Welltower Inc (WELL) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Health Care REIT third quarter results conference call.

At this time, all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question and answer session.

If anyone needs assistance at any time during the conference, please press the star, followed by the zero.

As a reminder, this conference is being recorded Tuesday, October 15th, of 2002.

I'd now like to turn the conference to Ms.

with

.

Thank you, good afternoon, and thanks all of you for joining us for today's third quarter conference call for Health Care REIT.

By now, everyone should have received a copy of the press release that was sent out earlier, but if anyone is online who did not receive a copy, please go to www.hcreit.com, or you may call

at 312-640-6691 and she will fax you a copy right away.

Additionally, we are holding a live Webcast of today's call, which you may access through www.ccbn.com, or www.hcreit.com.

At this time, management would like me 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 the press release and from time to time in the company's filings with the SEC.

And having said all that, I would now like to turn the call over to George Chapman, Chairman and CEO of Health Care REIT, for his opening remarks.

Please go ahead, sir.

Thanks very much.

My initial comments will address the most recent quarter.

Then, after Ray, Ray Braun, dissects the quarter, both from a portfolio and financial statement standpoint, I'll close with a few global comments relating to the sector and to our company.

On the portfolio, briefly, another very good quarter.

We have excellent

flow.

Hundred-and-five made on new investments the third quarter, generally comprised of stable, well covering assets.

Moreover, we added three new operators to our portfolio, and added to the already strong Life Care centers portfolio.

While estimates of final net new investments for the year are somewhat complicated, as we've indicated in earlier calls, is a result of our encouraging refinancing or our mortgage portfolio, as well as the pruning of certain operating lease investments.

What is very, very clear is that the gross deal flow is solid, diverse, and strong.

I should also point out that we have been selective, as we have rejected many submissions, including some rather close calls that have been financed by others.

Our most recent portfolio structuring success relates to the percentage of our operating lease portfolio in master leases.

At the end of this last quarter, we're up to 85% of our operating leases and master leases and that number is expected to reach 90% by the end of the year and as we discussed with you in other calls, this master lease structure provides HCN with a great deal of additional control.

From our operator, real estate and portfolio-structuring standpoint we have clearly, once again, strengthened our investment portfolio.

Moreover, with an additional 400 to 500 million of new investments under review, we anticipate continuing growth through the acquisition of additional quality real estate with a high percentage of stable assets.

On the financial results front, obviously this investment activity has driven strong results as well.

The 68 cent per share FFO in the quarter constitutes an 11% quarter over previous year's quarter growth.

Again, very strong growth.

Pay out ratio down to 86% driving it toward low 80s and possibly even into the 70s, if we continue to see the kind of growth that we're anticipating, and, again, our 126th consecutive dividend, again, is gratifying to us.

Three other events that we have noted before in public filings -- 150 million of 10-year notes, bringing our total to 500 million over the last 15 month; renewed line of credit for three years with an option for a fourth in HCN; decreasing our costs, increasing the amount, adding

Bank and UBS; and moreover,

moved us to a positive outlook.

So all in all, we are quite pleased with the third quarter as well as HCN's significant progress during the last five quarters since the capital markets reopened.

Now let me ask Ray Braun to take you, in depth through the quarter.

Ray?

Thanks, George.

First, I'll go through the quarterly results followed by portfolio matters and the outlook for the remainder of '02 and '03.

Financial performance was consistent with our guidance.

We recognized FFO of 68 cents per diluted share for the quarter.

Our board approved a dividend of 58 ½ cents per share earlier this afternoon and we're happy to report that the FFO pay out ratio is down to 86% during the quarter.

Gross revenues, including revenues from discontinued operations, were 43.8 million, representing an 11.71% yield on average assets.

Revenues were comprised of 83% from real property and 62% were from assisted living.

On the expense side, our depreciation increased to 10 million from 7 million in the prior year as a result of our increase in real estate owned.

We again added $250,000 to the loan loss reserve.

Our allowance is now at 7.6 million.

We previously indicated that we'll be carefully reviewing write-offs at the end of the fourth quarter.

We do believe we are appropriately reserved.

Moving to the balance sheet, we ended the quarter with a net real estate investments of 1.45 billion.

As George alluded to our gross investment activity was about 105 million for the quarter.

Investment activity during the quarter was 82 percent, real property, and 18 percent loans.

based investments were 21 percent assisted living, 17 skilled nursing and eight percent specialty care.

Funding was provided to 15 operators in 13 states.

Our acquisitions included 14 facilities with 1,652 beds.

Ten facilities were nursing home, three were assisted living and one a specialty care hospital.

Facilities are in seven states with eight different operators.

Our average cash yield was 10.65 percent and the average cap rate was a little over 14 percent.

We also completed disposition during the quarter of 51.7 million relating to seven assisted living buildings and one parcel of land.

The dispositions were primarily assets that we requested the operators to refinance out of the portfolio.

We anticipate further dispositions over the next two quarters of 50 to 120 million comprised primarily of mortgage loans as we further prune the portfolio and emphasize real estate owned.

As George mentioned, the acquisition pipeline does remain strong.

To date we've looked at over $7 billion of opportunities.

We currently have about 600 million that we're actively negotiating and or underwriting.

Given these solid opportunities and our capability to act on them, we believe that we would experience the same level investment activity during Q3 that we saw in the first half of '02.

And our guidance was established at a net 100 million in the second half of 2002.

We are confident that this solid pipeline will enable us to complete a

and additional 50 million of net new investments in the fourth quarter for a total of 300 million of net new investments for the year.

We also believe that between fourth quarter and first quarter our gross investments will fall in the range of 250 to 300 million.

Coupled with the anticipated dispositions, we would expect a net investments over the next two quarters to be between 150 and 200 million.

These new investment opportunities are expected to be equally split, perhaps two-thirds nursing and one-third assisted.

All the investments will be structured as master leases with initial yields ranging from 10 and a half to 11 percent.

Twenty-five basis point annual escalation on a 10 to 15 year lease.

Yield costing loans also increased slightly as we added some mortgage financings this quarter.

Sub debt investments decreased as we received a mandatory principal payment this quarter.

The third loan expenses increased as result of our note deal.

Finally, I'll note that the straight-line rent for the quarter was $816,000.

On the credit side, our profile's strong.

We completed our annual review with S&P and I had our ratings confirmed,

came out yesterday and confirmed our ratings as well.

Our leverage remains low at 42 percent, debt to total and depreciated book cap and 35 percent debt to total market cap.

Our last 12-month interest coverage is very strong at 3.76 times.

George alluded to some of the capital activity.

We did renew the line of credit during the quarter.

It was lead by Deutsche Bank and

as co-arranger and UBS Warburg and Bank of America were co-managers.

REIT has a total commitment of 175 million and a term of three years with an option to expand for another year.

In September, we issued senior unsecured notes of 150 million due in September 2012.

Lastly, on the capital side, we had some preferred share conversions.

The holder of our series C preferred shares converted 300,000 shares to common, reducing our preferred shares outstanding in the series C issue to 2.1 million.

At this point, I'd like to shift over and discuss the portfolio.

Our portfolio payment coverage remains strong at 1.6 times.

We have 90 percent stable assets.

Eighty-two percent of the assets are owned, and over 85 percent of our owned assets are in master leases.

We are particularly with an increase in master leases, which we believe is the highest in the industry.

This provides us with substantial protection in any bankruptcy filing.

In our assisted living portfolio, we continue to focus on stabilizing the remaining properties and fill up and monitoring industry conditions.

We currently have 16 assisted living facilities remaining in fill up, representing approximately nine percent of our revenues.

We have two properties stabilize in that portfolio during the quarter, but we did add one other property that was a turnaround acquisition.

We expect most of these properties to reach stabilization in this quarter and the first quarter of '03.

Our assisted living occupancy and the coverages have remained consistent over the last several quarters as we complete the stabilization process.

Legally, conditions are very favorable in the assisted living, with new development having slowed dramatically.

The American Senior Housing Association recently reported that the industry currently has only 4300 units under construction, which is less than one percent of overall supply.

With the demographic growth of the over age 75 population, the new supplies should be readily absorbed.

Further, operators with stabilized properties have great pricing power.

In our portfolio, we have seen average rates increasing by approximately four to five percent over the last 12 months.

The limited new supply, attendant increases in occupancy, and pricing powers, suggest improving performance over the next few quarters.

Our nursing portfolio remains strong.

We currently have 36 percent of our investments in Smiths.

Average occupancies have risen from a low of 81 percent in the third quarter of 2000 to 84 percent today.

Our payment coverage remains strong at 1.77 times.

We have considered the impact of the Medicare

on the

portfolio.

Because we have fixed rental payments and the annual escalators, a Medicare rate cut would not effect our rents from the nursing home operators.

We may, however, experience a slight reduction in payment coverage if the Medicare

are not restored.

The reduction in Medicare will largely be offset by the increase in Medicaid rates in 14 of our 16 states, and by operator changes in operations.

Also, the looming rate cuts could affect acquisition activity if buyers are uncertain about their valuation of assets.

Given the Kindred release last week, we've been asked to comment on Kindred, Florida, and liability insurance.

We currently lease to Kindred three nursing facilities with 482 beds with an investment balance of 18.8 million, or slightly over one percent of the portfolio.

Although the coverage is less than one times, Kindred is current on the leases and has insurance in place.

None of the facilities are in Florida.

As you will see in exhibit 10, we have 10 percent of our portfolio in Florida.

Eleven Smiths, with 1240 beds, a $74.6 million in vestment balance, payment coverage of 1.84

.

We also have 18

with 1271 beds and a 70.7 million investment balance with a payment coverage of 1.48 times.

All of our Florida properties have property and liability insurance.

In closing on the discussion of portfolio, I would like to emphasize that the economic fundamentals remain very strong for long term care assets.

The aging of the population continues irrespective of recession, slow job growth or deterioration of other macro economic variables.

The residents in our buildings are there to get care needs met, not to choose between a single family or a multi-family living arrangement.

Furthermore, the buoyant housing market provides a ready source of cash to pay rent and fees on our properties as residents sell their homes.

Finally, the elderly are resistant to change.

Once in the building, they are unlikely to leave unless required by acuity.

So we think that the conditions are as favorable as they've been.

The outlook for 2002 -- we are setting our expectation of FFO for '02 in the 265 to 267 range and increasing our FFO guidance from 282 to 287 for 2003 as a result of the acquisition pipeline.

The company intends to keep it's current dividend policy of 58 ½ cents per share.

Management and the board will consider resuming the increases when the pay out ratio returns to below 80% area.

That's my report, I'll turn it back to you George.

Thanks, Ray.

My opening remarks dealt with the previous quarter and at this point I'd like to broaden the scope of my comments somewhat and expand on a number of points raised by Ray.

First, we are clearly growing our asset base with attractive facilities operated by quality, seasoned operators.

Two, the investment, this investment activity is lengthening and diversifying our portfolio and adding leases with very attractive yields.

HCN's FFO growth is driving down our pay out ratios we've discussed previously so that the growth component inherent in our expanding portfolio, together with a very secure dividend, allows us to present quite an attractive investment case to the market place.

At this point, before closing, though, I'd like to emphasize a couple global points.

And that is really to expand a little bit on what Ray has said about the fundamentals of our industry.

We've really seen a number of the REITs drift down a bit in price, lose some backing, perhaps even miss some earnings number as a result of the prolonged recession and the effect impact on their underlying sectors.

We remain very much a recession resistant area.

The demand is clearly there with very favorable demographics as you all well know, but even on the supply side, as Ray indicated.

The virtual cessation of

development and the actual decrease in

bed supply, skilled nursing bed supply only adds to the sector of strength.

Clearly a period of great opportunity.

Let me become a bit more global.

There is unfortunately been a tendency among some to look at the last two or three year and generalize unduly from those experiences and events.

We had a

change in skilled nursing, in the skilled nursing sector that like hospitals previously, moved from cost phase reimbursement to a diagnosis related system.

And the newest subset of long term care, assisted living, emerged and it had some growing pains, but we're now most of the way back from those material dislocations.

As we go forward there will certainly be good and bad cycles as there have been during our 31-year history.

But just as clearly, none will be as severe as the most recent cycle.

Each will need to be managed through.

We believe that HCN has done a good job of managing through this latest and deepest cycle and for that matter we've done a pretty good job over 31 years of managing previous cycles.

As a result of the trauma of the most recent cycle, operators are now tougher, leaner and more resilient than ever.

In a sector with compelling demographics and cost effective delivery platforms, we continue to be comfortable focused on the most stable part of the healthcare delivery system long-term care.

We would remind you that Health Care REIT has provided a 17.3 percent composite average returns since inception in 1970 and once again we're preparing to pay our 126 consecutive divided in November.

We believe the case has been made for the sector as well as our ability to function very ability within it.

With that, we'd open for questions.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question and answer session.

If you have a question please press the star followed by the one on your push button phone.

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Your questions will be polled in the order they are received and if you are using speaker equipment please lift the handset before pressing the numbers.

One moment please for the first question.

The first question comes from

.

Please state your company name followed by your question.

, Legg Mason.

You know, congratulations guys, I think, on an excellent quarter.

I just had one or two things.

One of the things I was curious about, I guess, was just the pricing on some of the nursing home assets.

And, you know, we seem to be seeing prices on terms of cap rates or yields, whichever one you want to talk about, sort of all over the ball park.

And you seem to be sort of towards the lower end of what I'd seen on some of the nursing home stuff and I was wondering if you could comment on it.

Are you lower - are you just pricing yourself lower than other guys or is there a difference in assets?

If you look at the 10 facilities that we purchased this quarter,

, those ten facilities have 1,258 beds.

The cash yield was 10.61 percent.

The straight-line yield was 12.02 percent and the cap rate was 14.03 percent.

Those numbers we think are consistent with what we've seen over years of, you know, good quality nursing home acquisitions.

OK.

Let me add that, what's your difference between cap rate there and sort of cash yield?

The cap rate builds in the EBITDA coverage over the payment.

OK.

So if you take our cash yield of 10.61, our average coverage after management fee was 131 and that will give you 14 percent cap rate.

OK.

OK.

OK.

One other thing, I knew you talked about straight-line rents, and I was curious if you could give us any sort of guidance on where that's headed.

That's a very good question because this quarter is probably not an accurate depiction of where it would be.

We had several operators pay us pre-paid rents as deposits.

So that offset the straight-line rents.

But I would say that I good annual number to expect is around $7 million.

OK.

And that's just pretty much straight across the year.

It doesn't have any great seasonal variations in it under your system, like some of these other guys on contingent rents and that kind of stuff?

Yes.

OK.

That's all for now, I'll let somebody else ask.

OK, thanks,

.

Thanks,

.

Thank you.

The next question comes from

.

Please state your company name, followed by your question.

Realty Advisers.

Ray, appreciate -- and George, appreciate the update on conventional liability insurance and the Medicare cliff.

One question, and I know it's beating a dead horse here, but any update on Alterra?

Where they stand?

Bankruptcy?

All that fun stuff?

Well, we have not received any update from the company this quarter on their corporate restructuring.

Our portfolio is laid out in the supplement.

It's 45 buildings with 107 or so investment balance, and it's all in a master lease.

It has over

coverage on the master lease.

Continues to throw off substantial cash flow to Alterra.

But we think it's highly unlikely they would reject that lease, because they'd want to maintain the corporate cash flow, or the cash flow going to corporations.

OK, thank you very much.

Thanks, Patrick.

Thank you.

Ladies and gentlemen, at this time, if there are any additional questions, please press the star followed by the one.

As a reminder, if you're on speaker equipment, you will need to lift your handset before pressing the numbers.

One moment please for the next question.

And gentlemen, at this time, I show no further questions.

Please continue.

We just appreciate your participation.

If further questions arise subsequently, we will be available.

Thanks very much.

Thank you.

Ladies and gentlemen, this does conclude the Health Care REIT third quarter results conference call.

We thank you for your participation.

You may now disconnect.