Healthpeak Properties Inc (DOC) 2014 Q4 法說會逐字稿

Greetings and welcome to the Physicians Realty Trust's fourth-quarter and year-end 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Jeff Theiler, Chief Financial Officer for Physicians Realty Trust. Thank you, you may begin.

Thank you. Good morning and welcome to the Physicians Realty Trust's fourth-quarter 2014 conference call and audio webcast. With me today are John Thomas, Chief Executive Officer, and John Lucey, Principal Accounting and Reporting Officer.

During this call John Thomas will provide a Company update, an overview of recent transactions and our strategic focus. Then I will review the financial results for the fourth quarter and our thoughts for 2015. Following that we will open the call for questions.

I'd like to remind you that today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 that can be identified by words such as believes, expects, anticipates, plans, projects, seeks and similar expressions and involve numerous risks and uncertainties.

The Company's actual results could differ materially from those anticipated or implied in such forward-looking statements as a result of certain factors as set forth in the Company's filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to the Company's CEO, John Thomas. John.

Good morning. Physicians Realty Trust established a foundation for success in healthcare real estate in 2014 and we capped it off with another strong fourth quarter of investments and growth in our cash flow. During the fourth quarter, we completed $104.8 million of investments, highlighted by a number of investments with Pinnacle Health in Pennsylvania, the Carle Clinic Foundation in Illinois, and a hospital MOB monetization with Columbus Regional Health in Columbus, Georgia.

2014 we completed $565 million worth of investments with leading healthcare providers in the communities they serve. Bringing our total real estate assets to $819 million as of December 31, 2014. We have since closed on another $172 million of investments in very high-quality medical office facilities as of February 27, 2015, and now own just over $990 million of medical real estate. With over $100 million of additional assets under a binding purchase agreement, we expect to exceed more than $1.1 billion in gross real estate investments in the very near future.

I would also like to highlight the growth in our portfolio-wide occupancy rate which increased to 94.6% by December 31, 2014. Both with the acquisition of high-quality, well-occupied facilities but also through the active internalization of property management and leasing, led by Mark Theine, our Senior Vice President of Asset Management.

With the recent 2015 investments, we now have more than 3.5 million square feet of medical office and outpatient care facilities, and approaching a critical mass for cost effective property and asset management. This has enabled us to strengthen our normalized funds from operations as well as pay a fourth-quarter dividend to our shareholders of $0.225 per share, paid on February 6, 2015.

As we move into 2015, we are excited about the opportunities we see in front of us. We have a strong balance sheet with significant capital available in light of our $400 million unsecured line of credit and the very successful equity offering in January which raised almost $300 million in net proceeds. This will provide us with the fire power we need to capitalize on our growing pipeline in high-quality assets.

With our substantial growth, we have been prudent stewards of our resources but have made investments in people, people we view as DOC eligible to support our accounting and property management, underwriting and investment teams. We are pleased that Brad Page has joined us recently as Senior Vice President and General Counsel.

Brad and his legal assistant, Jill Marinello, have been so critical to the success of DOC from the beginning and we are honored that they have moved in-house which will not only save us cost but make us even more efficient and effective in identifying, underwriting, closing and managing our medical facilities and our organization overall.

John Sweet, our Founder and Executive Vice President and Chief Investment Officer, has recently agreed to extend his employment through the end of 2016, and we will be working to identify his successor later this year. We are so grateful to John and his tremendous success in sourcing and closing so many fantastic new physician relationship investments in 2014 and already in this year.

I want to be as clear as possible about our current status and the direction and future of this Company. We just completed our annual three-day strategic planning discussion with our Board led by DOC's Chairman of the Board, Governor Tommy Thompson. Physicians Realty Trust trustees reaffirmed our long-term strategic plan to build a visionary organization to stand the test of time.

We have a unique culture and talents as we know healthcare and focus on the real estate needs of high-quality physicians and providers as they serve their patients. We believe investments consistent with that core ideology will allow us to make attractive returns on invested capital relative to our cost of capital and thus deliver outstanding total shareholder returns.

While we've had tremendous success in 2014, we believe we can do better and will focus on getting better with everything we do, finding more and higher quality healthcare facilities, more physician and provider relationships who meet our investment criteria and be excellent stewards of our shareholders and stakeholders capital.

We didn't achieve everything we wanted in 2014 but we continue to have a disciplined focus on three fundamentally important strategic philosophies. One, the dividend should be covered by AFFO, that is real investments in our target assets classes. And it's very important to keep that policy in mind as we evaluate short- and long-term investment opportunities as well as balance sheet management. We're getting closer as you can see to achieving this goal but we're not there yet, but we will be soon.

Number two, we are healthcare people and as such we continue to differentiate ourselves, especially in our ability to evaluate, select and then work with our clients and partners. And those that are expected to pay us rent, to help them be more successful and thus provide greater value to our shareholders.

And number three, we should be mindful of our founding investors and our current shareholders and the opportunity to attract future long-term investors as we build and grow this visionary Company. As a REIT, we are mindful of the short- and long-term tools to fuel and grow this organization and we will select the tools available, mindful of our core ideology and strategic philosophy.

While the timing is not certain, now that we are about to surpass the $1 billion mark in real estate assets and market capitalization, we expect to pursue an investment-grade rating in 2015, and if successful, begin the transformation to a long-term capital structure. We also believe for now that the focus on medical office and outpatient facilities is the most appropriate healthcare real estate asset class to achieve our plan and short- and long-term goals.

But as always, we will evaluate opportunities when appropriate for other potential real estate, healthcare real estate, but we don't expect that to occur in the foreseeable future. Thank you for taking the time to listen and speak with us today. I will now ask Jeff Theiler to review our financial results. Thank you.

Thank you, John. We had an extremely successful fourth quarter of 2014 which capped off a very exciting year. Our funds from operations, or FFO, for the fourth quarter of 2014 were $9.7 million, or $0.19 per diluted share. Our normalized FFO which added back $1.6 million of acquisition expenses and some other small normalizing adjustments were $11.3 million, or $0.22 per diluted share, an increase of 29% from the third quarter of 2014.

Normalized funds available for distribution, or FAD, which consists of normalized FFO adjusted for various non-cash items and recurring capital expenditures including tenant improvements and leasing commissions, were approximately $10.5 million, or $0.20 per diluted share.

We closed on approximately $105 million of real estate investments in the fourth quarter of 2014, at an average first year cash yield of 7.6%. These assets generated about $800,000 of cash net operating income in the fourth quarter. And if we had owned these assets for the entire quarter, they would have generated an additional $1.2 million.

We were able to find over $550 million of attractive investment opportunities in 2014, more than tripling our asset base, also at an average first year unlevered cash yield of 7.6%. Following up on that strong momentum, we have announced another $172 million of investments so far in 2015, highlighted by the $116 million Minnesota portfolio, one of our most exciting and certainly the largest acquisition in our Company's history.

The first year cash yield on acquisitions completed so far in 2015 is 6.8%, which is lower than our usual yield but reflective of the very high quality of assets we acquired, particularly the Minnesota portfolio, which we acquired for a 6.4% unlevered cash yield.

As usual, we have been very conservative with our balance sheet in the fourth quarter of last year and through the first part of 2015. We utilized our at-the-market, or ATM, facility for the first time in the fourth quarter, raising roughly $55 million. The majority of these proceeds were raised in conjunction with our inclusion into the Morgan Stanley REIT index which provided several days of very strong investor demand that we matched with issuance from our ATM.

We ended the year with $78 million of secured debt and $138 million drawn on the revolver, for a debt to enterprise value of 19% and net debt-to-adjusted EBITDA ratio of 3.6 times. In January of 2015, we raised an additional $4.2 million on the ATM, but more notably completed our fourth, follow-on equity offering, raising $311 million in gross proceeds. This offering funded our new acquisitions and enabled us to pay down the existing revolving credit facility.

All of our acquisition and funding decisions are made with the intention of creating a Company that is positioned for long-term success. One of the key pillars of that success is having a strong balance sheet and we will continue to keep that focus in 2015.

General and administrative costs for the quarter were $2.6 million overall and $2.0 million on a cash basis. We had seasonally low professional fees this quarter and expect these to tick up slightly going into 2015. We also recorded an impairment of $1.5 million in the fourth quarter which was a reduction in the book value of our vacant property in Lansing, Michigan. This property was part of the original Ziegler portfolio and was also vacant during the formation transactions associated with our IPO.

Finally, to touch on our expectations for 2015. Our FFO and FFO per share are dependent on investment volume, investment timing and assumptions for raising capital. Those factors are highly variable, making it extremely difficult to provide meaningful guidance.

However, based on the composition of our current investment pipeline, we are comfortable providing guidance of $500 million to $700 million of total investments for 2015. This guidance includes acquisitions already announced this year, and at the midpoint represents a modest increase over the investment volume we achieved last year. With that, I'll turn it back over to John.

Thank you. Melissa, we're ready for questions.

(Operator Instructions)

Our first question comes from the line of Craig Kucera with Wunderlich Securities.

Good quarter.

Looking at your pipeline, I just wanted to get some clarity; did you say you had another $100 million under contract currently, or did I hear that incorrectly?

Yes, we've got another $100 million under contract. We've announced most of the -- I think all of that, the biggest part of that's the Kennewick, Washington medical office building that's under construction. We expect that to close this summer. But we've got more than $25 million of other assets under contract.

Got it. And appreciate the color on the G&A. You mentioned some cost savings by bringing things inside, what's the current expectation this year for G&A? Is it still, I believe at last it was maybe in the $14 million plus, or is that still on track?

Yes, I think that's pretty consistent with what we're thinking this year. I'd say on a cash basis we're probably going to run around $2.5 million a quarter, maybe a touch higher. So on a cash basis, maybe $10 million to $11 million for 2015. And then probably another roughly $1 million a quarter for stock-based comp. So overall, $14 million to $15 million.

Okay. And then finally, and I'll jump back in the queue, in the past you guys have looked also at some of the specialty hospitals. I think the cap rates on those is an [ARPS] down to where MOB is. Is that still the situation today, and is that why you are saying you're continuing to go the path of going more for MOBs and outpatient facilities?

It's generally the case, but we do have a couple of I'd say exciting opportunities, early evaluation. But we're seeing a couple of specialty hospitals at appropriate pricing we may or may not pursue. But you'll see us pick one of those off here and there, but the bigger focus is on the outpatient care and medical office building.

Got it. All right, I'll jump back in the queue. Thanks.

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

Quick question on the acquisition guidance, expectations on pricing, should it be more consistent with the transactions completed year to date? I would imagine obviously that would be skewing it. Or should we expect the balance to move back up toward the levels we saw last year? What are we seeing?

I think if we found quality, the markets -- we've paid up for quality. And then Minnesota is a very high-quality portfolio and we felt both it necessary, but valuable to make that investment in the 6.4% cap rate range. But we see most of our pipelines between 6.5% and 7.5%. So 7% a good blended number. But we've got plenty of opportunities above 7%, but where we can find quality tends to be necessary to pay somewhere in the high 6%s.

Okay. And then in terms of financing the activity, obviously you've got quite a bit of powder for now, but given the anticipation of trying to move toward the investment grade rating this year, what are we thinking in terms of the financing strategy for the year?

When we raised our offering in January, we did that with the intention of not having to go back to the market in advance of going for an investment grade rating, and that's assuming our acquisitions as we see them today. So if those -- if we get a great opportunity, obviously, that thinking could change. But as we look at it, based on the pipeline that we see today, we think that we've got plenty of dry powder for that and can achieve all those acquisitions and still maintain a sensible leverage.

So you didn't think you'd have to go back to the market for the bulk of the year, is that the -- to get through this acquisition guidance you thought the January deal would hold you over through?

I think it's fair to say that we don't think we'd get -- go back to the market for the bulk of the year, that's true.

Okay. And does that mean -- so was the ATM turned off post that deal as well or -- I know there was a small amount of issuance, I think, just prior.

Yes, exactly. So there's a little bit of issuance prior to that deal and since that deal it's been turned off.

Okay, that makes sense. Lastly on the dividend, I know that first philosophy the opportunity to be covering the dividend with AFFO. What's the time frame looking like based on what's under contract going forward? Is this year-end opportunity?

I think by the end of the year we should be in good shape with that. Obviously we had the big equity raise in January, which pushes that out a little bit more than it looked last year, but certainly by year end, we think we'll be in good shape with our dividend coverage.

Great. Thank you.

Our next question comes from the line of Paul Morgan with MLV & Co.

Talking about acquisitions more broadly, when you were formed in a lot of your strategic outline, you gave yourself the flexibility to pursue deals outside the narrow core sub sectors that you've actually focused on. As you look into 2015 and over the next several quarters at least, do you see yourself still sticking to essentially the portfolio as it is now, or do you ever take a look at healthcare real estate outside those areas? And is that a longer term thing, or are you happy with where you're looking at right now?

Yes, Paul, thanks for the question, and I was trying to articulate that at the end of my comments, generally. We spent a lot of time at this Board meeting and strategic planning discussion with exactly that question. And I think long term we will broaden and diversify but right now outpatient care, medical office is really our core and we see tremendous opportunities to continue to grow in that space and think that's where our focus should remain. But we see what most people see in the other asset classes, as well, and we'll keep our eye on it and be opportunistic. But I wouldn't expect to see anything in the foreseeable future, but long term, probably.

So you don't really spend much time looking at deals outside that area right now at least?

No, just because we have more than we can process in medical office space. But all joking aside, that's where our core focus is, and we're going to stay focused on that.

Okay. And then you had some OP units in Indiana deal this quarter. How is the conversation with sellers going in terms of using your units as currency? Is that -- should we expect to see more of that in terms of what your near-term pipeline is over the course of the year?

I think it'll continue probably at the same pace. That's been a tremendous tool for us. So many of the sellers we're talking to are physicians that have self-developed their own facilities and enter into sale-leasebacks with us, and so they like the attractiveness of that tax deferral and they like the investment in DOC.

So lot of our early transactions were OPU transactions and those physicians have held onto their OPUs and the value that they've written and have been great referrals of other opportunities for us. So we continue to see that. But just it's really on a case-by-case basis.

We're probably getting a little more selective about where we offer it, but the Minnesota transaction had a component to -- with the OPUs. It was a brand-new building so it was an important part of the negotiation in convincing the seller there to go ahead and make the trade now.

Okay. And then lastly, what about development? Are there opportunities you're exploring with your existing tenants or with new projects? Is this something that we should look for this year?

So all of the above. I want to be very clear about that. We have several tenants who are -- need to expand their existing facilities and we are very engaged with them about doing that. So you'll see that development, which is six to nine months funding. They'll typically fund the construction and then we'll refund that and amend the lease when they're completed is the typical way we approach that.

In the future, you may see us, again, partnering with a developer and looking to fund completely preleased or highly preleased outpatient care facilities, but that's not a core part of our near-term strategy. The Kennewick Washington investment that's under contract is a development take-out where we have not -- we didn't put any capital into that. We're not at any development risk.

The developer there has got to complete the construction and the lease is -- it's 100% leased and the leases got to commence before we're obligated to close or would close. So you'll -- we'll see some of that as well. But 10% of our target investments are focused on those kind of opportunities. But we're not going to take development risk. We're not going to take speculative development at all.

Okay, great. Thanks.

Our next question comes from the line of Juan Sanabria with Bank of America.

I was hoping you could speak to the pipeline of opportunities on the acquisitions and what you're seeing in terms of small deals versus more medium or large size portfolio opportunities. And where your focus is and where you want to butter your bread on the deal front and this spread on the cap rates between those two opportunity sets.

Yes, thanks. Good morning, Juan, and thanks for the question.

I think the Minnesota investment, which we'll probably talk about for years to come because we're so excited about it, that was a rare portfolio of that quality and essentially brand-new real estate. The average age of those buildings, eight buildings, is less than three years old and one of them just went into service.

So those types of portfolios, if you will, are few and far between. But we continue to move up the minimum dollar amount of our transaction. But this is a $20 million to $25 million space. We've got plenty of $10 million investments we're evaluating, and several in the $25 million to $40 million. So that's the sweet spot for this space. But anything that gets larger, we'll look at and hopefully like Minnesota be somewhat off-market and have the opportunity to earn the opportunity.

Okay. So the focus remains on small portfolios and single asset transactions?

Yes. I guess in contrast to M&A or anything like that. We'll evaluate all the opportunities that are presented to us or that we find. But you'll continue to see us execute our core plan.

Okay, great.

And then a question for Jeff. So what would be the plan, or what's your current thinking when you eventually do get the investment grade, about what you'd like to do to the balance sheet?

Yes, I think as we think about building a long-term Company and having a stabilized balance sheet, in my mind that's terming out long-term fixed rate debt, so call it 10-year debt, and running leverage at probably the investment grade, lower investment grade level. So we want to continue to be very conservative.

But for us it's been a little bit unsatisfactory, because we've had a revolver and you have this growing the revolver and then paying it off and it's a little bit of a yo-yo leverage plan. So, I think it'll be a much better outcome to have long-term debt out there so you can have a little bit more stabilized capital structure and be able to plan your earnings, et cetera, a little bit better.

Okay.

And then I wanted to follow up on the ATM. So is the plan not to have to tap the ATM for the balance of the year to match fund acquisitions as you complete them over the course of the year or just --

I think we'll be flexible with that, and I think it's going to depend on the acquisition volume, when it comes. It's easier to predict the total for the entire year, but it's very difficult to predict when those opportunities are going to present themselves and which quarter. So I think we'll be flexible with the ATM. It's certainly not our plan to just have it running all year, but we'll certainly look at that. If match funding certain types of acquisitions makes sense, we might do that.

Okay, great. Thank you.

(Operator Instructions)

Our next question comes from the line of Jonathan Hughes with Raymond James.

Congratulations again on the quarter. I was wondering if you could comment on rent spread growth and the types of tenants you saw leasing space during the quarter? And then if you could talk about how you're thinking about rent spreads on the 2015 expirations? And granted you only have 3% and 4% of rents expiring this year and next, but any color there would be helpful.

I'm going to have Mark Theine answer that question. I will say while he's getting to the phone, last year's renewals averaged 2% or better and we continue to see the opportunity to move rents. We don't have much 2015 expirations, but Mark's been engaged in that. Mark, you got any comment?

Yes, absolutely. In 2015 we have just 3% of the portfolio renewing, so it's a very small slice of the portfolio. 31 leases in total. And as John just said, for 2014 we had about 2% spread on lease renewals and during the year we had 82% retention rate and again, very small percentage of the portfolio renewing. But we are seeing leases rolling up.

Yes, I think that what we didn't retain was practices that expanded and needed more space than we had available in the building. So we're really excited about the work Mark's doing and keeping tenants happy and -- but able to move rents at appropriate levels.

Okay. And then are you seeing any current tenants like in the multi-tenant MOBs looking to proactively renew leases or expand space, given the performance within the sector?

Absolutely. Yes, we've had quite a few tenants that were looking to proactively expand their lease now at this time.

Okay. And then one last one.

I know we've already talk a lot about acquisitions. But the $500 million to $700 million acquisition guidance, is that net of any dispositions? Do you anticipate recycling maybe some legacy properties in the new investments?

Yes, it -- we've announced the contract to sell one of the small facilities in Columbus, Ohio from the legacy portfolio. There's -- we don't have any active disposition plans, but it would not be a material amount of cash for that. So that's really a gross and net number, if you will.

Okay. All right. Thanks. Appreciate it.

Our next question comes from the line of Wilkes Graham with Compass Point.

John, one question. As your -- you continue to increase the acquisition guidance, you obviously have done a great job with the portfolio thus far. Can you give us some color on how many deals you end up turning down and what the mix of those assets that you pass on are between price and credit.

Yes, so we don't keep a formal tally of that, Wilkes, but I would tell you that most of the things we pass on are the widely-marketed auctions. I think every day there's a new medical office building or hospital that pops up on the Internet for sale and we rarely evaluate those. And that's probably 80%, or 70% of what we see.

So the remaining 20% to 30%, I think it turns into the quality of the physician or provider, the quality of the market that they're in, the quality of the real estate they're in that narrows the focus. Assets in existing markets where we're at or expansion opportunities with existing clients usually jumps to the top of our priority chain, and usually most successful repeat business or direct referrals from existing. So I'd say it's 10% to 20% of everything we see we pursue and we close on 75% of that, if it meets underwriting.

I think this was asked before, but are portfolios any more widely available than they were six months ago in terms of the product you see out there at returns you like?

It's about the same. And I think the key question is if the returns you like. There's some lower quality portfolios floating around, which we don't even sign the NDA and get the -- we know enough about the market, we don't spend time on those.

There's -- the Davis portfolio, Minneapolis was a very exciting find and surprise, frankly. I would say it's one of the best portfolios I've been involved in, in the last five years, and pretty proud of what we were able to accomplish in the past. But those are few and far between.

But the one thing about the Davis portfolio is Mark Davis, the developer of those, is taking the proceeds from the transaction and reloading with a number of projects he's already working on and starting to lease up for development later this year. We're going to have the opportunity in 2016, probably, to continue to grow that relationship in that market.

So long-winded answer to your question, but those are few and far between, but if they're out there, we see them. Some of the portfolios have traded in the last six months traded at prices that didn't make sense to us.

Well, thank you and good luck this year.

Thank you.

Thank you. Ladies and gentlemen, we've come to the end of our allowed time for questions. I'd like to turn the floor back over to Mr. Thomas for any closing remarks.

Again, thanks everybody for taking the time to join the call this morning. As you can probably tell from my voice, we're very excited about what we accomplished in 2014. We're very focused on building a great visionary Company here and continuing that growth in 2015. We just look forward to seeing you soon and talking with you in May. Thank you.

Thank you. This concludes today's teleconference, you may disconnect your lines at this time. Thank you for your participation.