Welltower Inc (WELL) 2004 Q3 法說會逐字稿

Good morning and welcome to the Heath Care REIT third quarter, 2004, earnings conference call.

At this time, all parties have 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 our floor over to your host Ms.GeorgeAnn Housey (ph) of Financial Relations board.

Ma'am, you may begin.

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

You have received a copy of the press release, but in the event you have not you may access at via the Company's website 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 the Company's 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 Heath Care REIT believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that it's 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 from the Company's filings with the SEC.

And now I would like to turn the call over to George Chapman, Chairman and CEO of Heath Care REIT for his opening remarks.

Please go ahead sir.

Thanks GeorgeAnn.

During last quarters call we changed our investment guidance to 4 to 500 million, advised you of our decision to phase out straight line rent through changes to our lease structure, and discussed improvements in our portfolio.

Today I can report another excellent quarter of investment activity, operating results and portfolio performance.

On the investment side we earlier reported investments of 297.5 million in the third quarter, bringing our total gross and net investments to 459 million and 424 million respectfully.

We continue to be very pleased with our success in these competitive times and believe that our marketing team of Chuck Herman, Mike Stephen and Chris Irvin are best in the business.

On the portfolio side, Health and SNF coverages continued to improve this quarter driving our aggregate coverages in the portfolio to 1.71 to 1 across the entire portfolio.

At the same time that we are having success on the portfolio side and investment side, we continue to have success on the investment side.

Continue to have excellent support in the capital markets.

In September, we began a preferred offering with expectations of raising approximately $100 million.

The strong demand for the preferreds allowed us to upsize to $175 million with a very attractive dividend rate.

At the same time, the preferred stock deal was in process, we issued an additional $50 million add-on under our 2013 note deal at an effective yield of 5.68%.

Another very successful issuance for us.

All in all we're very pleased with the capital markets confidence in HTM.

And with that I'll now turn it over to Ray Braun who'll make a more detailed report on our third quarter.

Ray?

Thank you, George.

I'll first review the third quarter results and then management's guidance for the remainder of '04 and 2005.

We recognized net income available to common shareholders of 37 cents, FFO of 73 cents, and adjusted FFO, excluding an impairment charge, of 73 cents per diluted share for the quarter.

Dividends paid in the third quarter were 60 cents per share and our adjusted FFO payout ratio is 82%.

The Board approved our 134th consecutive dividend to be paid on November 19, 2004, please see the earnings release for reconciliation of net income and FFO.

Our gross revenues including discontinued operations were 63.6 million for the quarter, revenues were 91% from real property and 53% from the assisted living sector.

On the expense side our quarterly depreciation including discontinued operations increased to 18.9 million from 13.3 million in the prior year, as a result of the increase in real property owned.

We added $300,000 for the loan reserve and our allowance now stands at 8.7 million.

Additionally, our quarterly interest expense, including discontinued operations increased 18.9 from 13.3 million in the prior year as a result of the 250 million of senior unsecured notes issued in November 2003, the secured debt assumed in conjunction with new investments last yea,r and the $50 million of senior unsecured notes issued in September 2004.

During the quarter we identified one property that had an indicator of impairment and recognized an impairment charge of $314,000 to reduce the property's net book value to it's estimated fair market value.

Moving on to the balance sheet, we ended the quarter with net real estate investments of 2.4 billion.

At September 30th the Company had investments in 379 health care facilities in 33 states with 49 operators.

As previously reported, our gross investment activity for the quarter total 297.5 million and we had one mortgage loan payoff of 1.1 million.

We acquired 16 nursing homes and 18 assisted living facilities for 269.5 million during the quarter.

The new lease investments have terms of 15 years and average initial yields of approximately 9% and average expected yields of approximately 11%.

Our credit profile remains stable, leverage is low at 34% debt to total market cap at the end of the quarter.

Our interest coverage for the year-to-date is solid at 3.24 times.

Our debt maturity schedule is in good shape.

We only have 643,000 of mortgage payments due in 2004.

We had no change in our credit ratings during the quarter and we'll continue to manage the Company to maintain our investment grade status.

Our enhanced DRIP plan also continues to do well.

We issued 381,000 shares in the third quarter generating $12.2 million.

We continue to expect issuing approximately 300 to 400,000 shares per quarter through our DRIP going forward.

We also issued 7 million shares of 7.625% Series F cumulative redeemable preferred stock which generated net proceeds of approximately 169.2 million.

The preferred stock, which has no stated maturity, may be redeemed by us at par on after September 14, 2009 and the proceeds were used to repay borrowings under our unsecured lines.

We also issued 50 million of 6% senior unsecured notes maturing at November 2013 at an effective yield of 5.68%.

These notes were an add-on to the 250 million senior unsecured notes issued in November 2003.

The aggregate principle amount of outstanding notes of this series is now 300 million and the net proceeds were used to invest in additional health care properties.

At this point, I would like to shift over and talk about the portfolio.

At quarter end our assisted living portfolio was comprised of 235 facilities with 15,786 units and an investment balance 1.3 billion.

Payment coverage of 1.44 times was an increase of 4 basis points from the prior quarter and we only have 2 assisted living facilities remaining in fill-up (ph).

Our skilled nursing portfolio had 136 facilities with 18,829 beds and an investment balance 871.1 million.

Payment coverage remains strong at 2.06 times, an increase of 9 basis points from the prior quarter.

Moving on to the outlook.

As noted in the earnings release we are adjusting slightly our 2004 guidance and now expect to report net income available to common shareholders of $1.47 to $1.50 per diluted share, FFO of 285 to 287 per diluted share.

We are reaffirming our 2005 guidance and expect to report net income available to common shareholders in the range 147 to 155 per diluted share, and FFO 298 to 306 per diluted share, that assumes 250 million of leases.

And I'll flip it back to you, George.

Thanks very much, Ray.

Let me make some concluding remarks and then open the floor for questions.

As you know, we managed this company with a long term perspective and are pleased - - very pleased with our approximately 17% total return over our 33, 34-year history.

And given that perspective, I would submit that there is a much larger point that should be made at this point.

During 2002, 2003, and year-to-date, 2004, we made new investments of approximately $1.4 billion and we expect by the end of 2004 to have doubled revenues and total assets during this 3-year time period.

Also during this period, among the public Health Care REITs we estimate that we have the highest investment totals.

And generally, we viewed this period as one of unprecedented opportunity for our high margin investments in high quality facilities operated by top flight management teams.

We now have an average portfolio life of 12-years, which should drive a strong and a long term revenue stream.

Another very important aspect of this investment performance relates to our operator base.

During this period, since 2001, we have added 18 new operators and we would expect several additional operators in the fourth quarter of 2004.

As you know, we generally fashion relationship investment programs for our operators that tend to produce additional investments with these operators.

In a sense, our operators become part of our marketing effort.

Accordingly, these new operators are the life blood of our business and provide us with a great deal of comfort as we push into an increasingly competitive environment.

With that, I'll now open the floor to questions.

Thank you.

The floor is now open for questions.

If you have a question, please press star, 1 on your touch tone phone.

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

Questions will be taken in the order they are received.

We do ask that while you pose your question that you pick up your handset to ensure property sound quality.

Please hold as we poll for questions.

Our first question is coming from Jerry Doctrow of Legg Mason.

Good morning.

HI, Jerry, how are you?

Good.

I just had a couple of things.

I wanted to explore sort of the investments a little bit more in a couple of related questions.

Just, you were saying, yields, I think, of 9% and I guess long term 11ish, Ray, if I understand you right?

That's correct.

Is there a difference between the AL and the nursing homes in terms of yields?

The initial yields for the nursing homes were slightly higher than the AL.

Okay.

and the increasers for the AL are slightly higher.

I don't think though that it's necessarily symptomatic of the marketplace, Jerry, it just happened to be the 2 transactions that we entered into this quarter.

Okay.

And I guess on that, and just a little bit more on the transactions.

Americas' is now is up above your, sort of normal 10% kind of threshold for investments.

And I was curious, I guess, as to what the thought is there and are you still sort of maintaining that?

We'll try to limit them going forward?

Jerry, you know, we've been above 15% with a few operators in the past and we've always brought them back down to our 10% guideline.

Similarly we'll do the same with Beaty(ph) at Emeritus and I would point out too that our top 5 are still below 50%.

So we're very cognizant of concentration issues, and I think over time you've seen that we managed to that.

Okay.

I just want to confirm it's not changing.

And then, I guess on just price per bed and maybe a little bit yield.

The price per bed on the SNF's, if I was calculating it right, was about $55,000 a bed, was definitely on the high side in terms of the averages out there.

I guess, I sort of wonder, with CLN out of the market whether you guys are, you know, becoming sort of the most aggressive buyer?

And I was curious if you would comment on that?

What a loaded question that is! [ LAUGHTER ] First of all, on the SNF side, there are fewer buyers and, so, we don't really think we've been pushed by competition to being aggressive in that side.

We think that this is a very fair price for the assets with an excellent operator.

And I think you've known over time, as well, Jerry, that - - and as evidenced by our initial guidance in 2004, where we thought we might be limited to 200 million because of people buying too much, that we're not inclined to do it, unless we see good investments.

So, the answer, of course, is no, to your last question.

Okay.

Okay.

Yeah.

It just seems like a high price per bed and relatively low yield, so that's why I'm asking.

The - - and then just from a capital structure standpoint and then I'll stop.

It looks to me, just like the next issuance might be common equity just because you know the debt levels are up.

I mean, they're not high, but you know they've been trending up a little bit because you've done preferred and you've done some debt here.

Is that my sense and should we expect a common sometime next year, with your 250 million of expected investments?

Well, we did issue the preferred as you suggest, and think that we're pretty full on the preferred bucket right now.

And we are going to continue to manage to maintain our investment grade, which means watching the debt.

So we'll probably be issuing some common through the DRIP, the waiver program, and possibly a secondary.

Thank you.

Our next question is coming from Greg Andrews of Green Street Advisors.

Yeah.

Just a follow-up on the price per bed for the nursing homes.

Is there anything about the location of those facilities or the type of facility that helps explain the higher per bed price?

Well, the facilities are located primarily in Florida and other southeastern states.

They're in good markets and have strong operating results and we thought the price per bed was appropriate.

Okay.

With respect to the impairment, can you just comment a little bit about that situation?

And also whether there might be any more expected impairments going forward?

Yeah.

It's a small impairment.

I'ts a small assisted living facility that we decided to sell and because we don't think we'll be able to get what we had on our books and we decided to take the impairment.

We don't have any other indicators of impairments at this time or we would have taken charges.

Okay.

Fair enough.

And then finally, you mentioned in your comments, Ray, that depreciation expense was up because you're - - basically your asset base had grown, particularly for the rental property, but, actually, the depreciation charge is up more than the [inaudible].

Is there anything in terms of how your accounting for that that would explain why depreciation has risen, actually, faster?

Well, we did have a change in our straight line policy last quarter, and potentially, that's what's throwing off the relationship on the rentals and the depreciation.

Okay.

This is true for the 9 months as well, I'm not sure it's just a quarter thing.

For example, for 9 months depreciation is up 57% and rental revenues up 38%.

Yeah.

We started moving away from straight line, Greg, in the second quarter of this year.

Right.

So it would show up in the 9 months, too.

Okay.

Thank you.

Thank you.

Our next question is coming from Robert Belger (ph) of Prudential Equity.

Good morning.

Hey, Robert.

Yeah, few questions.

Could you provide some detail on your new operator that showed up, Delta Health?

Yes.

They're a private operator.

We acquired 25 SNFs with roughly 3,250 beds for approximately $180 million with them.

The facilities are leased under our 15-year master lease to them.

They, in total, have 45 SNFs with roughly 6,000 beds, and their facilities are located in Florida, Mississippi, Alabama.

The Company was founded in 1994, and the management team has, roughly, 20-years of nursing home experience, primarily in the markets that we're in.

Okay.

Then - - then, moving to the investments, completed in the quarter.

Can you give an indication under rental and interest coverages for the ALFs and also the SNFs?

Well, the SNF coverages are projected to be, roughly - - roughly 185 before management fees and the ALFs, 141.

Okay.

Then, my next question is: Your investment assumption didn't change, even though you appear to be on track to, at least, meet or exceed the mid-point.

It sort of assumes that the number could be a negative number in the fourth quarter.

Could you go over what could produce a negative investment?

It's going to depend upon the timing of investments and pay-offs.

We do have some potential pay-offs and we do have potential investments and we think we're going to be positive for the quarter, but, you know, a lot of it will be the timing.

Okay.

And, then, finally, could you just go over the variables that reduced your 2004 guidance?

Yeah.

I think part of it is the additional preferred.

I mean, we were only projecting we'd do 100 to 100 and a quarter and we did 175.

Okay.

Great, that's all of my questions today, thanks.

Thank you.

Thank you.

Our next question is coming from Philip Martin of Stifel Nicolaus.

Good morning, a couple of questions.

I jumped on a little bit late so I'm sorry if this is already covered, but sub-debt investments went up in the quarter and I just wanted to get an explanation for that.

And the second question I have is: On the timing of the acquisitions in the quarter?

If you could give us a little - - shed some light on that as well?

Yep.

Yep, sub-debt went up and we helped one of our operators buy-out their venture partner with some mezzanine financing.

And then on the timing of the investments, the large majority of them closed the last - - yeah - - well, roughly half in July and half in September.

Half in July and half in September of the aggregate of 297?

Yes.

So that - - half of 297 in July and half in September?

Roughly, yes.

Okay.

Okay.

Okay.

So that was- - okay, perfect, I appreciate it, thank you.

Thanks, Phil.

Thank you.

Once again if you would like to ask a question, please press star, 1 on your touch tone phone.

Our next question is coming from Scott O'Shea from Deutsche Banc.

Good morning, guys.

Good morning.

I was wondering if you'd just touch on the improvement in property level coverage on the outside and what's continuing to drive it up?

And ,you know, is there more coverage level upside in the tank?

Yeah.

It's slight occupancy increases but primarily rate-driven on the ALF coverages.

We would tend to see them, probably, relatively flat for the next quarter or 2, and then, the beginning of the year, as operators put in place rate increases, we would hope to see improvement again.

Okay.

Okay.

The impairment charge, was that a one-off facility that you had with someone?

Or was that part of a pool?

It's a pool of 3 or 4.

Yeah we had 3 or 4 assets with an operator and we're selling 1 of them - - or were selling 1 of them.

Okay.

And the others weren't strong enough to kind of carry the group, or you just decided to cut your losses here?

It just wasn't worth it.

As an opportunity cost, diversion of talent and time it just didn't make sense for either the operator or us.

Okay.

In terms of just currency of receivables.

I mean, any lagging operators from the October payment cycle?

No.

Okay.

That's it for me, thanks.

Thank you.

Our next question is coming from John Perry of Deutsche Banc.

Good morning.

Good morning, John.

Kind of a follow-up to Rob Belger's question, but as it pertains to the '05 guidance.

You raised $75 million more of preferred than you'd originally planned on, but the investment guidance has stayed the same for the remainder of '04 and '05.

Why was the '05 earnings guidance not impacted?

Where are the offsets?

Are the investments going to happen earlier in the year?

Yeah.

We just - - it's all timing.

And we're, you know, not sure of exactly when things are going to come on, but we're pretty comfortable we'll be able to meet those numbers next year.

Okay.

So it's just a matter of timing?

Yes.

Okay.

Thank you.

Our next question is coming from Chris Pike of UBS.

Good morning, guys.

Just a quick follow-up question to the Florida acquisition.

I think last quarter you guys talked about the Medicaid rates being slacked in Ohio and Florida, and here you guys are taking down a significant portfolio in that state.

Just wonder what your thoughts are there and if there is any embedded characteristics in that portfolio?

I think you talked about it a little bit previously that - - that - - that made you still decide to make the acquisition?

I mean, we evaluated potential cuts and looked at where our coverages would be and we're comfortable that the operator would be able to maintain acceptable operations.

Okay.

Great.

Everything else has been answered, thanks a lot.

Thank you.

Our next question is from Scott O'Shea of Deutsche Banc.

Yeah guys, one more.

On the going in yields and the 9 and the 11% on the third quarter investments, the 9 is the initial cash yield that you've got going?

Yes.

Correct.

And is the 11%, then, a terminal yield after, you know, 10 years or so?

No.

It's our projected average yield on the asset over the term of the lease.

Okay.

That would have been the GAAP that you would have shown before or booked before?

That's correct.

Okay.

That's helpful.

Thank you.

Thank you.

There appear to be no further questions at this time, I will now turn the call back over to management the for any closing remarks.

We would thank all of you for participating in our third quarter conference call.

Thank you.

This does conclude this morning's teleconference.

You may disconnect your lines and enjoy your day.