Welltower Inc (WELL) 2004 Q1 法說會逐字稿

Good morning and welcome to Health Care REIT first-quarter 2004 earnings conference call.

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

It is now my pleasure to introduce your host, Ms. Georgeanne Palfy (ph).

Ma'am, the floor is yours.

Thank you.

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

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

I would like to remind everyone that we are holding a live webcast of today's call, which may be accessed through www.fulldisclosure.com or again via the Company's Web site.

At this time, management would like me to inform you that certain statements made during this conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Health Care REIT believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the Company's filings with the SEC.

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.

Thank you, Georgeanne.

On our last call, I discussed our excellent year in 2003, and that included 576 million of gross new investments during that year, investment-grade ratings across the board, expansions of our lines of credit from 225 million to $310 million and excellent financial results that drove down our FFO payout ratio and allow us to pay our 130th consecutive dividend.

All of these achievements put us in a strong position entering 2004.

We indicated that, as we entered 2004, we looked forward to a solid year of building upon 2002 and 2003.

We began this year by increasing our annual dividend from 2.34 to 2.40.

Our first-quarter investments were 87.3 million, which was consistent with our annual guidance of 200 million of net new investments.

The closings of those investments occurred late in the quarter and that, together with the continuing dilution from the $250 million debt deal in November, did impact the quarterly results somewhat.

However, we indicated in our last call that some dilution would continue in the first and possibly second quarters of 2004 and yet we continue to believe that the very successful $250 million note deal was the correct, long-term decision despite some short-term dilution.

We continue to review attractive investment opportunities and believe we may have an opportunity to improve upon our investment guidance.

However, we will limit our investment to those that meet our underwriting standards and promise good long-term results for our shareholders.

Now, let me shift gears for a moment and talk just for a moment about our Board of Directors.

In January of this year, Tom DeRosa joined our board.

Tom is Vice Chairman and CFO of the Rouse Company, and we already believe that our Board was one of the strongest in the REIT sector and Tom only adds to that strength.

With that, I'll turn the presentation over to our President and CFO, Ray Braun, who will take you through a review of our financial results and portfolio performance.

I will then make some closing comments that largely focused on our portfolio.

Ray?

Thanks, George.

Our financial performance was consistent with our annual guidance.

We recognized net income available to common shareholders of 36 cents and FFO of 70 cents per diluted share for the quarter.

Dividends paid in the first quarter were 58.5 cents per share at our FFO payout ratio was 84 percent.

The Board approved our 132nd consecutive dividend, an increase to 60 cents per share to be paid May 20, 2004.

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

Turning to the operating results, gross revenues for the quarter were 61 million; revenues were 90 percent from real property and 58 percent from the assisted living sector.

On the expense side, our quarterly depreciation increased to 17.1 million from 11.7 million in the prior year as a result of the increase in real property owned.

We added $300,000 for loan loss reserve and our allowance now stands at 8.1 million.

Additionally, our quarterly interest expense increase to 18.6 million from 11.9 million in the prior year as a result of the $250 million of senior unsecured notes issued last November, as well as some secured debt assumed in conjunction with new investments.

Moving to the balance sheet, we ended the quarter with net real estate investments of approximately 2.1 billion.

At March 31, the Company had investments in 340 healthcare facilities in 33 states with 48 operators.

As previously reported, our gross investment activities for the quarter totaled 87.3 million.

There were no dispositions.

We acquired ten Smith's and two assisted living facilities for 74 million during the first quarter.

These new lease investments have terms of 15 years, average initial cash yield of 10.2 percent and straight-line yields of 11.9 percent.

The remaining 13.3 million relates primarily to funding of construction and renovations on our existing facilities.

Our credit profile remains stable.

Leverage is low at 32 percent debt-to-total market cap at the end of the quarter.

Our interest coverage for the year-to-date is a solid 3.11 times.

Please see the earnings release for a reconciliation of net income and EBITDA.

Our debt maturity schedule is in good shape.

We have only 1.8 million of debt maturing in 2004.

Excluding the $40 million senior Notes maturity which we paid on April 15 and the $30 million (indiscernible) line, which we renew annually.

We did receive an upgrade from Moody's and a stable outlook last year.

We are now investment-grade across the board and will continue to manage the Company to maintain investment-grade status.

Capital raised during the quarter -- our enhanced DRIP plan continued to do well.

We issued 474,000 shares in the first quarter, generating roughly $17 million.

At this point, I'd like to shift the discussion to portfolio matters.

Please note that the coverage statistics reflect the last twelve-month activity through fourth quarter of '03, whereas balances, facilities and bed counts reflect amounts as of March 31.

Our overall payment coverage is at approximately 1.58 times, an increase of five basis points from the prior quarter.

Our portfolio has 94 percent stable assets, 87 percent of our properties are owned and 81 percent of our owned assets are in master leases.

Moving to the Assisted Living portfolio, at quarter end, our Assisted Living portfolio was comprised of 221 facilities with 14,370 units and an investment balance of approximately 1.2 billion.

The stabilized portfolio was comprised of 207 facilities with 12,829 units and investment balance of 1.1 billion and payment coverage of 1.35 times, an increase of four basis points from the prior quarter.

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

We currently have 11 assisted living facilities remaining in fill-up, representing approximately 6 percent of our revenues.

We had two properties stabilize during the quarter and we have three assisted living facilities that remain in construction.

Moving to the Skilled Nursing portfolio, at quarter end, the portfolio was comprised of 111 facilities with 15,585 beds and an investment balance of 707 million.

Average occupancies have risen from a low of 81 percent in the third quarter of 2000 to 85 percent in the fourth quarter of 2003.

Our payment coverage remains strong at 1.84 times, an increase of nine basis points from the prior quarter.

HCN recognized revenues of 21.3 million in the first quarter of 2004 from the Skilled Nursing portfolio, which represents 35 percent of total revenues.

Lastly on the portfolio, I'd like to update you on Doctors, which was resolved early in the second quarter.

Doctors had filed for bankruptcy in November of 2002.

Pursuant to the Bankruptcy Court auction process, the assets of Doctors were auctioned off between December 10 and December 16.

At the conclusion of that auction, the debtor's independent director declared certain members of Doctors' management team to be the winning bidder.

Their bid contemplated a reorganization of Doctors and its subsidiaries with new equity and debt capitalization.

Pursuant to the plan of reorganization, we entered into mortgage financings totaling 22.2 million with the reorganized Doctors for two facilities.

The loans mature in 7 years and have approximately a 7 percent initial interest rate.

As part of the bankruptcy settlement, we also agreed to release our claim for post (inaudible) interest.

Now, I'd like to move onto the outlook for 2004.

Of course, these comments are management's expectations only and subject to the Safe Harbor statement at the beginning of the call.

We anticipate new investments of 225 to 275 million and dispositions of 25 to 75 million, resulting in net new investments of approximately 200 million.

We expect the investments for the year to be approximately 75 percent nursing homes and 25 percent assisted living and having average cash yields ranging from 9 to 10.5 percent on a 10 to 15-year lease with straight line yields ranging from 10.5 to 12.25.

We plan to manage the Company to maintain our investment-grade status with a capital structure consistent with our current profile.

We extinguished the $40 million of senior unsecured notes that matured in April, and we have no other significant public note maturities until 2007.

We are confirming our 2004 guidance and expect to report net income available to common shareholders in the range of $1.68 to $1.73 per diluted share and FFO of $2.99 to $3.04 per diluted share.

The guidance assumes no change in our forecast for net investments of 200 million.

Please see the earnings release for a reconciliation of the outlook for net income and FFO.

That completes our report.

I'll turn it back to you, George.

As most of you know, in 2002/2003, we made over $1 billion of gross new investments and I should point out that we funded our investments by raising approximately 885 million of debt and equity capital, generally at very attractive pricing.

The investments that we made essentially doubled our portfolio and were comprised of top-quality assets operated by excellent management teams.

The combination of excellent assets and operators, together with the high yields, probably represented the best investment environment we've experienced in our 33-year history.

Our total portfolio is among the newest in the Health Care REIT sector with a high percentage of newer, purpose-built facilities.

Moreover, our investments tend to be in markets with above-average elderly concentrations and above-average affluence.

As our weighted average portfolio life exceeds 11 years, this portfolio should provide us with a long-term and predictable revenue flow for a long time to come, and it also has the effect of minimizing reinvestment risk.

In the first quarter, we paid our 131st consecutive dividend and recently declared out 132nd dividend payable on May 20th.

We largely avoided the problems of the long-term care companies of several years ago and yet, during the last 2.5 years when superior returns were available, we led the public healthcare REITs in new high-quality investments.

In 2004, we have over 300 million of dry powder to invest in appropriate assets.

The volume of our new investments will depend on the availability of good investments with appropriate returns.

This will be determined only after exposing prospective investments to our disciplined underwriting process and standards.

Regardless of the actual level of investments, the prospects for the underlying long-term peer sector are favorable.

The band for long-term peer is primarily a function of aging; the graying of America continues.

The supply of assisted living has moderated recently due to the drop-off in new construction, and given the timeframes for getting new developments out and operating, we probably have an 18 month to 24 month lag before many new operations could be undertaken.

Supply in the nursing industry has actually decreased as older bids have been taken out of service and the rate environment is favorable.

Assisted living is primarily private-pay and quality operators are taking advantage of their pricing power.

In the reimbursement side for nursing, that is -- the reimbursement situation is definitely improved over the last year or two.

This favorable environment, together with the quality of investments made in the last half of 2001 and the years 2002 and 2003, all have contributed to the overall improvement in facility coverages in our existing portfolio.

This coverage growth, together with our continued active management of the portfolio, should produce an even stronger portfolio as the year ensues.

So with that, let me open the floor for questions.

Thank you.

The floor is now open for questions. (OPERATOR INSTRUCTIONS).

Philip Martin of Stifel Nicolaus.

Good morning, Philip.

How are you?

Well, I just actually have talked with Scott this morning at length but just a couple of other questions here -- what is the average age of your assisted living and skilled nursing portfolio, separately?

Six years for ALFs (ph) and about 21 years for Smith's.

Okay.

In terms of the provision for losses, should we maintain -- it was 250;

I know it kicked up in the fourth quarter '03, and it's now at 300.

Is that the run-rate, going forward?

Probably.

We have to reevaluate it at all times but generally, we do that annually, so it's likely to continue during the year.

Then just in terms of overall consumer awareness on the Assisted Living front, what are you seeing from operators?

Clearly, ten years ago, assisted living was not a well-known commodity and you still had a lot of potential residents that didn't know about the assisted living option or the alternative; they were still in that spend-down so they could get Medicaid for skilled nursing, etc.

Have you seen drastic changes in consumer awareness, over the last three to five years, in assisted living?

Are you hearing that from your operators, or is it something that's not really being tracked?

Anecdotally, we hear from the operators that it's becoming more well-known.

I think, at one point, OSHA may have done a study on it but it's a couple years old, so I don't know if there's any good empirical data, Philip.

Okay.

The only reason I ask is, you know, obviously, assisted living tends to be doing pretty well now; that's certainly because of the new development or the lack of new developments, and there's been a catch-up period here.

On top of that, as new development starts to kick in here, that's a risk that is out there.

Well, the NIC is doing a study right now of the top 30 markets.

Are you aware of that?

Yes.

The first one will be produced in July.

That will have some very good penetration-rate type data across numerous markets.

I think we will have a lot better understanding of this issue after that comes out.

I know the information -- sometimes you might hear things from operators, etc.

Okay, I think that -- and in terms of overall -- I know you mentioned the asset sales and the mortgages running off, prepayments, etc.

Again, just to make sure I have this right, the average yields being lost there are approximately what?

We didn't have any payoffs in the quarter.

I know you don't but I know you've mentioned 25 to 75 -- (multiple speakers) -- rest of the year.

Roughly the same.

You know, I'm glad you raised that point because we are anticipating some disposition activity this quarter, and as we ramp up the investment activity, second quarter may be a little bit slower than this quarter was on a net basis.

We anticipate many of the investments coming in the second half of the year.

Okay, well, fair enough.

That should do it.

Thanks again.

Thank you.

There appear to be no further questions.

I will now turn the call back over to management.

We thank you for your attention and interest.

Thank you.

This concludes this morning's teleconference.

You may disconnect your lines and enjoy your day.