芬塔 (VTR) 2003 Q2 法說會逐字稿

Good afternoon. My name is Deborah and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Nationwide Health Properties second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (CALLER INSTRUCTIONS) Certain matters discussed within this conference call may constitute forward-looking statements within the meaning of the Federal Securities laws. Although the company believes the statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Actual results and timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements, due to risks and uncertainties described from time to time in the SEC reports filed by the company. The company believes that funds from operations is an important supplemental measure of operating performance because it is predicated on operating funds flow analysis, and is widely used by industry analysts as a measure of operating performance for equity REITs.

The company, therefore, discloses funds from operations, although it is a measurement that is not defined by accounting principles generally accepted in the United States. The company defines funds from operations as income before extraordinary items adjusted for certain non-cash items, primarily real estate depreciation less gains losses on sales of facilities. The measure may not be comparable to similarly titled measures used by other REITs. Consequently, funds from operations may not provide a meaningful measure of the company's performance as compared to that of other REITs. Funds from operations does not represent cash generated from operating activities as defined by accounting principles generally accepted in the United States. Funds from operations does not include changes in operating assets and liabilities and, therefore, should not be considered as an alternative to net income as the primary indicator of operating performance or to cash flow as a measure of liquidity. Thank you. Mr. Andrews, you may begin your conference.

Thank you. Good afternoon. Let me welcome you to Nationwide Health Properties second-quarter conference call. I will discuss our property sector's improving condition, and then Mark Desmond, our Chief Financial Officer, will comment on the company's financial results. Our property sector, senior housing and long-term care, continues to show improvement in its financial stability as restructuring efforts and bankruptcy activities largely appear to be coming to a conclusion. Our Board of Directors yesterday reaffirmed our belief that this sector will offer our shareholders the greatest opportunity for earnings and dividend growth in the healthcare field. Recent developments in reimbursements for the skilled nursing sector, both from the Medicare and Medicaid programs, appear to be adequate to enable operators to maintain, if not improve, their financial returns in addition to maintaining an adequate quality of care for their patients.

Continued occupancy gains in the senior housing field, with a few exceptions, are improving profit margins for the operators of these facilities. Moreover, much needed recent tort reforms in many states, first in Florida, now in Texas, where we have our largest concentration of skilled nursing facilities, should lessen the overall liability exposure of our operators that has spiked unreasonably in the past few years. This in turn should lead to lower liability insurance costs which already appear to be stabilizing.

Let me briefly update you on the progress of certain operators in our own portfolio that have been going through restructuring efforts. Yesterday, the Alterra Bankruptcy Court approved an offer submitted by Ameritus Corporation and Fortress Investment Trust II as the highest and best bid in the recent auction for Alterra. With financial assistance from Fortress, Ameritus Corporation, headed by one of the most experienced and successful executives in the long-term care industry, will acquire the Alterra portfolio as the final step in completing its restructuring efforts. The should enable Alterra to emerge from its bankruptcy proceedings by September 30th. This will be very beneficial as the restructuring and bankruptcy processes have adversely impacted Alterra's facility occupancies and rental coverages. The company continues to anticipate that its leases with Alterra will be affirmed with no rental impairments.

The 10 assisted living properties that we took back from Balance Care and turned over to Senior Services of America, SSA, continue to show increasing occupancies and earnings in our rental income for the current year, which is being recorded on a cash received basis, is expected to be better than we had anticipated in our earnings guidance. As we indicated last quarter, we completed the restructuring of our Sun Healthcare portfolio of 5 facilities by placing two properties with other operators, resulting in only a $300,000 per year overall reduction in rental income. While we have a few relatively minor problems still to work through, all in all, our portfolio continues to show improvement as the industry's past difficulties continue to decline.

We are somewhat disappointed we were unable to complete any new investments during the second quarter. We are continuing our historical conservative discipline on price levels that we will pay for properties. Management is optimistic that as the year proceeds and looking into next year, that additional earnings from new investment opportunities will be generated. This optimism is a result of the company's improved financial position and liquidity following its recent $115 million common stock issuance. The improvement in our future cost of capital as a result of this equity infusion also allows us to be much more competitive in the marketplace. I will now turn it over to Mark Desmond.

Thank you, Bruce. Today we reported FFO per share of 41 cents for the second quarter 2003, which was in line with management's expectations. Revenues for the quarter were $40,570,000, up over 11% compared to the second quarter of 2002. The increase was largely due to acquisitions of properties during the second half of 2002. Interest expense for the quarter increased $2 million over 2002, due to additional debt incurred to finance the acquisitions in the second half of 2002, net of the decreased bank borrowings from the proceeds of our $115 million stock placement in the second quarter of 2003.

General and administrative costs have ranged from $1.9 million to $2.1 million for the past four quarters, and we would expect to be within that range going forward, only adjusted for a new chief operating officer position. Included in discontinued operations is a gain on sale of $444,000 that resulted from sales of assets held for sale at amounts above our carrying value, and is not included in our FFO. There were no acquisitions during the second quarter and we sold five assisted living facilities that had been leased to Alterra for approximately $13,600,000. These facilities were purchased from Meditrust during 2002 as part of a larger purchase involving both the company and our joint venture. These properties were underperforming and have been under contract for sale. We had anticipated this sale and it has been reflected in the company's unchanged 2003 FFO per share guidance, which we are affirming at $1.71 to $1.73 for the year. Attaining the lower end of our range would anticipate only a very modest level of acquisitions.

During the second quarter, we repaid $35 million of maturing medium-term notes. The notes had an average interest rate of 7.6%. Debt maturities in the third quarter are $41 million with a blended interest rate of 7.35%. We expect to close two mortgage financings totaling approximately $37 million secured by two facilities, with an average rate around 6%. As was our expectation indicated in our first-quarter call, the $40 million of medium-term notes puttable in July were not put. At this time, we would not expect the $41,500,000 of medium-term notes puttable in November to be put either.

As for the portfolio, we generally continue to see overall improvement in assisted living occupancy, although there has been some weakness in our Alterra portfolio, due largely to the disruption from the restructuring and bankruptcy processes. The current coverage numbers include six additional facilities that had been categorized as in lease-up previously. These six are well below our average coverage. As a result, overall rent coverages have slipped but are still strong at 1.34 times. Currently, two facilities remain in lease-up.

Nursing home coverages in our portfolio remain at high levels. The nursing home coverages reflected in our supplemental earnings release fully reflect the impact of the Medicare cliff. We have filed with the Securities and Exchange Commission a registration statement for a new dividend and stock purchase plan. Once the registration is effective, existing stockholders will be able to purchase up to $10,000 of common stock per month at a discount currently set at 2 percent. Additionally, investors who are not stockholders of the company may use this plan to make an initial investment in the company.

I would like to point out that during the second quarter, we recognized only $80,000 of revenues in excess of cash received due to straight line rents and that we had $323,000 of amortization of deferred financing costs. As a result, our funds available for distribution for the quarter actually exceeded our FFO. As a result of our reduced dividend in connection with our stock offering, our 37 cent per share dividend is a 90% payout of our 41 cent per share FFO. With that, we'd like to turn the call over to questions, operator.

(CALLER INSTRUCTIONS) Your first question comes from Rich Anderson of Maxcor.

Good afternoon, guys. Bruce or Mark, can you comment about what your impressions are of Ameritus versus the Alterra team, and whether them taking over the Alterra portfolio is a positive or a negative or a neutral event from a pure relationship standpoint?

Very fair question. We were frankly very pleased that Ameritus and the Dan Beatty-led company achieved their goal of acquiring the Alterra portfolio. He has been involved for some period of time there. In no demeaning sense at all to the senior level of the group at Alterra, I think Dan will be able to bring together a very solid reduction in G&A and create a very positive circumstance. He has been tremendously successful in this field. He now has a company the size that he really desired to do. My understanding is he'll be relocating the offices from Milwaukee out to Seattle. I think all in all, we are quite pleased, particularly compared to what could have been some of the other alternatives after the auction became a known event coming from the unsecured creditors committee.

Okay. You mentioned some of the minor slippage in the Alterra portfolio due to some of the distractions that are going on there. Have you seen that slippage continue to slip during July, or has it stabilized or what is the risk that things continue to deteriorate as they continue to go through this process?

I think -- it is kind of hard to forecall the future in that respect. I think the one thing you have to keep in mind, as Alterra has brand-named its facilities out in the communities and the competing facilities I'm sure all have a copy of the press release that indicates that Alterra is going into bankruptcy. That becomes a very strong anti-marketing tool that is used against the Alterra facility in that market. The fact now generally that we have completed the process, and I am quite sure that information is going to become readily available in the Alterra facilities, I would hope and expect that it basically could be moderated. And clearly once the thing is officially out come September 30th, I would expect a pretty quick return to the historical levels that they enjoyed.

What was the coverage last quarter on the Alterra portfolio?

Alterra, I think last quarter was about 1.4, and this quarter is below 1.3, tad below 1.3.

Can you comment on what sort of cap -- what you're seeing movement in cap rates for transactions? Are they changing, are they increasing, are they decreasing in the past six months or so? What have you seen?

I can't say as we have seen any one particular. It really does depend on the nature of the transaction what is involved. We have got one facility, a rather large, very nice skilled nursing facility out in the state of Colorado that we had hoped to close up in this current quarter. And because of a lot of unusual different reasons, it is a very, very low cap rate and we are very excited about it. We are waiting -- we have it under a purchase of sale contract. We are just waiting for the state people to approve it. It would be with Nexion, an existing customer.

I can't say if there is any one particular trend evident there. I think if anything, there could be a slight improvement. In other words, a little bit of a reduction in the cap rates just because of the stability that appears to be coming into place with the reimbursement programs.

Okay. Last question. Can you just remind me where you're at with the JV in terms of how much you have in terms of capacity left and how it works? When you want to make an acquisition, what goes where?

The way our joint venture is set up, it is basically any transaction that we desire to get involved with, it will be offered to the joint venture first. We have a letter of intent at this point in time executed that would provide for another $130 million worth of available capital in the joint venture; 85% from the JER group, 15% from us. We would also get a managing fee and we would also get an upfront origination fee, which would be quite productive from an FFO standpoint. Today, with what would appear to be our improved capital, it is entirely possible that transactions that we may be looking at here in the future, JER would not be interested in doing as it not meet their IRR hurdles, but would meet ours.

One of them being that Colorado SNF that you just referred to?

That is correct.

Thank you very much.

Your next question comes from Chris Pike of Wachovia Securities.

Just a couple of quick follow-on questions. In terms of the bid for Alterra, how does that impact the affirmation of the leases to you guys? I'm not familiar with how that all works. And I guess just as a follow-up to Rich's question, where do you see that going?

Let me turn that question ever to Don Bradley, our general counsel, who has worked this Alterra thing now for the past couple of years.

The way the bid has been presented to the court and approved by the court, they would be affirming our leases without any rental concessions. There might be a couple of non-economic type modifications they are looking for in the form of some covenants that we will be exploring over the next few months, perhaps in the JV leases. But, other than that, the bid is pretty much black and white. The court approved Ameritus because they thought their bid was the one with the fewest conditions, had the best financing behind it, and was the most likely to get from here to there and get this deal closed.

For you, Bruce, along the same lines. It was evident in the past you had a pretty working relationship with the folks at Alterra. Do you see a similar type relationship with the new operators?

Yes, we do. Dan Beatty has been a good friend of the firm for some period of time, although we have not had any transactions with them for lots of different reasons. But we are very excited and pleased about their getting involved with this, and I am sure we will have a very nice relationship with them.

In terms of the coverages, there was a little deterioration in terms of the coverages across the SNF and the Alt portfolio this quarter. Is that more attributable to, at least in the Alt sense, the properties coming online with lower coverages or lower occupancies --

Yes, that would be the case.

-- versus the degradation in the Alterra portfolio? What is driving the modest downtick there?

It is more related to the six that are well below the average.

We only have two facilities at this point in time that are in lease-up at this time.

One final question, in terms of your guidance, you affirmed your guidance this quarter. And you said your ability to meet the lower threshold is predicated upon your acquisition flow. Do you have any guidance on that front, and what is it going to take you to meet the $1.71 from an acquisition perspective through the rest of the year?

I think Mark had indicated in his remarks that it would be a very modest amount of acquisition activity. To quantify what some of our competitors are trying to get away from at this point in time, I think $20-25 million worth of appropriate investments would easily get us there.

How about 2004?

Where the problem comes in, and particularly a very nearby competitor, people get very hung up on when the particular transactions may close, may close within a given quarter. And, of course, I think the only way I could respond to it, we have some goals that we would like to achieve. It doesn't necessarily mean we will and it doesn't necessarily mean we will do them within the time frame that would be done. Again, we're looking only at senior housing and long-term care. I had, I think, nine months ago indicated that come a full year with available capital, the position we are now in, that a goal of achieving upwards to $400 million I felt could be achieved. I still have that goal.

I'm sure the pipeline is still growing at this point; is that not correct?

Yes. It was quite weak during the second quarter in all fairness, but we have identified here later in June and early here in July a lot more in the way of some very attractive type of opportunities.

One last question on the same topic. A competitor announced in their call that they believe there is an inflection point in cap rates, that they've seen this happen over the last several weeks that the tenure has run up. Can you comment on that relative to the comment you just provided in terms of acquisitions going forward?

I think if anything, I could see maybe even to the contrary. In other words, one of the alternatives a lot of people have had with the very attractive debt market that we have had is a little more of a difficulty in reaching at least some of the advantages that leasing can provide and the level of returns that we have all wanted to get. I think as we see the increases in the interest rates, I think the interest component, the debt component is going to become a little bit less of a competitor and actually could stir a little bit of a better situation, both for the individuals who are interested in acquiring properties where the majority of our transactions take place of instead of what you would view as the traditional sale-leaseback. It really is a purchase lease consideration.

Great. Thanks a lot. That's all I have.

Your next question comes from Robert Stevenson of Morgan Stanley.

This is Jason Yablon in for Rob, actually. Quick question in terms of the acquisitions again. How much do you think you guys could do now on balance sheet?

Obviously, it would depend on how we would finance it. We sort of have available funds now between the joint venture and unused line of credit of a couple hundred million dollars, but it would be our goal going forward here to basically do a blended combination of equity and debt on a going-forward basis and leaving a lot of dry powder for basically any kind of unknown situation.

In terms of the drip, how much do you anticipate to get from that in the year?

That's very difficult to say. The registration statement on that is not effective yet, so we don't even have a quarter to gauge. I know -- I think some of the others have been fairly successful in bringing in some significant dollars, but I think until our plan is up and going, it will be hard to predict.

We will have to inform our existing shareholder base and other individual shareholders of that availability, and I think it would be a good resource for us.

Okay. Are there any other equity issuances on the horizon over here or is that it for now?

No, that's it. We have had some possible inquiries, but until such time as we really have the investments in place so that it won't be dilutive, we have no interest in issuing any more equity until those come onboard.

Okay. Think you.

Your next question comes from Jerry Doctrow of Legg Mason.

Good afternoon. I have just a couple of things. Mark, do you happen to have the ending share count? I just want to make sure I was right on that, given the transactions that are in the period.

Ending is 58,797,216.

Great. Thanks. Where do we stand on the COO search action? I sort expected you to have something announced now. Can you give me any sense where we are on that?

I hope to have an announcement to make about our search for a COO and succession plans in the near future.

Okay. I probably will ask this in a different way. I was wondering if I can get -- you talked about acquisitions. The one thing, Mark -- I'm not sure it was Mark or Bruce -- mentioned was that you were likely to see some uptick from the Balance Care assets that you are dealing with on a cash only basis and that sort of thing. Any sense of magnitude -- I'm trying to get a sense of how much is coming from acquisitions, how much is from the JV and how much might be just growth in the existing portfolio?

I think come the third quarter, we might be in a better position to quantify it. In the meantime, we basically have left our earnings guidance unchanged, Jerry.

Okay.

We do like the trend, but I would rather see the third quarter behind us before we make any specific comments on it.

But your sense is we're going to see a little bit upward there and nothing else in the disposition category here?

No. Like we've said, our portfolio is largely in really good shape at this point in time.

Is there a date for the drip being effective? Is that kind of a third quarter event or a fourth quarter event?

It just depends on if we get it reviewed by the SEC, that would slow down the process.

No, from a working assumption you would assume --

At this point, it's going to be late third quarter, probably earliest you'd see anything.

Great, thanks.

Your next question comes from Robert Belzer of Prudential.

A few questions for you today. Just one question on senior services to start. What was the rent, rental income from that portfolio in the quarter? What might you have factored into third and fourth quarter guidance from senior services?

The second quarter, Robert?

Yes.

I think it was about $350,000, in that range.

Could you give us a bit of an indication on what you might have factored into your guidance?

We factored into the guidance at the beginning of the year was $1.5 million for the full year.

Has that changed at all, Bruce?

Not at the present time. Like I said, it is trending very nicely, but I'd like to see the third quarter behind us before we volunteer any changes to the guidance we have given out.

Okay. Moving on to Texas and the Medicaid rates in Texas. I hear that they have been under pressure. What kind of a rate reduction have you seen in Texas?

I'm going to turn that over to Don Bradley, also.

When you net it all out, the worst case it looks like we're going to be looking at about less than a half percent. The state itself is looking at anywhere between 2-3% on Medicaid cut, but the federal government has piled another $20 billion into funds coming in for all states. The portion that will go to Texas is expected to be directed to make up for the Medicaid cuts, and when you factor it all in, it gets down to a little less than a half percent.

Great. Moving over to Alterra, you indicated portfolio coverage. How about occupancy, how much of an occupancy slip have you seen in the Alterra investments?

We are down to about 86 percent in the NHP portfolio and 77 percent in the JV portfolio, and those are about -- since the beginning of the restructuring process back in 2002, those are probably about 6 percentage point drops each.

One final question on Ameritus. Do you see any opportunity to do business with Ameritus?

Very possibly. We always have had. At the same time, as you know, we have a very large position with Alterra which will now be a large position with Ameritus, and we would have to take that into consideration on just taking on too large of a concentration. This is a company that had historically a major problem with the concentration, so we are quite aware of that.

Okay. One final question on acquisitions. Do you have any kind of a cap rate threshold yield, both for the owned and JV portfolios?

Initial cap rate yield?

Correct.

I think at this point in time, in the neighborhood of 10% plus or minus depending upon the availability. Obviously, if it's the right opportunity and we can get beyond that. In other words, if we are able to acquire the property at a very attractive price so that they even get a yield of 11-11.5% to start as we did last year, can still be a very productive circumstance for our operator and obviously for us. But it depends to a large extent on just how much we do have to pay for the property and what the expectation for the return then would be for the operator.

Would that yield be attributable to the JV too, Bruce?

JV's goals I think are somewhat higher than that. It would be the more opportunistic type of things, I think, that they would have the most interest in. Like I said, we can meet our IRR goals a little easier than they do.

Great. That's all my questions today. Thanks.

Your next question comes from Doug Simpson of Merrill Lynch.

Good afternoon everyone. I just wanted to talk a little bit about the AL portfolio, just trying to understand kind of what you are hearing from your operators and what some of the trends are there. I guess as it relates to, you've touched on occupancy for some of your operators like Alterra, but what are you hearing about the liability exposure, liability and expense rather kind of year-to-year?

We have had a couple of (indiscernible) reports from relatively successful negotiations with a few carriers. You're talking the assisted living now?

Yes. I guess the point I'm trying to look at, if I'm reading the numbers correctly it looks like the assisted living coverage went from 139, slipped a little bit to 134, and I was just trying to understand are we seeing the rollover of the liability insurance or what was driving that?

Obviously, as we talked before, it was the occupancy levels at the Alterra properties and also the remaining six facilities that we had included being in lease-up that are now included in our coverage ratios which are far below the average within that group. I think across the board with very few exceptions, everybody is seeing an improving circumstance. Their insurance and workmen's comp costs obviously are up from where they were a year ago. There have been a couple of situations. American Retirement Corp., I think, feels very successful on what they recently negotiated on some renewals of their insurance coverage, but I think they are all getting their rates up on a much better basis than they were historically when they were at a heavier fill it totally type of attitude. Now as the occupancies have been improved, they're doing a good job of getting their rental rates up, and it does appear to be giving them the adequate coverage they need to cover those additional liability costs.

Maybe just a broader comment. Hearing yourselves and some others in the industry that reported, everybody has kind of reloaded their balance sheets and there really hasn't been much deal activity, certainly as much as we would have expected at the start of the year so far. I'm just wondering, are there some data points maybe you could point us to that give you more optimism as you look out towards the second half of the year in terms of either deal volume or indication of interest or anything along those lines?

I think we have had sort of the reverse situation. If you look at what we did last year, between our joint venture and what we did on the balance sheet was about $300 million worth of transactions. Literally all of those were with companies that were involved in restructuring efforts, lenders who had taken back properties, banks who were willing to take a substantial reduction in debts they had on properties. The word that the industry's conditions and problems appear to be mostly behind us, I think we have not really seen the banks being as forthcoming as they were to unload properties. I think we have heard a sense that many of them now expect in just a short period of time they might be able to recover their original loan balances. I don't think they are exactly being realistic, and I would still hope as we go forward here in the remainder of this year and obviously in the next year that a lot of properties that have gone back to banks, both assisted living and in some skilled nursing facilities, would become available for us and others for that matter as we go forward. But right now, that is the part that is really dried up.

Ok, maybe just one last question. Have you noticed anything specifically, I guess I would say in the last six weeks, as we have gotten some indications that there might be some positive movements on Medicare? Have you noticed anything specifically that the nursing homes have been involved in a little bit in terms of their pricing expectations?

Other than maybe a great big sigh of relief, no. I think the operators are all feeling a lot better. It is sort of what they had hoped for, and to actually have it crystallized and now being a known thing, they all feel better about it. But as far as stirring up that much more in the way of potential activity and opportunities for us, I think it is still a little premature.

I guess one more question for you. The Beverly assets that you guys have, are any of those involved in Beverly's current restructuring divestiture plans?

We have one facility, I believe, in a California package.

Okay.

One in their Florida deal that they had done -- gosh, when was that, first or second quarter, Mark? There was one there that's with the Centennial spin-off thing that was running the Beverly Florida properties. So essentially, there is sort of 1.5 type of properties at this point. We don't know who is going to do the California one.

Great. Thank you very much.

Your next question comes from Jerry Doctrow of Legg Mason.

I just had one follow-up, Mark. I think you mentioned that the FAD was actually higher this quarter. I just did not get some of those numbers. I was wondering if you could go over them again?

Sure. We had $80,000 of revenues in excess of cash from straight line rents, so that is a reduction.

Explain that, it’s turning around.

That is a reduction to our FFO. And then as the addition, $323,000 of deferred financing cost amortization. So net FAD would actually exceed FFO.

This $323,000 is an ongoing or that's just a onetime?

That is ongoing related to medium-term notes, bank lines, any of those deferred financing costs being capitalized and amortized. That is broken out in our 10-Qs in the cash flows.

And that is a quarterly run rate, basically?

Yes.

Thanks.

There are no further questions at this time.

Thank you, operator.

Let me thank everybody for attending the call. We look forward to talking to you as the year proceeds here.

Thank you for joining on today's conference call. At this time, you may disconnect.