Welltower Inc (WELL) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Health Care REIT fourth quarter 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, press the star followed by the zero.

As a reminder, this conference is being recorded, today, Monday February 3rd of 2003.

I would like to turn the conference call over to GeorgeAnn Palthing with FRB Weber Schandwick.

Please go ahead, ma'am.

I want to thank everyone for joining us on today's fourth quarter conference call for Health Care REIT.

By now, everyone should have received a copy of the press release sent out earlier, but if anyone is online who did not receive a copy, you may download one from the company Web site at www.hcreit.com.

Or you may call Lise Fishler 312-640-6786 and she will fax you a copy.

Additionally, I would like to remind everyone 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 that 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 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.

Having completed the Safe Harbor statement, 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.

Thank you, GeorgeAnn.

Let me take you through some of the highlights of 2002.

First, we drove our payout ratio down into the mid 80 percent tile range well on our way to our target of the low 80s or possibly into the seventieth per sen tile.

Two, our line of credit was renewed and expended for three years with a fourth year at our option.

Our spread was reduced by approximately 30 basis points as well.

We also received a positive outlook from Moody's and for the year, HCN was a leader in the Health Care REIT sector with a total return of 21% in 2002 and for the last three years, HCN provided a 35% total return for its shareholders, which ranked us in the top ten during that period for all REIT's.

All in all, we had an excellent year while maintaining our traditional low leverage and high interest coverage.

Let me talk briefly about our investments and portfolio.

I think as you can see from the supplement and our release that our deal flow was very strong once again in the fourth quarter as we added an additional 127 million of new properties.

For the year, our total of new investments reached 457 million.

We are quite pleased with the quality of the real estate and we also added nine new quality operators who enhanced our portfolio diversification.

At the same time we disposed of $110 million of properties, this ongoing process of calling through our portfolio, adding new properties and eliminating others is an important part of our job as portfolio managers.

By identifying average or underperforming assets or for that matter operators early, we are able to develop a win/win program for both the operator and HCN and avoid a more difficult situation later.

In 2002, more than one-half of the dispositions were mortgage loans and a substantial portion for investments we wished out of our portfolio.

In general, we believe HCN's portfolio quality to be greatly improved as a result of our investment and disposition activity in 2002.

Now let me take you through a few salient portfolio facts.

We ended 2002 with 85% real property with 88% of these owned properties in the master leases. 92% of the portfolio are comprised of stable assets, so we have very little construction or fill up risk.

The average age of the portfolio assets is approximately nine years with our out average life being just a touch over five years.

We are very pleased with the modern purpose-built facilities in our portfolio.

Now let me say a few words regarding Alterra and Doctors.

Two portfolio companies, which recently filed for protection under chapter 11.

While no one can be absolutely certain of the outcome until a company emerges from a bankruptcy, let me lay out a few facts and add a few reflections.

First on Alterra.

Alterra has a strong management team and has made considerable progress in rationalizing its portfolio and its focus.

It appears to have its necessary financing in line to emerge successfully from bankruptcy.

In doing so, Alterra's capital structure and its cash flows should be strong.

It will then be up to its management team to produce value.

The emergence of Alterra from bankruptcy, in our judgement, should be a very positive boost for at sifted living sector, that is already experiencing a solid year in 2003.

As we have reported, HCN's Alterra portfolio is in a master lease, covers at more than 1.5 to one and generates approximately $6 million of net cash to Alterra.

We fully expect Alterra to affirm HCN's master lease.

Second, Doctors.

This is an entirely different situation.

Doctors is one of the many companies caught up in the disastrous collapse of National Century financial enterprises.

While we wish we were not caught up in the problems, we remain very involved in the process through communications with Doctors management group and the regular proceedings by our council Arnold and Porter.

We believe our $18.8 million loan is adequately secured based upon a recent appraisal and accordingly, that the outstanding principal balance as well as the accrued post petition interest will be recovered.

Yet, we determined currently to take a conservative approach and not recognize any interest on the loan if payment is not received.

In my concluding remarks, I'll discuss the markets for a long-term care in 2003, but for now, I'll turn to Ray to take us through a details discussion of the portfolio and financial results.

Thanks, George.

I'll begin with the review of the quarterly and year end financial results then I'll review the portfolio and provide you with the industry outlook for 2003.

We'll end the report with management's guidance for 2003.

Our financial performance was, again, consistent with our guidance.

We recognized FFO of 69 cents per diluted share for the quarter.

Our board approved a dividend of 58.5 cents per share and we reduced the FFO payout ratio to 85% during the quarter.

Gross revenues for the quarter, including revenues from discontinued operations were 45.5 million, which was an 11.62% yield on average assets.

Revenues were derived 87% from real property and 59% from assisted living.

For the year, we had revenues of 166.9 million, which represented an 11.59% yield on average assets. 83% of the annual revenues were from real property and 63% from assisted living.

On the expense side, our quarterly depreciation increased to 11.8 million from 8.8 million in the prior year and our annual depreciation increased to 39.3 million versus 28.7 million in 2001.

As a result of the increase in real property owned, we begin added 250,000 dollars to the loan loss reserve and took a charge of 2.9 million against the reserve this quarter.

Our allowance is now at $5 million.

We also took an impairment charge of 1.7 million in the fourth quarter on two assets we expect to sell later this year, slightly below our book value.

Moving on to the balance sheet.

We ended the year with net real estate investments of 1.52 billion.

At year end, the company had investments in 244 health care facilities, 33 states with 44 operators.

As we previously reported, our gross investment activity for the quarter totaled $127 million.

The investment activity during the quarter was 94% real property, 6% loans.

Facility-based investments were 43% assisted living, 42% skilled nursing and 15% specialty care.

Funding was provided to 19 operators and 16 states.

Our new acquisitions included 12 facilities with 1,327 beds.

Four facilities were nursing homes.

Seven were assisted living and one a specialty care neurosurgery hospital.

The facilities are in six states with six operators.

The average cash yield on these investments was 10.9%.

Real property loans decreased slightly during the quarter due to two mortgage payoffs.

Investments decreased as we received mandatory principle payments and payoffs this quarter.

Deferred loan expenses decreased as a result of amortizations.

Finally, receivables include a straight line rent of 3.9 million.

This is higher than the previous quarter since we have minimal cash payments from tenants as rent deposits, nor did we receive payment of straight line rent acceptables on the sale of properties as most of the payoffs were mortgages.

The company also completed dispositions during the quarter of 225.5 million relating to two assisted living properties and one specialty care facility.

The disposition for primarily assets that we refinanced the out of the portfolio.

The average yield on these assets was 9% and we recognized an aggregate loss of 1.6 million in connection with these dispositions, bringing our net loss on dispositions for the year to $1 million.

Our credit profile remains solid.

Our leverage is low at 40% debt to total undepreciated debt cap and 30% debt to total market cap at the end of the quarter.

Our interest coverage for the year was solid at 3.65 times.

Our debt maturity schedule is in good shape.

We have only $400,000 of debt maturing in 2003, excluding our $25 million cash management line which is renewed annually.

We did do an offering in the quarter.

We issued 930,000 shares of stock in a direct placement with net proceeds in the company of 25 million.

Now I'd like to shift over and discuss portfolio matters.

Please note that the coverage statistics that we'll discuss represent third quarter coverages whereas balances, facilities and bed counts reflects amounts as of December 31, 2002.

Our overall payment coverage is at approximately 1.6 times.

Let's begin with the specialty care portfolio.

At year end, our specialty care portfolio was comprised of eight facilities with 1,304 beds and investment balance of 118 million.

George previously discussed the situation with doctors.

The only other item of note in that portfolio is the acquisition of the specialty care hospital which was a neurosurgery hospital in Chicago.

We -- moving on to the assisted living portfolio, year end, our assisted living portfolio was comprised of 160 facilities, 10,610 units and an investment balance of approximately 878 million.

The stabilized portfolio was comprised of 140 facilities with 8,779 units and investment balance of 735 million in payment coverage of 1.3 times.

Our fill up and construction properties remained within our stated goal of having 10% to 15% of the portfolio in construction fill-ups.

We currently have 17 assisted living facility properties or facilities in fill up representing approximately 8% of our revenues.

We had two properties stabilized during the quarter but added three fill up properties in connection with turn around acquisitions.

We expect most of these properties to reach stabilization in 2003.

The remaining three facilities are in construction and are expected to be completed within the next 12 to 15 months.

We expect to see stable to favorable conditions in the assisted living industry in 2003.

New construction has decreased dramatically.

The American Senior Housing Association reports that the industry currently has only 4300 units under construction which is less than 1% of overall supply.

Occupancies are improving.

The national investment conference reported improvement in average occupancy from 84.5% in the second quarter of 2002 to 85.5% in the third quarter.

At our portfolio, we have seen average rates increasing by approximately 4% to 5% over the last 12 months.

The limited new supply increases in occupancy and private pricing power suggests improving revenues over the next few quarters.

These rising revenues will be offset somewhat by rising insurance premiums and operating expenses.

Based upon our review of recently enacted and proposed assisted living regulations, we do not expect regulatory activity to impact operating income.

We believe our new purpose-built portfolio is well positioned for stable to improving performance in this operating environment.

Moving on to the nursing home portfolio, at year end we had 76 facilities, 10,482 beds and an investment balance of 540 million.

Average occupancies have risen from a low of 81% in the third quarter of 2000 to 85% in the third quarter of 2002.

Our payment coverage remains strong at 1.76 times.

We recognized aggregate revenues of 55 million in 2002, which is 33% of our total revenues.

We expect the operating environment for nursing homes to be challenging in 2003.

The absence of a Medicare give back, projected state budget deficits and rising insurance premiums will continue to pressure operating margins.

We expect our operators to respond to these conditions by focusing on improving occupancy, implementation of specialty programs and cost containment.

Let me briefly explain each of these items.

We have reviewed the impact of the Medicare cliffs on the skilled nursing portfolio.

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

However, we may experience a slight decrease in payment coverage if Medicare cliffs are not restored.

In our portfolio, the Medicare cliffs represent approximately 6.5% of Medicare payments.

Assuming no operating adjustments, the Medicare cliffs alone could be expected to decrease payment coverages 10 to 20 basis points.

We have also evaluated the impact of potential cuts in state Medicaid budgets.

When we last reported in detail on Medicaid in our second quarter earnings call, we reviewed the fiscal year 2003 budgets for our states.

At that time, we reported average per diem increases of 6% in our top five states that represent 75% of that portfolio.

Only two states, Indiana and Illinois, imposed per diem payment reductions.

Since then, the only other change is that Virginia proposed some freezes on funding in 2003, but the cuts did not impact our facility.

Our nursing portfolio coverages could be impacted in the second half of 2003 as states enact their fiscal year 2004 budgets.

Absent some federal relief, we expect state Medicaid budgets to remain under pressure.

On average, the 17 states we're in invest the 3.23% of their budgets in payments to nursing home providers.

These contributions are matched by the federal government based upon the federal Medicaid assistance percentage for each state.

Because the nursing home budgets are small and the federal government matches approximately 60% of the state contributions in the states in our portfolio, we believe this will provide some protection against cuts.

The biggest risk will be states with large budget deficits that enact across the board cuts and no budget category can be protected.

To assess the impact of Medicaid cuts in our portfolio, we deducted the pro rata share from the nursing home budget and adjusted our per per diem rate as accordingly.

Under this scenario, we would expect payment coverages in the skilled nursing portfolio to decrease by about five to ten basis points.

Despite the grim outlook for Medicare and Medicaid rates, we expect our portfolio to perform adequately this year.

Under the worst case scenario outlined above, we would lose 15 to 30 basis points of payment coverage due to rate cuts assuming no operating adjustments.

We do not, however, expect this outcome on coverages.

Our nursing home portfolio is relatively young and well positioned in the local market markets with sound investment structures.

We expect occupancy to continue increasing.

Occupancy in our buildings has increased steadily in the last few years and the operating environment remains positive for increases. 13 of our 17 states have a CLN or moratorium on nursing beds.

These 13 states represent 95% of the investment in our portfolio.

Furthermore, beds are actually being taken out of service.

In our states, bed supply has declined by 1% over the period in 1999 to 2001 with the slowdown in assisted living construction, there are fewer substitute options available.

Growth in the elderly population combined with these supply constraints suggests improving occupancy.

In fact, a 1% increase in occupancy by Medicare patients would entirely offset the impact of the Medicare cliffs in our portfolio.

Additionally, we have been encouraging our operators to adopt revenue enhancement programs and cost containment measures at the facilities.

We will continue to carefully monitor the operating environment and the facilities and update you on future calls.

To the extent we identify troublesome facilities, we will manage them as we have over the past several years through substitution of operators or refinancing the facilities out of the portfolio.

We remain dedicated to rigorous monitoring of our assets.

I'd like now to shift and discuss our expectations for 2003.

Of course, these are subject to the Safe Harbor read earlier.

The company anticipates new investments of 275 to 300 million in dispositions of 75 to 100 million resulting in net new investments of approximately 200 million.

We expect the new investments to be equally split between nursing and assisted and perhaps some more specialty care hospital investing.

We think average yields will be 10.25 to 10.5% on 10 to 15-year leases with straight-line yields of 1140 to 1225.

One item of change this year, we have adjusted our GNA to include the prospectus expensing of options in 2003.

The additional expense is estimated to be between 250 and 300,000.

In terms of capital activity, we currently have a $175 million revolver, a $25 million working capital line and $60 million secured debt line for total capacity of 260 million.

At December 31, we were drawing 109 million on these lines.

We will need to raise capital to fund new investments.

We anticipate raising both debt and equity in such a manner as to keep our debt to market capital below 40% and retain solid interest and fixed charge coverages.

As you saw in the release, the company is also modified its dividend reinvestment plan.

We think this will be an additional source of capital for the company.

Accordingly, our company's FFO guidance for 2003 is 2.78 to 2.83.

This includes no recognition of any interest income from doctors as previously disclosed.

The company intends to maintain its current dividend policy of 58.5 cents per share as we've indicated in prior calls.

We'll look at increasing the dividend once we get near 80% on the payout ratio.

That's the end of my report.

I'll turn it back to you, George.

Thanks, Ray.

Before we open to questions, let me spend a little more time on investment opportunities in the long-term care sector for 2003.

First and most of the time will be spent here in skilled nursing facilities.

And we've talked about the combination of disappointing Medicare reimbursement, state budgetary requirements, liability costs and the effect of skilled nursing investing.

Clearly, we're in a much more challenging environment.

Hardly as challenging as the period during which Medicare reimbursement moved from across base system.

And even during that very tough period, many of our operators adjusted very successfully, weathered the storm and benefited from some Medicare remedial legislation.

In our current market, there has been some positive movement in nursing home senses and it's clear as Ray indicated that with increases in census related to Medicare or private pay that those types of improvements can clearly offset reimbursement cuts.

I should point out that our experience in our 31 years being in the sector suggests that most nursing home operators are quite adept at operating within a regulated sector and adapting to inevitable changes in reimbursement cycles.

If anything, they have become more resilient and tough as a result of the sea change [INAUDIBLE] two or three years ago.

As portfolio managers, we buy, if you will, the market that contains a large percentage of private regionally focused operators, probably 80 to 85% of the skilled nursing operators.

We've always favored staff operators with a regional focus.

These operators know that health care is a local product and they totally immerse themselves in the local health care infrastructure.

They can adept quickly to reimbursement and other changes.

We will continue to selectively and carefully make skilled nursing home investments in 2003, taking into account possible Medicare and Medicaid changes as well as liability insurance costs and other factors.

The reality is that in a period of uncertainty, it is highly likely that some excellent investment opportunities will present themselves to us during this year and the following year.

In the assisted living sector, we continue to see good investment possibilities, and clearly, this is a sector moving up the cycle.

And I leave you with our ultimate comfort in our chosen investment area, and that is, one, the elderly demographics are strong and compelling.

We're in a need-driven area.

The patients are customers that go to long-term care facilities, need the services and perhaps as importantly, the status of long-term care providers as the lowest cost provider, it may be the most important aspect of all.

We believe that long-term care effectively addresses the societal mandate to deliver necessary care cost effectively in the most appropriate setting.

And with that, we'll 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.

If you would like to declaim from the polling process, press the star followed by the two.

You will hear a three-tone prompt acknowledging your selection.

Your questions will be polled in the order you they are received.

If you are using a speaker equipment you will need to lift the handset before pressing the numbers.

One moment, please, for the first question.

The first question's from Jerry Doctral.

Please state your company name followed by your question.

Legg Mason.

Hi, guys.

One specific one and then a couple more general.

On the specifics, just how did the investments during the quarter sort of lay out because there is a fairly big number that affects the numbers.

You have a sense of, you know, where in the quarter sort of it's weighted?

You're talking about the fourth quarter?

Right.

Probably midpoint would be a good assumption.

Okay.

And then I guess on the general ones, I was curious as to what, George, maybe your thoughts were about sort of where the Health Care REIT environment sort of looks, you know a year from now.

You know, do you think we'll see M&A activities?

Is that something that starts making any sense here given the wide variations and valuations?

I think that M&A activity is more likely, given the differences today, Jerry, as we all know in the past, there's been such -- so little difference among the rates that but for some sort of strategic friendly relationship, it didn't really make that much sense.

There probably are -- there's more reason to believe that M&A makes sense this year than the past.

We're always looking at it.

We're always looking at possibility combinations and trying to evaluate the effect on Health Care REIT.

Okay.

And my -- one last one.

On doctors, you know, looking at it optimistically, it seems like you could certainly recoup, you know, fair amount of interest income when this thing is resolved.

Do you have any sense about whether this sort of is a prepack or, you know, how long it takes to slug its way through the bankruptcy process?

Well, I don't think we should say too much.

It's very early, Jerry, and the complicating factor is that it appears that NCFE's financials are such a mess that the folks that are in there right now are just unable to determine in some cases who owes what to whom.

So I think that is a complicating factor and we view that as a factor that may lengthen the process unfortunately.

We really believe that the best thing for doctors, at least, and maybe for NCFE and its creditors might be a sale -- the liquidity of vis-a-vis some of their stronger facilities and right now, we are by far, we have a mortgage loan on their strongest facility called Pacifica Hospital, so we remain hopeful but we're not willing to bet at this point as to when we might get out of our problems with doctors.

Okay.

And was there any impact for doctors in the fourth quarter or was it all first quarter activity?

No it's just starting January 1st, Jerry.

Thank you.

We had a letter of credit that we used to pay the fourth quarter interest, Jerry.

Right, okay, thanks.

Thank you.

The next question is from Robert Belzer.

Please state your company name followed by your question.

Yeah, hi.

A couple of questions.

Hi, Robert.

First, what were your yields on your investments during the quarter?

The average cash yield, I believe, was 10.9%.

And can you give me the GAAP yield, too, Ray?

Yeah.

It was closer to like between 1215 and 1220.

Okay.

And then moving on to the writedowns you took in the quarter.

Are there any other investments that you're watching for potential impairment charges or long lost charges?

Let me start on that.

My general response always, Robert, to you or Jerry or whomever is we're always watching.

Several facilities and/or operators who fall back from our expectations and we just think that's part of what we do, okay?

And I don't think people in our sector, my colleagues or maybe even our company, we don't talk about it enough.

It is almost inevitable you are going to have somebody who underperforms in a particular quarter.

One of our biggest jobs is to find that out early.

And that's what to say that our monitoring systems do and to come down on them hard to hopefully turn that around.

So there are always people we're looking at, Robert.

In terms of the write-offs this quarter it's sort of a hodgepodge, by the way.

I mean, the 1.7, 1.8 related to probably the final stage of disposing of our psych properties began about seven or eight years ago.

I mean, so it's all over the map here.

And we told people we were going to clean up as much as we possibly could at the end of the quarter.

But I think from time to time we're always going to have to be out and very active vis-a-vis operator more.

And I think I can add to that, Robert.

Until the fill up portfolios are all stabilized, we have to watch those very carefully.

Secondly, at any point in time, we're going to have 10 to 12 properties that we're concerned about.

And working to either refinance out of the portfolio or get a subconstitute operator in there or potentially get a subconstitute operator in there or potentially have to get a substitute operator.

And, you know, when you look at some of at analysis I went through on the state payment cuts, if some of those are dematerialize, then we're going to have to deal with those issues.

The good news is generally with refinancing and lower costs of capital on the asset, the properties will do fine.

Okay.

And just moving on to, I guess, a broader question on the National Century and possibly to other factors due to what, you know, the potential disruption in that market.

If you could just kind of give me your feel on the, you know, just the size of the operator exposure to something like that or possibly the number or percentage that would rely on this kind of a financing for -- in their business models.

Yep, sure.

Not a problem.

If you break the portfolio down to assisted and nursing, the first comment is that assisted living doesn't generate accounts receivable typically, and therefore, there isn't receivable financing available to them.

The nursing facilities do generally obtain receivables financing.

If you look at our portfolio, about 75% of out nursing homes have receivables financing in place.

Of those 75%, about two-thirds of them are financed by banks or commercial finance companies like GE Capital and GMAC.

The remaining one-third is provided by companies like NCFE, which are asset-based financiers.

We don't think NCFE incident is symptomatic of larger problems in the asset-backed market.

I think you should take a look at the January 24th "Wall Street Journal" article on NCFE.

David Coles, of [INAUDIBLE] who is the turn around consultant hired to reorganize our liquid date NCFE described the problem as widespread deception at NCFE, and we believe that this is a very company-specific as opposed to a sector risk.

Okay, great.

That's all my questions today, thanks.

Yep, thanks, Robert.

Thank you.

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

As a reminder, if you are using speaker equipment you will need to lift the hand set before pressing the numbers.

One moment, please, for the next question.

Once again, if you do have a question, please press the star followed by the one.

And gentlemen, there are no further questions at this time.

Please continue.

Yes.

I'd like to thank all of you for your participation and in the event that you have additional questions or follow-ups occur to you, please give us a call and we'll be happy to help.

Thanks very much.

Thank you, sir.

Ladies and gentlemen, this concludes the Health Care REIT fourth quarter 2002 results conference call.

If you like to listen to a reply, Dale 303-590-3000.

Or 800-405-2236 with access number 520890.

Once again, if would you like to listen to a replay of today's conference call, please dial 303-590-3000 or 800-405-2236 with access number 520890.

Thank you for participating.

You may now disconnect.