Welltower Inc (WELL) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Health Care REIT, Inc. Third Quarter 2005 Earnings Conference Call.

[Operator Instructions] .

I would like to remind everyone that this conference is being recorded. I would now like to turn the conference over to Georganne Palffy, of the financial relations board. Please go ahead, ma'am.

Good morning, and thanks to everyone for joining us today for Health Care REIT's Third Quarter Conference Call. You may have received a copy of the press release late yesterday afternoon. But in the event that 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 webcast of today's call, which may be accessed through the Company's website, as well.

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. And having 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.

Thank you, Georganne. During the third quarter, our year continued to unfold generally as we anticipated. Our FAD for the quarter of $0.77 constituted a strong 13% increase over same quarter 2004. Our new FAD guidance of 2.78 to 2.80 per share for 2005 is up 9% from 2004 results. These favorable numbers come in the context of a tough investment environment.

After making quality new investments of approximately 1.6 billion in the period of 2002 through 2004, we considered 2005 to be a period for selective investing and the disposition of non-core properties. While our investment activity for the third quarter was nominal, our net investments year-to-date totaled $225 million. We are refining our net investments for the year to 125 to 175 million, expecting additional dispositions of non-core assets through the remainder of 2005.

However, we now believe that we have a reasonable chance to capture one or more of the large transactions totaling $300 million now in underwriting. If any of such transactions make it through our investment process in 2005, we would exceed the refined investment guidance. We're also becoming more optimistic as it relates to investment prospects for 2006 and beyond. We had assumed that the combination of additional payoffs of non-core assets in 2006, together with the overheated investment environment, would result in only moderate investment activity in 2006.

We now believe we can successfully capture some reasonably priced ALFs-assisted living facilities-solid skilled nursing acquisitions, assisted living, skilled nursing, Alzheimer's, stand alone or in combination projects that are development projects, as well as other investments such as rental CCRCs. We will release investment and earnings guidance for 2006 once there is more certainty as to the timing and dollar amount of acquisitions and dispositions.

Let me now spend time a moment on our portfolio management. As most of you know, we constantly comb through our portfolio, eliminating operators and properties that are underperforming or in some other ways are non-core. Subsequent to quarter end, one of our operators completed a mutually beneficial refinancing, that resulted in the sale of 6 assets for approximately $69 million and the repayment of 7.6 million of working capital loans that had been in non-accrual. We could potentially dispose of an additional 30 to 80 million of non-core investments during the remainder of 2005, with similar beneficial results to HCN, as well.

Some capture of previously unrecognized interest income, not currently part of guidance, would be part of these transactions. And if all potential dispositions occur in 2005, HCN could capture up to an additional 3 million of interest income in the fourth quarter. I should point out that we may also see dispositions of additional assets during probably the first quarter of '06, and we will provide more information as we learn more about the likelihood of any such possible dispositions.

All of these dispositions, both completed and hoped for, would significantly strengthen our portfolio, and in turn, the quality of our earnings. Through these dispositions, we expect to virtually eliminate our subdebt investments, cut loans on non-accrual by up to a half, and reduce overall loan amounts. So with that overview, I will turn the call over to our President and CFO, Ray Braun and Scott Estes, our Vice President of Finance, who will take you through more detail on portfolio and financial matters. Ray?

Thanks George. Please note that our earnings release is posted on our website under the heading "Press Releases" and it contains a reconciliation of FAD, FFO and EBITDA to net income. For the quarter, we recognized net income available to common stock holders of $0.37, FFO of $0.77 and FAD of $0.77 per diluted share.

The sequential increase in FFO per share from $0.70 in the second quarter to $0.77 was primarily the result of rent and interest earned on new lease and loan investments that closed at the end of the second quarter, offset by payoffs and the expiration of a six-month deferral period in connection with the transition of some assets to a new operator, which we discussed in our year-end call. Dividends paid in the third quarter were $0.62 per share and our FFO and FAD payout ratios were 81%.

As previously announced, the board approved our 138th consecutive dividend to be paid November 21, 2005 in the amount of $0.62 per share. Gross revenues, including discontinued operations, were 74.6 million for the quarter. These revenues were 93% from real property and 49% from assisted living. You'll note that we have a classification on our balance sheet for assets held for sale. This represents a portfolio that George eluded to of 6 assisted living facilities that we sold back to an operator last week.

As of September 30 , 2005, we have 7 loans aggregating $22 million with 6 operators on non-accrual. The pool of non-accrual loans decreased by 13.6 million from the prior quarter due to the October payoff discussed above, and an operator payoff in the third quarter. On the expense side, our quarterly depreciation, including discontinued operations, increased to 22.1 million from 18.9 million in the prior year as a result of a net increase in real property owned. We added $300,000 to the loan-loss reserve and our allowance now stands at 6.2 million.

Our quarterly interest expense, including discontinued operations, increased to 21.6 million from 17.9 million in the prior year, primarily as a result of higher average borrowings under our unsecured lines of credit and changes in our senior secured notes. Our G&A expenses totaled 4.6 million, representing a 28% increase over 3.6 last year, but only a $300,000 increase on a sequential basis from the second quarter. We continue to diligently monitor our G&A expense line item and have refined our overall guidance for calendar year 2005, from 17.5 to 18.5 million to 17.8 to 18.3 million.

Moving on to the balance sheet, we ended the quarter with net real estate investments of approximately 2.6 billion. At September 30, 2005, the Company had investments in 426 facilities in 37 states with 52 operators. As previously reported, our gross investment activity for the quarter totaled 17.2 million, and we had payoffs totaling 9 million, generating 8.2 million of net new investments.

New facility acquisitions for the quarter included one skilled nursing facility with 107 beds for $3 million and one assisted living facility with 101 million units for $8 million. The balance of the gross investment amount consisted primarily of construction and other advances to existing operators. The new lease investments have terms of 15 years, and average initial yield of approximately 8.8%, and average expected yield of approximately 11.1%.

We have been asked to comment on current market conditions. I think as most of you are aware, we have seen significant cap rate compression for independent living, assisted living and skilled nursing facilities. Quality portfolios of stabilized assets have traded recently at historically low cap rates for independent living of 6% to 8%, assisted living of 6.5% to 8% and skilled nursing of 8.5% to 9%.

Our credit profile remain stable. Our leverage is reasonable at 37% debt to total market cap. We would anticipate our line balance declining due to the significant amount of dispositions expected for the remainder of the year. Our adjusted interest coverage for year-to-date is 3.25 times. That excludes the impact of the loss on extinguishment of debt. Debt maturities are in good shape. We only have $1 million in scheduled mortgage principal payments due in 2005. We had no change in our credit ratings during the quarter, and we intend to continue managing the Company to maintain our investment grade status.

In terms of capital raising, we only had our DRIP activity that continues to do well. We issued 461,000 shares in the third quarter, generating $16.6 million in proceeds. We would expect issuing approximately another 300,000 shares per quarter through our DRIP. And with that, I will turn it over to Scott to discuss portfolio matters.

Thanks Ray. At this point, I would like to shift our discussion to portfolio matters. Please note that coverage statistics reflect latest 12- month activity through 2Q 2005, whereas balances, facilities, and bed counts reflect the amount as of September 30. Our overall stable payment coverage is at approximately 1.91 times, an increase of one basis point from the prior quarter. Our portfolio is 99% stable assets, 91% of our properties are owned and 85% of our owned assets are in massed releases (ph).

At quarter end, our assisted living portfolio was comprised of 233 facilities with 15,639 units and an investment balance of approximately 1.3 billion. The stabilized portfolio was comprised of 230 facilities with 15,370 units, an investment balance of 1.3 billion and stable payment coverage of 1.51 times, an increase of 2 basis points from the prior quarter.

Our skilled nursing portfolio was comprised of 180 facilities with 24,626 beds and an investment balance of 1.1 billion. Our stable payment coverage remains strong at 2.20 times, an increase of 2 basis points from the prior quarter. Now to provide an update on the Medicare front, CMS issued a final rule to refine resource utilization group's system effective January 1, 2006. The refinement will add 9 new RUG categories to account for medically complex rehab patients. The refinement is expected to result in an additional 20 million in aggregate spending in fiscal 2006 versus fiscal 2005.

Due to the timing of the various refinements, we project a $10 per diem increase in rates from October through December 2005, but then a reduction in rates of up to $20 per diem from January through September 2006. Therefore, effective January 1, 2006, Medicare rates may be slightly below current Medicare rates. The net impact varies among geographical regions, RUG categories and urban versus non-urban locations.

In addition, because reimbursement rates for certain RUGs will decline under the new system, operators must adjust their patient mix to maximize profitability. Operating margins may come under pressure until operators make the transition. Payment coverage may decrease slightly next year due to the new RUG system, but we do not expect it to materially impact our operators' ability to pay rent.

I would now like to discuss management's expectations for 2005, and of course, these comments are management's expectations only and subject to the Safe Harbor Statement read at the beginning of our call. All expectations discussed regarding new investments, asset dispositions and earnings are subject to the factors listed in the Safe Harbor Statement, including market conditions.

As previously announced, the Company is refining its 2005 net new investment guidance to a range of 125 to 175 million from the previous 100 to 200 million number. The net new investment guidance excludes approximately 300 million of portfolio acquisitions currently in underwriting with an average yield of 8.25%. The new investments will primarily comprise leases that will not require rents to be straight-lined. The Company currently expects to report net income available to common stockholders on the range of $1.02 to $1.04 per diluted share.

Excluding the loss on extinguishment of debt and any additional one-time items, the Company is also narrowing its guidance for 2005 FFO to a range of $2.91 to $2.93 from the previous $2.90 to $2.98 per diluted share. The Company now expects to report straight-line rent of approximately 7 million for the full year 2005 before any additional cash payment, outside normal monthly rental payment, and is revising its 2005 FAD guidance to a range of $2.78 to $2.80 from the previous $2.72 to $2.80 per diluted share.

The Company also anticipates the G&A expenses will total between 17.8 million and 18.3 million for the full year 2005. Turning to the fourth quarter, we've made some assumptions; the Company has assumed, number one, a growth investment of 35 to 65 million, at an average initial yield of 9%, occurring on average during the latter half of the fourth quarter. Second, dispositions of 100 to 150 million at an average yield of 9.25%. Three, proceeds from dispositions are used to pay down the Company's outstanding line of credit balance. Four, G&A expenses of 4.8 to 5.3 million. And five, no additional capital raising activities outside of the Company's DRIP plan.

Now with that, that concludes my report and I will turn it back to you, George.

Thank you, Scott. To sum up, management is pleased with the Company's results and prospects. Our financial results were strong, with an increased percentage of leases with organic growth. Our portfolio's performing well, with overall coverage of 1.9121. And moreover, the portfolio is being strengthened further as we continue to eliminate non-core assets and reduce exposure to subdebt and investments. The final thought is that our investment prospects appear to have improved significantly, as well.

And with that summation, I will open for questions.

Thank you, sir.

[Operator Instructions].

We will first go to Robert Mains of Ryan Beck.

Good morning, everybody. A couple of questions. G&A expense on a sequential basis, when you're talking about fourth quarter, the range that you're talking about would be a significant bump up from Q3. Is there anything going on specific to the fourth quarter?

No, we expect normal year-end professional service fees, accountants, lawyers, et cetera, that may increase it.

Then return to kind of a run rate in 2006?

Yes, Robert. Yes.

All right. Second, the 300 million that you mentioned is in underwriting. I know it is pretty hard to forecast this, but any feeling as to when-- It sounds like some of it could close 2005. Could some of it be 2006 events, as well?

Yes, it's possible that they could. Most of these closings are going to be toward the end of the year, if we get them done in 2005. Many of them came out of the recent NIC conference, so we are running hard to get them closed.

So if it's end of the quarter, it wouldn't have a big impact on 2005 anyway.

Would not have much of an impact.

Right. My last question is, you said a couple of times that you feel a little bit better about the investment environment than you have in the past. Qualitatively, what has changed?

I do not know the markets per se have changed, although there might be just a touch more sanity coming into the markets in terms of what people are willing to pay relative to their cost of capital. So I guess I am hearing more of that. I think that's positive that there is a little bit more discipline perhaps coming in.

And two, the largest factor, I think Ray and the rest would agree, was the recent NIC conference. We really made great contacts at that conference, probably talked to as many as 25 to 30 new operators that we're trying to form relationships with. A number of term sheets came out of that conference. Now, that just makes us feel more optimistic, Rob. I mean, there's a long way between that time of optimism and getting deals done. But I think it was the NIC conference, primarily.

It sounds like what you saw there was, people that you haven't seen before, rather than anybody who's out there lowering the asked.

I think a lot of our optimism comes from new operators. But I would say that what's interesting about this arena is that we see operators recycle continuously. Since we have been in this arena for so many years, we are seeing people who ran companies, who sold companies, and are back into a new company or executive vice presidents of companies that we did business with who are forming their own companies. So yes, there are a lot of new operators. But a lot of old faces, I suppose.

Got you. Okay, that's very helpful. Thank you.

Moving on, we will go next to Robert Belzer of Prudential Equity.

Yes, good morning. A couple of questions today. The first one is regards to the working capital loans that you had repaid. Was there any accrued interest ? Are you going to generate any accrued interest from that particular repayment?

I mentioned that if all of the transactions occur, that we could generate up to $3 million worth of interest that had not been recognized because of our fairly conservative recognition policies. On the one that has closed, I can tell you that the amount exceeds $1 million. And that is clearly going to be recognized in the fourth quarter. The rest depend on actual closings.

And I would assume that is in your guidance?

It is not in our guidance.

Okay, it is not. And then, just one other question. If you were to close some of the additional investments that total 300 million, how would you look to fund additional acquisitions?

Well, what has always been a moving target for us, and Scott, Ray feel free to jump in, is the fact that we are trying to dispose of non-core assets and we are having some luck. If one looks at the numbers that Scott put in front of you just recently, there are quite a number of dispositions expected or hoped for in the fourth quarter and there are other disposition possibilities in early, we hope, 2006. So if all of those occur, we can generally fund these transactions out of those amounts.

But our job really is then to look at what kind of comfort we have relative to the size of our line and how far up the line we will be. So that we are evaluating both debt and equity issuances in the event we are very successful soon in terms of acquisitions. We can't say more than that at this point.

So, we could assume potential disposition activity in 2006 might reach the magnitude that you're looking at in 2005?

No, it is highly unlikely.

That's not a likely possibility?

No. It could be, in one case, a fairly significant transaction. But if we accomplish all the dispositions that we tried to describe generally in 2005, we do not expect the disposition activity in 2006 to reach much more than 50, 60% of that amount.

Okay, great. That's all my questions today. Thanks.

[Operator Instructions].

Our next question comes from Scott O'Shea of Deutsche Bank.

Good morning, guys. Couple of questions here. The dispositions are a little more back end weighted this year. Is there a particular reason for that? Is it just taking a while to line up financing on the other side?

Yes. All of these Refis take time, and we not only see issues relative to paperwork, documentation, due diligence, coming from the operator, but some time delays, in some cases, by the lenders or going through their process. Ray, any more color on that?

I think, as we indicated on the first quarter call, we view this as a year of portfolio pruning. And when you approach people early in the year, it takes them 6 to 9 months to get their Refis lined up.

Okay. Next question would be the non-performing loan balance. Where does that stand now, and where do you see that maybe at year end?

Well, loans on non-accrual were $22 million. And assuming that we see some of the disposition activity, that number will go down by year end.

Okay. Do I recall correctly that it was 35ish the prior quarter or 2 quarters ago?

Roughly that is correct, Scott.

So has that already come down with dispositions or does it come down with improved performance? Or is it mostly dispositions?

It is dispositions and payoffs.

Okay. Great. Is there an internal growth number that you've got for the third quarter? Are some of your lease, your revised lease structures starting to kick into internal growth that you could disclose?

I still think the number is the same that we've given out before, Scott. Of our lease portfolio, 60% of it has some component - it had component of internal growth associated with it.

We will describe that more completely at the year-end call, once a lot more is known about acquisitions and dispositions, Scott. We think it's going to be a positive.

Okay. My last question is on the property level coverages. Do you expect those to maybe go up with the asset sales and payoffs that you see coming in the fourth quarter?

The ones that we are expecting in the fourth quarter should have a positive affect on coverage, but given the size of the portfolio today, it just can't be that much.

Okay. That's all I had. Thank you.

With no further questions, I will turn it back to you gentlemen for any closing or additional comments.

We just want to thank you for participating, and if there are follow-up calls, please feel free to call any of us in management. Thank you.

That will conclude today's conference. We thank everyone for your participation.