Welltower Inc (WELL) 2003 Q2 法說會逐字稿

Welcome to the Health Care REIT Inc. second-quarter 2003 earnings conference call.

At this time all participants had been placed on a listen-only mode, and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your hostess, Vice President of FRB Weber Shandwick Georgeanne Pelfy (ph).

Ma'am, you may begin.

Good morning and thank you, everyone, for joining us today on Health Care REIT's second-quarter conference call.

Everyone online should have received a copy of the earnings release, but in the event you have not you may access it via the company website at www.HCREIT.com; or you may contact Elise Fischler (ph) at 312-64006786, and she will fax you a copy.

I would like to remind everyone that we are holding a live webcast of today's call which may be accessed through www.CCBN.com; or again, the company website.

At this time it 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 obtained.

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.

In last quarter's call I spent some time describing our efforts to reshape and deepen our management team.

I can report today that the new members of our team are settling in and finding plenty to do with our very substantial investment pipeline and attendant capital activities.

On the deal side, we are quite pleased with the completion of investments totaling 132 million during Q2 '03.

And with a year-to-date total of 184 million or 163 net, we're right on target if not slightly ahead of our investment targets of gross investments between 325 to 50 million and net investments of 250 million for the year.

While we have a strong investment pipeline, at this point we're not increasing our investment or earnings guidance.

As we noted on last quarter's call, we are reviewing fewer but larger transactions, and this adds some uncertainty as to the timing of closings.

An example of this occurred even in the second-quarter '03 in which we closed 150, 160 million on last day of the quarter.

So no contribution effectively to 2Q earnings, but a nice contribution going forward.

We're going to proceed and review actual third-quarter closings and timing of same, and by the end of next quarter we should be able to update guidance if appropriate at that point.

In last quarter's call we noted the excellent capital markets and financial support we received over the last 24 months.

We detailed debt and equity capital of 645 million, as well as the expansion of our primary revolver, twice, to reach the current level of 225 million.

We also noted that we have increased our swing line to $30 million.

This quarter we initiated our enhanced dividend reinvestment plans, successfully raising approximately $3 million in June, and then in July raising approximately $18 million through the plan's waiver program.

We're very pleased with the excellent beginning to our enhanced DRIP plan.

In addition, we thought our $100 million preferred stock transaction was very successful, as well as the recent $48 million direct sale, continuing to demonstrate our continuous ability to access capital.

This access permits us to execute our capital plan, maintaining moderate leverage, strong interest coverage, as we continue to pursue our goal of triple-B flat ratings across the board.

I might point out, too, that this availability of capital and the support of the capital markets makes us much more effective when seeking quality health care investments.

And with that brief opening set of remarks, I will turn it over to Ray Braun for a more comprehensive review of the quarter.

Thanks, George.

Please note that our second-quarter earnings release is posted under our website under the heading press releases.

Our website can be found at www.HCREIT.com.

I will review the second-quarter results and then review management's guidance for the balance of 2003.

Our financial performance was consistent with our guidance.

We recognized net income available to common shareholders of 41 cents, and FFO of 70 cents per diluted share for the quarter.

Yesterday the Board approved our 129th consecutive dividend of 58.5 cents per share; and our FFO payout ratio was 84 percent for the second quarter.

Please see exhibit 14 in the earnings release for a reconciliation of net income and FFO.

Gross revenues for the quarter, including revenues from discontinued operations, were 47.9 million.

Revenues were 89 percent from real property and 58 percent form the assisted living sector.

On the expense side, our quarterly depreciation increased to 11.9 million from 9.6 million in the prior year, primarily as a result of the increase in real estate owned.

We again added $250,000 to the loan loss reserve, and the allowance now stands at $5.5 million.

Moving on to the balance sheet.

We ended the quarter with net real estate investments of 1.7 billion.

At June 30, 2003, the company had investments in 270 health-care facilities in 33 states with 47 operators.

As we previously reported, our gross investment activity for the quarter totaled 132.1 million.

Investment activity during the quarter was 96 percent real property and 4 percent loans.

Facility-based investments were 24 percent assisted living, 68 percent skilled nursing, and 8 percent specialty care facilities.

The facilities are in seven states with two operators.

The initial average cash yield was 10.2 percent, and the average straight-line yield was 11.4 percent.

Loans decreased during the quarter due to one mortgage payoff and other loan payments.

Deferred loan expenses decreased this quarter as a result of amortization.

Finally, receivables included straight-line rent of 3.1 million.

The company also completed dispositions during the quarter of 5.1 million relating to one assisted living facility and a parcel of land.

The dispositions included one loan with an average yield of 10 percent.

Our credit profile remains solid.

Our leverage remains low at 38 percent debt to total market cap at the end of the quarter.

Our interest coverage year-to-date is a solid 3.5 times.

Our debt maturity schedule is in good shape.

We only have a little over 400,000 of debt maturing the balance of the year.

Our ratings were recently reaffirmed by S&P as triple B- with a stable outlook.

We also recently met with Moody's and Fitch, and anticipate rating updates form each of these agencies during the third quarter.

We did have some capital markets activity since the quarter end.

We completed our public offering of 4 million shares of 7 7/8 Series D cumulative redeemable preferred stock.

A portion of the 100 million gross proceeds from this offering were used to redeem all 3 million shares of our 8 7/8 Series B cumulative preferred stock on July 15, 2003.

Also in July we completed a $48 million common stock direct placement with Cohen & Steers.

As George mentioned in his opening remarks, we successfully implemented the DRIP plan as well.

At this point I like to shift our discussion to portfolio matters.

Please note that the coverage statistics reflect the last 12 months activity through 1Q '03, whereas balances, facilities, and bed counts reflect amounts as of June 30th.

Our overall payment coverage is at 1.53 times.

On a quarterly basis SNFs were up a couple basis points and ALFs were down a couple basis points.

The decrease in the ALF coverage was largely attributable to softening of occupancy during the quarter.

Our portfolio has 88 percent stable assets; 87 percent of our properties are owned; and 83 percent of our owned assets are master leases.

The composition of the facility profile is in exhibit 5 to the press release.

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

Two properties stabilized during the quarter, and most of the remaining properties should reach stabilization in the next 12 months.

We have three assisted living facilities in construction.

We anticipate a relatively stable operating environment for assisted living facilities for the balance of 2003.

We expect occupancy to increase slowly over the next 12 months.

We also believe that operators of stabilized buildings will continue to increase rates.

However, these improvements to revenue may be offset by increased liability cost and staffing expenses; and we believe that these dynamics generally will result in coverage ratios that are consistent with those we report today.

Moving over to the skilled nursing front, we previously had expected a deteriorating operating environment for skilled nursing facilities.

Revenues from government reimbursement were under pressure due to Medicare cuts and state budget shortfalls, while liability insurance and staffing costs were continuing to rise.

Over the past three months, however, the reimbursement climate has improved due to an increase in the federal matching percentage for Medicaid, and two separate inflationary updates to the Medicare rate.

In addition, our states increased their Medicaid budgets on average by 2 percent for fiscal year 2004, despite shortfalls in their budget and other programs.

These increases when combined with the increased federal matching percentage should generate an overall increase of approximately 4.4 percent in Medicaid rates.

Medicare rates will also increase roughly 6 percent.

Accordingly we are revising our outlook for the nursing sector to stable, but do not expect coverages to change significantly from current levels in the near term.

I'd like now to discuss management's expectations for the balance of 2003.

Of course these comments are our expectations only and subject to the Safe Harbor statement at the beginning of the call.

The company continues to believe that its guidance for new investments of 325 to 350 million and dispositions of 75 to 100 million, resulting in net new investments of approximately 250 million, is appropriate.

We expect the net investments to be roughly split between nursing and assisted living, with some specialty-care hospitals.

Average yields are anticipated to be 10.25 to 10.50 percent on an initial cash yield; 10 to 15 year leases with straight-line yields from 1138 to 1225.

On the capital side, we currently have a $225 million revolver, a $30 million working capital line, and a $60 million secured debt line for total line capacity of 315 million.

At June 30th we were drawn 156.9 million on these lines, with capacity of 158.1 million.

Accordingly we have the ability to meet our investment guidance without further capital market activity.

We expect to manage our balance sheet consistent with our historic practices.

The company expects to report net income available to common shareholders in the range of 169 to 174 per diluted share for 2003.

Our FFO guidance is $2.78 to $2.83 cents per diluted share.

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

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

On dividend policy, we do intend to maintain our current dividend policy of 58.5 cents per share.

Management and the Board will consider resumption of the dividend increase when the payout ratio is in the low 80 percent area.

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

Thanks very much, Ray.

Obviously we're pleased with our execution thus far in 2003.

We look forward to closing additional quality investments.

We believe this activity will drive additional FFO growth while at the same time further reducing our payout ratio.

FFO payout ratio.

We believe we can reach 80 to 81 percent in the next several quarters.

And with those concluding remarks, we're open for questions.

(CALLER INSTRUCTIONS) DAVID HAVENS (ph), UBS.

Good morning.

You had your outlook adjusted to positive by Moody's about a year ago.

Now, based on recent discussions with Moody's, is it your view that you've accomplished what they wanted you to accomplish in order to achieve an upgrade at this point?

Or have there been additional hurdles that have sort of been put in the way?

It would be presumptuous for us to tell you that we had met every requirement of Moody's.

Times change, issues change.

But we think we've been in a very constructive dialogue with Moody's over the years, and felt that our meeting was very positive.

But I think I will leave it there.

The last thing we need to do is speculate as to what the rating agencies are going to do.

Thanks very much, and good to see the progress.

(CALLER INSTRUCTIONS) JERRY DOCTROW, Legg Mason.

I had two or three things.

One, I guess I was wondering if you could just talk about your expectations for using the capital markets?

You've done this direct placement, you have increased the DRIP.

Are likely to see that as kind of a primary focus for your capital raising, equity raising activities?

Or would you expect to do general offerings as well?

We really think that an enhanced DRIP program, dividend reinvestment program, is a real nice way to have a solid regular base of equity capital coming into us.

And from time to time we have done some direct placements.

But generally we understand that it's very important to be out in the marketplace, telling our story to a wide array of institutions and retail customers; and we have no plans to change that approach.

From time to time there will just be a convenient, very reasonably priced way to raise capital easily through a direct placement; and we're not going to ignore it.

But it is certainly not going to the centerpiece of how we raise capital.

Never has been; never will be.

The length of time for some of the properties and lease-ups seems to be fairly long.

I don't if those are properties that have gone through kind of a restructure or whatever.

But could you comment on that?

And is there a time, at some point, where those things get written down or have to get renegotiated because you just haven't made it to lease-up?

We agree with you.

We have experienced slow fill in some of these buildings.

Some of them are larger boxes but they are still filling slowly.

As we have indicated in prior calls, we will probably evaluate those as we get closer to year-end, and there may well be impairments or write offs if we don't think that things will get there within our investments.

I would just add that we've been very clear on every call and in every investor meeting that we believe that one always has to deal with potential loan losses; and that's why we take a provision every quarter for it.

As well as looking at each property that we own to see if there are impairments.

As you well know, through our history we've done a very good job of mitigating that risk through probably the best proactive management and monitoring in our sector.

But inevitably there will be some impairments, there will be some loan losses, and we will take them as and when we need them.

And they won't be material.

I agree you've done a good job managing the portfolio.

Is all the stuff that's in lease-up generally done under a loan?

Or is some of that lease as well?

Usually it is under a lease.

Yes, most of them are lease.

Just one or two other things.

On the Doctors Health, you did not specifically mention that.

I think there was an opportunity to resell that property, catch up some interest payments, if I remember correctly.

Any sense about where we stand on that, what's going on there?

Doctors is in bankruptcy.

We haven't accrued anything for the last two quarters.

They are attempting a sale in the bankruptcy process of the asset.

It was originally scheduled to have been submitted by the end of June; and that's since been pushed out.

But at this point we're waiting to see where the bids come in.

And again, that's not specifically in your guidance, but it might provide a little bit of upside if it happened to go through?

If that happened we might have a little bit of extra FFO due to that, that's correct.

All right, thanks.

ROBERT BELZER (ph) of Prudential Securities.

A couple of questions.

I understand that there's been some operating pressure on the Alterra portfolio due to its reorganization.

Could you update us on what the portfolio coverage has gone to?

What we have are the last couple of quarters I can give you.

Fourth quarter, the coverage before management fees was 150; first quarter it was 155; but based upon some monthly numbers that are coming in we think it might deteriorate slightly to the bankruptcy.

So it's not unusual for a company in bankruptcy to have some fluctuation in operations.

But it's nothing that we would consider putting our payments at risk.

Just to go over that, in the fourth quarter, it actually went up in the first quarter?

It went up slightly.

Is this a twelve-month comparison or a three-month?

Those are quarter over quarter.

Those are strictly three-month comparisons?

Yes.

And then just on the straight line rent number.

The number of 3.1 million, is that the amount included in minimum rent?

That is the GAAP straight line rent number.

And what would the amount that would be included in minimum rent total?

That was about 3-9 or 4; and then there was also a rental payment made of about 800,000 resulting in 3.1.

And could you go over what this rental payment can be attributed to?

It's the rent collected at the commencement of a lease.

It's a cash payment at the beginning of the lease obligation.

Yes.

Okay, great.

That's all my questions.

SCOTT O'SHEA (ph), Deutsche Bank.

I was wondering if you could spend a little bit more time on the acquisition this quarter, the 91 million, 18 SNFs and two ALFs.

Just give us more color on where those properties are located; kind of going in property level lease coverage; any type of just detail on what that portfolio looks like?

Sure.

We can provide a little more detail on that for you.

It was a private operator that acquired the properties.

They were acquired from Beverly.

There were 18 SNFs and two ALFs.

We paid about 91 million or $32,000 per bed.

The average occupancy of the facilities was very strong, and we bought them at over a 15 percent cap rate.

Most of the buildings are located in Mississippi, Alabama, Georgia, Tennessee, and roughly the buildings are late '70s, early '80s construction.

In terms of the investment terms on that deal, our initial cash yield was 10.25; our straight-line yield was 11.30.

I believe it was a 15 year lease.

We also have, as we announced on our call last quarter, we were seeking to get some organic growth in the portfolio, so we do have a component in here of participation and increases in the gross revenues.

What was the going-in property level coverage on this portfolio?

We don't disclose coverages on private operators.

But the cap rate was 15 percent and the initial cash yield was 10.25.

Also I had a question on the three properties in development.

Are those a single operator?

Or are those different operators?

And are those development deals crossed to stabilized properties in your portfolio?

One of them is the new orthopedic hospital that we're building, and that's with a single operator.

And the other ones are assisted living with an existing operator, and those are crossed their existing portfolio.

Actually they're part of a master lease.

Thank you.

TOM CHAPMAN (ph), Delaware Investments.

I apologize, I got on the call a little bit late, but I heard you refer to a private placement.

Direct placement.

Direct placement, rather.

At what price and at what discount to the prior day's close was that made?

Well, we actually came across the direct placement as part of our DRIP waiver program activity.

And we priced it at approximately 3 percent, is that? 4 percent off of the close that day.

How many shares was that?

Roughly a million 6.

It was rather a small placement, but were other large shareholders given an opportunity maybe to -- or did you consider carving maybe a piece of that out (multiple speakers)?

Absolutely.

We called, as part of the DRIP waiver program, most of our major shareholders, to find out what appetite they had.

As we were making those calls, we learned that Cohen & Steers had quite a large appetite.

So that's how it all came about.

Did any of the other shareholders participate, other than Cohen & Steers?

They all did it through the DRIP waiver program.

Good.

Appreciate it.

JERRY DOCTROW, Legg Mason.

The only follow-up I guess I was curious about on the Beverly stuff in the South; obviously that's where the liability costs are an issue.

I was curious how you view that?

And maybe what steps you've taken or the operator has taken to kind of mitigate your risk from liability costs?

Well, while there are structural ways to mitigate it through the leasing structure, which the smaller private operator is able to take advantage of, that some of the larger companies cannot.

So that's one thing, as we structure it very carefully, generally involving subleases to special-purpose entities at the facility level.

Then secondly, we can put in place different types of insurance programs to meet the actuarial history of the smaller operator, that are much cheaper than what some of these larger operators have.

So you facilitate actual provision of the insurance?

No, we don't have an insurance component in our business.

What we do have is that the people closing it, together with our insurance, National Insurance Consultants, evaluate the program and permit it only if it meets our standards.

All right.

And again, basically the sublease vehicle is the way you get to the SPEs.

Okay, thanks.

Gentlemen, do you have any closing comments?

We would thank all of you for participating; and if there are follow-up questions, don't hesitate to call.

Thanks very much.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a great day.

(CONFERENCE CALL CONCLUDED)