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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and thank you for standing by. Welcome to the Fourth Quarter 2021 Medical Properties Trust Earnings Conference Call. [Operator Instructions] Please be advised, today's conference may be recorded. [Operator Instructions]
I'd now like to hand the conference over to Charles Lambert, Vice President. Please go ahead.
Good morning, and welcome to the Medical Properties Trust conference call to discuss our fourth quarter and full year 2021 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 it, it is available on our website at medicalpropertiestrust.com in the Investor Relations section. Additionally, we're hosting a live webcast of today's call, which you can access in that same section.
During the course of this call, we will make projections and certain other statements that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed in or underlying such forward-looking statements. We refer you to the company's reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company's actual results or future events to differ materially from those expressed in this call.
The information being provided today is as of this date only, and except as required by the federal securities laws, the company does not undertake a duty to update any such information. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures.
Please note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. You can also refer to our website at medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliations.
I will now turn the call over to our Chief Executive Officer, Ed Aldag.
Thank you, Charles, and thank all of you for joining us this morning. For March 2020 until October 2021, like most of the world, MPT's offices were closed. In October of last year, while we reopened our offices, we still ran less than 100% back in the office due to various spikes in COVID throughout the last quarter of 2021.
Our people were working from their homes, remote offices, through Zoom and Teams in any way we could keep moving forward. And move forward, we did. I cannot stress enough how proud I am of the job all of our employees in our 5 offices around the world have done over the last 2 years to produce back-to-back record years during the worst worldwide pandemic we've seen in modern times.
Following on our record year for 2020, 2021 was another remarkable year in the past almost 20 years of MPT, which Steve will discuss in more detail. 2021 was also another banner year for acquisitions. MPT continued to execute on our acquisition strategy to amass another $3.9 billion in investments across 5 different countries, in 9 -- with 9 different operators, 5 of which were new operators. After including these acquisitions in our portfolio, we have 53 operators that manage over 435 MPT-owned facilities worldwide.
To recap the year from an acquisitions perspective, we began the year with a $1 billion-plus investment in the leading provider of behavioral health in the United Kingdom, The Priory Group. This investment included the real estate of 35 behavioral health facilities located throughout the U.K. as well as a 9.9% equity interest in the operating entity. This transaction highlights an important strategic relationship with Waterland, a private equity investor with whom we have had an ongoing relationship for many years. What began years ago as our first investment outside the U.S. has grown into a relationship with one of the largest multinational health care providers in the world to now merged MEDIAN and Priory Enterprise.
In the middle of 2021, we announced and subsequently closed 2 sizable acquisitions. The first was our $950 million acquisition of 18 additional inpatient behavioral health hospitals, along with an equity interest in the operating entity of Springstone LLC. These 18 facilities are purpose-built inpatient facilities located carefully selected U.S. markets. This transaction closed in October of 2021.
As we all know, the affordable CARE Act long before COVID, contained a large expansion of mental and behavioral health coverage. In the U.K., the NHS established a need for increased behavioral health services, also long before COVID. Behavioral health care is estimated to be a $200 billion-plus market in the U.S. with only 40% of that market currently accessed. The hospitals in which MPT has invested and will continue to invest in, both here and in the U.S. and abroad, will play a significant role in addressing these needs.
The second announcement was our $900 million acquisition of 5 general acute care hospitals in South Florida from Tenet Healthcare in conjunction with Steward Health's acquisition of the operations of those hospitals. Additionally, as we have previously discussed, we announced 2 other significant transactions in 2021, that will enhance our portfolio while also confirming and demonstrating the value of our business model.
In the second half of 2021, we announced our agreement to form a joint venture partnership with Macquarie Infrastructure Partners. This Macquarie-controlled subsidiary will acquire a 50% interest in a portfolio of 8 Massachusetts-based general acute care hospitals owned by MPT and operated by Steward Healthcare System. The transaction values the portfolio at approximately $1.7 billion. We expect this transaction to close in the first half of 2022.
The other previously disclosed transaction that we announced in 2021 that we expect to close later this year is the agreement to lease substantially all of our Utah hospitals to HCA Healthcare. This will place HCA as one of MPT's 5 largest tenants and reduce the percentage of MPT's portfolio represented by Steward to just below 19%.
As we have pointed out before, but it is a good reminder, no Steward regional market will represent more than 6% of our total portfolio and no single Steward property will represent more than 2% of our pro forma assets.
Fortunately, the much talk about Omicron variant of COVID has not caused much disruption to the health care services provided by our operators. However, most of our operators are experiencing staffing issues as health care workers battle burn-out from the pandemic and from federal and state mandates requiring health care workers to be vaccinated. While the vast majority of the staff at our portfolio of hospitals have been vaccinated, the disruption caused by the minority who are not has had an impact on our labor cost. As a result, labor costs have increased and in some cases, services have had to be temporarily reduced or limited.
Despite these challenges, our operators are managing through these times and continuing to perform well. You will recall that last quarter, we began the approach of providing our coverage metrics on a total portfolio basis instead of same-store. We've gotten to the size where additions and subtractions do not make material artificial impacts on the numbers. And just as a reminder, there are approximately 100 of our 435 facilities that are either not yet reporting because they were just recently acquired, not required to report other than parent company information because they were acquired from other landlords or facilities operated by operators who only provide the parent company financial information.
For the trailing 12 months of our total acute care portfolio, generated an EBITDARM coverage of 3.06x versus 3.11x last quarter trailing 12 months. We reported Q2 2021 trailing 12-month coverage of 3.03 during last quarter. As a result of moving 3 behavioral facilities to -- Steward into prospects to the behavioral health property type, the Q2 2021 trailing 12-month acute care coverage being reported this quarter is 3.11x.
The LTACH segment generated an EBITDARM coverage of 3.2x versus 3.27x last quarter trailing 12 months. The IRF coverage for the trailing 12 months was 2.09x versus 2.12 trailing 12 months. We reported the Q2 trailing 12-month coverage for 2021 of 2.14x during the last quarter. As a result of selling the Encompass, Fort Lauderdale facility and removing interim earnings, the Q2 2021 trailing 12-month coverage being reported today was 2.12x. Due to our recent behavioral health acquisitions, we have initiated reporting coverages on this property type this quarter, which generated an EBITDARM coverage of 1.92x for the trailing 12 months.
Now I'd like to provide some updates on some of our largest operators. Steward, which represents 19% of our portfolio on a pro forma basis, continues to perform well with coverage near 3x. The integration of the 5 recently purchased Miami facilities has been successful and the market continues to exceed expectations. Steward continues to closely manage the onboarding of the new facilities, including working down the accounts receivable to steady state levels in the near term.
The late COVID surge is having an impact on the volume in Q4 and early into Q1 as Massachusetts deferred some elective procedures there. Steward expects that most of these deferred procedures will still be performed at their facilities prior to the end of Q1.
Circle, which represents 11% of our portfolio, continued to show strong coverages. Their coverage for the third quarter in 2021 reflects stabilization at a high coverage level, driven by a robust increase in self-pay volumes, which provide for increased reimbursement. I'd also like to highlight the 2021 award received by Circle in November for Excellence In Acute Health Care Services with a focus on innovation.
Prospect, which represents 7% of our portfolio, is doing well in California and showing some softness in Pennsylvania and Connecticut. They are seeing some rising labor costs as the rest of the country has, but rebounding surgical volumes are helping to offset those costs with growing revenues. Most of the labor issues Prospects are occurring at their Pennsylvania hospitals. Several of Prospect's California facilities have recently been recognized with top excellence and 5-star quality awards from Healthgrades.
Healthscope, which represents 5% of our portfolio, continued to show quarterly EBITDARM increases. Despite periodic government suspensions of certain elective presurgeries due to the pandemic, revenues remained steady and patient days are increasing. MPT continues to partner with Healthscope to make additional investments into renovations and improvements at our hospitals in New South Wales and Victoria.
Median, which represents 5% of our portfolio, continued its steady performance. Median has performed superbly throughout the pandemic and continues to along that path today. Andre Schmidt, the CEO and his management team have done a superb job throughout MPT's relationship with Median.
Prime, which represents 5% of our portfolio, continues its stellar performance. Their consistent EBITDARM coverage is at the top of our portfolio. Volumes have shown steady improvement year-over-year.
During Q3, a number of Prime’s hospitals were recognized by Healthgrades as 5-star recipients for women's health care. On the 1-year anniversary Primes acquisition of St. Francis Hospital in Linwood, California, both Prime and St. Francis were recognized by local officials for their extraordinary service to the community.
Priory, which represents 5% of our portfolio, reports solid operational performance that is in line with our underwriting expectations. Priory has only reported 1 quarter of operational financial information to MPT thus far, but that 1 quarter is right in line with our underwriting projections.
Springstone, one of our newest operators, now represents 5% of our portfolio. Their either behavioral inpatient facilities continue to serve a vital need in each of their communities. While not yet include due to quarterly reporting, monthly consolidated EBITDAR is in line with underwriting projections and ahead of prior year.
Earnest, which represents 3% of our portfolio, continues to perform at the very top of the market. Coverages for their IRFs and LTACHs are both near or above all-time high coverage levels as a result of solid volume and revenue growth in 2021.
LifePoint, which represents 3% of our portfolio, continues to perform well. Though we did see their EBITDARM coverage plateau a bit in Q3, it is still seeing significant growth in 2021. They are seeing strong growth on the surgical side of business that should help continuing coverage growth. Additionally, LifePoint successfully completed the acquisitions of Kindred and the subsequent creation of [Sion] Health at the end of 2021. We now have facilities under both of these companies.
I'd like to refer all of you to our website to see the recently posted case studies on 1 of Prime hospital and 1 pipeline hospital. These 2 highlight the critical importance of hospitals in underserved neighborhoods in Los Angeles. These are examples of how our capital can rapidly facilitate improved care for underserved urban communities especially as they experience a disproportional impact from the global pandemic.
Like me, some of you may be a lifelong reader of National Geographic. If you are, you probably saw a cover story they did last year on the lack of trees in lower-income neighborhoods in urban areas. The article particularly focused on L.A. It has always been important to MPT to make an impact on the communities we serve in addition to its health care needs.
We contacted and established a relationship with an entity called City Plants, a not-for-profit organization in Los Angeles that distributes and plants approximately 20,000 trees a year in areas that lack access to the many environmental and health benefits of robust tree canopy. We have recently made a sizable donation and members of our staff traveled to L.A. physically work with this organization with their tree planning.
2022 is shaping up to be another great year for MPT. Our pipeline is robust. Our portfolio is diversified, not only from an operator perspective but also from a geographic perspective as well as from an asset class perspective, given our recent large investments in behavioral health space.
Steve?
Thank you, Ed. This morning, we reported normalized FFO per diluted share of $0.47 for the fourth quarter of 2021, along with AFFO of $0.36, continuing the extraordinary double-digit year-over-year quarterly growth that we have recently reported. On a full year basis, our normalized FFO of $1.75 and AFFO of $1.37 also represent the continuation of double-digit growth, a record virtually unmatched among, not only our peers, but the entire universe of REITs with a similar or larger market cap.
As a reminder, this growth comes on top of 2020 results, in which normalized FFO per share growth exceeded 20% and AFFO grew at a similar mid-teens rate. In fact, over the past 10 full years, we have delivered normalized FFO and AFFO per share at compound annual growth rates in the mid-9s and mid-6s, respectively, while maintaining an average net debt to adjusted EBITDA ratio in the mid-5x range.
While certain peaks and troughs in both earnings and leverage occurred over this time frame due to transaction timing, the long-term results speak for themselves, and we are confident that we will continue to deliver strong growth in the future.
As usual, there were a few items that impacted our reported earnings and corresponding adjustments to normalized FFO for the quarter. First, each quarter, we recognize a change in the market value of our investment in the securities of our Kennett Swiss Medical Network parent, AEVIS. This year -- this quarter, I should say, a $5.4 million gain.
Also each quarter, generally accepted accounting principles require us to present certain cost as MPT expenses, even though they are contractual obligations that are reimbursed by our tenants. These charges amounted to approximately $4.8 million for the quarter, and we included this amount in property-related expenses and offsetting revenue of a similar amount in our income statement.
We recognized roughly $25 million in debt costs, primarily related to our refinancing in October of EUR 500 million of unsecured notes, which effectively lowered our annual coupon from 4% and to less than 1%. Finally, we recognized gains exceeding $84 million for various properties and equity investments divested during the quarter, and which I will detail momentarily.
In November, we purchased our partner's 50% interest in IMED Valencia, a flagship private hospital in Valencia, Spain for roughly EUR 46 million. Because of the high development yield that we are already earning on our initial 50% interest in this facility and the economic benefits of capturing the previous third-party investment and asset management fees along with the control as the 100% owner, we expect this to become one of our most attractive European hospitals.
Also on the growth side, construction commenced on a new campus for Wadley Regional Medical Center, operated by Steward in Texarkana, Texas. The original facility, which is owned by other real estate investors, has been serving the community for more than 120 years, and the new campus will provide state-of-the-art care to a larger portion of the local population. MPT expects to invest nearly $170 million in the approximately 120-bed facility, with rent commencement under our master lease expected in the summer of 2024.
The fourth quarter was a relatively busy one for one-off dispositions. MPT completed the long pending sale of Capital Medical Center in Olympia, Washington for $135 million, including a $33 million gain representative of a mid-teens internal rate of return over MPT's period of investment. We also sold an inpatient rehab facility in Fort Lauderdale for roughly $27 million, reflecting additional strong gains, and we agreed to facilitate our operator sale of a Midwest hospital by selling the related real estate for about $63 million, that also includes an attractive gain. We expect this to close in the second quarter of this year.
Finally, we sold 5 former Adeptus freestanding emergency department properties. In addition to the substantial capital and the gains generated from our real estate sales, we also completed the sales of our equity investments in MEDIAN and ATOS for EUR 42 million in gross proceeds, virtually all of which is gained. These represent the most recent 2 examples in our history of highly profitable equity investments in certain of our operators.
Collectively, MPT received, and is under agreement to receive, approximately $300 million in proceeds from dispositions during and after the end of the quarter. On the flip side, we recognize the likelihood that our loans, including our DIP loan to the bankrupt Watsonville Hospital project may not be collectible and recorded a net charge of $31 million. Progress continues as expected on both our anticipated partnership transaction with the Macquarie Infrastructure Fund related to 8 Steward facilities in Massachusetts as well as our expected lease agreement with HCA Healthcare for 5 Utah hospitals commensurate with their acquisition of the operations from Steward.
As an aside, because we will not include extension options in our assumed lease term as we presently do for Steward, our noncash straight-line rent component will be approximately $12 million lower annually upon commencement of the new lease with HCA.
Pro forma for our expected joint venture proceeds of $1.3 billion that will repay our outstanding interim credit facilities, we anticipate having immediately available liquidity exceeding $1 billion in cash and revolver resources. Taking into account the FFO dilution of the joint venture, remember, we are selling 50% of our high-yielding Steward Massachusetts hospitals. The change in the straight-line calculation that I just mentioned, inflationary rent increases and pro forma revenue for certain under development projects. We estimate our annualized FFO run rate to be between $1.81 and $1.85 at our current pro forma leverage ratio of 6.4x.
However, that is not meant to establish a capital strategy different from our long-term target of between 5 and 6x. We plan to continue to prudently manage our balance sheet, liquidity and investments with capital sources that include: at the market and limited underwritten common stock offerings; one-off distributions -- dispositions, I should say; and loan repayments; the possibility of additional joint venture or partnership transactions that further diversify our portfolio and take advantage of more attractive private pricing; and retained AFFO, including inflationary rent increases.
The great majority of our leases have annual or other periodic contractual rate increases driven by inflation, including floors generally in the 1% to 2% range. The effect of those floors is included in our cash rental revenue regardless of actual inflation. Inflation during 2021 substantially exceeds these floors. So our 2022 and future rental rates will reflect incremental increases. We estimate that this incremental cash rent in 2022 will approximate $24 million or $0.04 per share.
This is tangible, measurable demonstration of one of the key strengths of the MPT model. Because the great majority of our debt is at fixed interest rates even in a rising interest rate environment, we expect to realize higher rents when our interest expense is rising only modestly, which will certainly be the case in 2022. As a reminder, this run rate guidance is an estimate of the expected annual FFO for our in-place assets as of today, plus other assets that are either under development or subject to binding acquisition agreements. These future assets are, of course, not included in fourth quarter results and in some cases, will not be for several quarters.
Similarly, certain revenue that is included in fourth quarter results, primarily revenue from 50% of our Steward Massachusetts assets that are pending sale to the joint venture and the noncash straight-line rent I just mentioned, will not be included in future quarters. These items alone, net of the benefit of refinancing activities and investments since we introduced this range in early September, account for an approximate annualized $0.05 per share. And in addition to the impact of assumptions related to leverage reduction, underpin our current guidance range and the pro forma 6.0x leverage, mentioned in this morning's press release.
Beyond this, we assume no other investments or capital markets transactions, and we'll plan to update the market in the future as they occur. Our pipeline of opportunities for 2022 is robust, and we continue to expect domestic opportunities to make up the majority of our near-term activity. This alone is expected to further lower our leverage as we generally use relatively higher levels of equity funding for domestic versus non-U.S. investments, while still generating accretive investment spreads, in addition to the multiple forms of common equity issuance that can accomplish this within certain pricing parameters.
We are confident that we are in the early stages of development of a global market that we helped greatly to create. With our execution we have historically delivered, and we believe we'll continue to deliver in the foreseeable future, well-covered cash dividends, outperforming AFFO growth and value creation, with a conservative approach to funding this growth that have made it a substantial total shareholder return out pro forma over virtually any period.
In fact, going back to our 2005 IPO, we have delivered total shareholder return of 661%. Recently, over the past 3 years, that notably include 2-plus years of global pandemic and accelerating inflation, we have returned 73% to our shareholders. And even in 2021, we generated a 14% 1-year total shareholder return. Almost incredibly for a company that started with 3 unpaid founders and no assets and listed on the New York Stock Exchange 1 year later, we have created $8.7 billion in value for our many thousands of shareholders.
With that, I will turn the call back to the operator for questions. Operator?
[Operator Instructions] Our first question comes from Tayo Okusanya with Credit Suisse.
Congrats on the solid results. Two quick ones from me. First of all, Ed and as well as Steve, you did talk about labor quite a bit and kind of the increasing risk of rising labor on some of your hospital tenants. Could you give us a sense of some of the things they're doing to come back that and what potentially the impact could be on rent coverage as we kind of look into 2022?
Well, Tayo, first, welcome back, Glad to have you on the call. The short answer is that I think we've seen the worst I think that the numbers are reflected in some of the third quarter, they'll be reflected in some of the fourth quarter. Interestingly, to me, we haven't had many labor issues as many labor issues in Europe as we're having here in the U.S., things that they've done are scaled back some of their services, adjust their schedules and obviously use contract labor.
Obviously, contract labor is extremely expensive, but they've been through this before with other tight markets. And despite that, you see that all of them continue to perform very well. So all of them believe that this is short term and that we won't see any long-term effects from this.
Got you. That's helpful. And then the second question is around Prime. Again, a much smaller part of your portfolio now, but they do constitute most of your lease maturities in '22. I know there's probably a bunch of purchase options behind some of those leases as well. Could you just kind of talk about how that's shaping up, possibility of them exercising the purchase options? And how we should think about that as we're modeling in '22 as well?
So Tayo, you point out well, that's the mid-2022 expiration of the initial term. Prime has typical options, one of which is to repurchase the facilities, in which case, we would receive because it's a fixed repurchase option for those facilities very unusual in our portfolio, but it's around $350 million that if Prime elected, they, as you point out, could actually repurchase those, in which case we would reinvest. Likely would be something of a dilutive reinvestment because we're earning pretty high rates on those now. Alternatively, we can negotiate a new lease or even an extension of the old lease, which in our experience is what happens in the great majority of times and what we believe will happen here.
Finally, of course, Prime could simply walk away from those hospitals and because they are extraordinarily profitable and cannot be replicated in those urban California markets, we think that's an unreasonable option for them.
So you think either they try to purchase them for the $350 million or to renew the leases.
That's right. Yes.
But again, given the cost of capital has been improving of late though, I mean, would you expect them to renew at current rents? Because again, like you said, that's a very high yield.
Yes. I mean we have about 6 months, and we've already started talking to prime about this. I probably wouldn't speculate now about what the terms of --again, we expect will be a new or an extended lease, but we're probably not prepared to talk about potential terms
Our next question comes from Steven Valiquette with Barclays.
So my question is on the legislative front for the U.S. hospital sector. My understanding is that there is a push for another covered relief bill that could come to fruition as early as this month, and most of the money is earmarked for the U.S. hospital sector. And I guess as part of this, there is some talk for the federal government to potentially forgive any remaining Medicare receivable loans that were taken out by some of the hospitals earlier on in the pandemic.
There's no guarantee to be in the final version, but I guess my high-level question around this is, where does Medical Properties Trust stand right now? And your U.S. portfolio hospital operators that may still have some of these federal loans still outstanding, and is this something that's on your radar screen as a catalyst to further improve the cash and liquidity profile of some of your operators, especially in the face of some of the ongoing labor and staffing challenges that we all talked about earlier?
So Steve, the answer to the last part of that question is that our operators are currently probably in the best liquidity and cash positions that they've ever been in the history --collectively in the history of MPT. I'm certainly not going to speculate on whether or not this bill will get passed or whether they get attached to a bill that gets passed. As your people have stated that if it doesn't get passed before the middle of summer then I don't think it will get passed at all given that this is an election year.
I think that for the most part, there are a number of rural hospitals or hospitals that weren't operating in 2019 that probably need some additional funding. I don't think that any of our hospitals will -- any of our hospitals in our portfolio will suffer if they don't get any additional. All of our hospital operators have either repaid all of their advances or are in the process of it being recouped in the normal course of business under the CMS rules and regulations. So it's not something that we're counting on. It's not something that we think if it doesn't happen, that it's a terrible thing for our hospital operators, and I'll leave it at that.
Our next question comes from Michael Carroll with RBC Capital Markets.
Ed, can you provide some color on how the company is thinking about new development? I know that in the press release, just announced a pretty big one with Steward. I know HCA just announced that they plan on building 5 new hospitals. I mean is this a bigger trend in the hospital space just going forward? And if so, will someone like HCA prefer to do that themselves? Or is this something that MPW can help out with?
Well, if you remember, Mike, you've been with us a long time, the widely hospital was originally owned by IASIS, and the redevelopment of that hospital was planned long before it was a Steward acquisition. So it's a facility that we've been looking at for a very long time.
And just to reiterate what Steve pointed out, we don't own the hospital and widely, but we've been looking at the replacement facility for a long time. We think replacement facilities like that are good, but you got to look at all of the various nuances that go with it, particularly east of the Mississippi River, there are -- there's not usually a whole lot of land for replacement hospitals. So that's one of the reasons why you haven't seen a really big part of the MPT’a portfolio.
I have not studied the announcement that HCA made about their Texas and Florida, new facilities that they plan on building. We certainly hope with the HCA transaction in Utah, and obviously, we worked with them closely on that list. I've been in this business for 35 years. I've got friends at HCA. And hopefully, we can continue to build on that relationship. We certainly have done development deals since the very beginning of MPT. I think that we'll do some more. But I don't think that you'll see a very large increase in the percentage of development deals that we continue to do.
Okay. Great. And then talking about, I guess, some of your funding strategies, I mean maybe there's a little bit deleveraging included in guidance and obviously, you need to fund future investments. I know there was a talk of a second joint venture. I mean, is that something that the company is considering now? Or are you willing to issue equity kind of at these prices? I guess, how do you lay the differences between those 2 options?
So Mike, we went through, at least in my comments, kind of a list of capital that's available to us. It does include common equity either and/or ATM underwritten offerings. We will continue to consider the types of joint venture access to capital that we did with Primonial and more recently with Macquarie. I really don't think you should overlook also. It may not be billions of dollars, but it's very important to look at the proceeds we received -- the $300 million I mentioned that we received on just kind of on recycling assets and on retained earnings. Retained cash earnings from an AFFO perspective amounts to several hundred million dollars over the course of the foreseeable future.
So all of those are available to us. There's certainly nothing we're announcing today, obviously, but we continue to be thankful and encourage that all of those types of capital access is available to us.
Okay. Great. And Steve, would you consider like a forward equity offering to kind of prefund some of your investments that you'll likely do in 2022? Has that kind of come across your desk yet?
So when we've looked at the forward structure -- first of all, you have to start with regardless of whether you've got a forward component in your offering, do you want to offer equity and the pricing and the discount and all that. So that comes first, and then maybe you want to use some portion of that as a forward. The problem with forward that we've always had at MPT and sort of remains, even though it's going away as we get larger and larger is the lumpiness and the inability for us to predict with any precision, a large transaction.
If we were to start doing more developments, as you just suggested a minute ago, then that provides opportunity when you know that over the course of several quarters, you're going to be drawing down construction funding. But we're not in that position right now.
Okay. Great. And then just last one for me. On the CPI rent bumps, thanks for the disclosure on the increase. I guess, what was the CPI increase? Am I correct to say that most of those will occur in 1Q '22? And is that fully reflected in guidance? Or does the guidance just reflect the minimum escalators?
No, no, the guidance reflects our full calculation for CPI. With respect to your earlier questions, most of it, you're right, especially in the U.S., probably virtually all of the bumps occur on January 1 of each year that differs in some of the other countries. Also, what difference in some of the other countries is the measurement itself. CPI in the U.K. is not identical to what it is in the U.S. and sometimes a different reference is used. There's a retail price index in the U.K., for example, that some of our tenants prefer and frankly, it's not it's not much different. So we're pretty agnostic toward it.
You know as well as we, of course, CPI in the U.S. in 2021 runs at -- or ran at upwards of 6%. That doesn't mean that we got 6%, of course, because many of our leases have ceilings in the 4% to 5% range. But whatever we collect, whatever we will earn over and above our floors is reflected in the $1.81 to $1.85 guidance.
Our next question comes from Jordan Sadler with KeyBanc.
I wanted to pick off on the pipeline, if I could. In the press release and some of your prepared remarks, you alluded to the robust pipeline of new opportunities. Here we are, early February, so it's still early days within the year. But maybe can you give us a little bit of flavor around what you have cooking and maybe line of sight in terms of investment opportunities?
Sure, Jordan. Most of it continues to be general acute care hospitals. While we haven't given an exact range of where we think we'll be this year. I don't think it will be in the $4 billion range that we did in the last 2 years. We're -- as Steve has pointed out, we're being very, very cautious and trying to use the best sources of capital and doing our pipeline.
Ignoring the capital uses, I think our pipeline could be as big as we want it to be. But I think if you realistically look at somewhere between $1 billion and $3 billion is probably the right range.
And would you expect -- what would the mix be, U.S. versus rest of world?
Yes. So that's really hard to say exactly. Most of what we're looking at right now is in the U.S., but things pop quicker, sometimes in other places. So probably the most conservative, I would say 50-50, but probably more likely more in the U.S.
Okay. And then maybe, Steve, just one for you. Just sort of rounding out the sort of sequential lack of a change in the run rate normalized FFO guidance, right, so you maintain the range, $1.80, $1.20 -- $1.85, but a couple of things have happened, obviously. You've got the CPI escalator as a positive. And then as an offset, you've got Macquarie in the closing and the adjustment related to the straight line rent. Are those basically just offsetting one another versus your sequential -- sequentially versus your prior guidance?
Yes. At a high level, in general, you're absolutely right. Between the straight-line rent change, which, again, I'll point out is an noncash, noneconomic change for us. But between that, offsetting a great part of CPI Plus because we've continued to grow modestly since we established that $1.81 to $1.85. The leverage has creeped up as you would expect, from wherever we were back then around 6.2 today at 6.4. And because we're maintaining that 6.0 metric, that it just requires a little bit more dilution to get back to 6.0 than it did a quarter or so ago. So it's really those 3 primary components that offset each other. Now there's details, there's ins and outs, but it's primarily the ones you mentioned, plus the incremental dilution that we need to get back to 6.0 .
Okay. And I think I misspoke, Macquarie was in the previous guide, I know. So it's basically $0.04 of upside from the incremental CPI adjustment that you'll be able to recognize, offset by a couple of pennies from lower straight-line rent and some additional dilution from some capital raising.
Yes. And on the $0.04 of CPI, we do accrue taxes. We're not yet in taxpaying situations, primarily in the -- away from the U.S. Of course, we don't pay taxes on real estate income in the U.S. In other countries, we accrue, and so that chips away a little bit at that $0.04 of CPI, perhaps as much as $0.01 out of the $0.04. But again, that's just one of those ins and outs amounts that I mentioned, there are a few others that all of which is why we left the guidance where it is.
Okay. And then is there anything in the normalized run rate guide related to the Prime expiry? Or has that -- would that be --
No.
No. Okay. Okay.
Our next question comes from Mike Mueller with JPMorgan.
Steve, just following up on the -- I guess, the guidance, when we think about the cash bump going up because the escalator goes up, your GAAP rent is staying the same though, correct?
Yes, that's correct
Got it. Okay. And then separately, what sort of cap rate should we think – are you thinking about this year in terms of acquisitions?
Well, from the GAAP perspective, and again, following up on Ed’s bias toward the U.S., which let's just say, it's 50%. I think you mentioned it's probably higher than that. But the most recent deals we've done and disclosed on a GAAP basis, probably where they were this time last year and through the summer, maybe with some upward pressure due to inflation, but we're still looking at -- on a GAAP basis, certainly U.S., high 7s into the 8s.
Got it. And then maybe just circling back to the guidance one more time, the run rate guidance. So if we have the straight-line burn off coming from the transition, what's the offset to that if your GAAP rent change isn't -- or if your GAAP rents aren't changing because of the bumps?
Well, the offset will be we'll be collecting more cash rent. And I don't know if that answers your question, but we'll continue to collect the cash rent due to inflation without respect to the straight-line rent.
Our next question comes from Joshua Dennerlein with Bank of America.
Just -- I know you talked about the Prime purchase option, but maybe it’d be helpful if you go over what else is under a tenant purchase option as I'd be particularly interested in knowing if there's any other in 2022 and 2023?
No. I mean there, again, we have 400-something hospitals. So I could be wrong, but there's certainly nothing that would even begin to move the needle other than Prime in '22. And I don't think there's anything different for '23 or for several years following.
Our next question comes from John Pawlowski with Green Street.
A few questions on recent dispositions. The Capital Medical Center asset and the Western Plains Medical Complex. Could you share the NOI cap rate on those sales?
The sale cap rate, I mean, I don't have that at my fingertips, but – and I'm not going to guess. But that was a very both of them are very attractive, particularly the capital, both of them were very attractive, significant compression below what we were earning.
Okay. Is there anything as -- so ostensibly these are core assets at one point and they shifted towards the physician bucket. Other than price, what else changed in terms of the outlook of these assets over time to warrant a sale?
Well, both of them were part of master leases. And we are always evaluating a large portfolio, typically the master leases are working with and trying to accommodate the needs of our tenants. We like to be a good landlord, which is one reason we've been able to grow so fast, I think.
There's nothing specific. In other words, we didn't go through the portfolio and say that one no longer meets our investment criteria. It is for the most part, as our tenant, our large master lessees, evolve their own portfolio that we try to be helpful and usually always, frankly, it's very helpful for us at the same time.
Okay. Makes sense. Last one for me. I may have misheard it in the beginning remarks, Steve, the impairment or the write-off of the mortgage loan. Can you provide some context of why it went south?
So this is the Watsonville property, I assume you're talking about. This is in Santa Cruz, California. We bought this property right before COVID hit. So the new operators were just operational with it in 2020. One of the problems with the funds, grants that hospitals received during COVID was that it was based on operations in 2019. So this hospital operator got very little to no grants, federal grants from COVID or Medicare advances from COVID.
So that is the primary reason, coupled with some other just market issues, the local community badly wanted to reacquire the facility through their hospital local authority, and that's where we are right now.
Our next question comes from Vikram Malhotra with Mizuho.
Maybe just stepping back, post the Macquarie JV and the value at which it was done, have you had any conversations, even maybe somewhat unsolicited with other large managers just interested in the hospital space? And maybe just give your thoughts more about the underlying value of certain pieces of the portfolio after sort of doing the JV with Macquarie.
So when we announced the Macquarie transaction several months ago, I think even at that time, we announced -- we talked about the high level of interest in from other potential partners that had been going on for a while. We actually did begin a formal process with the Massachusetts properties and you got a tremendous amount of interest and jump pretty quickly because we saw Macquarie as being a good eager partner, that has only increased.
We're certainly not in a position -- haven't begun to market any other portfolio. But we think we've got a tremendous amount of opportunity, particularly across the longer term to continue to acquire assets the way, frankly, we think we only are able to do, mature those assets, season them work with the operators, just like I just mentioned, to improve the portfolio. And then it becomes very, very valuable. So we think that will play an important role going forward for us.
And then just on the comment you made initially just sort of the more global nature now, has there been any change in the competition, especially post some of these larger deals and whether it's in the U.S. or any of your other global markets and just new players looking at this space?
No, not in the near recent past, there hasn't. The issue has been for a while, just as I mentioned a second ago, there's a tremendous amount of interest, especially coming out of COVID, it's only grown by, what I'll call, the lack of a better term, passive investors. Investors who see the sustainability, see the inflation protection, see the infrastructure-like nature of the assets and want to capture that long-term cash flow, but they recognize it does take an extraordinary level of expertise that very few REITs that compete with us have because just naturally, we built the company with hospital people.
So until we see competition that is built with hospital people who really have the capability of underwriting very complex hospital systems and governments and so forth, we don't think the competitive environment is going to change too much.
Okay. Great. And then just last one. On the benefit from the -- from inflation on the CPI link, is there -- can you just maybe remind us, is that -- is the whole benefit accruing this year? Is there any kind of spillover into next year from what we've seen in the inflation environment so far?
No. Again, most of our U.S. leases are pretty standard. We measure inflation here, and it takes effect on January 1 and then, of course, we do it again next year. So -- but inflation, the inflation escalation starts -- whether it's U.S. or not, it starts on a date specific, usually January 1. But there's no carryover. It doesn't come in over time.
I will point out though that on January 1, in rent raises and then in compounds for the next 30 or however many years that the property is under lease, so it is a very powerful component of our business story
Our next question comes from Andrew Rosivach with Wolfe Research.
Most of my questions have been answered. And there’s just 1 question. Because you guys have gotten so much more international since I covered you, should we be thinking about currency at all? Did that impact your bound rate?
Currency, you said?
Yes.
Well, yes, I mean we're -- yes, we're always thinking about currency, of course. And you may remember, Andrew, I mean, when we did the first deed, which really set the pattern for us. Back in 2013, we bought a portfolio that became median, and we used 100% debt financing in euros. That was a German portfolio. And that's the pattern we tried to follow when we have followed to a great extent. And that protects us from currency volatility, at least on the asset side.
On the earnings side, that's a little bit trickier. But at least through now, we're not bringing earnings home. So we are retaining earnings in the local currency and reinvesting in the local currency. So even that is not an issue for us. But it's -- I'll take the time to also mention that because we do think that way because when we buy away from the U.S., we try to use local currency in the form of long-term very low-rate debt.
And over the period from about 2017 through 2020, a significant portion of our acquisitions were overseas. That's why leverage temporarily got higher than it normally would if we were used -- if we were buying only in the U.S. where we use a lot more equity rather than debt. So that's our outlook on currency for the most part. It's been very successful so far, and we don't see any changes.
Because I was just -- do you -- because I understand that the capital hedge, the -- do you -- obviously, you're buying a higher yield than where the debt is at, do you hedge the income on top of that? Or would that be exposed to currency moves?
No, we don't. It would be exposed to currency moves. And of course, the income is income stream over decades. So obviously, you can't hedge that. At best, you can hedge out maybe 3 years, and that's not always the case, frankly. And again, you only need to do it or you only need to consider it if we bring -- if we're changing the currency. If we're earning, say, in euros or pound sterling and yet we want to bring that home into dollars, that's when you have exposure to a currency issue. We just don't have that yet.
And so did that -- when you were doing your run rate walk, did currency have any impact to it?
No.
Okay. And then one other -- Watsonville, I know it was a small deal, but did that impact your run rate calculation at all?
No, because that doesn't flow through FFO anyway.
Sorry, go ahead. Do not mean to interrupt.
Well, I was just going to say, we're not earning any more on that $31 million, that obviously, the earnings on the principal does flow through FFO. I think that has an impact of less than $1 million.
Yes, that's what I thought it was a small number on your size.
Our next question comes from Derek Johnston with Deutsche Bank.
I'm sorry if I missed this, but on elevated labor costs, so we know wage inflation is here to stay, but some expense components, notably high agency utilization by health systems, whether it's due to COVID call-outs, shortages or even isolation guidelines, they can be multiples of normal wages. So Ed, do your operators have a time frame when they believe overall labor expenses will retract back to a normal run rate?
Well, not exactly, but I think they think that the third quarter and the fourth quarter and a tiny bit of the first quarter is the peak, and then it starts going back to normal levels after that.
So you would think by June of this year, we should be seeing more normalized overall labor expense at health systems?
Well, that's certainly [Indiscernible] unless we see another variant come through.
Well, I'm with you there. That's it for me. My others have been answered.
Our next question comes from Michael Carroll with RBC Capital Markets.
I just want to follow up on the behavioral investments. And we're looking at growing in behavioral, I guess, mainly with the Priory investment in the U.K. I mean is that country and the behavioral product big enough for MPW to partner with another operator? Or will most of your investments focus to kind of growing a Priory?
Well, sadly, it's not big enough anywhere. Here in the U.S., we have a very, very fragmented market. We've wanted to be in the behavioral health for a very long time. It's been very hard to buy scale. We did that, obviously with Springstone. We obviously have been able to do it with Priory. There really was only one other operator that had any size, Ramsay acquired it recently. And so there really isn't any size left in the U.K. There will be small additions to it, but there aren't any additional really big investments.
That concludes today's question-and-answer session. I'd like to turn the call back to Ed Aldag for closing remarks.
Well, thank you very much. And again, thank all of you for listening in. If you have any additional questions, please don't hesitate to call. Thank you very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.