Welltower Inc (WELL) 2002 Q1 法說會逐字稿

Good gay, ladies and gentlemen, and welcome to the Health Care REIT conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the call, please press star, then 0, on your touch-tone telephone. If anyone should disconnect and need to rejoin, please dial 1-877-817-7175. And as a reminder, ladies and gentlemen, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Georgianne Pelfy of FRB Weber Shanwick. Ma'am, you may begin.

Thank you. Good morning and welcome everyone to Health Care REIT's first quarter conference call. By now, you all should have received a copy of the press release sent out last night but if anyone should need a copy, you may either download it from the company website or FRB's website or you may call Grace Blum at 312-640-6691 and she will fax you a copy. Additionally, we are holding a webcast of today's call, which you may access through www.ccbn.com or www.HCREIT.com.

At this time, management would like you to inform you that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Health Care REIT believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in today's press release and from time to time in the company's filings with the SEC. Having said all that, I would now like to introduce George Chapman, chairman and CEO of Health Care REIT, and turn the call over to him. Please go ahead, sir.

Thanks very much. In our year-end call, I spent a considerable time discussing our commitment to long-term care as a most stable part of the healthcare sector, and I'd like to reiterate some of our -- the points I made in that call. Compelling demographics, the demand-driven nature of long-term care and the cost-effectiveness of the facilities all contribute to making long-term care investing attractive to us. And we have purposely chosen not to expand our investments in any meaningful way, at least, into other areas of healthcare investing because we believe the risk profiles of hospitals, to some extent specialty care facilities, and medical office buildings are very different than long-term care facilities, and in some cases, the yields in our judgment on these investments do not justify the risk exposures. Now, having said that, other companies in our sector have made the determination to expand their investment programs into these other sectors. We support them, wish them well. However, what for some may be diversification opportunities becomes a lack of focus for others, and we're clearly in the latter camp. I also reported on the renewed investment program that the access to reasonable capital permitted. We -- as you know, we made new investments of 213 million in 2001, with 157 million coming in the second half after the capital markets had reopened. For 1Q 2002, we earlier reported 101 million of new investments so clearly we are having success in finding transactions. The number of attractive prospects continue to grow, giving us increased confidence in our deal flow. A couple caveats, though, would be -- would include: One, that the market still seems a bit thin and somewhat inefficient, so it really takes a great deal of effort to find these transactions. Another qualification that I discussed in our last call related to the Medpack recommendation relating to the so-called Medicare cliffs, and again, as most of you know, somewhat less than half of the reimbursement amount in jeopardy has been preserved for at least another year. So questions continue relating to the remaining payment add-ons. On the other hand, the recent decisions are certainly favorable and should tighten up the BIT and ASCAP somewhat and make the market for sniffs a little bit more rational.

All in all, we're very pleased with the growth in our pipeline. The deal flow looks good. We're probably looking at a comparable volume of closings for the second quarter, and possibly some may slop into the third quarter. But we're pretty confident that we can attain a level very close to the first quarter's. You should know we're also reviewing seriously three to four hundred million of possible investments and who knows where we'll come out, but certainly the deal flow is a little bit more solid and the book is building a little bit more consistently than it had in -- in several quarters. I should also point out that we're building a pretty good book of business, even though to date, we have turned down several large turnaround packages. We remain willing to look at limited numbers of these facilities, assuming the real estate has strong value and the operator has demonstrated its operational skills and caregiving abilities.

I should point out, too, just sort of an internal matter. From a staffing standpoint, we have increased the number of portfolio transactional analysts from our usual four or five up to 10. I think that shows something about our confidence in our deal flow.

I might point out too on the administrative side, we have also increased that function by an employee, so that we have even greater effectiveness in underwriting and closing transactions.

Let me now turn to a new topic that's very important to our company. As most of you know by now, since the press release went out this morning, the board agreed enthusiastically with my strong recommendation and elected Ray, Ray Braun as president of the company, a direct result of his work ethic and leadership that have both contributed so significantly to the success of Health Care REIT. I should note that Ray will continue as chief financial officer as well. And with that, I'll segue to Ray to discuss our financial results and bring you up-to-date on any portfolio news.

Thank you, George. I appreciate the endorsement. The company reported FFO of 63 cents per diluted share, which was at the high end of our range of 62 to 63% that we had previously discussed. Revenues were 37.4 million for the quarter, which represented an 11.48% yield on average asset. 81% of those revenues were from real property and 63% from assisted living -- the assisted living sector. On the expense side, the only item of note is a depreciation increase. It went from 6.8 million up to 8.7. In the prior year as a result of increase in real estate owned. Moving on to the balance sheet, we ended the quarter with net real estate investments of 1.3 billion. As George mentioned and we previously announced, investment activity was 101.7 million. And we think we're well positioned to meet our investment targets for the year. The company did not complete any dispositions in the first quarter.

Our credit profile remains unchanged. We continue to manage the company to be a triple B flat-rated company. We expect to meet with our rating agencies during the second quarter. We had one debt maturity this quarter, 12.25 million. It was our only debt maturity for 2002, and that was taken care of this month. At this point, I'd like to move from the financial statements and talk about the portfolio. As George mentioned, we made considerable strides with the portfolio by adding several well-positioned assets to the portfolio in the first quarter. The existing portfolio met our expectations. Our skilled nursing coverage actually improved 7 basis points from the prior quarter, moving from 125 to 132. Our assisted living coverages remained consistent. We are at 111. Although we'd like to see those moving up, we keep adding new stable portfolios to that -- or new stable facilities to that group which is dragging down the average. Our same-store growth did increase, however, by 3 basis points in the quarter to 115.

I'd like now to move on to management's expectations for the remainder of 2002. Of course these comments are our expectations only, and subject to the safe harbor read at the beginning of the call. The company is projecting FFO of 264 to 268 for 2002. We have increased that to reflect the greater-than-anticipated investment volume in the first quarter. The new investments, however, had limited impact on first-quarter activity. Approximately 60% of those investments closed at the end of March. We continue operationally to focus on stabilizing the remainder of our assisted living portfolio. As most of you have seen from the supplement, we're down to 18 properties in fill-up. Most of those should stabilize those year. We continue to see positive movement on net absorption, and remain optimistic that we will have the bulk of the portfolio completing the stabilization process this year.

As we have discussed on prior calls, we as a management team feel very comfortable running the company with 10 to 15% of our assets in construction and fill-up category. We ended the quarter with about 13% of our assets that were in the construction and fill-up category. We would anticipate moving closer to 90% by year-end. We do not currently see a lot of development construction opportunities that we find attractive. However, we do anticipate seeing some over the course of the next year or so, and are very comfortable running at 10 to 15% of the assets in construction. Finally, I will add that the board elected to maintain the dividend at 58-and-a-half per share per quarter. As we have disclosed in previous calls, we will keep that dividend at that area until we can see our payout ratio dipping from the -- dipping to the mid to low 80% range. That completes my report -- report and I'll turn it back to George.

Okay. Thanks, Ray. I have just a few concluding words before we open it for questions.

Clearly, the long-term care sector has shown significant improvement in the last year. In the sniff side, the skilled nursing side, reimbursement has improved and frankly, operators are becoming more effective in this new world of reimbursement. Fears regarding the Medicare cliffs have been somewhat mitigated and that's helpful as well, as I indicated earlier. The dramatic reduction in assisted living development is helping existing facilities, both with respect to census and in terms of being able to increase revenues. Moreover, because of the difficulties experienced in the last several years, many lenders and financiers are on the sidelines and while underwriting must be conservative and thorough, specialty lenders such as REITs have the field largely to themselves, facing most competition from government or quasi-government programs such as HUD. And although these programs can be quite attractive to operators, to those who live long enough to actually get to closing, there are certainly ample good opportunities for the rest of us.

We're making good progress in building a pipeline and having good success in closing solid transactions. This, in turn, is allowing us to drive down our FFO payout ratio once again, which decreased to 93% for the first quarter of 2002, and it should reach the mid-80s by year-end. We will then continue to drive it south from there. With our 124th consecutive dividend to be paid on May 20th and no public debt maturities remaining in 2002 and 2003, we're in very good shape in a much improved healthcare sector. So with that, we'll open it for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone telephone. If your question has been answered or wish to remove yourself from the queue, please press the pound key. Our first question comes from Ron Doria of USB Warburg.

Excuse me.

Sorry.

That's all right. First of all, congratulations on the quarter and congratulations to Ray on the title.

Thank you.

George, I just wanted to -- you know, if you can get into depth of -- you spoke about the market being a little bit inefficient and thin but yet you guys continue to bring on a lot of properties. I was wondering if you can go into depth about, you know, whether it be your development team or, you know, where you're seeing those properties coming from and kind of -- just kind of, you know, make those two kind of fit together, where you're seeing all these properties being able to close, this amount of properties, when you're saying the market is a little thin and inefficient.

Well, Ron, let me make a couple general responses first and then I'll try to drill down a little bit. One, frankly, inefficient markets and sort of transitional markets are probably the best markets for specialty lenders like REITs because you don't have a lot of traditional lenders in there, and then it just becomes hard work to find the good deals. I mean, it's inefficient in the sense that pricing for sniffs is somewhat adversely affected by the uncertainty relating to the Medicare cliffs, so one has to do very careful underwriting. Perhaps deals have to be structured so that we deal with the possibility of the cliff actually occurring, in part or in whole, in terms of sizing the financing. So it takes maybe some creativity to both benefit the operator and protect the lender, if you will. The reason why we have done pretty well is that we've been in the marketplace sort of consistently, dealt pretty well with our operators. I think we have a pretty good reputation. I think Ray and Mike Steven out of our Sarasota office and I have done a great deal of the marketing and our efforts have been substantially aided by Chuck Herman coming on board last year -- Chuck? because Chuck just adds to the breadth of our reach in terms of knowing good regional and national operators who -- you know, who are very good at -- in terms of providing good care and operating their facilities effectively. But it is a lot of work, and on the other hand, there just isn't a lot of competition out there to get these deals and it's really, on balance -- is very worth -- a very, very beneficial time for us. Ray, did you want to add anything to that?

No. I think it's -- it's a very personal business, Ron, and I think Mike and Chuck focused full-time on origination matters. Given their longevity in the industry and their connections it really gives us an opportunity to see a lot of transactions.

Great. Thanks a lot guys.

Uh-huh.

Thank you.

Thank you. Our next question comes from Jerry Doctro of Legg Mason.

Good morning.

Good morning.

Hi, Gary.

I wanted to actually sort of follow up, I guess, on sort of the main same area maybe just coming at it a little different way. I was just trying to get a little bit more feel for the -- you know, who's out there that you're doing transactions, because, you know, as you say, the market's been a little uneven and certainly as we see it across REIT to REIT, and so I was just trying to get a sense of, you know, mix and then kind of what's motivating the people that are doing transactions, what size operator, that kind of thing, if you can give us a little color.

We're not going to get into names, but most of our operators are regional operators, which is really our preferred type of customer that focus on the local markets. The reputation within the referral sources, the hospitals, the docs, et cetera. But Ray, you want to add a little bit of the balance maybe between the sniffs and assisted living?

Yeah. The -- the first quarter acquisitions of those 580 beds of sniffs and 718 health units. The 580 beds were approximately 33 million, and the 718 sniff units were approximately 62.25 million. Average going-in yields, we averaged around 1070 as our initial yield. The typical structure was a 10 to 15-year lease with 25 basis point annual increases. When you look at our average -- our average cap rates or EBIT-R compared to the investment amount, our cap rates were in the 17% range for the sniffs and a little over 13% for the inaudible.

Okay.

Yeah. The -- none of the acquisitions were coming out of bankruptcy. Some of the acquisitions were with existing operators who were acquiring facilities from sellers in their regions. And some of the transactions were refinancing transactions with existing operators.

Okay. And then I just wanted to know two other things. You know, I know just in terms of inaudible, are you seeing any sort of troubled assets in the portfolio or any -- you know, any significant underperformance or things that we should be worrying about there?

I don't know if you should be worrying about it, but every day we have something to worry about because that's sort of the way we look at this business, that it's a business where you don't just put deals on the shelf and 15 years later they exercise their options and go away. And that's been the way we've always looked at the business. And I've been sort of -- I don't know if "amused" is the right word, but interested to read some of the comments lately about people who have had some troubled assets because, you know, that's why we monitor. We monitor, and if we have an asset that is underperforming our expectations, or if -- certainly if there's ever any question of quality of care, we're going to move the asset. And you've seen us do that, Jerry. And we make no bones about it. It seems to us that in a lot of respects, the marketplace doesn't really understand the nuts and bolts of doing real estate investing in this area, which has such a strong operating component to it. So, yes. I mean, every day we're looking at the projections. Is somebody below? Is somebody above? And if we have a problem for a concerted -- for a period of time, and they don't improve, then we move the asset to somebody else. And to date, we have just done very well with it. In terms of just getting down to individual assets, I mean we have some that are underperforming, but that's true for all of us in the industry, and usually those assets after a little jolt from us or one of our colleagues in one of the other REITs, they get their act together and improve, and if they don't, we find an operator who can make it work.

You know, a couple things I would add to that, Jerry. We spent a lot of time last year restructuring the legal structure of our real estate owned. We now have about 80% of our properties that we own are in master leases, and only a handful of those properties are in master leases which are without stabilized properties in them. And that gives us a lot of comfort that in a bankruptcy scenario, that those leases are going to be assumed and not rejected, because people aren't going to want to give up the good covering properties. Secondly, we've continued to maintain our loan loss reserve. We added 250 again this quarter. We're up over $7 million. We've charged our earnings quarterly for that because we think that's the prudent, safe way to manage the company, and we continue to review that each quarter, and as you've seen in the past, if we think we have a problem, we'll take a loss.

Jerry, I'd just like to expand on that too. This isn't something that this company began to do, you know, in the last two or three years when there have been some problems in healthcare -- in the healthcare field. This is something we've done for 31 years. And probably people are so used to seeing the -- the provision each quarter, and we've been running it at 250, which is right now seven-tenths of a cent against our earnings or FFO every quarter, and used to be about a penny when we were a little smaller, we've just done it for 30, 31 years. We think that's prudent investing. Running -- the right way to run this kind of company. And I guess it does say, yeah, we anticipate over time that if you make enough loans or do enough investing, you're going to have to take care of an operator who doesn't perform that well. But, you know, so we're -- we've already been taking that for 31 years right through our income statement.

Okay. Okay. And just to -- go ahead.

No, that's fine.

I just wanted to add two other quick things, if I could. The -- one was just if you were to are very simply look at it, categorizing the portfolio sort of last year to this year, would you say things are, you know, improved? Were you more worried last year than you are at this point?

Well, I'd tell from you my standpoint, I feel very good about the direction we're taking. But that -- it's partly that there are a lot of stable assets out there that we can purchase that immediately have coverages, so they're going to start really bumping up our coverage numbers and making our portfolio even stronger. The other thing that gives me a lot of comfort is that the people who -- the operators who live through this experience, both the reimbursement problems as well as perhaps the overbuilding in selective markets on the outside and the lack of capital, are just much tougher minded. They're better operators. And frankly, we've -- we've gotten rid of some operators who thought -- didn't understand the degree of difficulty in operating these types of facilities. So, yes, I'm much more comfortable.

Yeah. I think I'd add one other thing, Jerry. If you go back a couple years ago -- well, actually I'm showing my age. It's more than a couple years ago now. If you go back five or six years ago, we made the strategic decision to shift from nursing to assisted living financing, and at that time there weren't many assisted living facilities to buy, so you necessarily had to adopt a development and fill-up agenda, and you go back a couple years ago, when we were running 40 to 45% of the portfolio was in fill-up, it was a much riskier time for us than it is today.

Can I add on -- add to that? Jerry, the other thing that's sort of interesting about it, we don't have to do much development today, for one thing, because we can buy a lot of assets that might be at, you know, 70%, 75%, and just ready to move over the top with a good operator, a new good operator. But if we did development, think about the risk profile even there. Unlike five or six years ago when all of the -- essentially all of the buildings were going to be development deals, now we might do one or -- one or two development projects with one of our existing operators who might have 10, 12, 14 stabilized facilities, and the projects would come in as part of a master lease. I mean, that's just a huge difference in terms of risk.

All right. And I think you guys have done a good job managing the assets, which is -- and if you could just maybe touch on Alterra then I will let somebody else ask.

You want to take it?

Yeah. Alterra, we are -- we have a very good portfolio with Alterra. Our portfolio throws off over $4 million of cash to Alterra. It's a master lease structure. We understand that one of their options would be to file Chapter 11 or do a prepackaged bankruptcy, and if they do -- which would be the worst-case scenario from our perspective, and if they do that, we are very comfortable that our master lease would be assumed as part of any bankruptcy reorganization because of the quality of the assets.

Thanks.

Thank you. Our next question comes from Robert Belzer of Prudential Securities.

Good morning.

Yeah, hi Robert.

Good morning, Robert.

I've got a couple questions. First, could you indicate a GAAP yield on the investment activity in the first quarter?

Yeah. The GAAP yield was approximately 10.3%. Or excuse me. 12.3%.

Okay. And how about rental coverage of the portfolio -- of the facilities, on average?

Approximately 1.2 times.

1.2?

After management fees.

It's about -- what is it before? I mean, because so many people report it before and don't identify it. We're going to start emphasizing that too. It's about 1.5.

Yeah, 1.4 to 1.5.

Okay. And could you split that among the oufs and the nursing homes?

It was approximately 1.3 for the sniffs, and 1.10 to 1.15 for the elves.

That's after.

That's after management fees. I don't have before management fees here.

Okay.

Okay. Moving on, I noticed that you had a million dollar subdebt investment in the quarter. Can you indicate where that funding went, or what it was for?

It was normal subdebt financing under commitments to various operators.

And in your 10-K, you indicated that you had subdebt investments with four operators. Was this account -- was this for a new account or was it for one of your existing four accounts?

Existing operators.

And could you indicate who these four operators are?

We don't disclose our private operators.

Okay. Okay. And then moving on to your receivable accounts, the number went up by $3 million in the quarter. What's driving that number up?

2 million of it is straight-line rents, and the other million is normal -- normal rent timing of payments.

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

Okay.

Okay. Thanks, Robert.

Thank you. Our next question comes from Scott O'Shea of Deutsche Banc.

Good morning, guys. Could we get a quick update on just how Merrill Gardens is doing, just from a corporate standpoint, as well as the properties with the inaudible portfolio?

We own -- actually, I prefer not to answer that too specifically. We're going to have Bill Pettit and his team in, I think, May 30th, and we may be able to, you know -- you know, subject to his concern about, you know, confidentiality.

It is a private company.

we might be able to do an update, but I will say that from what we've seen in the past two years when Bill's come in, they have gotten better and better throughout their entire portfolio. And had very good -- continued to have very good liquidity and net worth. But I wouldn't want to say more than that right now, Scott.

Okay.

I must say that we're -- we're big fans of theirs. They provide very good quality care, and -- and work hard with our assets and the rest of the assets in their portfolio.

Yeah. And our portfolios have very, very good performance, so .

Okay.

We're pleased.

Great. Thank you.

Thank you. Once again, if you have a question at this time, please press the 1 key on your touch-tone telephone. There appear to be no more questions at this time. I would like to turn the program back over to you for any further remarks.

My -- I'd like to emphasize one point, and that is that I'm very pleased to have Ray assume the presidency. It's a well-deserved promotion. We look forward to many, many years with what we think is one of the best management teams in the -- in the sector. Two, we have a lot of work to do. We're -- we're -- we've been very pleased with the deal flow, and -- and we appreciate all of your -- all of you being part of this call and we will be available from time to time to answer any follow-up questions. Thanks very much.

Ladies and gentlemen, thank you for participating in today's program. This concludes the call. You may now disconnect.