Welltower Inc (WELL) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Health Care REIT first quarter 2003 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 any assistance at any time did your the conference, please press the star followed by the "0".

As a reminder, this conference is being recorded today, Friday, May 2nd, 2003.

I would now like to turn the call over to Ms. George Ann Palthing (ph).

Please go ahead, ma'am.

Thank you and I would like to thank everyone for joining us for today's first quarter conference call for Health Care REIT.

By now everyone should have received a copy of the press release that was scented out earlier.

But if there is anyone who did not receive a copy you may download it from the company's website at www.hcreit.com.

Additionally, I would like to remind everyone that 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 detail in the press release and from time to time in the company's filings with the SEC.

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

Please go ahead, sir .

First let me welcome Scott Estees (ph) to our team.

He was the senior health care analyst at Deutsche Banc and as VP of Finance he will contribute immediately to all aspects of our Capital Market activities.

And let me expand on our efforts during the last 15 to 18 months to and reshape an deepen or management team.

During this time we have added eight new people, four analysts, awe new monitoring employee, real estate specialist to enhance our closing capabilities and a new West Coast marking person.

We've also shifted two key people into management roles, one is head of the underwriting processes and the other into the finance group as controller.

We have also recently found out that one of our former top young analysts is returning in June with his MBA from Michigan to be the co-head of the underwriting process.

We have built a great team and continuously enhance that team to execute our strategy and take the company to the next level.

Let's talk a little bit about the portfolio.

First it's important to note that our portfolio becoming stronger each quarter.

Clearly the real estate we've purchased during 2002 in the first quarter of 2003 improved the quality of our portfolio.

Now, the new deal front we invested $51.5 million and experienced run off of 15.7 million relating to mortgage properties.

For our net investment number of 35.8 million.

I should note for you that we anticipated closing of 43, $44 million skilled nursing investment in the first quarter but in the last analysis we simply could not get it through underwriting and decided not to go forward.

Thus far in 2003, we are reviewing arguably fewer transactions but those transactions are generally larger.

I should say that our marketing team comprised of Mike, Steve, Chuck Herman an Chris urban we believe are second to none in our sector.

In our earnings press-release we increased guidance from 270 (inaudible) of gross investments up to 325 to 350 million based upon our increased level of commitment letters and growing optimism about our pipeline.

At this point we did not increase earnings guidance because we are uncertain which transactions will actually close, in particularly when.

As we actually close the investments under contract or in the evaluation stage, we will update our guidance as appropriate.

And with that, Ray Braun, our President and CFO will give an in-depth report on financial results in the portfolio.

Ray?

Thanks, George.

Please note that our first quarter earnings release is posted on our website under the heading "press releases."

I'll follow the customary format and begin with a review of the first quarter results then move on to portfolio matters, industry update, and review of management's guidance for 2003.

Our financial performance was consistent with our guidance.

We recognize net income available to common stockholders of 41 cents per-share and FFO of 69 cents per diluted share for the quarter.

The board approved our 128 consecutive dividend of 58.5 cents per-share and our FFO pay-out ratio was 85% for the first quarter.

Please see Exhibit 14 in the earnings release for reconciliation of net FFO.

Gross revenues for the quarter including revenues from discontinued operations were 46.3 million, representing an 11.5% yield on average assets.

Revenues were 89% from royal property and 56% from the assisted living sector.

On the expense side our quarterly depreciation increased to 11.7 million from 8.3 million in the prior year as a result of the increase in real property owned.

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

Our allowance now stands at 5.2 million.

Moving over to the balance sheet, we ended the quarter with net real estate investments of 1.55 billion.

March 31, the company had investments in 248 healthcare facilities and 33 statements with 46 operators.

As we previously reported, our gross investment activity for the quarter totaled 51.6 million.

Investment activity during the quarter was 75% real property and 25% loans.

Facility based investments were 62% assisted living, 27% skilled nursing and 11% specialty care facilities.

Funding was provided to 20 operators and 14 states.

Our new acquisitions included eight facilities with 725 beds.

Six facilities are assisted living with an investment balance of 23.8 million and two are skilled nursing with an investment balance of 12.2.

The facilities are in four states with four operators.

The initial average cash yield was 10.9% and the average straight line yield was 12%.

Loans decreased during the quarter due to three mortgage payoffs.

Deferred loan expenses decreased this quarter as a result of amortization and the 3.4 million premium from the $100 million senior note issuance.

Finally receivables included straight line rent of 4.2 million.

The company also completed dispositions during the quarter of 15.7 million relating to Four Elks (ph) the dispositions included three loans with Merrill Gardens which they had agreed to refinance to lower our operation concentration and to decrease our mortgage loan portfolio.

The average yield on these assets was 10%.

Credit profile, our credit profile remains solid.

Our leverage is low as 45% debt to total book cap and 38% debt to total market cap at the end of the quarter.

Our interest coverage for the quarter was solid at 3.6 times.

On the ratings front we had no change in the ratings.

We expect to go in for our annual reviews in the next couple of months.

Debt maturity schedule is in good shape.

We have only 316,000 of debt maturing in 2003 excluding our $25 million cash management swing line which is on in the annual renewal.

In March we issued 100 million of senior unsecured notes as an add-on to our 2012 maturities, increasing the size of that issuance to 250 million.

The notes were priced to yield 7.4%.

At this point I would like to shift over and discuss portfolio matters.

Please note that the coverage statistics reflect fourth quarter activity whereas balances facilities and bed counts reflect amounts as of March 31.

Our overall payment coverages at approximately 1.5 times.

Our portfolio has 88% stable assets, 86% of our properties are owned and over 87% of our owned assets are in master leases.

Please note that beginning this quarter we remove the public versus private composition statistics that were previously disclosed in Exhibits one and two as we no longer deem this metric important in analyzing the company.

Let me begin with the specialty care portfolio.

At quarter end our specialty care facility portfolio had eight facilities, 1,304 beds and an investment balance of 128 million.

We previously disclosed the chapter 11 bankruptcy filing by Doctors and our decision not to accrue unpaid interest.

Doctors did not make the interest payment for the quarter.

Doctors is currently soliciting bids for the facility in the bankruptcy proceeding.

Based upon a recent appraisal and Doctors internal evaluation we believe we'll fully recover all principal and interest before year-end.

Our payment coverage in the specialty portfolio dipped 36 basis points primarily due to deterioration in operating results at the Doctors' facility.

We have seen a rebound in the operating results this quarter and expect improvement on the coverage for the next quarter.

At quarter end our assisted living portfolio had 162 facilities with 10,815 units and an investment balance of approximately 892 million.

The stabilized portfolio had 138 facilities with 8,739 units and an investment balance of 742 million and payment coverage of one-three times.

Our fill-up and construction properties remain in our stated goal of having 10 to 15% of our portfolio in construction and fill-up.

We currently have 20 assisted living facilities remaining in fill-up representing approximately 9% of our revenues.

We had one property stabilized during the quarter and added four fill-up properties from turn around acquisitions.

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

We have four facilities in construction, three are standard facility constructions that we expect to complete in the next 9 to 12 months, one involves the construction and sale of eight assisted living cottages and is projected to occur over the next eight years.

We recently reported that Alterra (ph) remains current on rent which is still the case.

Master lease payment coverage remains acceptable at 1.5 times, Alterra did file its plan of reorganization and disclosures statement on March 27th and indicated it's attempt to assume the Master lease at current rental levels.

Based on Alterra plan and disclosure statement we expect ask confirmation sometime in the third quarter.

And in February we reported that we expected stable to favorable conditions in the assisted living industry in 2003.

Our outlook is unchanged.

At quarter end our skilled nursing portfolio was comprised of 78 facilities with 10,788 beds and an investment balance of 545 million.

Average occupancies have risen from a low of 81% in third quarter 2000 to 85% in first quarter of '03.

Our payment coverage remains strong at 1.7 times.

HCN recognized revenues of 17.5 million in the first quarter from the skilled nursing portfolio which represents 38% of total revenues.

In our annual outlook we reported our expectation at the skilled nursing industry would face challenges this year.

We indicated that the Medicare cliffs would likely decrease payment coverages by ten to 20 basis points.

While some facilities did experience this level of coverage decline, overall the portfolio coverage only dropped by seven basis points.

State Medicaid budget remain under pressure for fiscal year 2003.

The only state to cut its Medicaid per diem since our last report was Massachusetts with a 2.7% reduction in payments for the remainder of fiscal year 2003.

We previously reported that across the board budget cuts -- we previously reported that across the board budget cuts to approximate state budget deficits would result in a five to ten basis point reduction in our payment coverages in '04.

We hope that the states will not cut this extensively, however.

We will continue to monitor the operating environment in the facilities and update you in our next call.

Moving on to the outlook for the remainder of 2003, the company increased its guidance and now anticipates new investments of 325 to 350 million and dispositions of 75 to 100 million resulting in net new investments of approximately 250 million.

We expect the new investments to be equally split between nursing and assisted living with perhaps a little specialty care and having average cash yields of 10.25 to 10.5 on ten to 15 year leases with straight line yields from 1135 to 1225:

As we previously announced, we commenced recognizing compensation expenses related to employee's stock options on a perspective basis affective January 1st.

We will record the expense related to the 2003 options issued over the option vesting period of five years and we'll follow the same policy for future stock option issuances.

The currently year charge is estimated to be $200,000.

Moving on to capital activity, we currently have a 175 million-dollar revolver, a $25 million working capital line, and a $60 million secured debt line for total capacity of 260 million.

At March 31st, we were drawn 74.1 million on these lines with capacity of 186 million.

Although we have enough capacity under our lines of credit to fund most of our forecasted net investments for the remainder of this year, we will consider raising additional capital including common and preferred stock to retain liquidity and maintain our conservative credit profile.

We believe this is prudent for conservative balance sheet management.

I'll note that we did file with the SEC a registration statement that amendments our dividend reinvestment and stock purchase plan.

Once the registration statement is affective, existing stockholders will be able to purchase up to $5,000 of common stock per month rat a discount currently set at 4%.

Additionally, investors who are not stockholders may use this plan to make an initial investment in the company.

We have the discretion to grant wavers for purchases in excess of $5,000 per month.

Moving on to FFO guidance, the company expects to report net income available to common stockholders in the range of $1.69 to $1.74 per diluted share for 2003.

The company's FFO's guidance for 2003 is 278 to 283 per diluted share.

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

Please see Exhibit 15 in the earnings release for reconciliation of our outlook for net income in FFO.

Although we increased our investment guidance, we have chosen not to raise our FFO guidance at this time for several reasons.

As George mentioned, many of the transactions we're reviewing are large and in excess of $100 million with complex, structural and due diligence issues that may prevent a closing from occurring.

Secondly, the timing of closings of acquisitions and capital activities will affect our guidance and we think many of the acquisitions will be in the second half of the year.

Lastly, we are structuring some transactions to provide the company with organic growth which will have a small accretion for FFO in the short run without straight line rent.

Dividend policies the company intends to maintain its current dividend policy of 58.5% per-share and management and the board will consider resumption of the dividend increase with the pay-out ratio is in the low 80% area.

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

Thanks, Ray.

Before we take questions, I would like to take note of the excellent capital markets and financial support we have received over the last two years.

We've raised approximately 645 million from debt and equity issuances in the capital markets and in addition in 2002, we renewed and expanded our revolving line of credit led by Deutsche Banc and T up to 175 million over a three-year term with a fourth year at our option.

This support allows us to be more successful in closing new investments.

We're able to proceed with confidence in our marketing and for that matter, operator select us knowing funds are going to be available to complete the transaction.

All in all the last five or six quarters have been excellent for healthcare REIT capital has been available at recent prices.

We're closing transactions with high quality real estate and operators and thus far in 2003, we had a solid first quarter and we have an improved backlog.

We're optimistic going forward.

With that I'll open for questions.

+++ q-and-a.

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 decline from the polling process, please press the star followed by the two.

You will here a three tone prompt acknowledging your selection and your questions will be polled in the order they are received.

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

The first question comes from Robert Belzer (ph).

Please go ahead with your question and state your company affiliation.

Prudential Securities.

Good morning.

Yes, just a few questions.

The Medicaid cut in Massachusetts, was that an overall cut or a specific to nursing home funding?

It was a nursing home Medicaid cut.

2.7% of the per diem.

And that went into effect for the current year?

It's March 1st so it will be March through June 30th.

Currently they're pro joking pro joking that that cut will go away and the per diem will be reinstated in fiscal year 2004.

Okay, then moving you mentioned that you're changing your lease structure a bit.

Could you indicate what kind of a structural change you're putting in place there and what percentage of your investment activity you may intend to use as lease structure for?

Well, we currently typically have our leases structured as 10 to 15 year terms with an initial cash yield of 10.5% and then annual 25 basis point increases which results in a straight line yield as I mentioned of between 1135 and 12 and a quarter.

Some of the newer leases we're looking at and putting in place an initial cash yield say around 10%ish and then we're doing incremental gross revenue bumps in the future years.

You do not anticipate incurring straight line revenues?

That's correct.

And what percentage of the investments will you be using as on this restructure?

Unsure but it will probably be less than 10% of our balance sheet would be a fair guesstimate.

And do you intend to do all your new transactions with this lease structure?

No.

Robert, not by any means.

I think that these types of deals are opportunistic in some cases we may be able to get a very good return.

In other cases we blown the two concepts.

Our old concept with -- that has straight line REIT's and incremental gross revenues factor and the way we do that is by having a -- some minimum increase together with some sharing and incremental gross revenues above that number, sometimes with a cap.

So it's just whatever works on the particular transaction.

Sometimes it's a result of negotiations solely negotiations between the operator and ourselves.

Okay, then moving on to the investment -- your investment program, the cash cap between 10.25 and 10.5, it seems that has come down since what your closing transactions are at.

Are you incurring additional competition for acquisitions?

Is that what is driving the cap rate down a little bit?

They have come down a little bit.

The cash yields, and that is to enable us to be competitive.

Okay, great.

That is all my questions today.

Thanks.

Thank you, sir.

Our next question comes from Rick Reuben.

Please state your company name followed by your question.

Yes, hi, Lake Macon.

A question with the new lease structure.

Is this going to be an assisted living, skilled nursing is there any differentiation?

Is these the properties where you think there is a lot of upside in it and how will that impact, say, guidance for straight line REIT's going forward?

Let me start, Ray.

I think that Ray -- Ray raised a very valid point indicating that we had done some leases with organic growth.

It is highly unlikely that for now at least they'll go above 10%.

I'm sure that it is a totally new lease structure because in many cases it blends both components, partially a minimum REIT or in regard for us and sometimes some IGR, so I guess I would like to not have folks on this call thinking that it's a brand new concept.

We're not sure how many times we'll use it.

It's very much a product of negotiations with a particular operator and our evaluation of a particular full properties.

Ray, go ahead?

So, Rick, it's not going to be a major part of our portfolio and we'll use it where appropriate for both skilled nursing and assisted.

Okay, sounds like it is going to be used opportunistically then?

Yes.

Can you give some guidance on straight line REIT's for 2003?

Probably a safe range, Rick, is 12 to 14 million.

Okay.

And you talked about potentially raising common or preferred equity.

Has there been any discussions with the credit rating agencies, I guess especially Moody's about what that could mean for an upgrade I guess for investment rated?

We have not discussed those capital raising activities with the agencies.

As I mentioned we have our annual reviews coming up in the next couple of months and we'll be in chatting with them at that point.

Rick, I should say that while any kind of equity offer really can't hurt any discussions or the rating agencies, I really think the rating agencies look more to our on-going commitment to reasonable leverage and liquidity and then certainly that pertains to any offerings but I think it is a longer term view.

Okay.

And for the potential to raise equity obviously you're talking about acquisitions being a little bit lumpier than they have in the past with potentially larger deals.

Would you consider raising equity, you know, before some of these deals close while the window is still open so -- I guess what are your expectations on someone managing the capital position?

I think, Rick, the toughest job for any rate management team is trying to match capital with acquisitions.

And frankly over our long history here, there have been times when we have really tried to match earth very precisely and then a management team can wait too long to raise capital and the markets are not quite as good.

It is sort of imponderable.

Certainly we will consider this, either type of equity preferred or common and we would be willing to take some short-term dilution to making sure that we had capital to execute our game plan.

But it's a very tough management decision for all of us in this sector and beyond.

Great.

And last question I guess as it relates to Doctors' community.

You expect to fully receive all the income principle on that.

When you do at that point will that income be in FFO?

I assume it would be?

Yes, we would include it in FFO in the quarter when it happened.

Terrific.

Thanks a lot, gentlemen.

Thank you, sir.

Ladies and gentlemen, if you have an additional question, please press the star followed by the one and we do ask if you are using speaker equipment you will lift the handset.

Gentlemen, we have no further questions at this time.

I'll turn it back over to you.

If you have any closing remarks.

We would like to thank the participants and if there are any follow-up questions upon reflection, please get in touch with us.

Thank you.

Thank you.

This concludes the Health Care REIT first quarter 2003 conference call.

That you think you for participating.

If you would like to listen to the replay of today's call please call (303)590-3000 or you may dial 1(800)405-2236 and you will need to enter the pass code of 534470 followed by the pound sign.

Thank you for participating.

You may now disconnect.-