Healthpeak Properties, Inc. (DOC) Q1 2015 Earnings Report, Transcript and Summary

Greeting, and welcome to the Physicians Realty Trust's First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Brad Page, Senior Vice President and General Counsel. Thank you, please go ahead.

Thank you. Good afternoon and welcome to the Physicians Realty Trust first quarter 2015 conference call and audio webcast. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; and John Lucey, Principle Accounting and Reporting Officer. During this call, John Thomas will provide a company update and overview of recent transactions and our strategic focus. Then Jeff Theiler will review the financial results for the first quarter and our thoughts for the remainder of 2015. Following that, we will open the call for questions. I'd like to remind you that today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 that can be identified by words such as believes, expects, anticipates, plans, projects, seeks and similar expressions and involve numerous risks and uncertainties. The company's actual results could differ materially from those anticipated or implied in such forward-looking statements as a result of certain factors as set forth in the company's filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to the company's CEO, John Thomas. John?

Thank you, Brad and good afternoon. This morning we hosted our second annual shareholders meeting here in Milwaukee, Wisconsin. And I am pleased to report the reelection of all our trustees the approval of our employee stock purchase plan and the appointment of Ernst & Young is our auditors. Thank you for your support. We are particular excited about the employee stock purchase plan as many of our teammates have already purchase stock, shares and DOC and want to buy more systematically. This plan will enhance the alignment of interest between our team and shareholders and we appreciate our shareholders recognizing this and providing our team that opportunity. As we mentioned last quarter we are very focused on hiring, retaining and enhancing the capability of DOC eligible teammates. As we reported to our shareholders this morning to straight Physicians Realty Trust is very strong and healthy. We are pleased to report we have now exceeded $1.1 billion and high quality medical office facilities with over 4 million rentable square feet, which is almost 95% occupied and the average lease term of just under nine years. A strong healthy portfolio that we believe will produce reliable and growing cash flow for years to come. Since our IPO it emphasis our strategy to build a high quality portfolio with low leverage and seek investment grade as soon as possible. The strategy that we believe will optimize total shareholder return and long-term value. As of March 31, 2014, we had about $1.05 billion in gross real estate assets and only $157 million in debt. With our recent acquisitions announced this morning, we have almost $1 billion in high quality unencumbered medical office facilities. Our board and management team continued to believe that keeping our properties unencumbered and low leverage is the best capital strategy for the company and more importantly the company’s shareholders. If you study the capital and balance sheet strategies of our peers and the data is clear that the best performing REIT in terms of total shareholder return over the course of time have focused on maintaining a strong balance sheet with low leverage and that is our plan. During the first quarter we invested $234 million highlighted by the Minnesota portfolio developed by Mark Davis. Mark and his high quality clients including strong credit health systems like Allina, Fairview, North Memorial Health Care and Essentia are the four thinking providers we seek to work with. These providers want facilities designed to meet their current and future needs of patients. During April, we added four facilities and a total investment of $56.5 million and a number of healthcare systems to our client base. Through investments and facilities in Louisville, Kentucky with Catholic Health Initiatives, Baton Rouge, Louisiana, with tenant healthcare and another Essentia Health Ministry outpatient on-campus facility in Michigan as well as another HCA anchored outpatient facility in Jacksonville, Florida. Each of these facilities was owned in part by physicians and we believe the DOC focus on docs continues to be a powerful strategy. CHI tenant especially with their recent announcement to acquire United Surgical Partners and Essentia Health continue to grow and evolve multi-state health systems focused on the future of healthcare delivery services, which we believe will be an outpatient care facilities combining physicians offices, diagnostic services, imaging, ambulatory, surgery and physical therapy or rehab services all of the various physician alignment strategies. Last night our board and team have done it with the CEO a physician of one of the leading healthcare systems in United States. He has led a dominant healthcare system through an evolution focused less on inpatient care and more on outpatient care, consumerism and cost containment. All the while investing heavily in evidence based medicine and information and technology. This Physician CEO has 5,000 patients who actively provide feedback on the services provided by this multi-billion dollar organization. And one of the most important messages he delivered to us is “little things matter”. We believe taking care of our healthcare provider tenants and partners in the visitors to our facilities and taking care of the little things differentiates us in the market and while we’ve been so successful since the IPO, acquiring facilities from owners who care who the next owner will be. There have been some very interesting transactions recently in our market and while we have great respect for our peers big and small we continue to believe our best strategy is to remained focused on medical office and outpatient care with opportunistic investments in small specialized hospitals from time-to-time, but as an unusual opportunities which by definition we did not see occurring anytime soon. You should expect to see is growing our medical office and outpatient care portfolio on and off campus anchored by leading healthcare delivery systems and large multi-specialty and specialty position groups. As we discussed in our last earnings call while the timing is not certain now that we have surpassed the $1 billion mark in real estate assets and market capitalization, we expect to pursue an investment grade rating in 2015 and this success will begin the transformation to a long-term capital structure. Thank you for taking the time to listen and speak with us today. I’ll now ask Jeff Theiler to review our financial results and then we will take some Q&A. Jeff.

Thank you, John. We start off 2015 was another successful quarter. Our first quarter 2015 funds from operations or FFO were $7.7 million or $0.11 per diluted share. Our normalized FFO, which added back $5.9 million of acquisition expenses and some other small normalizing adjustments were $13.7 million or $0.20 per diluted share, a year-over-year increase of 67% from the first quarter of 2014. Normalized funds available for distribution or FAD were approximately $12.5 million or $0.18 per diluted share, a year-over-year increase of 50% from the first quarter of 2014. We continue to execute on our strong acquisition pipeline in the first quarter closing on over $234 million of high quality investments featuring premium healthcare tenants with an average unlevered first year cash yield of 6.9%. These assets generated $1.9 million in cash NOI in the first quarter. And we acquired all these assets at the beginning of the year they would have generated an additional $2.2 million in cash net operating income. In addition, subsequent to the end of the first quarter we have acquired an additional $56.4 million of properties with an average first year unlevered cash yield of 7.1%. In order to fund these acquisitions while maintaining our commitment to a conservative balance sheet we closed almost 19 million share follow-on offering on January 21 of this year the largest in the company’s history. This offering raised $297.7 million in net proceeds enabling us to fully pay down our existing line of credit and help fund a portion of our first quarter acquisition activity. We also utilize our aftermarket equity program in January raising $4.2 million of total proceeds in the first quarter. At the end of the quarter we had $73 million drawn on our $400 million line of credit combined with our modest existing secure debt of approximately $84 million, our debt to total asset ratio was just under 15% at the end of the quarter. Leaving us well-positioned to continue to execute on the acquisition pipeline we see for the remainder of the year. On the operations front our portfolio is just under 95% leased at the end of the first quarter. This is the second quarter in which we have reported our same-store portfolio statistics. As a remainder our same-store portfolio is relatively small part of our overall portfolio and small adjustments can significantly impact the results. Our same-store cash NOI for the first quarter of 2015 grew 2.4% year-over-year, which was primarily due to expense savings. Finally, our general and administrative costs for the quarter were $3.4 million, or $2.7 million on a cash basis inline with our expectations. To touch on guidance for the remainder of 2015 because we continue to focus on external growth our FFO and FFO per share are highly variable depending on investment volume, investment timing and assumptions for raising capital. This makes it extremely difficult to provide meaningful guidance on these items. However based on our acquisition success in the first quarter of the year and the pipeline we see going forward we remain comfortable with the previously provided acquisition guidance of $500 million to $700 million of total investments for 2015. This guidance includes acquisitions already announced this year and at the midpoint represents a modest increase over the investment volume we achieved last year. With that, I will turn it back over to John.

Thank you, Jeff. With that, Brendan please open up the lines for questions.

[Operator Instructions] Our first question comes from the line of Juan Sanabria with Bank of America. Please go ahead with your questions.

Hey, good afternoon guys.

Good morning, Juan.

I was just hoping you could remind us how many deals have you guys announced that haven’t closed but are still pending just to give us a sense of easy wins in that pipeline built-up to guidance?

One second, Juan. I think its just two, yes I mean I’m thinking about $64 million.

Yes, Kennewick which is the large development project where we have a takeout which appears to be on schedule for this summer some time.

Okay, and what should we be thinking about in terms of cap rates for that $500 million to $700 million and is the focus mainly on single assets or just assets in secondary markets are you looking to maybe do small portfolios and maybe a little bit tighter in terms of cap rates?

Yes, we’ve got really both, but we are still seeing lots of good volume and high quality around the 7% first year unlevered cash yield, but we are in both in bigger markets and smaller markets.

Okay, and then just on the dividend when do you guys expect to be in a position to be able to have that covered?

Yes, Juan, it’s Jeff. We’re looking forward to covering the dividend by the end of the year, that’s our projection, where it’s a priority for us, obviously we feel like we are making good progress towards it, so we expect to be covering it by the end of the year.

Okay, great. And just lastly any update on senior management search you’ve got on ongoing and to any other personnel that you maybe looking to add to the team?

No, I think we are still rounding out some additional accounting staff primarily, but right now as we announced previously John Sweet has extended his contract through at least 2016 and probably by the end of this year we’ll add some additional senior leadership in our business development.

Thank you, guys.

Thanks a lot.

Our next question comes from the line of John Kim with BMO Capital Markets. Please go ahead with your questions.

Thanks, good afternoon. You’ve done a very good job so far balancing your acquisition growth with maintaining a strong balance sheet, but this year the REITs as you know have been very volatile and are down a little bit this year. If the capital markets are not there what’s the Plan B as far as trying to maintain that balance?

Hey, John, it’s Jeff. I think when we look at our growth and our growth through acquisitions and how we fund that certainly a big part of our objective is to make sure that we are keeping the company safe and keeping in position for a long-term growth. To the extend capital markets aren’t there and I mean I think that would mean a pretty big drop from where we are today. I think we would be comfortable sitting and waiting for pricing to readjust on assets before we start acquiring assets again. I mean we are not going to do deals that are destructive to our equity value. And we are also like we’ve talked about many times committed to maintaining a sensible balance sheet. So if the pricing isn’t there and it doesn’t make sense then we are comfortable passing, we don’t see that as we sit here today.

Is it too early to discuss dispositions as a source of capital and also would you potentially look at giving joint ventures?

It’s too early to talk about dispositions, we have a couple of legacy assets, we’ve been trying to sell, we sold one of those but they were small assets they came in the legacy portfolio and generating enough capital really be consider for capital recycling, everything we bought since the IPO we bought with the intention of kind of a 15-year old and they have had no affected all more gotten better than no real issues with the credit loss or anything like that. So the next year the next will probably start thinking about that more routinely. And then on the JV we have lots of kind of private investors that recap to us looking to partner from time-to-time and we want small kind of very small JVs where they had the asset or had an ownership interest in the asset, but again we think we have access to big capital partners and small capital partners in the capital markets general.

Okay, and then on your occupancy is there any difference between the leased rates and the physical occupancy in your portfolio?

What’s the difference? I am looking at about 4% of leased versus occupied so 91%.

Just in one portfolio overall…

Okay.

Yes, it’s a very small part that’s the difference between leased versus occupied I mean we kind of go under this lease terminology because there might be a small tenant, 2000 square foot tenant in some building that vacate and they are still paying the lease so we feel like leases are little bit more of appropriate term to use.

And then if you all ready talked about this and just ignore this question I’ll look it up, but the same-store leased rate decline this period versus the fourth quarter, what was the reason for that?

Yes, we had in the same-store portfolio there are two tenants that left one was just over 3,500 square feet and that was [indiscernible] comments so we had another one in new is just over 3,000 square feet that vacated as well. So two small tenants have left in again this is the downside of having a small same-store portfolios you get relatively small changes in your operating statistic and it just carries a big way.

When they left, they left early and had to pay like a termination fee or they just left…

That was all leased role that we had anticipated when we bought the buildings, so again relatively small tenants compared to the overall portfolio.

Got it. Okay thank you.

Thanks.

Our next question comes from the line of Mike Carroll with RBC. Please go ahead with your questions.

Thanks. Can you guys give us some additional color on your investment pipeline how many deals are you currently tracking and then what’s the composition of that, my guess to meet in your comments that mostly medical office buildings?

Yes, Mike its John. The pipeline continues to be robust I think the same kind of averages has we’ve been producing each quarter recently what we consistently would think about and then back to the kind of the $700 million top end guidance for the year potentially but when you got plenty of pipelines to at least [indiscernible] to that number or you know kind of the midpoint of that $500 million to $700 million. I think most everything in the pipeline right now is medical office and healthcare system anchored maybe on or off campus but healthcare system anchored, so really we’re seeing some very high quality opportunities right now.

And then what’s the signs of those potential acquisitions or there mostly smaller deals or do you have some of the large ones like the Minneapolis transaction that you completed.

Yes, we got some nice sizeable opportunities as well but this business is $20 million to $25 million at a time. So we’ve got some $10 million ones we got some $40 million so the averages will look like in next quarter or two look like what we have been doing, so.

Okay it seems like over the past I guess several quarters that your investment strategy shifted a little bit you’re acquiring a large type portfolios are larger type assets that you did in the beginning is that kind of by design or do you expect kind of go back to those smaller one-off pipe deals.

No I think its by as we’ve had a opportunity for lower cost of capital having the opportunity to be competitive with the larger buildings the larger on-campus buildings, but it’s well, but as I said minute ago, we still see a lot of nice $10 million opportunities I mean we’ve gotten to a point ourselves we’re looking at things smaller than that is hard to justify the time and energy in some of those transactions but we completed nice $8 million of acquisition Louisville, Kentucky which is brand new ASE leased to the CHI affiliated hospital there. So we see – still see and we’ll still do some transactions like that, but it usually because there is some bigger relationship opportunity out of it.

Okay great thank you.

Thank you. And our next question comes from the line of Jonathan Hughes with Raymond James. Please go ahead with your questions.

Hi, guys good afternoon. Just curious in the same-store pool operating expenses were down by 9% year-over-year just curious what is the driver behind the significant decline?

Hey, Jonathan. So again for the small pool impact, we have some higher than normal operating expenses in the first quarter of 2014 and it’s a stuff like [pipe first] that we had as maintenance expenses, we have some paneling on a roof that we have to replace that we had an expense through. So there is just a couple out of the ordinary expenses in the first quarter of 2014 that weren’t there in the first quarter of 2015 and that’s really what drove that down.

Okay. And then I’d guess more broader picture, could you guys maybe talk about the impact of potential DOC fix and just any impact that’s having on maybe your underwriting forecast and potentially any valuations out there.

I wouldn’t say it has had a huge impact, obviously it’s a great change – great legislation for physicians just creating their stability that they had to kind of fight for every other year, every 18 months. I don’t think it really changes our underwriting at all I mean you kind of after – ultimately fixing it every 18 months for the last 20 years it came to be predictable. So kind of stabilizes the physician community generally. So I won’t say any real great impact. Hospital reimbursement overall, partly used to pay for that, I think just a continued emphasis on outpatient care are reflecting a continued emphasis on outpatient care and lowering the cost of care that Medicare is going to pay for. So we do think that is kind of support of our strategies of looking outside the big box hospital for real estate investment assets.

Okay, and then I don’t know if I got it, the size of the current pipeline you set it near the high end of the $700 million guidance range back to this year?

Yes, I didn’t probably said to [indiscernible], that the pipeline is very robust what I meant by that I think we are comfortable with that guidance and at least a midpoint or the higher end of that guidance with the pipeline in front of us.

Okay. All right, that’s it for me. Thanks, guys.

Thank you. [Operator Instructions] Our next question comes from the line of Jordan Sadler with KeyBanc. Please go ahead with your questions.

Thank you, gentlemen. Just question regarding sort of a little bit bigger picture in that, you guys have obviously grown your scale a bit and as if effective in the first quarter you deleverage yourselves and availed yourselves of some capital and John having sort of been here before I’m kind of curious if getting to this better scale and having closed all the acquisitions that you have closed to date kind of just changes the opportunity set at all and if you notice that and if there is anything you can speak to there where you may see bigger deals or just be able to toss your hat on the ring on bigger opportunities, what that flow might look like?

Yes, Jordan I think that’s a good observation I mean we’ve clearly got into a critical math and we got $1 billion – almost a $1 billion of unencumbered real estates, we have a lot of capital or a lot of different tools in the tool box now for capital. So we can’t look at bigger deals there are some fairly large deals out there that with our assets and clients that we know well we’ll take a look at a year ago we probably wouldn’t spend anytime at all. But again our regular way investing is we are going to continue from the foreseeable feature which I think is years which is - this is a very fragmented business and we pick up a lot of business again $20 million to $25 million at a time and that’s what’s sitting in some of us. So when we talk about pipeline we are really focused on those kind of opportunities. And then in addition to that looking at some bigger opportunities floating around the market.

Is it safe to say that the larger portfolio deals even a couple $100 million tend to have come along with sort of a premium price tag?

They generally do so and kind of think about that a couple of different ways, but 50 basis points probably the minimum when you get into those backup, you get the big three involved in and you get anybody is looking for a big opportunity is going to pay a premium for the bulkiness of it. The Davis portfolio was frankly he was particularly focused on a specific type of partner, our investors know the assets and so. And I think Dave will get those at a very attractive price and probably didn’t have as much portfolio premium there because he was willing to take a discount because we wanted to be very selective with the owner – the next owner.

And then just last one here on the operating side I am curious what you are seeing in terms I know there were some optimism previously about that being able to continue to pick up some occupancy and I am curious if that I assume that’s still there and then what you are seeing in terms of the ability to goner rent bumps 3% plus in your…

Yes, that’s market by market, but I mean the few renewals that are left for this year in it $19 bucks kind of expiring so we should be able to continue to move those up. And some markets are 2% markets, some markets are 3% market. So we continue to focus kind of on that 2.5% average across the portfolio, but the near-term we don’t have a lot of expiring so we don’t have any roll downs that risk and overall we only have about 5% in the entire portfolio available, so 30,000 feet of that is one building that we would again in Lansing, Michigan that may move into more a disposition effort than a leasing effort. So Mark has done a – Mark and his team had done a great job not only with renewals but advancing the absorption of the other space. Feel very good about it.

Okay thank you.

Thanks Jordan. End of Q&A

Thank you, we have no further questions at this time. I would like to turn the floor back over to John Thomas for closing remarks.

We appreciate you all taking the time this afternoon to join us and appreciate your support we are working hard for you, for your investors and for all our shareholders and just thanking - look forward to talking you at – seeing you at NAREIT in the next quarter. Thank you.