Healthpeak Properties Inc (PEAK) 2003 Q3 法說會逐字稿

Good day everyone and welcome to the Health Care Property Investors third quarter 2003 earnings conference call. Today's call is being recorded.

At this time I would like to turn the call over to the Chief Executive Officer, Mr. James Flaherty III. Please go ahead, sir.

Thank you, operator, good afternoon and to our friends in the west good morning, and welcome to the third quarter earnings call for Health Care Property Investors. At this time I will ask our Senior Vice President and General Counsel, Ed Henning, to read the forward-looking statement.

Thanks, Jay.

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 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 stale.

I'll now turn the meeting back over to Jay.

Thank you, Ed.

In our program for today I'll review the developments for the recently completed quarter. Our Executive Vice President and Chief Financial Officer Jim Reynolds will then take you through the financial results and provide data on recent property acquisition efforts on our behalf. Prior to taking questions I will make comments concerning the current business environment. With respect to the most recently completed quarter I would like to organize my comments around our portfolio, our capital markets activity, and our people.

One, our portfolio. During August we renewed leases relating to six tenant hospitals for an additional five-year term through February of 2009. Subsequent to that renewal one of the hospitals, Three Rivers Healthcare System in Poplar Bluff, Missouri, was sold, and the related lease assigned by tenants to HMA, a BBB plus, A minus for Moody's and S & P credit.

This sale reduced to seven the hospitals owned by HCP and leased to tenants and reduce annual operating revenues running to tenants to approximately 15% of total company revenues. In September we restructured our investment in American Retirement Corp. By acquiring four continuing care retirement communities for a total purchase price of $163.5 million. On October 1st we announced the $575 million acquisition of MedCap Properties in conjunction with our GE joint venture, HCP Medical Office Portfolio. The majority of these 113 properties involved are located on hospital campus's owned and managed by HCA.

Let me turn to our capital market activity for the quarter. In July the company issued 1.4 million shares for an aggregate proceeds of $58 million. In August the company issued $100 million at 7.25% preferred stock. During the quarter the company redeemed all of its outstanding series A and series B preferred stock, aggregating $194.6 million. When combined with the series C preferred stock issue called in April of this year, HCP has now redeemed approximately $300 million of higher cost preferred stock during 2003.

Finally, interest in our drift program remains strong as approximately $36 million in gross proceeds were raised during the quarter at an average price of $42.06.

Three, our people. In September we announced the addition of Paul Gallagher as Executive Vice President of portfolio strategy. Paul joins us following a successful 15-year career with GE Real Estate and will focus the bulk of his information on our existing portfolio.

Also in the month of September we internalized the tax and tax planning function with the addition of Diane Wilson. Internalized the IT function with the addition of Sam Schorr, and filled our open controller position of the addition of David Swanberg.

Before turning the program over to Jim I'd like to make an observation. This is my first complete quarter as Chief Executive Officer of Health Care Property Investors. While we have a lot of work to do we are pleased with our recent accomplishments. As a new CEO you do not achieve, particularly right out of the box, this level of progress without a very strong management team, and a well-orchestrated transition process.

The results of this quarter can be traced directly back to a lot of hard work and planning that began following my arrival at the end of last year. In particular, I would like to acknowledge the contributions of Ken Roath who, with the board's support, initiated that management success process and has presided over an unusually effective transition period.

When the time comes for me to hand the reins off to my successor, if I can achieve a process half as good as the process that Ken has presided over that, will have been a very, very good thing for When the time comes for me to hand the reins off to my successor, if I can achieve a process half as good as the process that Ken has presided over that, will have been a very, very good thing for HCP's shareholders. At this point let me turn the program over to Jim Reynolds. 's shareholders. At this point let me turn the program over to Jim Reynolds.

Thank you, Jay.

Let's first talk about guidance. If you recall, our guidance early in the year was at $3.51 to $3.59 was the original range. Today in our earnings release you can see it's $3.25 to $3.27, but that's after .29 of preferred redemption charges. If you take the numbers before that, it's $3.54 to $3.56. As you know, that is strongly impacted by acquisitions, and the acquisitions at the end of September and early October, that Jay has already talked about, will have a significant impact on the numbers in the fourth quarter and in 2004.

Severance costs, some overlap in people, because of the MedCap group and also our own group that runs the medical office portfolios, and charges related to FAS 141 will have some negative impact on the fourth quarter and earnings. Turning to impact on the earnings transaction, it was $163.5 million purchase of four outstanding CCRC's.

In that transaction we got full credit for $50 million worth of messinine financing at the fully accretive 19.5% interest rate. We have also moved up the accrual rate on the remaining messinine debt which aggregates $76 million from 13.25% to 16.5%.

The total interest reserve adjustment in the third quarter was $4.7 million, or about .07 per share. The 16.5% accrual rate will add about a penny per share in the fourth quarter.

Looking at ARC we now have an improved balance sheet with that operator. We'll have an improved income statement going forward, as they amortize the large gains on these properties. Investors when they look at their -- at the results of ARC should again focus on their cash balances, improving occupancy, and we think also improving pricing power at their facilities. And, of course, their improved stock price.

Turning now to the GE joint venture, the venture itself was about $460 million in assets, one-third to HCP, two-thirds to GE. The NOI is expected to be at about between 9 and 9.25% of the acquisition price. The two most significant fees are the acquisition fee, which is paid once, when the transaction closes, and then ongoing management fees, and finally a promote if certain earnings hurdles are reached.

Market rates for acquisition and management fees ranged between 50 and 75 basis points. The acquisition fee will add about .02 per share in the fourth quarter of this year to our earnings. The management fee will add approximately .03 annually. The $50 million down REIT transaction has similar economics to the JV, but there are no relate fees.

Finally, with respect to the HCA property acquisitions that were embedded in both of these transactions, there were questions on our last call about the cost per square foot. Which are about $96 per square foot for the entire transaction.

We've recently bid on four different transactions in the marketplace for medical office buildings. Those transactions have ranged from $88 per square foot to over $200 per square foot. Also, if you take a look at our existing portfolio of medical office buildings, which aggregate about $150 per square foot, if you took out the high cost properties of California, Massachusetts, New York, and the research labs, it would reduce our overall portfolio cost to under $120 per square foot. But I think the overall comment we have about prices of medical office buildings is that they are generally supported by the in connection with of those portfolios, and there's a wide range of prices in the market today, and the market is very strong.

Turning to our operators, Jay has already made some comments about tenants. We do have the recent list of tenant issues summarized in our earnings release. Trailing 12-month rent coverage is down to 4.6 from 5.1 a year ago. We predicted that it would be coming down based on some of the comments the tenant had made to us.

Overall coverage is still excellent for the hospital. California is a little more weak. It's more impacted by the out-liar payment charges that have been discussed in their press release. Rent from tenant is basically flat.

Regarding HealthSouth, they had good news this last quarter, as they brought all of their unsecured bond holders current on interest. As you know, our rent payments are senior to those bond holders, so we think we're in good shape there. And all of our rents from HealthSouth are current.

On the nursing home front, you'll notice that our coverages, our cash flow coverage of rent, is slightly down. We think it's just a timing issue. It's down in part because our rents are higher on some of our recovering portfolios and also because of the Medicare rate increases which occurred beginning October 1st have not kicked into our historical numbers. Also, therapy caps are technically in effect. We don't expect that that will have any impact on our operators' operations for the fourth quarter, but it may have some impact next year. There is still a chance, though, that those therapy caps will be deferred again.

We also expect that there will be a Medicare rate increase again next year. With respect to Medicaid reimbursement, we think we could achieve up to 2% increases in our largest states in 2004.

Our managed medical office properties have been doing well on a same-store base. Our occupancies are up to 94% now, which is 1% higher than we previously reported to you. The 9-month NOI is up $1.2 million over the same nine months last year on a same-store basis.

Turning to capital markets activity, Jay has already covered it very completely. I would just say that our bank line today is $385 million outstanding at about 2%. We expect to reduce that balance through financing of our joint venture assets in the GE joint venture within the next couple of months at some time, and from potential property sales. Additionally, common stock issuance through our dividend reinvestment program continue at a high level and we may issue additional preferred stock or long-term debt in small quantities.

Turning now to the accounting issues which I wish were fewer, but there's been a fairly long list coming out, as you know from reading our recent press release, the FASB requested that we and others defer our earnings release until after they could suspend their accounting for minority interest in partnerships, which would have had us value our minority interest only at settlement value without the opportunity to write up our assets to their fair market values. They have now indefinitely deferred that criteria, and we don't expect any changes due to FAS 150.

With respect to FAS 141, which deals with purchase accounting, it has some effect on how we would account for our medical office building, office purchases. New intangible assets would have to be set up related to lessees in place, and this will reduce future income and FFO through amortization of this intangible.

Again, the SEC has taken a look at how the REIT world has accounted for impairments, and they're now differentiating between impairments and losses on sales of buildings. We think in most cases they're the same thing and should be treated similarly. But this issue is in a state of change and REIT is currently addressing it.

Finally, there's FIN 46, which deals with consolidation policies. Since we don't have much in the way of off-balance-sheet debt, we don't expect that this will have much impact on HCPI. With that I'd like to turn the program back to Jay.

Thanks, Jim. Let me close with a handful of unrelated observations.

Number one, demand for our company's securities remains very strong. A year ago we increased the availability under our bank line to approximately half a billion dollars. In February of this year we increased the size of a 12-year debt offering and then priced the issue at the lowest debt cost in HCP's history. In July of this year we increased the size of an equity offering and then twice that issue -- priced that issue at the highest price that any Comstock issue had been issued at during the company's history. In August we increased the size of preferred stock issue and priced that issue at the lowest cost of a preferred financing in the company's history. Year to date, our drip program has raised $94 million. This interest in our fixed income and equity securities has allowed HCP to refinance meaningful balance sheet amounts this year and to fund significant strategic initiatives. At its October 23rd board meeting HCP's board made the decision to continue the company's drip program and effective January 1st, 2004 reduce the discount on that program from 2% to 1%. Secondly, relative to my compensation, I've indicated to the chairman of our compensation committee to the extent that committee deems that I'm entitled to any bonus or incentive award that it is my intent to receive such awards solely in the form of HCP stock or the equivalent and none of that award in cash. Furthermore, I have notified the chair of our compensation committee that it is my intent for the foreseeable future to go out of pocket into personal funds to pay appropriate tax liabilities as my restricted share grants vest. I initiated this 100 prts retention policy two weeks ago as my initial restricted shares vested on the first anniversary of my employment at HCP.

Third, let me turn to the subject of earnings guidance. As Jim has previously discussed, last October we announced earnings guidance of $3.51 to $3.59 in FFO for 2003. As Jim has just indicated, X the .29 in redemption charges relate to preferred securities that we've redeemed earlier this year we have tightened our range to $3.54 to $3.56. With respect to 2004 guidance, we have now begun a detailed planning process that will culminate in a submission of the 2004 budget to our board at its January meeting.

It is our intent to communicate guidance in advance of that January board meeting, possibly before year end this year. However, I want to make it clear that the guidance we communicate will exclude any effect for property acquisitions and property dispositions. Rather, we will be updating the 2004 guidance for subsequent property acquisition and disposition activity on a quarterly basis as those transactions close.

Finally, a comment on the current operating environment. I think the most important observation is that the senior housing providers, including those in our portfolio, are getting healthier. One needs to only review the stock price performance of these concerns to confirm this point. The hospital sector is currently experiencing some challenges, most notably with the impact of increased bad debt expenses. In addition, tenants continue to encounter a series of company-specific matters. The healthcare property market remains very competitive, and I would speculate that it's senior housing providers continue to strengthen financially, REIT financing ought to become relatively less attractive to those companies. From HCP's standpoint, in addition to the planning process we are now in the midst of, we will be very focused internally in coming months on efforts to improve our working knowledge of our portfolio and getting our arms around a significant technology investment that will allow us to digitize our portfolio and improve our knowledge base and decision-making processes.

At this point, please let me stop and open the session up to questions.

Operator?

Thank you, gentlemen. Our question-and-answer session will be conducted electronically. If you would like to ask a question please press the star key followed by the digit 1 on your telephone. We will come to you in the order that you signal, and if you find that your question has been asked and answered before you could ask it, and would you like to remove yourself from the question roster, please firmly press the pound key. Also, if you're on a speakerphone, please make sure that your mute button is disengaged so that your signal can reach our equipment. Again, if you would like to ask a question, please the star key followed by 1. We will pause for just a moment to assemble the question roster.

And for our first question we go to Rich Anderson with Max Core Fin.

Thank you. The GE fees, could you just run through them real quick for me? I missed them. .02 for the years?

The acquisition fee will add .02 in the fourth quarter, the management fee is the run rate annually of about .03.

Okay. And you said they typically are -- combine 150 to 200 basis points, is that right?

I said market fees would range between 50 and 75 basis points.

For each of those.

For each of those, yeah.

Okay. What were the cap rates on the sale, the sales this past quarter?

Good question. I don't think I know off the top of my head. We made -- we did very well, because we booked gains, but I don't have that. I can call you back with that.

Okay.

With regard to the nursing home portfolio and the 1.1 times after management fee coverage, first a comment on where that is, where that stands right now, and second, what do you think the impact to the coverage could be, including the increase to the Medicare reimbursement rate?

My guess is that it could pop up a couple of points, should pop up a couple of points, so maybe a 1.1 to a 1.3 would be a guess.

Okay. With regard to the dividend, I know that you're reviewing it now on an annual basis, but I guess, is there any change to your sort of thought processes as it relates to the common dividend, now that you're sort of much more active investing externally? And putting your capital elsewhere?

You say we're more active investing externally?

Well, it seems that you've been very active, from an acquisitions standpoint. You've been more opportunistic with the direction that you've taken, and I was just wondering if that had any impact on your dividend policy on a go-forward basis.

I think we'll take all the factors into consideration. Certainly that's what the board will be looking at when it receives the detailed budget and it will assess the current operating environment and our previously stated objectives to, one, grow the dividend, and two, reduce the payout ratio. So I suspect that those will all be topics for further discussion at the board meeting at the end of January.

With regard to the redemption of the series B and the charge that you took during the third quarter, I guess, if you redeemed it in October, why does the charge come in the third quarter, or is that up to you? Is that like your discretion?

Well, seems like the rules don't leave anything to discretion these days, but the reason for taking it is because the -- it became a legal liability at the time that we told investors we were redeeming it about a month earlier.

I see. Okay. And my last question is just sort of more a conceptual, I guess. The opportunistic approach that, Jay, you've sort of led the charge on since your arrival. You're bringing on new management that by, I guess, purposely not heavily experienced in the healthcare area.

And I was wondering, you know, what you're doing to sort of protect against landmines, you know, when you're sort of taking on an opportunistic approach, what sort of effort are you taking to make sure, you know, you don't have something that really disappoints and you sort of miss the boat completely? We've seen that happen before with these so-called opportunistic strategies where all of a sudden things start to go wrong. I'm just wondering what protections you have in place considering the fact you're not bringing in people that are healthcare professionals, per se.

Well, first off, the strategic moves we've made have all been in the healthcare real estate arena, and you should not expect us to go outside the healthcare real estate arena, point one.

Point two, if you go back to our earnings call, the first earnings call we had this year, wherein we announced a restructuring of the organizational structure, I think the most significant part of that, or piece of that reorganization, directly addresses your concern, which is at the time we had the entire real-estate portfolio reporting up through the accounting department. In fact, the point person on that was some four levels removed from the chief executive officer. As part of that organizational restructuring, we took the portfolio, the real-estate portfolio, arguably the crown jewels of the company, and created a new reporting line reporting directly to the chief executive officer, then spent the better part of six months looking outside the company for someone to head that up. And what we were looking for there was someone that had a wealth of experience in terms of, you know, reviewing portfolio and making decisions on a day-to-day basis concerning our portfolio.

So I can tell you that the amount of attention, the amount of resources, the significance of the portfolio within our company today, on November 3rd, is materially higher than it was at the beginning of this year. And again, I'd reiterate that I think that was one of the very beneficial results of the kren ten yell experience that we went through about a year ago. It really heightened our need to be doing that on a much more proactive basis, and we are following suit on that regard.

Okay. Thank you.

We go next to A. J. Rice with Merrill Lynch.

Actually, it's David for A. J. quick question. Have you received any indication from HMA that they would like to buy the Poplar Bluff facility?

We have not.

Okay. And have there been any changes in the nursing home deal environment given the payment increase to nursing homes effective October 1?

I think, David, those were anticipated, so I don't think we'd want to convey that there's been some, you know, material overnight increase in the financial health of the nursing home operators. I think these sorts of events had been anticipated and had been baked into a lot of people's thought process, so this, without a doubt this sector has gotten healthier, it was healthier in the second quarter than the first quarter, healthier in the third quarter than it was in the second. As Jim indicated, we don't even have that captured in our data because our data typically lags a quarter. So we would continue to see the -- we'd continue to envision that the long-term care sector will strengthen some more.

And again, I speculated in my remarks that, in fact, as those companies' stock prices go up and their cost of capital goes down, the margin that, ought to probably make REIT financing alternatives less attractive because those folks will have the ability on their own to affect financings and subsequent transactions ostensibly without it. So those are my comments with respect to the impact on us and our industry.

All right. Thank you.

And there's a reminder, if you would like to ask a question, please firmly press the star key followed by the digit 1. We go next to Kerry Callahan with Goldman Sachs.

Good afternoon, guys. I wanted to just talk quickly about, Jay, you had talked once upon a time about diversifying the portfolio, getting into some other types of property that are non traditional to HCP. Can you give us an update on that? One of the areas you specifically mentioned was the nonprofit hospital sector.

Well, I think we continue to have, as an intermediate to long-term objective, the desire to further diversify our company. I have stated in these forums on many occasions that of all the fantastic things that Ken Roath did for this company, the most significant legacy that he has left this company with is a diversification across, to date, four very significant sectors of the healthcare arena.

I would very much like to create a fifth sector. We've said that publicly. The time frame we indicated for that was kind of '04, '05. We continue to look at any one of a number of candidates for that, and we haven't made any conclusions on that. Separate and apart from that, you know, the nonprofit sector we are in today about 5% of the company's revenues flow from the nonprofit sector. We would like that to increase.

That could come in a fifth concentration. It could come across, however, Kerry, all of our concentrations. So those two are different objectives, and we think consistent. I'm spending time with a nonprofit healthcare system tomorrow. My colleagues here in the room have spent many amounts of time with high quality folks in that arena.

Paul Gallagher who, is sitting to the left of me, made a presentation three weeks ago at a GE-sponsored event where you had the CFO's of the 50 largest healthcare's in the country as guests so. We continue to pursue and think about a fifth concentration for us, and we continue to pursue and focus on the nonprofit arena and you should not assume that those two objectives are mutually exclusive at all.

Okay. Great.

On the medical office portfolio, can you comment on the scope and the kinds of measures you can undertake to increase that initial yield beyond the 9%?

Well, again, you're talking about the MedCap transaction?

Yes.

Again, we closed that just a month ago. Most of the senior management are going to be down in Nashville with our partners down there next week going through detailed budget and planning processes for '04, and one of the things that we saw and our partners in Nashville absolutely agree with is that there's a good opportunity for us to raise those occupancy levels, and that is, in addition to continuing to be an active player in the property market for medical office buildings, that is, without a doubt, the top priority of our team.

Okay. Great. Thank you.

And, ladies and gentlemen, we have no further questions on our roster at this time. Therefore, Mr. Flaherty, I'll turn the conference back over to you for any closing remarks.

Thank you, operator, and thank you overbody for your interest in Health Care Property Investors. Take care.

Ladies and gentlemen, this does conclude today's Health Care Property Investors third quarter 2003 earnings conference call.

We do appreciate your participation, and you may disconnect at this time.