芬塔 (VTR) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2004 Ventas conference call. My name is Chris and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question-and-answer session for the end of the conference. (OPERATOR INSTRUCTIONS). I will now turn the presentation over to your host for today's call, Mr. Rick Riney, General Counsel. Please proceeds, Mr. Riney.

Welcome to the Ventas conference call to review the company's announcement last evening regarding its results for first-quarter 2004. As we start, let me express that all projections, predictions and certain other statements to be made during this conference call may be considered forward-looking statements within the meaning of the federal securities laws. These projections, predictions and statements are based on management's current belief as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks, uncertainties and contingencies and stockholders and others should recognize that actual results may differ materially from the company's expectations whether expressed or implied.

We refer you to the company's reports filed with the Securities and Exchange Commission including the company's annual report on Form 10-K for the year ended December 31, 2003, and the company's other reports filed periodically with the SEC for a discussion of these forward-looking statements and other factors that could affect these forward-looking statements. Many of these factors are beyond the control of the company and its management. The information being provided today is as of this date only and Ventas expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any changes and expectations.

Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation and its most directly comparable GAAP measure are available in the investor relations section of our website at www.ventasreit.com. I will now turn the call over to Debra Cafaro, Chairman, President and Chief Executive Officer. Debra.

Thanks Rick. Good morning to all of our participants and thank you for joining Ventas for our first-quarter 2004 earnings call. In addition to Rick Riney, today I'm joined by Rick Schweinhart, our CFO; Ray Lewis, our Chief Investment Officer and my other colleagues in Louisville. Once again Ventas had an excellent first-quarter. With the closing of the ElderTrust merger and the Brookdale sale leaseback transaction during the quarter, our strategic growth and diversification plan is in full swing. In those deals we acquired 32 high-quality health care and senior housing assets with stabilized in-place cash flow operated by quality providers of care. These acquisitions, totaling 276 million in investment value, expand our asset base, broaden our tenant relationships, reduce our Kindred concentration to 75 percent of gross book value and 83 percent of annualized rent and are accretive to our shareholders.

This quarter we continue to produce reliable, quality earnings and cash flow growth. We earned 41 cents per diluted share, a 17 percent increase over last year's results. In the aggregate our 34 million of FFO this quarter represented a 22 percent increase from our first-quarter 2003 results. As we continue to manage the company to generate superior total shareholder return, we also announced a dividend increase of 21.5 percent in the first-quarter to $1.30 per share. This decision by our Board of Directors follows through on our commitment to share the benefits of our growing cash flow with our shareholders. It also signals our confidence in our future.

This quarter we continue to focus on aggressive balance sheet management by raising over $51 million in new equity in mid-March. Our effective capital market executions puts us in a strong position to implement our acquisition program for the balance of 2004 without the need for additional equity capital. At March 31, our run rate ratio of debt to EBITDA was a strong 3.7 times. While we were successfully executing on our business plan the REIT equity market has experienced a lot of turbulence. The downward pressure on REIT equity prices was not a surprise to anyone who follows or invests in the REIT space, although the speed and force of the capital outflows were somewhat surprising. Despite this change in the equity market we remain very confident about our company, our asset class and our ability to deliver strong and predictable earnings and cash flow growth to our shareholders.

Actually we relish the opportunity once again to demonstrate why Ventas is a superior investment choice. In particular, we believe that the company is positioned to prosper in the current environment. First, our company has the highest built in growth rate of any health-care REIT, so we should produce positive FFO growth year in and year out. Second, we have an active and engaged diversification and growth strategy that should add to our internal growth through accretive acquisitions of high-quality health care and senior housing assets. Our acquisition efforts continue to gain momentum and we are confident that we will continue to grow earnings per share while decreasing our Kindred concentration during the balance of 2004.

Third, while we raised our dividend by over 21 percent in 2004, we maintain a prudent 75 percent payout ratio. That allows us to retain free cash flow to fund new acquisitions. In addition, our conservative payout ratio when coupled with our predictable reliable cash flow growth should give us room to increase our dividend in the coming years if our Board chooses to do so. This attribute is particularly valuable in a rising interest rate environment because it gives us one more tool to increase total shareholder return.

From an interest rate standpoint, we benefit from having no floating-rate debt exposure, therefore, our FFO expectations should be insulated from rising interest rates. Our primary tenant, Kindred Healthcare, continues to perform well reporting very strong results earlier this week. Because we have Kindred's full equity value of almost $1 billion supporting our master leases and strong cash flow to rent coverages, our future rent streams should receive a high valuation. On the portfolio side our Kindred assets continue to represent a potential source of selective divestiture opportunity that could allow us to generate capital internally and recycle it into new investments.

And finally, our master leases with Kindred give Ventas the one-way option to increase our rents to market rates in 2006. This unique upside sharing arrangement gives our shareholders the opportunity to benefit from improvements at Kindred and in the health-care operating space and could represent another avenue for future FFO growth. So we are excited about our prospects and we are looking forward to using all of our positive attributes to differentiate our company and to continue delivering superior risk adjusted return to our shareholders.

Looking out across the industry, Medicare reimbursement for our two major asset classes is stable to positive and we expect this trend to continue at least through the end of fiscal year 2005. Kindred recently announced that it expects its full year corporate EBITDAR to be between 484 and 494 million in 2004 as a result of these favorable reimbursement trends and Kindred's operating improvements, including its successful ongoing transition of its hospitals to the new fixed payment LTAC PPS system. With Kindred's fixed charges expected to be about 273 million this year, Kindred has about 200 million of cushion between its anticipated EBITDAR and its fixed charges.

At the portfolio level we have recently received Kindred operating data for the trailing 12 months ended 12/31 of '03. For that period, the EBITDAR to rent coverages at our Kindred portfolio were a very strong 1.7 times after a 5 percent management fee. The full year EBITDAR before management fee coverages for our portfolio were 2.3 times. These strong coverages further evidence the reliability of our Kindred rent. Looking ahead we remain confident that we will be successful in making additional acquisitions in the near-term. We are well positioned to do so given our recent capital raised and our limited debt balances. We intend to make acquisitions that will improve the strength and reliability of the company by further diversifying our revenue sources while simultaneously increasing our FFO per share and shareholder value.

We continue to see more deal activity in the market and we are actively working on some attractive opportunities. The timing and volume of potential deals is always unpredictable, so our 2004 FFO guidance of $1.70 to $1.74 per share does not include any impact of potential acquisitions or divestitures or from refinancing capital markets or derivative related activities. If achieved, our current 2004 guidance, would constitute 12 percent year-over-year growth in our normalized FFO per diluted share. So we feel great about our position and we're excited about continuing to execute our business plan for our shareholders' benefit during the remainder of the year. I'm going to turn the call now over to Rick Schweinhart so he can review our first-quarter results in detail, after which will be happy to answer your questions.

Thank you Debbie. Normalized FFO per diluted share for the first-quarter was 41 cents compared to 35 cents for the first quarter of the previous year, an increase at 17 percent. Normalized FFO for the first-quarter totaled 34 million compared to 28 million for the first quarter last year. The $6 million increase is attributable to $7 million of revenue increases and a $3 million decrease in interest expense, offset by discontinued rent of $3 million and also offset by a $400,000 increase in G&A and professional expenses and a $200,000 increase in property level operating expenses, both as a result of our two acquisitions that closed this quarter.

GAAP net income for the quarter was 23 million or 28 cents per diluted share compared to last year's 37 million or 47 cents per diluted share. Last year's net included a $20 million or 26 cent per diluted share benefit from the reversal of a contingent liability as a result of the successful conclusion of the 1997, 1998 IRS audit. Rental revenue and interest income for the quarter totaled $54 million compared to $47 million last year. The $7 million increase was due to the May 1, 2003 Kindred escalators (ph) of $1.5 million, the Kindred Master Lease amendment effective July 1st of $2.1 million, the ElderTrust merger which was effective February 1st for accounting purposes, of $2.8 million and the remainder of $900,000 due to the Brookdale transaction that occurred in stages throughout the quarter.

Interest expense declined $3 million from the first quarter of '03 to the first quarter of '04 due to the average debt balance declining from 745 million to 713 million. Importantly, if you look at the company's year ago balance sheet, our total debt was 792 million compared to 782 million at March 31, 2004. So while our debt balances at quarter end are comparable to those a year ago our asset base has grown by about $150 million in the same period. Weighted average diluted shares increased from 79.3 million in the first quarter of 2003 to 82.8 million this year reflecting our recent March 2004, 2 million share equity offering and option exercises.

Outstanding shares at March 31, 2004, are 83,851,000. Items of note on the balance sheet. The real estate investments reflect the ElderTrust and Brookdale transactions; cash from the latest sale of properties to Kindred held at year end was disbursed in the ElderTrust and Brookdale transaction; the increase in restricted cash is due to the acquisition related to security deposits and debt escrows. Debt increased $141 million from $641 million at December 31, 2003, to 782 million at March 31, 2004, reflecting assumed property level acquisition debt of 103 million and borrowings on the line to fund the acquisitions.

Our first-quarter annualized pro forma as if the acquisitions had occurred at the beginning of the period, net debt to EBITDA ratio was 3.7 times. A few facts about the acquisitions. The real estate assets increased $276 million, 160 million due to the ElderTrust acquisition, and 116 million due to the 14 asset Brookdale transactions. We also assumed debt of 102.3 million, ElderTrust of 82.4 million and Brookdale of 20.3 million. The ElderTrust assumed debt as an average effective interest rate of 7.3 percent.

The Brookdale assumed debt has an average effective interest rate of 5.8 percent. It was a busy quarter for the company and the results for the first quarter of 2004 improved significantly over the results for the first quarter of 2003 demonstrating the company's ability to grow FFO internally and from acquisitions. Back to you Debbie.

Thank you. Chris, would you please open our call to questions?

(OPERATOR INSTRUCTIONS). A.J. Rice of Merrill Lynch.

Hello everybody. A couple questions if you could. Debbie you mentioned in your comments about how the market has reacted to the prospects of potentially rising interest rates down the road. Has there been any change that you've noticed or do you approach the market differently in terms of new investment opportunities given that the rate environment may be changing or have you seen any reaction in the marketplace in terms of pricing of new deals?

That's a good question. Typically the capital markets act immediately with the specter of rising interest rates, and then there's a lagtime before they find their way into the asset level pricing. We're obviously keeping the potential of rising interest rates in mind as we are making new acquisitions, but I think for the next three to six months we will see the impact of that at the asset level. Happily, what we did in the spring and with our current debt balances, we have attractively priced capital that should allow us to make accretive acquisitions during this bridge period.

Also, just in terms of going forward, you mentioned in your remarks how you had limited your use of floating-rate debt etc., etc., thinking there might be a change in outlook. If you go forward from here the way you fund the company's growth debt to equity, also maybe dividend policy, and you've been running a conservative payout ratio, would any of that either funding or dividend policy likely change if interest rates are now on a modestly upward swing for the next year or two?

We would still expect to have a strong balance sheet and run the company at a three and half to four times debt to EBITDA level, which basically means we would expect to fund acquisitions about 50-50 debt and equity. One of those great things about having our conservative dividend policy, A.J., is that it does give us one more tool to enhance total shareholder return. Right now we are not contemplating any changes in our policy, but obviously it gives our Board of Directors more tools to work with in the future should we feel it appropriate to increase our payout ratio.

Thanks a lot.

Thank you.

Tony Howard of Hilliard Lyons.

Good morning and congratulations on a good quarter.

Thank you.

Now that you have ElderTrust under your belt, you're talking about a G&A expense, do you see any potential synergy and can you give a run rate, what you expect G&A to go for the rest of the year?

Thank you Tony, we can. As we said last quarter, we are projecting combined professional fees and G&A to be about 19 million for the year. We also have about one million and a quarter in property operating expenses from the medical office building portfolio that we acquired. In terms of synergies, we did believe that we reduced ElderTrust's run rate G&A of about 3 million to about 1 million of that 19 million that we're budgeting.

Good. As far as the debt situation I don't have it in front of me but how much of the fixed debt are the ElderTrust debt actually matures next year or this year?

We have a very small note of about $3.5 million that we will probably take out this year, Tony. We have very little of it in the next year but there are some prepayment opportunities that we'll obviously look at as they become available. The mortgage debt is priced fairly attractively but I think that's an ongoing decision. We will try to get rid of a lot that mortgage debt when we can.

Thank you.

Thank you.

Rich Anderson of Maxcor Financial.

Thank you. A couple questions. What were your straight line rents for the quarter?

They were about 300,000 and I think we're expecting them to be at about 600,000 a quarter going forward, Rich.

On the balance sheet, you have to sort of a holding place it would seem for preferred equity. Have you contemplated adding that to your capital structure?

We're always looking at optimizing the capital structure and we obviously have no preferred outstanding now and we have -- it's a great piece of paper because it's relatively low yielding and you never have to pay it back. It's a great piece of paper to have in your capital structure. We have that opportunity but we have no intentions right now to use it although we may in the future.

Let me finish my balance sheet. There is a line item also, and it's been there for a long time, called the deferred revenue and liability section. What is that?

We have some deferred revenue that occurred a long time ago with regards to Kindred. It was kind of pay it now and then you amortize it over the life. That is part of the non-cash, we call it Kindred rent. So if you look on the fund statement you will see about 600,000 amortized back into rent on a quarterly basis.

As it gets amortized by quarter that number goes down.

What was your DRIP equity contribution this quarter and what do you sort of expect it to be?

We can answer that for you. It was fairly minimal because it's really limited to retail usage which is what we desire. It was about 600,000 for the quarter.

Okay. Bigger picture. With your guidance $1.70 to $1.74 and the fact that you have no exposure to bearable rate debt and you have this in place, rent growth from Kindred, what could go wrong to derail you from that $1.75, $1.74 range? Would you be able to hypothesize what keeps you up at night that would make you miss that number?

We feel confident with our number and I think one of the things we really try very hard to do for the investment community is to do what we say. And so when we put a number out there, we certainly have scrubbed it hard and made as careful a prediction as we can and would fully expect, barring something extremely unforeseen, that we will in fact deliver $1.70 to $1.74 per share this year. So we feel good about that, and nothing really keeps me up at night because I'm too tired. The variation that comes from our projections really tends to be from, we don't know what our G&A expenses will do you as we grapple with Sarbanes-Oxley, as we renew our corporate insurance program, as we hire people. Things like that are somewhat unpredictable.

We may have dead deal costs because we are working on a lot of transactions, and experience tells us that not all of them will happen and we try to take into account things like, we don't know what our stock price will be and that affects your diluted shares. We feel great about the number. There is some variation imbedded within it and that's why we give a range. We feel pretty good about where we are.

That's very helpful, thanks. Could you maybe quantify the acquisition pipeline in terms of the dollar amount of deals that are on your table right now?

Our pipeline remains pretty strong. Obviously having closed $276 million with Brookdale and ElderTrust, that took some of the dollars that were in the pipeline out. We've seen a number of good opportunities. I think if you look at what our, what the other REITS in this space have done, they have been active as well. And so we think there is going to continue to be a good strong deal flow and we would expect to get our fair share.

Nicely vague. Would you say it was more or less active today than it was six or three months ago?

I would say we're seeing as much or maybe a little more activity than we saw three to six months ago in terms of deal flow.

How would you characterize your dry powder today with your mix of debt and equity?

We have about 235 million of availability on our line.

Okay. And that would constitute the entire -- would you say you can add any more debt or anything, any other sources of capital raising or is that it, 235 for now?

We have the ability under our line to expand it and so that capital is available. As you mentioned, to the extent there are attractive other capital market executions, that capital would be available to us. We have probably 250 total under our line available, which is great.

Last question. When did the ten additional Brookdale assets close during the quarter?

They closed in phases throughout the quarter with about 40 percent of the value and all of the debt closing in that last week of March.

Thank you very much.

Thank you.

Robert Mains of Advest.

Question. In the press release you put out a table that explained the pro forma impact of the two acquisitions this quarter, had they occurred at the beginning of the quarter. I assume that the impact on FFO would be about the same in terms of about penny as the EPS impact?

I concern myself about predicting the future. I think if you look at the pro forma for the first quarter, that basically is what the first quarter would do. Now obviously the second quarter, there are certain things that would change. We would have to deal with the Kindred rent increase. But I think the easiest way to say that without the predicting the future, is we're comfortable with our guidance for the year still after going through the numbers, and if you look at the pro forma guidance for the first quarter that's what a quarter would look like.

You gave out, for the first quarter you gave the EPS impact. I was just saying for Q1 whether that is about the same for FFO?

Yes, it is.

Fine. Second question. The straight lines that you mentioned, those come out of the new leases right, the straight line rents?

Mostly the new leases, yes. We had very minimal straight lines in the past.

Is that evenly spread among ElderTrust to Brookdale, or is it one or the other?

It's more Brookdale than ElderTrust, but ElderTrust has some too.

I think that's all I have. Thanks.

Thank you.

Jerry Doctrow at Legg Mason.

Good morning. It was a nicely boring quarter and a number of questions have been asked. I just have one or two things. Rick, I think there is a little bit higher interest cost than we saw. Is the (indiscernible) effectiveness or is there something else going on in the interest line at all? It wasn't much, but I was just curious.

No, I don't think so. I think it's always complicated to do the interest. We brought on a lot of mortgage debt that comes on obviously at a given rate. When you put the incremental debt on for the acquisitions, the swap costs was already in there. That adds some variability to it but for the most part the interest rate is pretty consistent.

One or two other things. You put out the detail on the Kindred (indiscernible) by sort of master lease and the numbers overall are very impressive. Some of them are a little bit lower and I just wanted to clarify, when we think about the reset right, if I understood it right it's on a lease by lease basis. As you eyeball these, I still think of them as sort of one/four coverage. I don't know if that's the right way to think about it or not. There are a few that are above, well above, and then there are some that might not be a reset if you're just doing it today. Is that the right way to think about it?

Jerry, that's a good question. It is done on a master lease by master lease basis. The one wrinkle in that is that master lease five is a subset of master lease one, and so that gets done jointly. And so each appraisal will be done with respect to that master lease and assuming that rents go up based on the market rate appraisal, we have the right to opt in then or opt out at that calculation.

When you set them originally, again what I remember is this 1.4 coverage. I know that was a trailing 12, or if that's the right way to think about it. But is that -- if I'm thinking in that way, that original 1.4, is that comparable to your trailing 12 that you, EBITDAR coverage that you lay out here?

In the restructuring we're trying to hit somewhere around 1.3 to 1.4 coverage and that would have been done on a trailing 12 basis.

Last thing. You asked us a couple different ways. I was wondering if any -- if you can give a little color in terms of the acquisition market? What's out there in terms of mixes of stuff, maybe nursing home versus assisted living versus maybe MOB's and things that you are seeing and any of that that looks more or less interesting, and any places that you think you have better ability of play? One other technical thing is just -- are you doing management directly on your MOB's or are you -- is that part of what's going on with the ElderTrust stuff or is it contracted out?

The management was already -- on the MOB's was already subject to a management contract with the hospital system that the MOB is affiliated with, so we're doing that. I'm going to ask Ray, who has been working hard on the strategic growth program, to answer your question about what we're seeing.

Jerry, I think in the marketplace right now I would say that we have probably seen more independent and assisted living opportunities early in the year than skilled nursing opportunities. I'm not exactly sure what I would attribute that to other than I think that the fact that there hasn't been a lot of development in the assisted living industry, that the occupancies have stabilized and are starting to improve. I think there is a sense that it's a good time for assisted living operators to monetize some of their assets. We've seen a couple of larger portfolios come through, some good individual assets in that space.

Cap rates remain relatively attractive for independent and assisted living properties, independent down in the 9 to 10 percent range and assisted living in the 9.5 to 11 percent range. I think that trend should continue for the near-term. As far as the skilled nursing assets go, it's our experience that every year we see a couple of good large skilled nursing transactions. I haven't seen those yet this year, although I would expect that given the relative attractiveness of the market place, the fact that reimbursements are stable in that space and that the operating environment is pretty good relative to historical environments, that people might look to monetize their assets there as well. And there the multiples have remained relatively consistent between the 7 and 8 times range.

Is MOB's something that you think about now that you've got some in the portfolio?

I think the feeling there remains pretty consistent with what we have said in the past which is we are interested in doing single tenant health-care related real estate. So to the extent there might be an MOB or two out there that are single tenant, not multitenant managed facilities, on a one-off basis, we would be interested in looking at those. I think as far as multitenant MOB goes, if we found the right platform that brought the management and the other critical success attributes of the medical office building to our business we would be interested in that. But as far as one-ff multitenant MOB's it's really not in our core strategy.

Great, thanks.

Thank you.

(OPERATOR INSTRUCTIONS). At this time we have no further questions.

Thank you to all of our participants. We appreciate your interest in Ventas and we look forward to speaking with you soon. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes. You may now disconnect.