芬塔 (VTR) 2006 Q3 法說會逐字稿

Good morning. My name is Bobby, and I will be your conference operator today. At this time, I would like to welcome everyone to the NHP Third Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise.

Certain matters discussed within this conference call may constitute forward-looking statements within the meaning of the Federal Securities laws. Although the Company believes that these statements are based on reasonable assumptions, it can give no assurance that exceptions will be obtained. Actual results and timings of certain events could differ materially from those projected and/or contemplated by the forward-looking statements due to the 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 measurement of the operating performance because it excludes the effects of depreciation and gains and losses from sales of facilities, both of which are based on historical cost which may be limited relevance in evaluating current performance.

Additionally, funds from these operations is widely used by the industry analysis -- analysts, excuse me, as a measurement of operating performance for equity REIT. The Company, therefore, discloses funds from operations, although it's a measurement that is not defined by accounting principles generally accepted in the United States. The Company calculates funds from operations in accordance with the National Association of Real Estate Investment Trust definitions. The measurement may not be comparable to the similarly titled measures by -- or used by other REITs. Consequently, funds from these operations may not provide a meaningful measure of the Company's performance as compared to that of other REIT.

Funds from operations does not represent cash generated from operating activities as defined by the accounting principles generally accepted in the United States. Therefore, they should not be considered as an alternate net income to the primary indicator of operating performance to cash flow as a measure -- as a measure of liquidity.

I would now like to turn the conference over to Douglas Pasquale, President and Chief Executive Officer. Sir, you may begin.

Thank you, Bobby.

Good morning, and thank you for your interest in Nationwide Health Properties. Joining me for today's call are Don Bradley, Chief Investment Officer; Abdo Khoury, Chief Financial and Portfolio Officer; David Snyder, Vice President and Controller; and Brent Chappell, Vice President, Portfolio Management.

Much was accomplished on all fronts during the third quarter and year to date, enabling us to increase our 2006 FFO guidance range before impairments to between $1.92 and $1.93 per share.

Since our published earnings release and supplemental analyst information are very thorough, I will refrain from repeating information in that report in any detail and instead focus on what we believe are key headlines.

Our financial results for the quarter and year to date reflect notable improvements across the board as compared to the same periods a year ago.

For the quarter, revenues are up 36%, FFO is up 25%, and FFO per share is up 4% to $0.49 per share.

For the nine months, revenue is up 29%, FFO is up 17%, and FFO per share is up 6%.

Our 431 million Hearthstone senior housing investment continues to perform well relative to our original underwriting assumptions. Despite rent increases of 5% or more over the last several months, occupancy increased to nearly 92% at September 30. Given Hearthstone's operational performance to date, we fully expect our EBITDAR coverage to be approximately 1.1 times by year-end.

The firm that built most of Hearthstone's facilities has completed its expansion construction analysis, allowing Hearthstone to prioritize their near-term expansion plans. Hearthstone and NHP now intend to aggressively initiate the expansion program. For these reasons and many others, we remain very bullish on this investment.

Our Broe Medical Office Building joint venture continues to perform [material] on plan although we did experience a very slight decline in occupancy and net operating income this quarter. We expect to make up these declines and much more in ensuing quarters. At closing, we identified for sale two of the 21 assets we acquired and expect to complete both [disposition] in the next couple of quarters.

On the acquisition front, NHP and Broe have identified a number of interesting assets that we are currently evaluating to purchase.

Turning to other portfolio management-related matters, we recently hired two assistant managers to assist with the management of our rapidly expanding portfolio. We expect our actual 2006 revenue loss from loan payoffs, asset recycling, and purchase options to be about $5 million, which equates to about $10.5 million on a full-year equivalent basis.

Proceeds associated with these transactions will be about $74 million. While we will update you regarding our 2007 revenue leakage forecast on our year-end call, for now, we expect less revenue loss in 2007, both on an absolute basis and as a percentage of total revenue, than we experienced in 2006. Hopefully, 2006 will prove to be, at least for the next few years, our single-most challenging year with respect to revenue leakage.

On the investment front, we continue to be very successful in sourcing quality accretive investments at a pace well ahead of any point in the Company's history.

During the third quarter, we closed on 40 million of senior housing assets and expect to close about 260 million of investments in the fourth quarter, almost 95% of which are senior housing facilities. Assuming closings occur as planned and there is always some risk to hitting closing targets, NHP will complete over 1 billion of investments in 2006, about 75% of which will be senior housing facilities.

More important than quantity of investments is quality of investments, and here, too, we believe NHP has excelled.

On a portfolio basis, the 2006 combined underwritten cap rate is 10.2%, initial yield is 8.3%, and rent escalators averaged 2.8%. Our rent coverages are consistent with our recent underwriting standards for each applicable asset class.

As an important bonus, nearly 100% of our 2006 investments are with new customers with which we expect to do considerable additional business in ensuing years.

In tandem with NHP's investments, we have also been quite active on the capital markets front. In July, we issued 350 million of 6.5% senior unsecured notes and have issued through September 30 about 15.9 million shares, producing about 340 million of net equity via a secondary offering in our controlled equity offering and DRIP programs.

NHP currently has about 600 million available on its credit facility, and we are actively exploring alternate capital sources, including joint ventures and select asset sales.

With 2007 now on the near horizon, we have significant financial firepower and flexibility even after our unprecedented investment volume in 2006.

This concludes my formal remarks. We are now pleased to answer your questions. Bobby, please open the line.

Yes, sir. [OPERATOR INSTRUCTIONS]

And your first question comes from the line of Herb Tinger.

Good morning.

Oh, thanks. Good morning. Just a couple questions. Interest and other income in the quarter was $4 million, which is quite a bit higher than recent periods. Was there anything unusual or any one-time items included in this quarter's number?

We --

During the quarter, we had a tenant that had a purchase option that we financed the acquisition of the purchase option and was about, I think, 33 million or so, in actually a couple of tenants. We have been working with some of our tenants that have purchase options to try to mitigate some of the leakage by providing the financing for the exercise of the options. So I think we had probably about 40 million of those, and that's the reason for the increase in the interest income.

Okay. And just one other more general question. A number of REITS have been experiencing big increases in acquisition activity. Is there anything that's changed in terms of the seller psychology or anything you can attribute to what's -- what might be changing their motivation to sell?

I'm not -- actually, if I look across the other REITs, most of the activity has been more of an M&A variety, like [ACP] has been more with the large [G&L] transaction and [Aventos] has done a large M&A transaction. So I'm not so sure that that corresponds to the onesy/twosies that we tend to get more involved in.

But that said, you're still seeing a very favorable market. A lot of these people have either private investors who have been supporting them for some time and see this as a chance to liquidate their investment after having gone through some tough times. You see some generational transfers, where seniors that have been running these facilities are transferring them on to their children and looking for financing to do that. You're seeing a number of people who are beginning to realize that having real estate on their financial statements is not necessarily a good thing. It's kind of a wasting asset for them. And by doing something like a sale-leaseback with us, they could monetize that real estate and use it to grow their operations. There's a whole variety of things going on that's making that happen.

Okay. Thanks for the clarification.

Your next question comes from the line of David Tsoupros.

Good morning.

Thank you. I just want to ask a question about the coverage on your skilled nursing portfolio. You know, it went down year over year, but it looks like it also went down sequentially and with occupancy going up. Can you explain that?

I mean in terms of the coverage, David, I mean it's reflective of a number of factors. I think in terms of -- we're seeing on the acquisition side a monetization of coverage through our acquisition of under-managed, lower-coverage facilities above the market rates. We've got a significant number of facilities that are currently in stabilization as a result of the acquisition and/or renovation and redevelopment of the expansion. And then a significant portion of our leakage is resulting from the [sniff] transition that's taken place since the end of the year.

So it's acquisitions in the last 12 months bringing down the average across the portfolio?

Yes, the acquisitions over the -- we don't underwrite necessarily at 2.4 and 2.2.

Right.

We underwrite more in the 1.7 range. So that's bringing down the average. We've done over 200 million of [sniff] acquisitions, which is almost over 25% of the total portfolio.

And also, on the purchase options, a large number of those are skilled nursing facilities and have been in our portfolio for some time, and most of them had higher yields and higher coverage, and by replacing them with a newer acquisition, you do get little movement in the coverage, but 2.2 is still a very good coverage.

Okay. That answers that.

I just want to ask you about the medical building space. Are you going to expand more into that space? Do you expand your JV with Broe Companies, or do you do something else?

Really, David, everything's on the table. We've asked Don to earmark a meaningful part of his time to identify the population of alternatives and to explore and evaluate, prioritize those. He's in the process of doing that. We'd very much like to expand our relationship with the Broe Companies, but that's not the only thing that we're looking at.

Great. I mean just going back to the [sniffs] -- sorry to harp on this, but just looking at the EBITDAR as opposed to the EBIDARM coverage, and it was 1.4 in this quarter?

One second; we're looking that up. Yes, that's correct.

That's correct.

So the management makes up that much of a difference between 2.2 and 1.4?

The management fees?

Yes.

Yes, and that is function of really the operating margins that the operators have, and so you get sometimes high volume -- high revenue but with a little lower margin, [it can] generate a significant difference between the coverage before and after management fees.

And we tend to be conservative, David, and use the 5%, which is sort of the -- has been the industry standard in skilled nursing, yet we've seen plenty of skilled nursing operators that would be more than happy to operate managed facilities for less than 5% given the volume, the revenue volume that you see.

You know, we have a facility in Pennsylvania that has over 400 beds. The revenue on that [inaudible] it's huge, and when you take 5% on that, it's quite significant, and anybody would be happy to manage that particular facility probably with 2% or 3%.

Okay, very good.

The only other thing I would say about the coverages is that Brent and Abdo have done a tremendous job of explaining why they came down, but there is nothing endemic in the portfolio that there is suggesting there's any problems. Our same-store facilities are doing great. This is just merely us trying to better a situation we have and react to a situation in the case of the exercise-to-purchase option. So there's nothing working there to -- for people to be concerned about.

Okay. No, that makes perfect sense; the acquisition, both coming in and going out, is changing that average. Thank you very much.

You're welcome.

Your next question comes from the line of Jerry Doctrow.

Hi, thanks. I came in a little late, so I apologize if some of this got covered.

Just in the quarter, we found it a little confusing. I mean you made acquisitions, you made mortgage loans, but they were placed in sales as well. So could you just clarify sort of the sales and the net investments in the quarter?

I think, Jerry, if you will reference the -- if you have in front of you the analysts' supplemental information --

If the detail's there and I just didn't see it, that's fine. I'll just --

[Inaudible]. We don't have year to date. We don't have it by quarter. But --

What we truly have are $40 million of acquisitions that are clear on there. We've got about $40 million worth of sales of property that we financed. And we had about 8 -- 8 to $10 million, I think, Abdo? --

Loan pay --

-- loan pay-offs during the quarter.

I think it's about 17 million.

[Inaudible] about 17 million. So about 27 million going away, 40 million coming on, so probably somewhere between -- around 13 to 15 million of net investments.

Okay. I'll go back and double-check that. Thanks.

If you need clarification, just --

If you look at the Q, Jerry, I think you can get to it pretty easily from footnote three and footnote four.

Okay. Okay. Great. And then the large acquisition in the -- you know, that you were sort of anticipating for this fourth quarter, and again, I apologize if you covered some of this, but any additional color as to timing or what's going on there, the nature of it, that sort of thing?

Actually, it's several, Jerry.

Right. Okay.

So, no, really nothing additional cover -- color. We'll try to do that once they do close. These are all items that we'd receive board approval on, are well down the way of our diligent documentation, so we felt very comfortable indicating that they were things that were going to be in the closing Q. This was not everything that we're looking at right now. There may be other things to add to this, but this is several different items, not just one thing.

Okay, and obviously, you haven't closed yet, so we're looking at sort of back half in the fourth quarter?

Yes, it could be back half, yes, it's --

Middle -- well --

[Inaudible] times, but I think it's not a bad assumption just to assume midway through and --

Okay. Okay. The interest was bouncing a little bit. You know, I think it had been 6.4 up to 7. I think given our cost of -- you know, your kind of cost of capital overall and what you're pricing your deals, I'm assuming that coming down, but I was just trying to get some clarification what was going on there and I guess really what your outlook is for the rate go-forward. I mean I assume it maybe had to do with the timing of some of these note issuances and stuff in the quarter.

Yes, we have -- most of our debt now is fixed. There's very little left that's variable, the 100 million on our credit facility, and then there's some secured debt that's floating, but we have no interest on that debt because we get the spread over the actual rate.

It's difficult to predict what the interest rates are going to do. It has been interesting recently when you think that interest rates may go up a little bit and then come down. They've been down much faster. So we may take advantage of the [defending] with this 100 million that we have. Closing, we may take advantage of the rates and maybe hedge some of it or fix it long-term. So we're [inaudible] looking into that.

For just -- or my real question is kind of for modeling purposes. You know, is the rate closer to 6.5 than 7 sort of the right thing to be thinking about? And that's kind of --

Oh, let's see. The fixed rate is about 6.6. Then on the floating, currently, they're at about 5.5%. And then the 100 million that's remaining, we -- our -- it's 90 basis points over the LIBOR.

Okay. So I mean we're calculating about a 7% rate for the quarter, and I'm assuming the run rate should be lower than that just based on what I'm seeing your cost of funds.

It should be lower than that.

Okay. And then G&A was a little bit below 6% the last couple quarters. Is that a good -- sort of the dollar amount right now, a good run rate to go forward on?

Yes, it's about the right amount.

Okay. And then just my last question, and I'll jump. It's just purchase options. You know, what does that look like over the next sort of year or two years?

I think we're going to address that in our year-end call. We -- as Doug mentioned in his comments, it doesn't -- 2007 doesn't look as bad as 2006.

It would be probably, as a percent of our total revenue, a much smaller amount, much smaller percentage than in '06.

Okay. I guess I'll leave with that. Thanks.

Your next question comes from the line of Greg Andrews.

Good morning.

Morning, Greg.

I'm here with Jim Sullivan. We had a couple of follow-ups. On the -- Abdo, you talked about the $33 million mortgage to Brookdale. Could you give us the term on that and the rate?

Actually, it's the same rate that the rent was on, and [inaudible]. It's close to 10%.

And how long does that loan go for?

2'08.

Okay, so it was really just accelerating there, purchase option?

Yes.

Great. And then just on the coverage for your assisted living and independent living, that also went down sequentially from last quarter. Is that really just reflective of adding Hearthstone to the portfolio?

You're correct. That's why.

And how about Hearthstone itself? When you announced the deal, you indicated that the coverage after management fees and some CapEx was around 1 to 1. Has that stayed at that level, or are you seeing any signs of that improving?

It's improving, and we still expect it to hit 1.1 by year-end.

Okay, great. Thanks. And then just to clarify, you have some Series B preferred that is convertible under certain circumstances. Have -- are those now convertible because the stock price exceeded the threshold?

We're trying to remember what the threshold price [inaudible]. No, I --

I think it was a little over 28.

Yes, a little over 28, and that's -- yes.

Does it need to stay above that level for a certain period of time, or is it just any time once you've crossed that threshold?

I need to look at that, and I don't recall the details.

Okay. Yes, if you could get back to me on that, that would be great.

But, Greg, you know that it's already reflected in our FFO, the number, the dilution impact of the preferred if it converts.

Right.

We already count in all the shares, so the impact of it -- it's all baked into our FFO, and there's no impact of it when it converts other than we stop showing it as preferred and go to the common, but it doesn't impact our -- it doesn't create any dilution. The dilution's already accounted for.

Right. And we have that in our model. Great. Thank you.

Yes.

Your next question comes from the line of Rich Anderson.

Morning, Rich.

Hi. How are you?

Good.

So first question is when you look at the Broe joint venture -- you sounded like you were excited about Hearthstone, and then you sort of came down a notch when you started talking about the Broe joint venture. Is it fair to say that this is maybe not as exciting as you thought it was going to be?

Not at all. We're just telling the facts, and the facts were we had one tenant leave a little earlier than we were pro formaing, and they -- some of the utility costs and stuff like that, they've hit straight-lined, and actually, they were more seasonal, and that had just caused a slight decline relative to what the plan was. So we have no reason but to be extraordinarily enthusiastic about it.

Okay.

Finding -- we're finding what we think will be good investment opportunities. We continue to meet with them on a regular periodic basis face to face. They're excited about trying to build the base. So it's just a little bit different business where you don't have the triple-net lease, and so it is -- you have tenants come and go. Things change a little bit. Frankly, the decrease was so significant that we could have easily not even mentioned it but just -- it is significant.

Okay. So will this be your vehicle of choice for medical office and maybe a change to future structures to the next sort of set of transactions? Or will you -- are you getting comfortable in the business, and will you start to consider taking on a more -- a bigger role in the process?

Well, we've accomplished what we set out to do to this point in terms of coming up the learning curve quickly with respect to the asset class. We still do not have the infrastructure in place to do this on our own, and that wasn't our intent going into it.

So we'll either -- and it's likely that some combination of these things will happen. We'll either continue to grow as rapidly as possible the Broe joint venture, which is our intent and their intent. We'll also continue to look at other opportunities, including the acquisition of some kind of significant platform, which -- an ideal medical office building acquisition platform for us would be something that had a significant existing asset base, had a significant pipeline in terms of both acquisitions and development, and had a management track record over a significant period of time that would suggest that they're very savvy in the space and know how to extract profits in both good times and somewhat less favorable times.

So we're trying to identify that opportunity, but in the meantime, we'll continue to grow with the Broe joint venture, and who knows what we might be able to accomplish with and through them.

Are you looking at both public and private entities?

Yes, we are.

Okay. And is there any restriction for you to -- does the Broe joint venture have the first look -- the right to look, or can you -- are you free to sort of cheat on them?

Either side has complete freedom, which is what we thought was in our mutual best interest when we struck the deal.

Okay. When you mentioned the acquisitions this year, I think you said an EBITDA -- a yield of 10.2%. Did you say that, like a profit-level yield?

We're talking about the underwritten cap rate.

Okay. So cap rate 10.2 and a lease rate of 8 or something like that?

Yes, 8.3%.

Okay. So then that would imply a coverage of, say, 1.25 or something like that?

That's right.

But that's before or after management?

[Inaudible]. Don, how [bad] is it?

That would be -- [DAR] is underwritten cap rate, so it would be after management.

Okay.

It's about 1 -- a little under 1.25 coverage, Rich.

Okay. Those math classes came in handy.

And, actually, yes, you'd see it right there. The senior housing is 1.2, and the skilled is enough through the Wingate acquisition at 1.4 to bring it up a little bit from the 1.2 to 1.25.

Okay, and then the last question is I guess I'm curious as to why someone exercising a purchase option would be willing to finance that at the exact same rate that they are buying it at, and hence, like economically, there's no impact on them except for the fact that they're loading up their balance sheet with real estate. So I guess why would they do that?

That was the goal is they wanted to take advantage of the depreciation.

Okay.

And it's a short-term -- it's 2008, so it was like 2.5 years or something like that. It's 30-month-type arrangement.

Okay. All right.

And other -- and depending all what the purchase option is and all of that. In the other situation, the purchase option was at fair market value, so when you -- the yields go down and you're still at the same point in terms of plan.

Okay, I sort of didn't factor in the depreciation [inaudible].

Yes.

Okay, thank you.

You're welcome.

Your next question comes from the line of [Tao Okisanya].

Good morning.

Good morning, gentlemen. A quick question. With Brookdale now making up 24% of revenues, any concerns about that tenant concentration risk? And if there are any concerns, how would you go about managing that?

We're not particularly concerned about that for a number of reasons. One is we think that we can meaningfully reduce that concentration through our continued investment program. We've spoken carefully and thoroughly with the rating agencies, and they don't have any particular concern as long as the Company continues to grow. So that's the first reason. And if it ever got too high, we could always sell some of the assets either to them or to somebody else. So there are a lot of ways we could mitigate that, but frankly, right now, there's no reason for us to be concerned about the concentration level.

Okay. A quick follow-up question.

And you know the reason for that. Their credit is excellent and seems to continue to improve as their stock trades up, approaching $50 a share.

Right. Just a quick follow-up question for you, Doug. Your earlier comment about the '07 revenue leakage most likely be lower than the '06 numbers, and although you're going to fully address that side in the fourth quarter, could you just kind of give some more color in regards to what that forecast is based on, like high-level generic comments on why you think that's going to happen?

Well, the reason it's going to happen -- I don't -- the guys are still working on the numbers. We've had a very busy quarter. We're still in the process of completing our 2007 budget. So I don't have those figures at my fingertips.

But for a number of reasons, 2006 just tended to be -- to have a cluster of purchase options that came due, and it results from NHP's past when we had some workouts to deal with -- our predecessors had some workouts to deal with. And in order to find tenants and operators that could complete the process of bringing the assets up to a more profitable level, purchase options were given, and a lot of them just accumulated around 2006.

Now, we navigated through that, I think, pretty well given the past that we faced at the beginning of this year in terms of selling some assets that, frankly, we were glad to see leave the portfolio, in redeploying the capital, the 74 million or so that we got from the proceeds, and then in some ways, mitigating, pushing out the revenue loss by, as Abdo discussed, the financing the acquisitions or whatnot. And even though some of those are short-term, you don't know what's going to happen over the next couple years. They could be stretched out for a longer period of time.

As you look forward into 2007, 2008, 2009 and beyond, what you see is a less significant clustering, but quantifying that now, it would be really not as specific as we'd like to be. So we'll get to that and let you guys know just as soon as possible, but frankly, it wasn't a priority for us relative to all the other things we were trying to accomplish this year. We know it's manageable. We know it's going to be less. But quantifying now would be -- I wouldn't be comfortable with it until we do some more work.

Great. Thank you.

You're very welcome.

Before we take the next question, I just wanted to comment back on Greg's earlier question about the convertible Series B. In order for that to be convertible, we'd have to trade over the conversion -- over the 125% premium, so over the $28 type price for 20 of the last 30 trading days at the end of the quarter. We did not. We didn't even break 28 until I don't think after September 30. So that is not convertible in Q4, and we'll see how the performance does during Q4, whether that's convertible in Q1 2007.

And given that the -- if my memory is correct, the coupon on the preferred is substantially higher than our common dividend yield right now, so I'm not so sure that that's a bad thing if people choose to convert. In fact, it's a very good thing. So --

Ready for the next question, sir?

We are.

Your next question comes from the line of Michael Mueller.

Hi. Question's been answered. Thanks.

You're welcome. Thank you.

Your next question comes from the line of Scott O'Shea.

Good morning.

Good morning, guys. Within the [MOB] portfolio, what type of CapEx budget are you [inaudible] currently for just leasing, maintenance, commission expenditures over the course of a year? Any significant --

No, nothing insignificant. We've already put that -- most of that has been deployed already. When we took over the portfolio, there's some deferred maintenance to be done and some splash we wanted to get done, so maybe 1 or 2 million, something like that.

On an ongoing basis, 1 million to 2 a year given the current size of the MOB?

I think that's fair.

Okay, that's helpful. Thank you.

[OPERATOR INSTRUCTIONS]

And at this time, there are no further questions.

Okay. Thank you very much. We appreciate your interest. If you have any follow-up questions, we'll all be here today. Feel free to give us a call. Thank you very much. Have a good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.