Welltower Inc (WELL) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Health Care REIT Third Quarter 2003 Earnings Conference.

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

It is now my pleasure to hand the floor over to your host, Ms. Georgianne Paulsy (ph.), Vice President of FRB Weber Shandwick.

Ma'am the floor is yours.

Thank you.

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

You should have received a copy of the press release, but in the event you have not, you may access it via the Company's website at www.hcreit.com.

I would like to remind everyone that we are holding a live web cast of today's call, which may be accessed through www.ccbn.com or again the Company website.

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 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 of 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 Georgianne.

You may recall that in last quarter's call I noted our strong investment pipeline.

And yet due to uncertainty as to the actual timing of closings, especially large transactions, we determined not to change our investment earnings guidance at that time.

Third quarter's investment volume of $340m was quite gratifying and allowed us to change our guidance as per yesterday's earnings release, and Ray will have more on that during his remarks.

Clearly exceeding the $2b of assets, threshold is an important achievement for Health Care REIT and our management team.

The growth, most of which came at the very end of the quarter, drove our FFO to 72 cents for the quarter, excluding any adjustments for the non-cash, non-recurring preferred stock redemption charge.

In turn, our adjusted payout ratio reached 81% for the quarter and 83% for the nine months ended September 30th of this year.

We are clearly approaching our goal of a 80% payout ratio.

On the capital market side, our access to capital has been excellent this year.

During the last quarter we had two common stock transactions and $100m, 7 and 7/8 preferred stock offerings, both -- all are very successful offerings.

Our recent upgrade to investment grade status by Moody's during the third quarter was very welcome as we have been working on that for several years now.

We believe that that upgrade should significantly improve the access to and cost of public debt going forward.

And based upon the market today, our spreads have come way in on our public debt so we are very gratified that that occurred.

And with those brief preliminary remarks, I will turn the call over to Ray Braun, our President and CFO for a more complete financial and portfolio overview.

Ray?

Thanks George.

Our results were consistent with our guidance excluding the impact of the preferred stock redemption charge.

We recognized net income available to common shareholders of 46 cents, FFO of 66 cents and adjusted FFO of 72 cents per diluted share for the quarter.

The Board approved our 130th consecutive dividend of 58.5 cents per share.

And our adjusted payout ratio was 81% for the third quarter.

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

Gross revenues for the quarter including revenues from discontinued operations were $51.5m.

Revenues were 88% from real property and 53% from the assisted living sector.

On expense side, our quarterly depreciation including discontinued operations, increased to $13.3m from $10.2m in the prior year as a result of the increase in real property owned.

We added $250,000 to the loan loss reserve, which now stands at $5.7m.

In August, we lowered net income guidance as a result of the SEC clarification of EITF Topic D-42 to implement the clarified accounting pronouncement, our third quarter results reflect a reduction in net income available to common stock holders resulting from a non-cash non-recurring charge of 2.79m or 6 cents per diluted share due to the redemption of our 8 and 7/8 Series B cumulative redeemable preferred stock.

At that time NAREIT had not definitively pronounced the impact of this accounting clarification on its definition of FFO.

Subsequently, NAREIT recommended that preferred stock redemption charges should not be added back to net income in the calculation of FFO.

We have adopted this recommendation.

However, we have also disclosed FFO adjusted for the redemption charge for enhanced clarity.

Moving on to the balance sheet.

We ended the quarter with net real estate investments of approximately $1.96b.

At September 30, 2003 the Company had investments in 321 health care facilities, 33 states with 47 operators.

As we previously reported, our gross investment activity for the quarter totaled $340.2m.

Investment activity during the quarter was 91% real property and 9% loan.

Facility based investments were 95% Assisted Living, 3% Skilled Nursing and 2% Specialty Care Facilities; funding was provided to 18 operators in 22 states.

Investments for the quarter involved the acquisitions of 56 Assisted Living Facilities with 3679 units, one Skilled Nursing Facility with 132 beds, and two parcels of land for $320.4m with four operators.

Additionally, we funded $19.8m on existing investments of 29 Facilities with 17 operators.

Investments were comprised of $304.1m of leases, $6.7m of construction advances and $29.4m of loans.

On a weighted average basis, these investments have GAAP yields of 10.88% with some leases including revenue participations.

And are projected to have initial coverages of approximately 1.3 times before management fees.

Please refer to our press release on October 8, 2003, for additional details.

As a result of transactions completed during the quarter, Emeritus has become our largest operator.

Emeritus is a public traded corporation and is one of the largest operators of free standing assisted living facilities in the U.S.

Emeritus currently holds interest in 169 communities representing capacity for approximately 17,600 residents in 32 states.

At September 30, 2003, our Emeritus portfolio was comprised of 30 facilities with 2,529 units and an investment balance of $233.3m in 16 states.

Additionally, Southern Assisted Living has become our second largest operator.

SALI as they are known is a privately held corporation and is the largest provider of assisted living in North Carolina.

SALI currently operates 47 facilities with 2,395 units in North Carolina, South Carolina, and Virginia.

At September 30, 2003, our total SALI portfolio was comprised of 44 assisted living facilities with 2,130 units and 2 parcels of land with an investment balance of $212.7m in North Carolina, South Carolina, and Virginia.

The company also completed two dispositions during the quarter of $54.6m relating to 7 health and 2 skilled nursing facilities.

The dispositions included two loans with an average yield of 10% and 7 leases with an average yield of 11.9%.

Our credit profile remains strong.

Our leverage remains flow at 36% debt-to-total market cap at the end of the quarter.

Our interest coverage year-to-date is 3.64 times.

Our debt maturities are in good shape.

We only have $520,000 of debt maturing the remainder of this year, and only $40m of notes due in the second quarter of 2004.

As George mentioned, we received an upgrade from Moody's to BAA3 with a stable outlook this quarter.

We will continue to mange the company to maintain investment grade status.

George also referenced our successful quarter in the capital market.

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

A portion of the $100m of gross proceeds from this offering was used to redeem all 3 million shares of our 8 and 7/8 Series B cumulative redeemable preferred stock on July 15.

In July, we also completed at $48m of common stock direct placement of 1.6 million shares.

In September, we completed a $92m public issuance of 3.2 million shares and earlier this month we issued an additional 480,000 shares per the overall allotment exercise generating an addition $13.8m proceeds.

As previously announced, we have implemented our new enhanced [drip] plan and it is off to a successful start.

During the third quarter, we generated significant interest from our investor base issuing approximately 200,000 shares per month under the regular provisions of the plan.

Also during the quarter, we sold 648,000 shares for $19.5m to a series of investors under our waiver program.

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

Our overall portfolio payment coverage is at approximately 1 [inaudible] times.

Our portfolio has 91% stable assets, 88% of our properties are owned, and 80% of our owned assets are in master lease.

Our Assisted Living portfolio is comprised of 217 facilities with 14,000 units and an investment balance of approximately $1.2b.

The stabilized portfolio was comprised of 197 facilities, with 12,171 units and an investment balance of $1b.

And payment coverage of 1.3 times.

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

We currently have 17 assisted living facilities remaining in fill-up representing approximately 9% of our revenues.

We had 2 properties stabilized during the quarter and opened 1 after completion of construction.

Finally, we have 3 assisted living facilities currently in construction.

We anticipate a relatively stable operating environment for assisted living facilities for the balance of the year, national occupancy improved modestly in the most recent quarter.

And operators should continue to achieve increased rates as the economy improves.

However, these improvements maybe offset somewhat by increased liability insurance and staffing cost.

We believe that these dynamics will result in coverage ratios that are generally consistent with our current results.

On the skilled nursing side, we have 96 facilities with 13,490 beds and an investment balance of $632m.

Average occupancies have risen from a low of 81% in the third quarter of 2000 to 86% in the third quarter of this year.

Our payment coverage remains strong at 1.72 times.

We recognized revenues of $21.4m in the third quarter from the skilled nursing portfolio, which represents 42% of total revenues.

We discussed in last quarter's call that the reimbursement climate for skilled nursing facilities 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 have increased their Medicaid budgets by roughly 2% for fiscal year 2004 despite budget shortfalls that necessitated cuts in other programs.

Pressure on staffing expenses continues to moderate as a result of increased unemployment.

However, increasing liability insurance cost continues to pressure operating expenses.

Our outlook for the nursing sector remains stable due to the reimbursement and staffing improvements.

Recent acquisitions of stable skilled nursing facilities should improve our overall portfolio coverage in the fourth quarter.

I would now like to discuss management's expectations for the balance of the year and to introduce our guidance for 2004.

Of course, these statements are management's expectations only and are subject to the Safe Harbor statement read in the beginning of our call.

Our guidance for new investments in 2003 is $575m to $625m and dispositions of $75m to $125m resulting in net new investments of approximately $500m.

We expect the investments for the year to be approximately 25% nursing and 75% assisted living with some specialty care hospitals as well.

Having average cash yield of 10.25% to 10.5% on 10 to 15-year leases with straight line yields ranging from 11.4% to 12.25%.

We currently have $225m outstanding on our -- we currently have a $225m revolver, and a $30m working capital line, and a $60m secured debt line for total line capacity of $315m.

At September 30, 2003, we were drawn $143m on these lines with remaining capacity of $172m.

We are revising our guidance for 2003 to reflect the significant investment activity during the third quarter and the impact of recent accounting pronouncements.

We expect to report net income available to common shareholders in the range of $1.69 to $1.72 per diluted share and FFO in the range of $2.77 to $2.80 per diluted share for the year 2003.

Excluding the impact of the preferred stock redemption charge, we expect to report adjusted FFO in the range of $2.83 to $2.86 per diluted share for the year 2003.

The guidance assumes net investment of $500m and non-recognition of interest income on the mortgage loan with Doctors Community Health Care.

Please see Exhibit 15 for a reconciliation of the outlook for net income and FFO.

We are also introducing guidance for 2004.

We expect to report net income available to common shareholders in the range of $1.71 to $1.76 per diluted share, and FFO in the range of $3.01 to $3.06 per diluted share for the year 2004.

The guidance assumes net investments of $200m.

Additionally, we plan to manage the company to maintain investment grade status with a capital structure consistent with our current profile.

Please see Exhibit 15, for a reconciliation of the outlook for net income and FFO.

Finally the Board approved this current dividend policy of 58.5% -- or 58.5 cents per share.

I'll turn it back to you George.

Thanks Ray.

Obviously we are pleased with the quarter and the year-to-date, and this point we'll open up the call for questions.

Thank you.

The floor is now open for questions.

If you have a question, please press the numbers "1" followed by "4" on your touchtone telephone at this time.

If at any point your question has been answered you may remove yourself from the queue by pressing the "" key.

Again that’s "1" followed by "4" on your touchtone telephone at this time for questions.

Please hold while we poll for our first question.

First question is coming Jerry Doctrow of Legg Mason.

Please state your question.

Good morning.

I guess the one thing that I wanted to just raise.

There has been some controversy about the straight-line rent issue.

And you guys -- I was wondering if you might want to specifically address the amount of straight-line rent in the quarter?

And then also just so that everybody can hear it, review your thoughts about straight-line rent?

Our straight-line rent for the quarter was a negative $314,000.

We book our straight-line rents in accordance with GAAP.

That means when we sell a property and we get paid those straight-line rents, that’s a reduction in our straight-line rent balance.

And we had net reductions this quarter.

Okay, and any sense about the size in the net reductions?

Yeah, I mean -- we are not going to disclose the components of the straight-line Jerry.

Okay.

That’s the net balance.

I think that’s partly why there has been some confusion because people have misinterpreted the calculations.

Okay.

And just in terms of investment levels for next year. $200m looks very modest given what you have done this year.

Is your sense there is a lot of flex there and you are just being conservative or maybe give us a little sense of the investment outlook?

Jerry, that’s a very tough question to address.

We hope that we are somewhat conservative in terms of any investment guidance.

At the same time, we think we have the best marketing team in our sector.

And if there are good solid transactions to do, we are going to get our share of them.

I think, Jerry, that the issue is how much new money, sort of silly money, is going to be out there next year.

There are other people who are being attracted to the healthcare sector.

How many of those people will come in and bid up, if possible investments, to levels that are not satisfactory to us and some of our other colleagues -- I think so it's hard to know.

We -- I guess, we hope it's conservative but I think that's our best guess right now.

Okay thanks.

Thank you.

As a final reminder ladies and gentlemen, you may press "1" followed by "4" on your touchtone telephone at this time for questions.

Thank you.

Our next question is coming from Patrick Beytagh of Invesco.

Please state your question.

Sure.

Ray, this is a kind of a follow-up from your statement.

Can you talk in a little bit more detail about -- you talked about there was still pressure on some of the operators as far as liability, insurance costs are concerned?

Well in 2003, generally, liability, insurance costs continued at a -- increasing at a pretty strong clip.

There is some evidence that that may be abating the insurance market is coming back.

But there continues to be considerable premium increases this year.

Okay thanks.

Thank you.

Again that’s "1" followed by "4" for any further questions at this time.

Our next question is coming from Scott Oshea of Deutsche Banc.

Please state your question.

Good morning guys.

Couple of questions here, could you just comment on the doctor’s property and just how it is doing at the property level?

Has it been affected by, you know, the issues surrounding the bankruptcy or what's going on with it?

Sure Scott.

Yes it has been affected at the operational level.

We have seen our coverages deteriorate this year on the property, which is not unusual in a situation where you have a bankruptcy.

In terms of resolving it, we anticipate that it will be resolved late this year or early next year.

Currently, there is a bankruptcy auction process being conducted that will conclude in mid-November with the expectation of a closing at the end of the year.

However, in any bankruptcy you have to anticipate some delays.

It will happen later this year or early next year.

We still are hopeful that we will get paid all of our delinquent interest to about $600,000 per quarter.

And we are now behind three quarters on it.

So, if we pick that up in the fourth quarter, it will be about $2.4m.

Okay.

I believe on the last call you mentioned there might potentially be some impairment charges taken and some of the Alps, I believe, in the fourth quarter.

Is that still on the table, any update there?

We evaluate our assets quarterly, as we did last year.

We will sit down this year and evaluate our loan loss reserve policy at the end of the year.

And evaluate where all of our properties are operationally versus budget and expectations.

And we will revise our forecast and if there are impairments we will take them.

Yes, Scott I think, you know that that's our approach, I mean we look at it all the time and if there is an impairment charge to take or if there is a charge against our loan loss reserve, we are going to take it.

We will do that on a regular basis as required.

Okay.

I was also wondering if you could comment on the third quarter asset sales.

What was culled out of the portfolio, why was it targeted, were these things you wanted push out or were these situations where the operators, just wanted to buy the deal back?

I think that at least most of them, Scott, related to operators and properties that we've discussed generally with people before one related to [Atria] who did a great job of turning around the Company and they had the desire to move on from operating leases into owing their own properties and we worked very effectively with them and that effectively eliminates Atria from our portfolio and again we appreciate their efforts on their behalf and ours.

The other one related to Merrill Gardens which took over the torch portfolio years ago.

And this has been anticipated and talked about in the past and most of those projects were mortgage loans.

They had the opportunity for their own benefit of taking them to harder other types of lower cost financings and we have the benefit of having a number of mortgage loans removed from our portfolios.

So it was a -- you know -- both were very much anticipated and I think good for the operator and good for us.

Okay good thank you.

Thank you, at this time we are showing no further questions in queue.

We thank you very much for participating in the call.

Thank you for you participation.

This does conclude today's teleconference; you may disconnect your lines at this time and we hope you have a wonderful day.