芬塔 (VTR) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2004 Ventas Earnings conference call. My name is Michelle and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a Q&A session towards the end of the conference. If at any time during the call you require assistance, please press star, followed by 0, and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Rick Riney, General Counsel. Please go ahead, sir.

Thank you, Michelle. Good morning. Welcome to the Ventas conference call to review the Company's announcement yesterday regarding its results for Second Quarter 2004. As we start, let me express that all projections and 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 [clause] [ph]. These projections, predictions, and statements are based on management's current beliefs 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 SEC, 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 day 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'll now turn the call over to Debra A. Cafaro, Chairman President and CEO. Please go ahead, Debra.

Thanks, Rick. Good morning to all of our investors and other participants. I want to welcome you to our Second Quarter 2004 Earnings call. With me in Louisville, in addition to our General Counsel Rick Riney, are Rick Schweinhart, our CFO, Ray Lewis, our CIO, and my other colleagues.

Ventas produced another quarter of excellent results for our shareholders. The quarter was distinguished by meaningful cash flow growth and continued implementation of our strategic growth and diversification program. We continue to manage the Company to maximize total shareholder return, and we are pleased to increase our full year 2004 normalized FFO guidance to $1.75 to $1.79 per share. We expect our progress to continue in the second half of the year due to our strong acquisition pipeline and our efforts to drive down our cost of debt with the recent launch of a new credit facility.

Before Rick Schweinhart reports in detail on our second quarter financial results, I'd like to cover some highlights of the quarter and discuss some other recent developments. Following our presentation, we'll be pleased to answer your questions.

During the second quarter, we made $70m of new accretive acquisitions. Our tally of diversifying investments year-to-date is $346m. These new acquisitions include 4 quality healthcare and senior housing facilities mixed among independent living, assisted living, and skilled nursing assets, each with stabilized in-place cash flow to support our rent.

Importantly, our recent acquisitions diversify our revenue stream by bringing revenue from Kindred, our primary tenant, down to approximately 80 percent of our run rate REIT revenue. On the same annualized basis, our rent from non-government reimbursed facilities now represents about 12 percent of our REIT revenue. Finally, these new acquisitions also increased the book value of our non-Kindred assets to approximately 30 percent of the total gross book value of all of our assets. We are continuing with our growth and diversification plan, as outlined.

This quarter Ventas continued to produce reliable quality earnings in cash flow. We earned FFO of $0.45 per diluted share, which is a 15-percent increase over last year's results. Our FFO growth is the result of our industry-leading cash lease escalation supplemented with additive FFO from acquisition and further enhanced by reduced interest expense year-over-year. While we are increasing our asset and revenue base, we are focused on keeping our balance sheet and our credit statistics strong. At June 30, our run rate ratio of net debt-to-EBITDA was 3.7 times.

As the results of our aggressive efforts to improve our balance sheet, and because of our growing cash flow and our diversification progress, Standard & Poor has upgraded our unsecured credit rating to 'BB' in the second quarter. We intend to continue taking steps to move up the credit curve because we believe that driving down our cost of capital will be a significant component of our future success in the triple net lease business. To further that goal, we also launched a new bank deal last week that should knock at least 100 basis points off our existing LIBOR spread. We have already received terrific support for the deal from our incumbent lenders and we look forward to completing this important refinancing transaction within the third quarter.

We believe we can continue to grow earnings and reduce our incremental debt costs, even in a rising interest rate environment. We hope to use these positive attributes to continue delivering superior risk-adjusted returns to our shareholders.

I want to step back for a minute and discuss the overall environment for our two major asset classes, which are skilled nursing facilities and long-term acute care hospitals, as well as the performance of our portfolio and, the condition of our primary tenant Kindred Healthcare. All are positive. First, we expect Medicare reimbursement for skilled nursing providers to increase by an inflationary factor of about 3 percent on October 1, 2004. This inflationary update would follow the 6.26 percent Medicare rate increase for providers that took us back last October. In addition, the Medicare rates for our long-term acute care hospitals rose approximately 6 to 7 percent net on July 1 of this year. This rate increase for the [L tax] [ph] should prove to be a modest positive for Kindred while it continues its transition to the 6-payment system for long-term acute care hospitals.

Because of these favorable reimbursement trends, and Kindred's operating and financial improvement, Kindred is financially healthy. At last report, Kindred said it expects to have almost $500m in EBITDAR this year to cover about $270m in fixed charges. Kindred's corporate cash flow cushion supports the reliability of Ventas rents under the master leases between our two companies. Kindred is scheduled to report its second quarter earnings on August 4th.

Finally, our Kindred portfolio continues to exhibit excellent performance metrics that further enhance the reliability of our future cash flows. For the trailing 12 months ended 3/31/04, the EBITDAR to rent coverages at our Kindred portfolio were a very strong 1.7 times after a full-sized percent management fee. The trailing 12 months EBITDARM before management fee coverages for our portfolio were also well in excess of market at 2.3 times.

Turning back to the Ventas picture, we remain very confident about our Company, our asset classes, and our ability to grow organically and through acquisition. We are ever mindful that we will face challenges as we grow our business, but we expect to manage those challenges intelligently and to the best of our ability.

On the acquisition front, [new] [ph] activity in the market continues to be strong and we're actively evaluating a number of interesting opportunities. We fully expect to make additional investments later in the year, although we cannot predict the size or timing of those acquisitions, and therefore did not include any future investment results in our revised FFO guidance.

Before I turn the call over to Rick Schweinhart, I want to touch on one other item mentioned in our press release. This quarter, we disclosed our pending litigation against law firm Sullivan and Cromwell. Sullivan and Cromwell represented the Company in its 1998 spin-off of Vencor and related transactions. In 2002, we brought an action against Sullivan and Cromwell alleging legal malpractice and conflict of interest. We expect the court to set a trial date for sometime in 2005. While we are aggressively pursuing our claims in the litigation, we cannot give you any guidance whatsoever about how this matter will turn out or when it will be fully and finally resolved.

I'm now going to turn the call over to our CFO Rick Schweinhart so that he can review our second quarter results in detail.

Thank you, Debbie. Normalized FFO per diluted share increased 15 percent to $0.45 for the second quarter compared to $0.39 for the second quarter of the previous year. Normalized FFO for the second quarter totaled $38m compared to $31m for the second quarter last year. The $7m increase is attributable to $12m of revenue increases and a $4m decrease in interest expense, offset by last year's discontinued rental income of $4m and a $4m lease termination fee, and also offset by a $1m increase combined general administrative professional fee and property level operating expenses as a result of our recent acquisitions.

GAAP net income for the quarter was $26m or $0.30 per diluted share compared to last year's $16m or $0.20 per diluted share. Last year's net income included a $5m loss on sale of assets, a $1m gain on the sale of Kindred stock, and $4m of interest expense pertaining to the U.S. settlement, which was paid off at the end of last year's second quarter.

Rental revenue and interest income for the quarter totaled $60m compared to $48m last year. The $12m increase was due to the May 1, 2004 Kindred escalators, which added $1.6m, the Kindred master lease amendment effective July 1st, which accounted for $2.1m, the first quarter ElderTrust merger and Brookdale facilities acquisition, which added $7.2m, and the second quarter acquisitions, which added $1m.

Interest expense declined $4m from second quarter of '03 to second quarter of '04 due primarily to the pay-off in the second quarter of last year of the U.S. settlement. In the last year, net real estate investments have grown $278m and debt has grown $132m, consistent with our long-term capitalization strategy of 50 percent debt and 50 percent equity.

Weighted average diluted shares increased from $79.6m in the second quarter of 2003 to $84.6m this year, reflecting our recent March 2004 $2m-share equity offering, option exercises, and renewed interest in our DRIP, which produced $3m last quarter. Outstanding shares at June 30, 2004 are $84m and $71,000.

Items of note on the balance sheet compared to the March 31, 2004 balance sheet, our real estate investments increased $70m, reflecting our second quarter 2004 transactions. Debt increased $70m from $782m at March 31, 2004 to $852m at June 30, 2004, reflecting volumes on the line to fund the acquisitions. Our second 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.

Let me mention a few facts about the recent acquisitions. Real estate assets increased $70m. Annualized rent on these assets totaled $7.1m, or $1.8m per quarter, of which $1m hit the second quarter. No debt was assumed to complete these transactions and all funds required were drawn on the revolving line of credit. We are also increasing our 2004 guidance to $1.75 to $1.79 per diluted share from $1.70 to $1.74, reflecting our most recent acquisitions. To the extent that we issue any long-term fixed rate debt during 2004, our 2004 normalized FFO results should be on the lower end of the revised guidance.

Consistent with our practice, Ventas' normalized FFO guidance for 2004 excludes the impact of additional acquisitions and divestitures, gains and losses on the sales of assets, and capital transactions. Our guidance also excludes the future impact of non-cash "swap ineffectiveness" expense and other non-cash items. Our revised guidance does include interest savings, assuming that we complete our planned new revolving credit agreement later this year.

The main takeaway for the second quarter is that results for the quarter improved significantly over the results for the second quarter of 2003, and the balance sheet remains in excellent condition.

Back to you, Debbie.

Great, Rick. Thank you. Michelle, would you open the call to questions now from our investors and analysts.

Yes, ma'am. Ladies and gentlemen, if you wish to ask a question, please press star, followed by 1 on your touchtone telephone. If your question has been answered, or you wish to withdraw your question, press star, followed by 2. Questions will be taken in the order received. Your first question comes from A.J. Wright of Merrill Lynch. Please go ahead, sir.

Actually, sorry, it's David Sucross for A.J. Wright.

You don't have to be sorry. Good morning.

Good morning. Question in regards to this lawsuit. Have you incurred any costs year-to-date, and what are the costs that you expect to incur going forward basically?

We've incurred minimal cost to date, and the case is being handled principally on a contingency basis.

Okay, so we shouldn't necessarily work anything into our model there.

It's been minimal and should continue to be minimal.

Okay. And regarding the recent acquisitions, when did they close exactly in the quarter and what are the rent coverages?

A fair way to look at the acquisitions is about mid-point of the quarter. The coverages are basically market coverages depending on the asset type, which are basically between a little over 1.0 to about 1.4 times EBITDAR to rent.

Okay. How's your outlook in terms of the size of the transactions that you're looking at, and have the yields on those transactions changed at all?

No. We continue to have a good pipeline. I'm going to ask Ray Lewis to put a little more color on that.

Yes, thanks, Debbie. The pipeline remains very healthy. It's consistent with prior levels. We're seeing activity across all the sectors with a continued emphasis on the market rate products - assisted living and independent living. There are several interesting opportunities we're pursuing. We're seeing some larger transactions. Yield remains fairly consistent with prior levels between 9 percent and 10.5 percent. A number of transactions recently in the marketplace have been done at the lower end of that range. But we're seeing relative stability in that area.

Okay. Thanks a lot.

Michelle?

I'm sorry, sir. Your next question comes from Jerry Doctrow of Legg Mason. Please proceed, sir.

Good morning.

Hi, Jerry.

Just on investments first of all, it looked like there was some straight-line rent going on, because I think you talked about cash yield on investments like at $6.7m, which is like a 9.6 percent yield and then the GAAP yield, it was higher. Can you just kind of explain what's going on there, just where straight-line rent is overall?

Absolutely. We're happy to do that. First of all, our preference is always to have our FFO come as close as possible to our actual cash earnings. As a result of that, we try to avoid straight-lining as we make new investments. In the case of making the ElderTrust acquisition as well as for the Brookdale transaction, we have a limited amount of straight-line rent. Our total receivable on the balance sheet, to put it in context for you, is about $1.6m, Jerry.

Okay. So if you added basically a little bit more as part of Brookdale in terms of the stuff that was done in the quarter, is that --

That's correct. Based on where we stand now, we would expect a normal full quarter of straight-lining to be about $600,000.

Okay, alright, thanks. I guess on the lawsuit, is there any more color just in terms of why it came about? I guess it was obviously just issues on the spin originally and -- I'm just trying to understand what was driving it or whatever?

I think what you probably know about us by now is that in every circumstance we're going to represent our shareholders effectively and to the best of our ability. And in this case, we're alleging matters that arose out of the spin in the nature of legal malpractice and conflict of interest.

Okay. Just in terms of the Kindred reset, maybe remind me again of sort of the dates that you start the process [inaudible], and then I'd like to try to get a sense of whether there are any negotiations going on with them at this point?

Okay. As you know, what we call the reset right is the one-time, one-way right that we have under the master leases with Kindred to increase our rent to market if market is higher than what our contractual lease provides. And that reset right was designed to give our shareholders upside in the healthcare sector. We can trigger that right, if at all, starting in January of '06. We hope to again manage that situation in the best interest of our shareholders.

So the positives would start, in terms of you sort of -- there's this process of conceivably appraisals on both sides and that kind of thing. That process would trigger January '06, and as implemented, the dollar amounts are going to change would be mid-year '06. Is that --

That's correct, Jerry.

Okay. You started to talk with them at all about that, or is it still too far away to?

I think we, again, it's starting to obtain a fair amount of visibility for our own shareholders as well as probably for Kindred. I think over time conversations will likely accelerate as we look forward to that '06 date.

Okay. Just on other debt structures, obviously you're bringing down the bank loan, which is great. Are there any other -- I guess if you could just remind me sort of what on sort of the term debt, the stuff that's out there, is there the ability refinance that, or is that still sort of in a lockout period? I know you have the interest rate locked or whatever as well, which I think has been negative. Are there any others that are potential interest rate savings out there, and what's the timing of those?

We think that the line of credit is the lowest hanging fruit, if you will, to decrease our marginal cost of borrowing. I think the way that we're going to continue to hopefully create more shareholder value is that as we incrementally borrow for acquisitions our cost of debt is decreasing, and as a result our overall average cost of debt will hopefully go down, even in a modestly rising interest rate environment. So, as we incur new fixed rate debt, for example, our marginal overall cost is going to be decreasing.

Okay. The term debt that was out there, again I probably should remember this, but I can't offhand, you refinanced already since the whole Kindred bankruptcy and that sort of thing and so there's not a refinancing opportunity on the term debt at this point.

The bonds are probably -- you should look at those as being in place through maturity.

Okay. That's fine. Just one thing about pricing, I think we've seen some evidence of, [inaudible] back for Ray, that a pricing pressure. My sense is yield volume across the board is up, but there's been pricing pressure. You have people pointing to one deal that was done recently with nursing homes of like 9.3, some other deals that have been done. There's certainly talk of [inaudible] opening, but in the low 8s. Are you seeing much of that? Your pricing really is holding relatively firm on the new stuff.

I think if you look at the transactions that we've done with an average yield of 10.2 percent, we're actually able to hold our pricing pretty well in the face of a competitive market, as you point out. I think you're right to point out that if you were to sort of dice the activity that's taken place recently by property type you would see a movement downward in some of the skilled nursing assets. I'm not sure if that's a function of specific circumstances or if that's a general trend in the marketplace. I think it's a little early to tell. But we certainly did see a couple of aggressive skilled nursing transactions done last year. The independent and assisted living marketplace, which we are emphasizing in our diversification efforts, remains relatively consistent.

Okay. Alright. Thanks a lot.

Thank you, Jerry.

Your next question comes from Rich Anderson of Maxcor Financial. Please proceed, sir.

Thank you. Good morning.

Hi, Rich.

Of the $0.02 that you beat consensus by this quarter, was that entirely a function of the acquisitions that you did?

It's principally acquisitions and our run rate, G&A and professional slightly below our sort of $19m projection.

Okay. And then for the full year guidance, how much of the new acquisition, the $70m, contributed to that, and how much of that is a function of your anticipated launch of the new credit facility?

This is Rick. The credit facility adds a small amount. The acquisitions are approximately a little bit more than a penny each quarter, and then I guess we had a half a penny in the second. So you're picking up half pennies in the second, you're picking up a full penny, I say a penny in the third, and in the third and the fourth, and then you kind of put the interest on top of that and it kind of puts you right up to where our number is.

Okay.

Again, we're dealing with fractions of cents with pretty much everything.

That's helpful though. How much of the $70m again during the second quarter was a function of relationships that you created from past transactions with ElderTrust and Brookdale? In other words, how much are you sort of rolling off of past -- creating business relationships and actually creating more business down the road, sort of snowballing?

The majority of the volume was related to prior relationships with Brookdale and Genesis.

Okay. Of the 10.2 GAAP yield, or the 9.6 cash yield, how does that relate to sort of the EBITDAR yield? In other words, can you give us a sense of what the profitability of the property is relative to what they're paying in rent?

The coverages range between 1 and 1.4 times on the portfolio of acquired properties in the second quarter.

Is that after management fees?

Yes.

Yes, it is.

Okay. So presumably the EBITDAR, if I'm using the right terminology, yield would be something like 10.5 or 11?

That's correct. I would say closer to 11.

Okay. You mentioned non-government reimbursement now at 12 percent of your total. What is your target for the next few years?

Rich, this is Debbie. As we basically implement the strategic growth and diversification plan, we're trying to of course increase earnings and decrease risk and volatility in the portfolio. So, we obviously want reduce the Kindred exposure over time. We want to build out the piece of the pie that's basically market rate products or non-government reimbursed, and obviously maintain our good geographic diversification. I think, all other things being equal, you're going to see the ALIL and a piece of the pie expand maybe from 12 percent to maybe 20 to 25 percent over time.

Okay, that's helpful. Thank you. And last question is with regard to your coverages in the Kindred master leases of 1.7, how would you say that compares, I mean this may be an obvious question, but how would that compare to what the market coverage is today so maybe we can get a sense for the reset right and what the upside might be?

Okay. If I were EBITDARM right now, which is before management fees, on the Kindred portfolio it's about 2.3 times. I think if you listen to the calls that people are having currently about what fields are being done in the marketplace at for these asset classes, you would see EBITDARM coverages at 1.4 or so. Maybe a little bit higher for hospitals, although there are fewer data points for that. So that's what we're seeing.

Okay, perfect. Thank you very much.

You're welcome.

You have no further questions at this time. Again, to ask a question, that's star, 1.

Okay. If there aren't any more questions, I just want to thank everyone for joining us this morning. We really appreciate your participation and look forward to speaking to everyone soon. Thank you.

There are no further questions, ma'am.

Thank you.

Thanks, Michelle.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.