Welltower Inc (WELL) 2006 Q4 法說會逐字稿

Welcome to the Health Care REIT fourth-quarter and year-end earnings conference call. (OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded.

Now I would like to turn the conference over to Vicki Baker of the Financial Relations Board.

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

In the event you did not receive a copy of the news release distributed late yesterday afternoon, you may access it 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 the Company's Web site as well.

At this time management would like me to inform you that certain statements made during this conference call which are non-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, the Company 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 news release and from time to time in the Company's filings with the SEC.

Having said that, I would like to now turn the call over to George Chapman, Chairman and CEO of Health Care REIT, for his opening remarks.

Please go ahead sir.

Thank you, Vicki.

We're quite pleased with our performance in 2006.

The facility level coverages are excellent, the value of our real estate continues to go up, and our portfolio has grown and become more diversified.

Yet we are most enthusiastic about our success in 2006 in establishing our new platform and infrastructure that should allow us to take advantage of opportunities in the evolving senior housing and healthcare sectors.

We have discussed in depth the drivers of this change.

Technological and pharmaceutical breakthroughs are certainly important.

The demands of the ever more knowledgeable consumer has also had a major impact on delivery systems and facilities.

And the advent of the Baby Boomers will only accentuate that impact.

The merger with Windrose broadened and deepened our management team, and added development and property management capabilities.

We are very well positioned as a leader in our sector.

As we have reported, our line of credit operator relationships have grown to historically-high levels.

These lines, together with anticipated closings and new relationships in process, many driven by our enhanced capabilities, now are in the range of $2 billion to $3 billion.

We are very optimistic about our investment prospects.

Our investment guidance for 2007 totals gross investments of 1 billion to 1.2 billion, or net investments after anticipated dispositions of $800 million to $1.1 billion.

And at this point I will ask Ray Braun, our President, Fred Farrar, our Executive Vice President and President of the Windrose division, and Scott Estes, our CFO, to comment on various portfolio and financial matters.

I should point out as -- just as an advisory to you, that Fred Farrar is not with us today in Toledo.

So bear with us, as we are not sitting across the table from each other, as we go through the Q&A portion of the call.

At this point, Ray, take over please.

Thank you, George.

I'll discuss portfolio matters, our development initiative, the Rendina acquisition, and our progress on the merger integration.

Our portfolio composition is shown in exhibit 1, with coverage by property type in exhibit 2.

For 2006 we had very consistent performance with strong payment coverage at 1.93 times and stable occupancy.

The reimbursement environment for both Medicare and Medicaid remains stable.

Medicare continues to pursue placement of patients in the most efficient subacute setting, which should be a positive across the healthcare spectrum.

These changes are occurring incrementally, which gives our operators time to adjust and respond without significant operational disruption.

We continue to see development opportunities in select markets with proven operators, and currently have 32 properties in development.

Exhibit 8 provides detailed information on those properties. 10 of the projects are expansions to existing assets and 22 will be new buildings.

We view this selective development as an attractive way to grow earnings, with newly built properties designed to meet the evolving needs of healthcare consumers.

At the end of the year, the concentration for fill-up and construction represented 11% of our total investment balance.

Last month we announced a purchase agreement for a portfolio of medical office buildings from affiliates of the Rendina Companies.

As part of the transaction, we also agreed to acquire Paramount Real Estate Services, the property management group of Rendina Companies.

The purchase price is approximately $300 million, including the initial assumption of approximately $150 million in secured debt.

The transaction is expected to close in the second quarter of this year and is included in our 2007 guidance.

The Rendina medical office portfolio includes 18 properties in 10 states.

The buildings range in size from 24,000 square feet to 78,000 square feet, with a portfolio total of nearly 1 million square feet.

The occupancy in the portfolio is strong at 94%.

The portfolio was recently constructed, with an average age of only three years, and is closely aligned with hospital systems. 13 of the buildings are on hospital campuses.

We will disclose further transaction details after the closing.

Paramount, founded in 1988 and headquartered in Palm Beach Gardens, Florida, currently manages over 60 medical office buildings, including the 18 buildings we acquired in the Rendina [transaction], and 30 properties currently owned by us.

We gained many benefits from this transaction, including Paramount's ongoing relationships with tenants and healthcare systems of the medical office buildings owned by us, the related fee income earned on these properties, and consolidation of our property management operations.

We closed the Windrose merger on December 20, and our systems and process integration are proceeding according to plan.

Our new platform enables us to provide property management, development and project management and services.

We are already beginning to see the benefits of our enhanced platform in additional investment and development opportunities.

With that, I'll now turn it over to Fred Farrar to walk you through the Windrose division update.

Thanks, Ray.

At year-end 2006, the Windrose division represented 93 buildings totaling 3.6 million square feet at 93.5% occupancy.

Results for the fourth quarter were affected by merger-related expenses, including revaluation of assets, leased intangibles and straight-line rents, and early extinguishment of debt and other balance sheet adjustments.

The property portfolio generated property-level NOI, consisting of rents, including reimbursements, less property operating expenses of approximately $64 million for the year.

Before any 2007 acquisitions, the property-level NOI run rate is budgeted at 65 million, or slightly more than $18 per square foot.

For 2007, in addition to acquisitions, our opportunities include improving our occupancy and per-square-foot NOI, integrating into Health Care REIT and maximizing the synergies, including the existing self-development capacity for future revenues at cap rates above the current cap rate environment.

In addition, assimilating Paramount's property management and the 18-property portfolio acquisition we announced in early January that Ray discussed, represent potential earnings improvement for 2007.

With the expanded capacity and lower cost of capital as part of Health Care REIT, Fred Klipsch and I are truly excited about the opportunities ahead.

That completes my update, so I'll turn the call over to Scott Estes to discuss financial results and guidance.

Thanks, Fred.

Good morning, everyone.

During the fourth quarter, we completed gross investments of 163.4 million and 559.2 million for the full year of 2006.

The average initial cash yield on new investments for the quarter was 8.2%.

As detailed in exhibit 8, our 2006 development advances were 158.6 million.

At this time, we have outstanding unfunded commitments related to projects which are underway at the end of the year totaling 342.8 million.

We also had a number of dispositions during the fourth quarter, which totaled 75.4 million.

Most of the dispositions related to smaller portfolios, including one non-revenue-generating project.

The average yield for the terminated investments this quarter totaled 7.8% including the non-earning investment, and 9.4% excluding it.

As previously announced, the Board of Directors declared a prorated dividend of $0.2991 per share.

When combined with the prorated dividend of $0.3409 cents per share, paid on December 28, 2006 in connection with the Windrose merger, this represents a total dividend of $0.64 per share for the quarter ended December 31, 2006.

For the full year 2006, our normalized FFO and FAD payout ratios were 86% and 89%, respectively.

The Board also approved a new quarterly dividend rate of $0.66 per share, or $2.64 annually, commencing with the May 2007 dividend, which represents a 3% increase above last year's rate.

DRIP activity remained steady in the fourth quarter, as we issued 436,000 shares, generating net proceeds of 17.4 million.

Turning now to our earnings results, our fourth-quarter performance was strong relative to Wall Street expectations.

Our fourth-quarter normalized FFO per fully diluted share increased 1%, to $0.77 from $0.76, in the comparable quarter last year, while fourth-quarter normalized FAD per fully diluted share increased 4%, to $0.74 from $0.71, in the fourth quarter of 2005.

For the full year 2006, normalized FFO and FAD per fully diluted share increased 1% and 4%, respectively, to 2.97 and 2.87 per share.

One other item of note is that we have adjusted our FAD calculation to add back the amortization of loan expense this quarter.

This adjustment has also been made to all prior periods in this report, as well as in our forward guidance.

Both fourth-quarter and full-year 2006 results include 12 days of operations from the Windrose division.

Importantly, the impact of the Windrose operations over the short period had virtually no impact on either our FFO or FAD per share in either the fourth quarter or full year 2006 results, excluding merger-related costs.

G&A expenses this quarter totaled 10.2 million, which includes 5.2 million of merger-related costs.

Excluding these merger-related costs, G&A was 5.0 million, compared to 3.9 million in the fourth quarter of 2005.

Now taking a look at our balance sheet, we ended the quarter with gross real estate investments totaling 4.5 billion.

As of December 31, our debt to undepreciated book capitalization was 49%, and our debt to market capitalization stood at 39%.

At the end of the year we had a line balance of 225 million, resulting in existing capacity on our lines of credit of 515 million.

We do remain committed to maintaining our investment-grade ratings, and continue to target a debt to undepreciated book capitalization level of approximately 45%.

Secured debt at the end of 2006 totaled 379 million, which represented approximately 9% of total assets.

As Ray previously mentioned, as part of the Rendina transaction, we anticipate assuming as much as 150 million of secured debt, which would increase our total secured debt basket to approximately 11 to 12%.

However, as with the Windrose transaction, if any of the debt can be prepaid at a reasonable cost, we'll do so.

Longer-term we will also work to keep our secured debt basket at the 10% level or below.

As a result of the Windrose merger, there are several new line items in our financial statements this quarter.

First, looking at the balance sheet, there's a new acquired leased intangibles line item included in the real property owned section on the asset side of the balance sheet, which represents real estate intangibles acquired through the Windrose deal and fair valued at the time of the acquisition.

Next, in the liabilities section, we've added the liability to the subsidiary trust issuing preferred securities line, which represents the fair market value of this debt at the time of acquisition.

And the last new item on the balance sheet, minority interests, represents the minority ownership interest stakes held by our minority partners in three buildings obtained through the Windrose deal.

Turning to the income statement, you can see we've added a new line item for our property operating expenses associated with our property management efforts, and there's also a new minority interest line item associated with the period income attributable to the ownership interest of our minority partners in the three buildings, as previously mentioned.

Now I'd like to discuss our 2007 guidance.

As detailed in our press release, net income available to common stockholders is forecast in a range of $1.17 to $1.25 per diluted share, FFO in a range of $3.06 to $3.14 per diluted share, and FAD in a range of $2.80 to $2.88 per share.

As always, our FAD guidance excludes any cash receipts which we may receive during calendar 2007 related to prepaid rents or straight-line receivable payouts.

Our assumptions are discussed in detail on page 3 of our earnings release, but I would like to point out several items here at this point.

First, our FFO per share guidance range of $3.06 to $3.14 represents solid 3 to 6% growth over the normalized FFO per share of $2.97 reported in 2006.

Both our 2007 FFO and FAD guidance include the impact of $7 million of non-cash stock-based compensation expense, or $0.09 per share.

And our 2007 FAD guidance is also impacted by an estimated $7 million of CapEx, tenant improvements and leasing commissions, which also represents $0.09 per share.

Next, G&A.

G&A is expected to total approximately $33 million to $35 million and 2007.

These amounts represent -- first, a combination of the historical Healthcare REIT, Windrose, HADC and Paramount management company G&A run rates post-acquisition; a commitment to the continuity of our senior leadership through the extension of the employment contracts of both George Chapman and Ray Braun; other additional hires made part-way through 2006 and anticipated during 2007; an incremental investment in our infrastructure in the form of several new potential satellite locations and the rollout of J.D.

Edwards as our new IT platform; and the additional legal and accounting expenses expected as a result of our greater size and diversity.

These amounts will be offset in part by the anticipated synergies from the Windrose and Paramount acquisitions of roughly 1 million to 2 million.

And just on a timing note, in addition, as was the case last year, we do anticipate that the accelerated expensing of non-cash restricted stock and options related to certain officers and directors in the amount of 1.9 million will hit our G&A during the first quarter of 2007.

So, really, as we think about our future growth opportunities, I think the final and maybe most important item of note relates to the potential future benefit we expect to realize from our development pipeline.

We are very optimistic about the opportunity to accelerate our earnings growth rate looking toward 2008 and beyond.

We believe, really, that calendar 2007 should be the last year before our development pipeline begins to pay huge dividends in regards to earnings results.

To further illustrate, we currently have 138 million of construction in progress on our balance sheet, and expect to fund additional development of 300 million to 400 million during calendar 2007.

This results in an aggregate bucket of roughly 400 million to 500 million of projected development which is yet to yield any significant return for us.

As most of you know, during the construction period, we capitalize our development costs at our average cost of debt, or roughly 6.5%, which flows through our income statement as a reduction in interest expense.

This compares to the current 9.4% average initial yield illustrated in exhibit 8 of our earnings release that we expect to earn on these projects once they open.

So, as you look at this 400 million to 500 million of identified development and the incremental spread we could earn of about 3%, we have as much as a $15 million unrealized earnings contribution which will roll out over the next several years.

Of this amount, we really expect to see relatively little benefit during 2007, since the vast majority of our 137 million in projected construction conversions this year won't occur until very late in the year.

So, as a result of this embedded future growth, we, then, are very excited about the potential for accelerating earnings trends in 2008 and beyond as we continue to ramp up our development pipeline over the next several years.

With that, I will conclude my report and turn it back to you, George.

Thanks very much, Scott.

Let me briefly wrap up.

Senior housing and healthcare sectors continue to be very strong, we have ready access to very efficiently-priced capital, our ongoing dialogue with the rating agencies remains quite constructive, and our new platform is even more synergistic than many would have predicted at this early stage.

In closing, I would like to thank the management teams and employees of Windrose and Health Care REIT for working so diligently together to make this merger a success.

We will now open for questions.

(OPERATOR INSTRUCTIONS).

Jerry Doctrow, Stifel Nicolaus.

I just had a couple things.

I was wondering if I could get a little more color on acquisitions as well as development.

Because I think you're assuming, I guess, this 800 million to 1.1 billion of net investments, and most of that is going to be acquisitions in '07, not development.

So, just a little more color on the acquisition environment, where you see spending money, and yields and stuff.

The acquisition market is very competitive.

I think in calls with some of our colleagues, you've seen that cap rates are still at pretty low levels, really, across the spectrum of senior housing and healthcare assets.

I think that our line, Jerry -- our lines of credit and relationships over the years give us pretty good access to getting our share, or more than our share, of those acquisitions.

And frankly, our success in the short-term in terms of earnings, FFO, FAD growth, relates very distinctly to getting as many acquisitions as possible.

Because as Scott indicated, the development pipeline is really very significant, and there is some pretty significant embedded future growth in that.

I think we're doing well.

We can close out the Rendina deal, hopefully, in the second quarter, or maybe late first quarter; that's probably optimistic.

And we have a number of acquisitions already teed up.

So we feel pretty good about it right now.

I was just going to say just a little bit maybe more in terms of just NICs, private papers, skilled, versus sort of the kind of health facility stuff.

Rendina is a large transaction which, of course, is mainly MOBs.

And we have a number of -- skilled nursing is going to be somewhere around 150 million to 200 million, we would view at this point, and the remainder is likely to be private pay [ILAL].

Just -- I was wondering if I could get a little more color on some of the non-cash comp.

I think Scott provided a little bit of detail on that.

Was some of that treated as merger-related costs sort of in the quarter?

I was just trying to clarify that.

And also, I think you said this, but I just wanted to clarify how you're treating it in FFO and FAD for reported numbers and guidance.

I guess, first, with respect to the last part of your question, the impact of the $7 million of aggregate non-cash comp is -- the negative impact, if you want to call it that, is included in our guidance for both FFO and FAD next year.

And as you look at the merger-related expenses this quarter and for the full year of $5.2 million, those amounts are basically -- most of that is non-cash comp related to the deal.

So it is non-cash comp?

I'm sorry. 2 million this quarter -- I'm sorry; that's right. 2 million this quarter of the $6 million. 6.9 million for the full year of 2006.

So backing that out, if you look on our -- on one of our reconciliations in the back of the release that has stock-based compensation, I think, our run rate for stock-based comp is 5 million this year, plus the 2 million of stock-based comp as part of the Windrose merger.

So, 5 million is growing to 7 million next year.

And largely, that's a function of the commitment we made to George and Ray through their long-term contracts and the stock they're going to receive as a part of that.

And it's basically a 5 million kind of run rate, and there's an extra 2 million, roughly, in the first quarter?

There is an additional 2 million -- that's correct -- in the first quarter.

Scott, I think you said this number, but I just didn't pick it up as you were going through.

I think you were saying there was also CapEx sort of coming out of FAD next year.

What was that number again?

It's in our reconciliation in the last exhibit of our release, but it's $7 million.

(OPERATOR INSTRUCTIONS).

Omotayo Okusanya, UBS.

A couple of questions.

In regards to the development pipeline, (indiscernible) not really going to be a significant factor in regards to earnings in '07.

But, could you give a little bit more details in regards to how you expect it to [roll on] in '08?

Sure.

Hang on a sec; we're getting some numbers together here.

I guess I would first point out that in our exhibit 8 in our press release, you can see the projected construction conversions.

And those -- we have an aggregate amount of projects that are underway of -- total committed balances of about $481 million, of which, as I said, about 137 million are projected to convert this year.

But most of that is right near the end of the year.

And then we should have an additional -- it's projected, as you can see in that exhibit -- a little over 170 million during 2008, and then 113 million in 2009, etcetera.

But, again, this doesn't include any projects which haven't started yet.

So you start to layer on additional conversions in future periods as construction projects are completed and they convert as well.

If I could just point out, too, Scott, as you look at those numbers that relate to existing projects, those are generally part of existing lines of credit or relationship financing programs with people we have done business with, generally, for years.

So, we would expect there to be a number of layers on top of those conversions shown in exhibit 8.

And then, for the gross investments of 1 billion to 1.2 billion for 2007, you're estimating about 700 million to 800 million would be at an average initial yield of 7.75 to 8.25.

Just given where cap rates are going right now, is that something that (indiscernible) the feasibility of being able to acquire so much (indiscernible) between 7.75 to 8.25?

Could you talk a little bit about that?

Maybe, Fred, you can chime in as well, if you like.

But I think, you know, as I think about those numbers, you realize there's really two pretty equal components, if you want to call it that.

You have the Rendina deal at approximately 300 million, plus the Windrose normal rate of acquisitions, which has been 100 million-plus potentially, really in the MOB space, representing about half of that number, as you think about initial yields.

And then you kind of think about the other opportunities in the senior care and other sectors.

And obviously it's a blend, a pretty even blend, of where cap rates are and more of our MOB potential investment opportunities, versus probably -- which are a little bit lower.

And Fred, feel free to comment.

But the blend of MOB yields at sub 7 5/8 and 1/4, and maybe about that range or a little bit higher for more of the senior housing cap rates.

On the MOB space, we are circling right around 7.5, plus or minus, in the assets that we have in the pipeline that we're acquiring.

And so, as Scott said, blending it with the senior housing assets, and if you look at 800 million as roughly split, you can see, then, the guidance does hold up, even in today's cap rate environment.

Just one more question in regards to (indiscernible) exhibit 2, the selected facility data.

Specialty care facilities -- the expenses there dropped to 60% from 70%?

There was a slight impact on our coverage and occupancy this quarter, which again looks at the trailing 12 months ended September 30.

I guess I would first reiterate that the specialty care portfolio is, obviously, only about 6% of our total portfolio investment balance.

But, we did have operational performance, and a few of our facilities in the third quarter did decline.

One in part due to an operational and, also, a reimbursement issue that have since been resolved.

A couple of facilities -- there were a change in referral pattern for one of our operators, as a result of losing a key operations person, and some change in referrals because of an issue at an individual facility.

And the second factor was there was a -- for a separate operator, there was a Medicare reimbursement adjustment, where the operator had to repay Medicare this quarter for some historical overpayments.

So it kind of skewed this period's results.

And more importantly, I think, we're not concerned; it's since been corrected, and don't really anticipate any material payment risk as a result.

So the change in referral pattern, as well as the change in reimbursement for the quarter -- both issues have been resolved?

Yes.

Great.

Thanks a lot.

Good quarter.

Ross Nussbaum, Bank of America.

Two questions.

One, can you refresh me a little on Rendina, in terms of the deal?

This was not their entire medical office portfolio, right?

Fred, do you want to handle that?

Sure.

This actually represents the balance of the mature medical office assets that Rendina owns.

They have a significant development pipeline, roughly, in the $300 million to $500 million per year over the next two years.

So they continue to bring on new assets, but it is substantially the completion of the stabilized assets within their portfolio.

Do you have a Right of First Offer on the future development projects?

There is not a formalized Right of First Offer, but we, obviously, continue to develop a stronger and deeper relationship with the remaining management team.

The other question I have is with respect to the development pipeline.

I'm just looking at the footnote with respect to your projected average initial yield, and I'm -- I guess maybe I'm just not understanding it.

How are you potentially going to be getting higher yields if underlying market rates increase if these are basically just long-term sale/leasebacks?

I'm trying to make sure I understand your question, Ross.

Are you getting beyond the, obviously, the incremental increase from the initial yield as the projects convert?

Yes.

Yes.

I guess he's getting at the structure.

There's a floor; for example, 10-year treasury plus 400 basis points at time of certificate of occupancy on a lot of these structures.

With a floor as well, Ross.

Jerry Doctrow, Stifel Nicolaus.

I just thought I'd ask whether you're buying the HR senior housing assets.

Excuse me;

I think we're going to have to put you on listen-only, Jerry.

Seems like a reasonable question.

Next?

There are no further questions at this time. (OPERATOR INSTRUCTIONS).

There are no questions.

I would like to turn the conference back over to Mr. Chapman for closing remarks.

We all thank you for your participation.

Thank you, everyone.

That does conclude today's conference.

You may now disconnect.