years back, at a large gain. And I believe the cap rate that we sold those at, was around 300 basis points lower than where we were initially invested - because of the success of that investment.
And so we feel very good about that initial foray. Obviously, we're not done - we've done a lot of other things in Europe - and really the largest thing that we've done is the BMI Circle deal we did in the first quarter. Almost $2 billion U.S., where Circle's now operating this portfolio of Hospitals in the U.K. And what's been very fortunate is - during COVID - the way that the U.K. handled it: the NHS in the U.K. has stepped in and covered all the operating costs - not only of public Hospitals, but privately-run Hospitals. And so they've made us whole. They've guaranteed essentially to make us whole on our lease payments, regardless of what's happening with COVID, regardless of whether facilities are being idled or shut down - it doesn't matter - it's being covered by the government. And so there's obviously very widespread, very steadfast support of the healthcare system in the U.K.
And these relationships existed for a few years now, but to go through this together with them, and for the U.K. to see the value in private Hospitals - has been great. And I think that ties to something else that we saw - both in the U.S. and globally - where in many cases, private Hospital operators were much more nimble: if they were forced to shut down elective procedures - and COVID patients weren't necessarily coming in. From a profitability standpoint, they were actually able to adjust their staffing levels relatively quickly and get some of the operating costs down - temporarily - while they were forced to run at lower capacity.
But likewise, they were actually much more able to secure PPE to provide care to COVID patients when necessary: things like ventilators - they were able to move personnel, doctors, nurses - from facility to facility, based on need - and they were willing and able to work with public Hospital operators in the same areas, to identify which Hospital might be best to keep all the COVID patients at - what other Hospital might be a better place for people that were in the Hospital without COVID, to transfer them somewhere else.
There's a lot of coordination between the private and public Hospital operators and with the government - and I think, coming through the other side of it - it was proven that, frankly, everybody did a great job responding to it. And I think the private Hospital operators really proved their worth and their flexibility in dealing with this, and also their willingness to just work with the public sector in the middle of a crisis - and do so very effectively.
So, in coming out of this, we feel very good about just the prospects of further expansion of private Hospitals, here and abroad.
BRAD THOMAS: Great. You touched on some asset recycling, internationally. Would you mind discussing the balance sheet a little bit, and some of the balance sheet policy that the company has in place currently?
DREW BABIN: Sure. So currently as it stands, or I should say after the second quarter, we have no balance on our revolving credit facility, which is $1.3 billion. We had, I think, a few hundred million dollars in cash - so a lot of immediate liquidity. We had a net debt to EBITDA ratio a little bit above 6, which, historically, the range we'd like to be in, is in the 5s somewhere. And so it's a little bit higher.
Obviously, last year was a huge year for acquisitions: we bought $4.5 billion of properties last year. We've already acquired well over $2 billion year to date - this year. And so our leverage is a little higher than where we want it - but that said, we also don't really have the immediate capital needs. And we have plenty of liquidity. And so, we're certainly not going to do anything just to get a number lower on paper - just to say we have a leverage ratio under 6, if we don't have an immediate use for the proceeds.
And we have an At The Market equity facility: over $800 million in capacity for funding, as well. And so we have many different options in the form of ATM issuance, or some kind of larger deal, forward equity, or even dispositions. We have a lot of options to source capital because we continue to see a very robust pipeline - our pipeline as a whole, really hasn't slowed because of COVID. We don't think yet that it's necessarily picked up because of COVID - but we do believe that there could be some consolidation and things to create opportunities down the road. We do think that this is going to be something that creates more opportunities than it defers.
But for the time being, we're always working on a very robust pipeline, and there's always things coming down the pipe that we're looking at - we see everything - and you're going to see us execute on deals where they make sense for us. And these are deals that are - almost always - immediately accretive to earnings. And certainly we believe in the quality in the underwriting of what we buy. And we think that our track record has really proven out our very high batting average in the way that we underwrite these deals for the long term. That's about it on the balance sheet.
BRAD THOMAS: Yeah. We’re kind of moving into one of my last questions, which I always end that - and I know Medical Properties Trust, by the way, has been fairly receptive to its retail investor database. I know you've grown the institutional coverage over the years quite a bit which - your background, of course - but you've always been somewhat aligned with this retail investor.
I know, as of the last few years ago, you started to increase the dividend - it was static for a couple of years, but you have been able to increase that dividend. So can you talk a little bit about your dividend policy, and what you feel like a safe payout ratio looks like?
DREW BABIN: Sure. We prefer to be in the high 70%s, low 80%s, max. If you look at consensus AFFO estimates for 2021 - that represents a payout in the high seventies. Now, we certainly have investment activity in things - even that we've pointed to in our earnings release - that aren't in our guidance run rate yet. And so, as our AFFO estimates increase - as our guidance increases - we like where we are, from a coverage ratio right now- and believe that the dividend should move, relatively in tandem, with our earnings growth. The next time that our Board evaluates the dividend, I think we'll probably see where we are in terms of COVID, and whether there's any kind of uncertainty that may have emerged, related, but certainly we think we're through the worst of that, at this point. And so our expectation would be: we keep that dividend moving. We think we have plenty of cushion to do that.
And something I've always observed - as a buy side analyst, as a sell side analyst - is: great REITs that perform well over time, are the ones that grow their dividends. And we believe - we know - that we will be a dividend growth story. That's our expectation. That's what we've been, and it's what we will continue to do. And while our Healthcare REIT peer weighted average dividend, or AFFO payout, has now come down into the eighties, it's because we've had three dividend cuts in the sector, year to date, that have gotten that payout ratio down from over 100%.
As other property types within Healthcare have struggled in different ways with COVID, our rent collections have been very strong. In fact: 98% on an annualized basis, for this year. And we expect to begin collecting all rent - all current rent - in the fourth quarter. We're in a very solid position. We're moving forward, we're continuing to grow, and there's really no reason why we wouldn't continue to grow our dividend - relatively on pace with our cashflow growth.
BRAD THOMAS: Great. Well, Drew, this has been very helpful for me, and I'm sure for our audience, as well. I look forward to seeing more of you again - it's always great to see the transparency and the interaction your company has had with the retail investor base.
So again, I really appreciate your time in conducting this interview. And I wish - tell Ed and the rest of the management team: I wish them the best, and hopefully we'll see you again very soon.
DREW BABIN: Sure thing. Thank you very much, Brad.
BRAD THOMAS: Thank you.
