芬塔 (VTR) 2006 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Fourth Quarter Ventas Earnings Conference Call. My name is Carissa 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 towards the end of today's conference. [OPERATOR INSTRUCTIONS]. If at any time during the call you require assistance please key star follow by a zero and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's conference Mr. T. Richard Riney, Executive Vice President and General Counsel, please proceed.

Thank you. Good morning everyone. Welcome to the Ventas conference call to review the Company's announcement yesterday regarding it's results for quarter and year-ended December 31, 2006.

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 Laws. These projections, predictions and statements are based on managements current beliefs as well as on a number of assumptions concerning future events. The forward-looking statements are subject to many risks and 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, 2005, and the Company's other reports filed periodically with the SEC for 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 in expectations.

Please note that quantitative reconciliations between each non-GAAP financial measure contained in this presentation in its most directly comparable GAAP measure are available in the Investor Relations section of our Web site at www.Ventas REIT.com. Later in the call we will be making some brief remarks regarding our pending transaction with Sunrise REIT but the purpose of this call is of course to review the Company's recently announced quarterly and annual results so we intend to limit the Q&A session to those topics and not entertain questions regarding the Sunrise situation.

I will now turn the call over to Ms. Deborah A. Cafaro, Chairman, President and CEO of the Company.

Thank you, Rich. Good morning and welcome to the Ventas' fourth quarter and year-end 2006 earning call. I'm happy to speak with you today from Louisville where I'm joined by my colleagues, Rick Schweinhart, Ray Louis and the rest of the Ventas team. Today we want to discuss our 2006 accomplishments and earnings and our 2007 outlook.

Following my comments Rick Schweinhart will report in detail on our financial results. Ventas had another terrific year in 2006. I always hope that I can report to our shareholders that we were a better company at the end of each year than we were at the beginning. During 2006 we significantly improved our platform, delivered excellent total shareholder return and positioned the Company to succeed in the future. First we maintained our high growth profile in 2006 by growing normalized FFO per share by 17% to $2.44 per share. This is our fifth consecutive year of producing double-digit normalized FFO per share growth.

We also continued to execute our strategic growth and diversification plan by acquiring almost 700 million in assets during the year. These assets are diversified across the senior housing and healthcare spectrum. We have now successfully acquired and integrated over $3 billion in assets, mostly private pay senior living assets, during the last couple of years including three acquisitions of other REITs.

As in prior years we have tried to make investments in senior housing and healthcare assets that are operated by experienced, capable third party tenant operators. And in late 2006 we also successfully completed the reset REIT right with Kindred [Management] which added $33.1 million in annual rent to our Kindred portfolio. I'm also happy to report that both Ventas and Kindred Management immediately began a very constructive dialogue that could yield important benefits for both sets of shareholders in the future. Our enterprise value continues to grow with current value at about $7.5 billion.

Our run rate rent from Kindred even after the reset has been improved to less than half of our analyzed revenues, more importantly the private pay portion of our portfolio now accounts for 44% of our total analyzed revenues. We remain a leading healthcare REIT with a productivity diversified portfolio of 453 senior housing and healthcare assets located in 43 states. Likewise during the year we retained our focus on keeping a strong balance sheet. At year end our net debt to enterprise value was an excellent 34%, giving us significant financial strength and flexibility. We are committed to becoming an investment grade rated company through strong balance sheet management and diversification efforts.

In July, [Fish] initiated credit coverage on Ventas with a triple B minus investment grade rating and in December Standard & Poor's improved its outlook on Ventas to double B plus positive. We believe this improved outlook positions Ventas to achieve a second investment grade rating in the near future.

In 2006 we continued to invest in people and infrastructure to support our future growth. We have talked about the benefits of scale and liquidity but we have also been focused on ensuring that we have our footings in place as we grow. Part of our discipline includes operating Ventas in a transparent and reliable manner for all of our stakeholders and following best practices in corporate governance.

As a result of our efforts Ventas continues to have a 99 percentile corporate governance ranking from ISS and, more importantly, the trust of our shareholders, lenders and operating partners. As we pursue our strategic goals we have remained faithful to our obligation and commitment to deliver consistent superior return to our shareholders. During the last seven years Ventas has delivered a 52% compound annual total shareholder return.

In 2006 alone we delivered a 38% TSR. On a comparative basis Ventas has about twice the compound annual return of our peers and the Morgan Stanley re-index during that period. On a simple return basis, we out performed the same groups by nearly four times. As a result of our growing, reliable revenue stream and our confidence in our assets and our future, we are pleased to increase our dividend by 20%, to $0.475 per share for the first quarter of 2007.

This $1.90 indicated annual dividend level shows our commitment to continuing to share our increasing cash flow with you and also to generate more after dividend free cash flow to invest in our future growth. As this exceptional dividend decision makes clear our outlook for 2007 is very positive. Our acquisitions program remains active and we are working on a number of interesting opportunities in addition to our announced acquisition of Sunrise REIT.

We are also in the process of adding several new investment professionals to Ray Louis's team to increase our reach and expand our resources. These executives will focus on private pay senior housing, the long-term care arena and the hospital space. Our in place medical office building initiative is also gaining traction and we have established strategic partnerships with several regional developer operators. We expect these relationships to lead to additional future opportunities for us and we intend to significantly build our portfolio in the MOV area during in 2007.

In multiple areas across asset classes in the broader senior living and healthcare markets the huge seams of institutionalization, privatization and consolidation should create significant capital needs and lead to extensive investment opportunities for Ventas in the near-term. So we are excited about the dynamic nature of our markets and believe we will continue to find good growth opportunities, achieve excellent risk adjusted returns on equity and create reliable, uncorrelated future cash flows that will make us a better company at the end of 2007 than we were at the start.

With that I will now turn the call over to Rick Schweinhart so that he can review our financial results in detail, after which we will be happy to take your questions.

Thank you, Debbie. 2006 normalized FFO per diluted share grew 17% to $2.44 from $2.09 last year. In 2006, FAD per diluted share grew 16% to 225 from 194 last year. The increases are primarily due to our strategic diversification program and the Kindred rent reset effective in July of this year.

Fourth quarter normalized FFO per diluted share increased 22% to $0.67 compared to $0.55 last year. Normalized FFO totaled $71 million compared to $57 million for the fourth quarter last year. Normalized FFO excludes $1.4 million of gains on the sale of securities. The $14 million increase in normalized FFO from 2005 is attributable to $20 million of revenue increases offset by $6 million increase in interest expense and flat general, administrative and professional fees.

Revenues for the quarter totaled $121 million, $119 million excluding gains on the sale of securities, compared to $98 million last year. The $20 million increase was due to the Kindred May escalator and rent reset effective in July which added $10 million. The senior care asset acquisition which was effective November 7, added $7 million. The senior care bridge loan, which ended November 7, added $1.8 million.

And other acquisitions and escalators net of reductions in mortgage loan interest which added $1 million. Interest expense increased $6 million from the fourth quarter of 2005 due primarily to acquisition borrowing offset by a decrease in our effective interest rate. The fourth quarter 2006 effective interest rate of 7.2% improved from 7.4% in the fourth quarter of 2005. General administrative and professional fees for the fourth quarter of 2006 totaled $6.7 million, or 5.5% of revenues. This compares favorably to G&A of 7.1% last year.

Fourth quarter 2006 normalized FFO per share grew $0.03 sequentially over the third quarter 2006 due to a full quarter of the increased rental income from the Kindred rent reset effective July 19 and incremental effect of the senior care transaction. Items of note on the balance sheet at December 31, compared to September 30, 2006 balance sheet are, real estate investments increased $606 million, and mortgage loans receivable decreased $157 million, due to the senior care acquisition.

Debt increased $322 million to $2.329 billion at December 31, 2006, from about $2 billion at September 30, 2006. The increase plus the $65 million equity issued and cash flow from operations funded the senior care transaction. During the quarter we issued $230 million of three and seven eighths percent convertible Senior Notes due 2011. Our debt to total capitalization at quarter end was 34%.

The revolver balance decreased to $57 million at December 31, 2006, from $72 million at September 30. We also assumed $115 million of mortgage debt in the senior care transaction which we paid off early in the first quarter by drawing on the revolver.

Our fourth quarter acquisitions are summarized as follows. Real estate investments increased $606 million. Analyzed rent on these investments totaled $46.8 million, or $11.7 million per quarter. Due to the timing of these investments $7 million of this revenue was recognized in the fourth quarter. The initial cash yields on these investments is over 7.7%.

Weighted-average diluted shares grew to 105.7 million in the fourth quarter, up from 104.6 million shares in the third reflected the weighted issuance of 1.7 million shares in the senior care transaction. Prior to the announcement of the Sunrise REIT acquisition we announced that we expected 2007 normalized FFO to be between $2.70 and $2.75 per diluted share. As part of the Sunrise REIT acquisition announcement we stated that assuming the transaction closes early in the second quarter of 2007 we expect the Sunrise REIT acquisition to dilute normalized FFO in 2007 by about $0.05 to $0.07 per share excluding development assets.

With that said let me turn it back to Debbie.

Thanks, Rick. Before we open the call to your questions I'd like to discuss for a moment our purchase agreement to acquire Sunrise REIT. As you know on January 15 we announced a definitive agreement to acquire Sunrise REITS interest in 74 high quality, private pay assisted living communities in the U.S. and Canada and the exclusive right of first offer to acquire other newly developed assets in Canada and portions of the U.S. for a total value of 1.8 billion. Our agreement to acquire Sunrise REIT provides its unit holders with a 45% premium over the volume weighted-average trading price of their units on the Toronto Stock Exchange for the 20 trading days preceding the announcement of our transaction.

We believe that the price we are paying is a full and fair one but it is justified by the quality of the Sunrise portfolio. Ventas has a signed, binding purchase agreement with Sunrise REIT. Our transaction is fully financed and Ventas has entered into arrangements with Sunrise Senior Living the manager that enable us to acquire the acquisition of the REIT in a timely manner. The Ventas Sunrise REIT transaction was the result of an extensive auction process conducted by the Sunrise REIT independent trustees.

Healthcare property investors which is now seeking to displace our purchase of Sunrise REIT was a full participant and finalist in that very thorough and complete process. At the conclusion of the auction HCP withdrew from the process and declined to submit a final binding proposal, apparently because it was unable to reach the necessary agreements with the parties.

Following the unanimous recommendation of Sunrise REIT special committee of independent trustees Sunrise REITS board approved the Ventas transaction. We understand that some of the recent developments and related legal proceedings can be somewhat confusing and we appreciate your patience as these matters are resolved. This is not a situation we wanted. From the start we have acted with respect for the process and the people involved and we have played by the rules. We expect others to do the same.

The binding agreements that Ventas had entered into with Sunrise REIT and Sunrise Senior Living, The Manager, provide us with certain rights and benefits that are entirely appropriate in a context where a full and fair auction was conducted and Ventas was selected as the winner. Ventas will continue to comply with all of its obligations under the agreements it has signed and make its decisions for the benefit of our company and our shareholders. As we have said we believe Sunrise REIT and its unit holders should have serious concerns with respect to HCPs serial proposals each of which seems to include a changing set of unfulfilled conditions.

In conclusion I'm pleased to report that we had another great year at Ventas marked by our fifth consecutive year of double-digit normalized FFO per share growth, successful conclusion of the reset right with Kindred, 700 million of accretive diversifying acquisitions, our first investment grade rating and 38% total shareholder return. And we are starting 2007 off with a 20% increase in our dividend. We have a strong, consistent track record of making good decisions that create long-term value for all of our shareholders. All of us on the Ventas Management team are committed to continuing to do so as we look forward. That concludes our prepared remarks. As we stated at the outset, the purpose of this call is to discuss our quarterly and full year results and 2006 accomplishments. Because the Sunrise REIT transaction is the subject of pending litigation we will not be able to answer any questions on that topic.

Therefore we will appreciate it if you will limit your questions to the results for the period in question. Thank you in advance for your understanding and cooperation. Operator?

[OPERATOR INSTRUCTIONS]. Your first question comes from the line much Rich Anderson of BMO Capital Markets. Please proceed.

Hi, thanks and good morning, everyone. Just a couple questions here. On the convertible notes you basically, basically you are already in the money. How are you showing that in your share count if at all?

This is Rich Schweinhart it's on a net share method so when you go through the computation it's a computation that provides very little dilution until the stock price rises a good deal higher than it is today. So basically it's not in there at the present time and as the stock price goes up it will start to have a minimal dilutive effect.

Right now it's infinitesimal.

Okay. I calculate at 230,000 shares.

I don't think it would be that high until the stock price goes a lot higher.

Yes.

Okay. In terms of your dividend increase I know that you guys, it's my understanding that you sort of run at a 75% type of pay out, FFO pay out, is that right, has that been sort of the convention at Ventas?

Well, what we tried to do with our dividend decisions is to use the dividend to provide an important component of our overall total shareholder return and make sure that we are growing it at exceptional above average levels and every year maintain more and more free cash flow to fuel our future growth.

But by my calculation you're below that 75% pay out level at this point, right? With the new increase.

Well, when we had set the dividend last year what we had talked about for 2006, as a historical matter was setting it at approximately 75% of cash flow or fad.

In terms of your medical office sort of overall strategy first of all the one that you bought you said is connected to Mercy Hospital. Do you mean physically connected to Mercy Hospital?

Yes, yes, this is Ray, through a walkway.

Is your overall MOB strategy to really look at those on campus type of assets or are you inclined to sort of go a little further afield with your MOB strategy?

The vast majority of our acquisition will be targeted to be on campus transactions.

Okay. G&A you mentioned hiring new investment professionals. How will that impact G&A for 2007?

We have in the projections that we have previously given we have a growth in G&A as part of those guidance projections.

You don't have a number?

I think if you take the percentage and as the revenues continue to grow, the percentage ought to stay up approximately the same, it may go up just a tad.

Last question is joint venture opportunities, how do you feel right now in terms of your ability to sort of tea up some private equity to sort of further your acquisition strategy on maybe a longer term basis?

Well , when we had written the 2005 letter to shareholders that's in our annual report we had talked about the possibility in our interest and our interest in potentially using a low cost institutional capital under the right circumstances to continue to grow in areas where we want to grow. So that's a topic that we spent a fair amount of time on in the period since we wrote that letter.

Do you think you would turn it on pretty quickly at this point if you had a need? In terms of relationship and that sort of thing?

Yes, yes.

Okay. Thank you.

Thank you, Rich.

Your next question comes from the line of David Tsoupros of Merrill Lynch. Please proceed.

Thanks and good morning.

Hi, David.

You mentioned this purchase agreement on the MOB specialty hospital that's being developed, I guess specialty hospital is used to describe LTAC as well as orthopedic and specialty surgical hospitals. What kind of property is that, LTAC or surgical hospital?

This is a specialty surgical hospital focusing on neurosurgery.

Okay. Are you disclosing who the partner is?

It's a partnership with National Surgical Hospitals.

Okay. Is there a pipeline of potential opportunities going forward with the same partner?

Certainly we entered into this transaction with the hope that we would be able to do additional transactions with them but there's not an arrangement as such.

Okay. When does that property kind of come on line?

The development process should take between 12 and 18 months.

Okay. Great. Just another question. I guess, how unique is the situation where you have someone who is willing to manage the assets and give you the flexibility to capture the cash flow of the property? I.e., is that something you could do with senior care, your senior care partnership or is it contingent on the REIT tax law change?

It's not contingent on any REIT tax law change, David, and we believe there are multiple operators of senior living and other kinds of assets who would welcome the opportunity to structure a management contract with us.

Is that something you would do in the skilled nursing area for example, or consider, I should say.

At the time we really are focusing on using that structure for the higher growth private pay senior living assets.

All right. Thank you very much.

Thanks, David.

Your next question comes from the line of Jonathan Litt of Citigroup. Please proceed.

Hi, it's Craig Melcher here with John.

Good morning, Craig.

You mentioned there's a few opportunities beyond the Sunrise. Can you talk about the cap rates you are seeing on the transactions you are looking at?

Absolutely.

Sure, Craig, this is Ray again. I mean healthcare real estate yields are increasingly situational and we are seeing a fairly wide range of cap rates over the last six months. Moreover the traditional measures like cap rates on historical cash flow are I think becoming somewhat less determinative so cap rates on large transactions with a strategic component are more difficult to peg. But when you look at individual transactions which I think there is a little bit tighter range on on the independence assisted living properties going in at least yield between 6.5 and 7.5 generally on underwritten projection, skilled nursing and hospital transactions are pricing in the eight to ten times EBITDA range. And medical offices is hovering around 7%, give or take.

On Kindred you mentioned there's been some constructive dialogue recently. How has that dialogue changed since the rent reset has occurred, since?

That's a good question. That's a good question, removal of that source of debate between us and Kindred has been very positive and we've been able to really have a good dialogue with Paul Deas and his team and obviously the Company's have lots of things they could potentially work on together that would benefit both companies.

Thank you.

You're welcome.

Your next question comes from the line of Ross Nussbaum of Banc of America Securities. Please proceed.

Okay. Thank you.

Good morning, [inaudible] here with Ross. Debbie, can you provide some more detail on what exactly that gain on securities was related to, what the investment was?

Sure, we invested in some of the equity securities of another REIT and we sold a bit of that investment.

And I believe Ross has a follow up as well.

Okay.

Yes, hi, Debbie, let me follow up on that one, can you tell us which REIT?

No. We would rather not but it's a very small investment.

Was it strategic in nature or, just trying to figure out what prompted you to put cash to work in another REIT as opposed to an acquisition.

It was strategic in nature. It is strategic in nature.

Is it something other than Sunrise?

Is it bigger than a bread box, yes, it's something other than Sunrise, okay?

I'll stop there. I have two other questions if I could.

Then we are going to have time for just one more caller after that, operator. Go ahead, Ross.

Thanks. Can you talk a little bit about the pricing of hospitals today versus snips because I'm sort of curious that we've seen cap rates come in a little bit on the skilled nursing side but not very much in the hospitals and it would seem that there's a little bit of miss pricing developing there. Do you think that's a fair statement?

We had talked again in the unit report last year about the idea of the hospital stay becoming a little bit more opportunistic and I think what you are seeing this year with the private equity play in both Triad as well as ACA, that other people think that, too. And they of course would act if there is some perceived miss pricing opportunity. I think what we are seeing is historically low EBITDAs and then historically low multiples on those EBITDAs. So the way we always have thought about it is if you can acquire assets in that environment and either the cash flow goes up or the multiple goes up, you've won. And I think this is going to be an area that is going to present a lot of capital needs and a lot of transactional velocity and hopefully some opportunities for us in 2007.

Then really quick, outside of what you have going on on the M&A front is it fair to assume that your acquisition activity at least through the first half of this year is going to remain a little more subdued than it other wise would have been because the management teams time obviously being spent elsewhere?

With us, time is expandable and I don't think you will ever find anyone who will work harder than we will so I don't think that's a fair assumption. We are going to continue to work all front cards.

Thank you.

Thank you. Operator we will take this last question, okay.

Your final question comes from the line of Jerry Doctrow of Stifel Nicolaus. Please proceed.

I have a couple things, on the senior care investment it looks like what came in in the fourth quarter is a little bit more than what we had expected. Has there been any growth in earnings pattern? Can you give us more color on that?

This is Rick Schweinhart, the hard part of looking at that is you have to also factor in the shares. So if you look at the EBITDA and you also have to kind of look at the notes. We had preceded that investment with several mortgage notes to in effect bridge some of those transactions.

In favor of senior care that we were getting earnings on for the first part of the quarter.

Right. So when you put income off the mortgages, then put income off the properties the net, try to figure out what the dilution is on a full quarter basis I think it's right in line with the numbers we gave you initially.

And Jerry, I think it's interesting to follow up on Rick's comments. Remember, we did this acquisition, it's a seven and three quarter going in yield, with three to 5% escalators, in a nice, diverse portfolio with lots of good bells and whistles. And we had said at the time that it would be maybe about nickel accretive and we continue to expect that if not a little bit better. But that is factored into our go forward guidance.

Okay. But when you made basically take out some mortgage and earnings essentially that quarter on a go forward basis?

Right, because the mortgage was to senior care and then it was repaid in connection with the actual acquisition of the assets by us.

Okay. And one last one, just in terms of your guidance when you talk about the $0.47 dilution on the transaction, let's talk about, did that assume you are going to buy it on balance sheet, I assumed you did?

It made a whole variety in assumptions about long-term capital structure.

Okay. Sorry. I guess, I guess that's all the question I'll get.

Yes, he who shall not be named. Thanks for listening and we appreciate it. I want to thank everyone for joining the call. As always we very much appreciate your interest in our company and we look forward to speaking with you soon. Thank you.

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

Thank you.