Health Care REIT Earnings Call Insights: Same-Store Growth Outlook and Pool

Health Care REIT, Inc. (NYSE:HCN) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Same-Store Growth Outlook

Michael Carroll – RBC Capital Markets: Do you guys still expect to drive 5% same-store growth from the Senior Housing operating portfolio after delivering about 5.6% the first quarter and 8.4% in the second quarter?

Scott A. Estes – EVP and CFO: Mike, its Scott Estes. Yes we do. The portfolio continues to do very well on the whole and as I said we are forecasting about 6% for the year and hopefully we will do a little bit better than that, but everything is going well the RIDEA portfolio.

Michael Carroll – RBC Capital Markets: What was the sequential same-store occupancy increase compared to last quarter?

George L. Chapman – Chairman, President and CEO: In the RIDEA portfolio?

Michael Carroll – RBC Capital Markets: Yes, the same store portfolio.

George L. Chapman – Chairman, President and CEO: Yes. It was down a little bit I think 30 basis points, but the NOI growth was high, was in the neighborhood of 5% quarter-over-quarter. So good rate growth, very modest expense growth more than offset a small decline in occupancy which we have more than recaptured as of today.

Michael Carroll – RBC Capital Markets: Thanks for the disclosure on the tenant coverage ratios. At what level do you start being more concerned, is it at the 0.95 level, because it does look like you have about 8% of your NOI still having a coverage ratio below 1.05?

George L. Chapman – Chairman, President and CEO: It really depends on the portfolio. We try to produce a little bit of detail on each one, is there a guarantee, is there a letter of credit, what’s the term of the lease, what kind of assets are they. So it really varies. Some portfolios are still in the sort of turnaround phase and we are perfectly comfortable that they are eventually going to hit 1 times plus payment coverage ratio. So it’s hard to say. We prefer to have – hold them above 1.0 today but on that list there aren’t too many that were I would say we are concerned about if any, and as you can see all of them are current on their rent payment…

Michael Carroll – RBC Capital Markets: Is there any particular operator that’s in that lower group?

Scott Brinker – EVP Investments: No. Like I said, generally speaking, we are very comfortable with the triple-net portfolio. We are happy to provide the additional transparency. We are confident it’s going to produce consistent growth going forward. I mean we are providing the transparency hoping that you are going to come to the same conclusion.

Scott A. Estes – EVP and CFO: Yeah. I would note Mike too, of that portfolio, it’s only 1.6% of total NOI, every single one of those lines that we have additional detail is just one facility except for one specific relationship and that one specific relationship is actually likely to pay us off and remain current on rent throughout and its projected sometime next year, I believe.

Michael Carroll – RBC Capital Markets: Then how do your current leverage metrics impact potential investment opportunities. I mean, it looks like in the third quarter, your leverage metrics will start creeping a lot higher than your targeted long-term leverage metrics just given the strong investment activity you completed recently?

Scott Brinker – EVP Investments: I don’t think there is any change. As a reminder to everybody, I think, we saw a benefit in our overall cost of capital given our recent upgrade to BBB flat from S&P. So, we are now BBB flat across the board and I feel like our general target remains 40% debt to un-depreciated book and from time to time as we raise capital it goes up or down around that number. But again that still we would remain committed to that target long-term and I don’t think we could have done more than raise a $1.7 billion of equity this quarter. So, I think, we still feel comfortable with our target level.

Same-Store Pool

Jeff Theiler – Green Street Advisors: I guess, this one is for Scott Brinker. Is the same-store pool this quarter the same as the same-store pool last quarter, those same 118 assets or did it somehow shift?

Scott Brinker – EVP Investments: Same pool, Jeff. Over the next year we’ll start adding portfolios like Chartwell, Sunrise, Brookdale, Revera, Belmont Village, so it’s the total RIDEA portfolio today is 357 assets. And about a year from now you’ll have all of those in the same-store pool.

Jeff Theiler – Green Street Advisors: So looking at it sequentially, it looks like the revenues were relatively flat in that same store pool, but the expenses dropped by 200 basis points or so. Can you kind of talk about what’s driving that?

Scott Brinker – EVP Investments: Jeff, let me look at the numbers, but in general occupancy was down a little bit, but it was more than offset by strong rate growth and then operating expenses increased only very slightly. So, the quarter-over-quarter, if you are comparing 1Q to 2Q, the NOI growth was more than 5%…

Jeff Theiler – Green Street Advisors: I’ll talk to you offline. And then how many of those assets in the same-store pool are lease up assets?

Scott Brinker – EVP Investments: There aren’t many at this point. The growth for the whole same-store pool is 8.4% year-over-year. Only four of them are lease-up assets, so the 114 stabilized assets NOI year-over-year grew almost 8%.

Jeff Theiler – Green Street Advisors: Then quickly just shifting gears to investment activity, in terms of the U.K. and Canada, what kind of supply growth do you see in the senior housing market there, and how do you – does that make you nervous at all or is it less in the U.S.? Where is it in relation to U.S.-based investment in senior housing?

Scott Brinker – EVP Investments: It’s modest in Canada about 2% a year, which is less than the growth in the population. So, throughout the country, occupancy is up, rates are up about 3% and our portfolios are up even higher. U.K. there isn’t good construction in this construction stats, but what you have in the U.K. is really a need to replace the lion’s share of the supply that exists on their older, outmoded buildings, mostly government pay and the assets that we own 46 communities now are modern private pay assets. So I’m not sure what the stat is but there needs to be more development not less in the U.K.

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