Healthpeak Properties Inc (PEAK) 2002 Q2 法說會逐字稿

Please stand by, the conference is about to begin. Good day everyone, and welcome to the Health Care Property Investors' second quarter 2002 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Kenneth Roath. Please go ahead sir.

Thank you very much. And welcome to all of the people who are on the conference call today. We will commence after first an announcement that has to be read by our legal counsel regarding forward-looking statement issues.

Thanks Ken. Good morning. Some of the statements made during this conference call will contain forward-looking statements, subject to risks and uncertainties, which are described from time to time in press releases and SEC reports filed by the company. Forward-looking statements reflect the company's good faith belief and best judgment based upon the current information, but they are not guarantees of future performance. Projections of earnings and FFO may not be updated until the next announcement of earnings, and events prior to the next announcement could render the expectations fail.

Thank you very much Ed. Now we will commence with the report on the company's operations for the quarter. We are very pleased to announce that we achieved record funds from operations for the company, exceeding the consensus estimate by about two cents. It was a very good quarter, a lot of things came together for the company, contributing to those, to those good results. We were particularly benefited by a very favorable debt issuance early in the quarter, bringing in the spread to treasuries considerably from where our public debt had been trading, yielding us an all in six and three-quarter percent cost of ten-year financing.

The transaction was extremely well received. We announced the transaction and within three hours there was a book, or there were orders for over a billion dollars worth of the bond. We only issued $250 million in bond. We were extremely pleased by the way it went. We're pleased by the reception that we got in the marketplace, and that only tends to support the, you know, position that the company has in the marketplace.

Earlier you may recall this year that Standard and Poor's had removed the negative outlook on the company, so we were offering a triple B plus rating. A rating that incidentally we have had with Standard and Poor's now for 16 years. We do have the highest bond rating of any of the health care REITS, and it has been the highest for the entire 16 years. Additionally in the quarter we've benefited by a very good volume of acquisitions, completed during the quarter. There were about 70 million, bringing the year to date total to about 188 million.

During the quarter we looked at a $1.7 billion in new investment opportunites. That compares with $1.9 billion in the first quarter, so as you can see that the volume of potential investment opportunities remains extremely robust.

Year-to-date the acquisitions that we have completed, our breakdown is as follows: 21 percent long-term care facilities, 29 percent retirement living communities, 29 percent medical office buildings and 19 percent assisted living facilities.

The backlog at this point in time also looks outstanding. We have commitments for a little more than $60 million in transactions. We have a couple of construction transactions that will be completed later on in this year, totaling another 40 million, so that's about 100 million, but the backlog in addition to that is very substantial at this point in time, and we believe that the acquisition volume that we have set forth for the year will be well in excess of the number that we had previously indicated.

Now, I must caution you at the same time acquisitions are very delicate transactions and you can often have a transaction that collapses at the very last moment, so I'd caution you on that respect.

However, I want to say that the volume that we have, the backlog that we have, the commitment that we have all lead us to believe that we will be in very good shape for the year.

There were a number of other issues during the quarter regarding accounting. I want to first of all say in terms of accounting we have excellent supplemental financial data that we release with our financial statements. We think we're a leader in that area and we would encourage all investors to look at the supplemental financial data.

There is one other item I want to draw your attention to. We, along with a few other companies, have adopted the expensing of stock options, which is discussed in our press release and you can read about it there. We want to be on the forefront in these things and we believe that it is a prudent thing to do at this point in time, and so we have adopted that and we're getting that behind us at this point in time.

That concludes my comments right now for the present time. Jim Reynolds will go into more detail on the financial statements and other issues.

Thank you, Ken.

As you know, we achieved a record $0.90 per share in FFO for the quarter. In terms of our guidance looking forward, we expect to be around $0.87 for the third quarter. One of the things that will cause us to come down a couple of cents is the way that we record rents. Our SAV101 rents are actually a couple cents less in the third quarter than they are on the second quarter. So the comparison to the prior year will still be strong.

Then looking to the fourth quarter we think we'll have an exceptional fourth quarter because of the acquisition levels that we expect and the low cost of financing those acquisitions.

Our annual guidance number remains unchanged in the range of 3.43 per share to per share.

Turning to the financing environment, which Ken has already stated has been excellent, it could really refer to nothing other than exceptionally strong. As you know, in January we paid off about $100 million note at 7.05 percent. That was refinanced 60 basis points lower - at least at the coupon level - with the transaction that Ken talked about for $250 million of ten-year notes.

That transaction also extended our average maturities from 3.6 years to 5.2 years, which we think is a very welcomed development. We also expect to further extend maturities in the second half of the year by concluding a new multiyear bank agreement.

If you look back a year, we were in a position where we had just done a fairly significant stock transaction. We raised in stock. And we were under-leveraged at that point in time. Since then, we've done a good job at putting some of the leverage back on the books, and our debt balances are actually $190 million higher than they were just a year ago.

But the interesting thing is that the cost of carrying that debt is lower, on a quarterly basis, by more than $1 million. The primary driver in that has been higher average bank borrowings at lower rates, but also a lower cost of long-term debt. And to some extent, we're carrying some construction in progress where we capital interest, about $25 million of that at this point. Today, our bank line stands at $86 million outstanding, at a rate of 2.54 percent.

Looking forward through the middle of 2003, we have opportunities to refinance $45 million in debt maturities outside the bank line. Our senior notes, primarily, but a couple of mortgages as well. The average rate on those facilities is about 7.4 percent. So we think we could achieve today at least a one percent gain on refinancing those, were we to do it today.

We also mentioned in the press release that our dividend reinvestment program continues to do quite well, in spite of the fact that the redemptions that we see in the rest of the market. We raised $5.7 million in the program just this month, which was close to what we achieved in the previous month.

Turning to receivables for a moment, our receivables are very clean. They stand at the level they have stood at for each of the last two quarters, about $21 million net. We have over a $5 million reserve against those receivables. We reported only $450,000 of straight-line rent in the quarter, and our straight-line receivable balance, which is part of that $21 million, is $4.2 million.

Turning to the subject of professional liability insurance, which is a hot topic of conversation today because of the press release within the last week and the larger provision that they took, we've refocused on that question. This is not a new issue. Nursing home operators and assisted-living operators have been dealing with higher insurance costs for at least a couple of years now.

Our nursing home portfolio aggregates 27 percent of our portfolio overall. If you aggregate the states that talked about in their press release, and added Texas, which I don't think they operate in, but it has some insurance problems, we have 45 facilities and they aggregate less than six percent of our total revenues.

We've taken a look at what our nursing home operators incur in the way of insurance costs, and they have a wide range of costs measured on a per bed basis. Five to $900 per bed, per year, would be for some of the smaller operators, and that's really the only common point we've been able to figure out, is some of the smaller operators achieve lower costs of insurance, and those are generally incurred on Western states, where they're doing business, and to some extent, Midwestern states.

Our assisted living operators incur about five to $600 per unit per year. In some cases, the nursing home operators incur much more than that. In a limited number of situations, we have worked with operators to reduce their insurance requirements. In part this is because insurance companies have only offered uneconomic transactions in some cases. In other cases, we didn't want to be a target for the plaintiffs' bar with too high a level of insurance coverage, and we've helped in some of those situations. There are only a handful of properties where our operators have no insurance coverage, and in those cases, those facilities are going very poorly and it's probably the least of their problems. We're not recording any rent on those facilities, on those few facilities.

Turning to reimbursement for nursing homes, little has changed since we spoke with you last quarter. We still expect that the state Medicaid reimbursement rates will be up in the two to three percent range overall, for our largest states. And that the Medicare reimbursement cliff that is coming up on October 1st, could range in a rate cut of between zero and five percent. Should the nursing home operators get a cut in their reimbursement, we believe that they will be able to lower some of their vendor costs, and perhaps some of their payroll costs.

The lease coverage ratios on all of our operating sectors have improved in the last quarter. In particular we're buoyed by the nursing home improvements. On average there I would say our rents are now below market. That gives us a cushion with the cliff reimbursement coming up, but we've also seen improvement in the assisted living coverages, the acute care hospitals and elsewhere.

In the medical office-building portfolio, we had $2 million of NOI growth over the same quarter last year. That was primarily due to net acquisitions, but it also included a net internal growth of about 300,000. Our occupancy remains at 91 percent, we expect to go to 92 percent by the end of the year. The same store statistics are somewhat better on 84 buildings through six months, we are up 800,000 over the same six months last year. That is due to occupancy improvements in primarily the San Diego market, but also Indianapolis.

I was quite positive last quarter with respect to our vacant facilities, and the progress I thought we would make. Unfortunately we've only closed one of the buildings since then. But we have three additional facilities in escrow, we think a fourth is going into escrow here shortly. And the reason that is significant is that once those facilities are sold and the funds reinvested we'll have $2 million more in an ally in the company. So we expect to make better progress in this quarter.

That concludes my comments. Back to you, Ken.

OK. Thank you, Jim.

Just in conclusion, I would like to make the following comment again: We think the backlog is really good going forward. The biggest sector of that backlog would be assisted living. The balance of it is spread between acute care hospitals, MOBs, retirement living centers, biotech and wellness centers. There's a broad spectrum. However, note that there are not any nursing homes in that backlog that we're looking at right now. I want to say that does not mean we won't acquire nursing homes; it just means that the things that we're looking at right now, it just happens that they're not in that category.

I think the backlog is such that we should very easily exceed our goal for the year, and on that basis I think we will have a very easy time achieving our numbers for the year.

With that, that concludes our remarks and we'll take questions.

Thank you, sir.

Today's question and answer session will be conducted electronically. If you'd like to signal to ask a question, please press the star key followed by the digit one on your touchtone phone. Once again, that is star-1 for questions. We'll pause for just a moment to give everyone a chance to signal.

And our first question comes from Doug Simpson with Merrill Lynch.

Thanks. Good morning, everybody.

Good morning, Doug.

I just had a question, we've heard about some of the capacity issues that we're seeing in the hospital industry and I was just wondering if you could talk a little bit about the development opportunities you're seeing there. Obviously you guys have that one facility, the $20 million short stay hospital and MOB and I was just wondering if you could talk about that market opportunity a little?

Well, Doug, the acute care hospital business is very difficult for us to find opportunities and we only have one property at the present time. We focus on trying to acquire properties in that segment but they're just difficult to come by. It's very difficult to buy an existing facility on a sale/lease back because all the good hospitals aren't for sale and all the ones that might be for sale you don't want or they involve total conversions or other things like that, and so it's too difficult.

Again, all I can say is it's an area of business we like, we're very interested in They're probably our best performing properties in our portfolio are the acute care hospitals, but they're very difficult to obtain.

Doug, this is Jim Reynolds. I think we will probably have some success in doing some short stay, overnight ambulatory care type facilities that may be matched with some medical office buildings at the same time. We have one development situation that we think might close soon and that might be followed on with three or four per year with that particular customer and we're talking to other customers. So I think that's a way to perhaps play in the same environment and some of those facilities are going to be joint ventured with the hospital systems and doctors, so they should be excellent transactions.

And then you had mentioned that the deals that you're seeing very strong but it went from 1.9 down to 1.7 and, Ken, you had mentioned that you're really not looking at nursing homes at this point or you're not seeing as many of them. Can we attribute that to the snip-clip and people wanting to get visibility on that, and could we expect in the fourth quarter a big increase in that volume number?

I would think that that would be a proper assumption, that the fourth quarter probably come loose. The fact that it's gone, by the way, our volume that we've looked at dropped from to , at those levels, even at 1.7, those are record levels for us to be looking at. Those are huge numbers of investment opportunities that we are looking at. So I'm not the least bit concerned that it dropped a little bit.

OK, great. Thanks a lot.

Thank you.

Our next question comes from with Prudential Securities.

Hello.

Hello, , how are you?

Hello, .

Good, how's it going?

Good, thank you.

A few questions today. Could you indicate the yield on your acquisitions for the quarter?

Yeah, they were 10 - 11.1 percent.

Was that for six months, Ken, or was that for the quarter?

That's for the quarter.

That was for the quarter - OK. It looks like the amount of percent you recorded in the quarter went up about $400,000 to $2.4 million. Is that timing related or was that an increase?

Was it what related?

Was it just timing related? It looked like that number trended up a bit.

Well, I do know that we have had some strong situations and some good internal growth in percentage . So I don't think it's just timing.

belWas it what related?

Was it just timing related? It looked like that number trended up a bit.

Well, I do know that we have had some strong situations and some good internal growth in percentage . So I don't think it's just timing.

OK. So you are seeing an increase in that account?

Yes.

Moving to your problem nursing home area, the number in that category went from 27 to 23, but the lower rental payments went down from $1.4 million , at least in the sequential comparison. Can you just give me an indication of why you added to that and also why the, you know, rental recess went down?

Well in terms - , you're talking about what we talked about in the narrative in terms of nursing homes?

Yeah, it looks like you added to that account.

Yeah. Well, I mean we're just rolling that discussion forward each quarter. And so you're looking at a different facility count and a different period that you're comparing. I mean the positive aspect of it is that we're now seeing things coming out of the troth, and we're getting increasing revenues on some of that.

So I think what you're going to see is that, given a little more time, that negative comparison is going to drop off quite quickly and eventually will get to where we have a positive comparison.

And then is there any reason in particular why the actual number went up, Jim?

The number of facilities?

Yeah. Any particular ?

No, there's no particular . Each be monitored and things come out and - or go in. So it's an assessment done each quarter looking back. And then you look at the numbers backwards 12 months for those properties. So it's a function of what was the rent that you got from the facility a year ago. And when , then the numbers change.

OK. And then, finally, moving on to one hospital lease rental reset, was that in - had you previously indicated that number would, in a schedule for 2004, you had indicated you expected resets of four million. Is this number in that 2004 number, and you just moved it forward to this year?

That is, that is correct. We, you know, only because we just entered into negotiations with them. We had not anticipated it occurring at this point in time. I want to make sure that you understand that that was a transaction entered into by American Health Properties, it was part of that acquisition, of that entity. We were aware of it when we acquired the company, and were anticipating the roll down in rent in 2004. This transaction just extends the lease all the way out to 2017, I believe it is, and at a lower rate, but it's really a market rate for that property. The rents on that property were way above market when we acquired it, we knew that.

OK. OK, good. That's all my questions today. Thanks.

Next we'll go to with Bank of America.

Good afternoon.

Hello .

Two quick questions. One is, I just want to clarify the options expense for the quarter. You put the full six months in this quarter, and just clarify the amount of that, and that's in G&A I assume?

Yes. It's $308,000 and it was all in the quarter.

Well that's also the full ...

Oh I'm sorry, for the year.

For the year it's going to be 308,000. We took 154,000 in six months charge all in the second quarter. And yes it's in G&A.

So that's in G&A. In the next two quarters we ought to see then 70 something a quarter?

Correct, yes.

That's how that'll flow through. OK, and then just on the medical mal issue, I appreciate the color on the few properties where there's no coverage. But I wanted to get back to some of the, some of your other operators. What sort of representations or diligence is there that your existing operators have been fully reserving for their claims experienced? Do you have access to actuarial reports or how do you monitor that?

Well, what we - we don't get in and re-audit their books. We leave that to their public accountants. But we do make sure that we have insurance certificates that show that they've got the insurance.

That has some adequacy opinion from an actuarial firm?

Well, we have our own standards, and as, and we determine those in consultation with our insurance advisors. And to the extent that they have a problem with those levels, they come and talk to us about whether a reduction is warranted or not.

OK. OK, thank you.

Just a reminder, it was star one for questions. Next we'll go to with Legg Mason.

Yes, good afternoon everyone. A couple quick questions. You sound very comfortable in the acquisition front, as far as hitting the $400 million number. Can you give us an idea about the property types, obviously not skilled nursing, but can you give us an idea, you know, why such the high comfort level from here?

Well the high comfort level is because we've been looking at so many different properties, and we have a lot in-house that we're working on right this minute. We have commitments for about 60 million that are already signed, but in addition to that we have a few hundred million dollars worth of projects that we're working on at the present time, at least a couple hundred million let's say.

The biggest sector is assisted living and then the balance of it is just kind of split between acute care, MOBs, retirement living centers, biotech and wellness centers, so it's a little bit of everything.

Assisted living is probably close to 40 percent of what we're looking at.

OK. And with those assisted living transactions, are they sort of your conventional sell/lease back? Are there any unique types of transactions?

Having been in this business 17 years there is no cookie cutter deal. Every deal is different. But, no, basically they are traditional investments. We see that coverage ratios are improving in that area. We see that occupancy is improving in that segment of business and we are looking at those kinds of properties. It affords us an opportunity to acquire newer properties, properties that are all private pay, and those are obviously a whole great interest for us.

OK. And then I guess the next question is feeling that the pipeline is so strong on the investment front, why not raise earnings guidance for the year?

We would like to be just comfortable where it is. We're happy here. Let's wait and see how things come. Remember, I did mention earlier in the conversation that although you have a lot of things you're working on, transactions in real estate aren't done until they're closed, so you don't know.

And having said that, I will say that I think there's a very good chance that we will do extremely well for the year but I'm not comfortable at this point in time in raising the bar.

OK. Thank you.

This concludes today's question and answer session. I'd now like to turn the conference back over to Mr. Roath for any additional or closing remarks.

Well, we thank everybody for being here today and we are certainly hopeful for our prospects for the next quarter and the balance of the year and that concludes our remarks. Thank you.

This does conclude today's conference. You may now disconnect.