Welltower Inc. (WELL) Q2 2012 Earnings Report, Transcript and Summary

Good day. And welcome to the Sunrise Senior Living Second Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I’ll turn the conference over to Mr. Tim Smith. Please go ahead, sir.

Thank you. And welcome to Sunrise Senior Living’s second quarter 2012 investor conference call. This is Tim Smith of Sunrise’s Investor Relations. Before we begin, let me remind you that this call is being recorded and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management’s expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those anticipated by these forward-looking statements. Any forward-looking statements reflect management’s current view only and the company undertakes no obligation to revise or update such statements in the future. I will now turn the call over to Mark Ordan, Sunrise’s Chief Executive Officer. Mark?

Thanks Tim. Good morning. We are pleased to speak about another overall solid quarter for Sunrise Senior Living. Our quarter-over-quarter stabilized occupancy increased 90 basis points to 88.1%, which is even with our first quarter results. Our current quarter is off to a strong start. Our results always vary regionally and we have even very pleased recently by strength in our West Coast communities where we have a large concentration. Our average revenue per occupied unit grew 2.4% to the second quarter of 2012 over the same period in 2011 and 1.2% sequentially. NOI grew 1.6% quarter-over-quarter for stabilized communities and 2.9% overall. General and administrative expenses were $25.2 million for the quarter, compared to $27.6 million for the same period in 2011. The decrease in the period is primarily due to $1.1 million of severance expense is paid in 2011 relating to the reduction of 20 positions at our corporate and regional offices, compared to $300,000 in severance cost in 2012. As a result of those and additional staffing reductions at our corporate and regional offices in 2011, salary expenses decreased by approximately $900,000 in the second quarter of 2012, compared to the second quarter of 2011. Our adjusted EBITDA for Q2 was $49.7 million versus $39 million for the same period last year. The difference was driven primarily by the 15 community acquisition, which occurred in the latter part of Q2 of 2011, along with our reduced overhead and NOI growth. As you would expect with very few remaining workout completions to be done, our daily attention in Q2 and beyond is devoted primarily to increasing strength of our operations. While we are reducing our overhead spending, we have been and will continue to spend more on care. Our costs of care delivery and oversight have increased and…

Thank you, Mark. And thank you all for joining us today for Sunrise’s second quarter conference call. Today I will discuss Sunrise’s consolidated operating results for the three and six months ended June 30, 2012, including our recent transactions have impacted our consolidated financial results. As Mark mentioned earlier, our 2012 second quarter adjusted EBITDA increased by $10.7 million compared to the same period last year. This increase is primarily due to approximately $8.5 million of incremental EBITDA generated from communities acquired in 2011 and 2012, and the decrease of $3 million in general and administrative expenses, excluding non-cash stock compensation expense. We've adjusted net income before interest taxes, depreciation, amortization and rent expense to further exclude certain non-cash gains and losses, and certain items of income or expenses, and arriving at adjusted. Net income attributable to common shareholders for the quarter was $9.6 million or $0.16 per fully diluted share, compared to $1.3 million or $0.02 per fully diluted share for the second quarter of 2011. The change between periods was primarily driven by a $21.7 million return on investment resulting from the sale of 16 venture-owned assets to Ventas, a $5.1 million increase in our share of earnings and unconsolidated communities, which was primarily driven by NOI growth and transaction cost incurred for certain ventures in 2011, but not in 2012, and the $2.3 million reduction in general and administrative expenses in the second quarter of 2012. The difference between the periods also reflects a $15.6 million impairment charge recorded in 2012 related to in-place leasehold improvements and furniture, fixtures and equipment at 10 communities whose leases are being terminated early, and an $11.3 million gain on fair value for business combinations relating to the acquisition of AL US recorded in the second quarter of 2011. Management fees…

Thank you, Mark. I’ll provide comments for our consolidated assets, our leased assets, our joint ventures and our management contracts for both stabilized and leased-up properties, which is a reflection of how we manage our business. I will also speak about key transactions within each segment, details are available in our supplemental 8-K filed yesterday. Our consolidated community portfolio now consists of 23 communities, all of which are stabilized as of June 30, 2012. In the second quarter, our consolidated portfolio was reduced by seven communities and these communities were transferred to a newly formed venture. I will detail this shortly. For the second quarter, the 23 consolidated communities produced $11.6 million of net operating income before management fees, resulting in a NOI increase of 1.5% for the second quarter of 2012 over the second quarter of 2011. For the same period, occupancy was up 170 basis points, and average revenue per occupied unit was up 1.7%. NOI for leased communities was down 13.1% and occupancy was 87.7% for the second quarter of 2012 versus 88.3% for the second quarter of 2011. Within our leased community segment on May 29, 2012, we entered into an agreement to terminate 10 operating community leases with the lessor, Senior Housing Properties Trust. The lessor lesser paid us $1 million as consideration for the in-place furniture, fixtures and equipment. Communities will be transitioned to a new manager over the next four to 12 months. Excluding the 10 terminated leased communities, NOI decreased approximately 7.6% and occupancy was 89.4% for the second quarter of 2012 versus 90% for the second quarter of 2011. This decrease was due to lower run rate as discussed on previous calls and lower skilled nursing resident days. Combining stabilized U.S. and U.K. joint venture communities, NOI was up 9.7% in…

Thank you, Greg. Thank you, Marc. We will now take any questions.

(Operator Instructions) We’ll take our first question with Daniel Bernstein of Stifel Nicolaus. Daniel Bernstein – Stifel Nicolaus: Hi. Good morning, gentlemen. I just want to start off on the G&A which seems to continuing to come down do you have a sense of what your -- what you expect that run rate to be going forward that kind of annual mid-90s million dollar mark based on the 2Q, or do you expect G&A to come down a little further as we go throughout the year.

We have -- we don’t have a new run rate, Dan, to announce this morning. I would say that we continue to try to find ways to reduce overhead. And as I also said in my comments, we temper those reductions with what we think is necessary in fruitful spending in areas like care and systems. So we think we can be at this level or little bit lower but not prepared right now to throw out any number. Daniel Bernstein – Stifel Nicolaus: Okay. When I look the U.K. lease of assets, it look like the occupancy declined a little bit and the rate declined a little bit sequentially. Obviously, there is some economic problems in Europe at this time in U.K. Can you talk about little bit about how your operations they are performing and especially on the lease of assets. And is that influencing the length of the negotiations to modify the U.K. loan covenant there?

Dan, it’s Greg. Let me talk a little bit about, sort of, operations in the U.K. As you'll see, the NOI for the U.K., including the large 15 asset portfolio increase even though occupancy -- unit occupancy decreased. What's happening there is a couple of things. One is that we are doing more semi-private occupancy. So what we're doing is actually resident in account of the building has increased. And with that, we have actually more residents in the building paying rent. Second thing that’s happening is that there's higher care utilization. The two sort of -- the impact of the two has the impact of actually increasing NOI year-over-year, even though we show a unit occupancy dip. So there is a sort of a phenomenon there that we think as the -- as productives of the bottom line. The second part of your question relating to the U.K. loan modification. I tried to do give some guidance on this at the end of the last year that this was going to be a lengthy process based on what we had seen others in the market do and sort of how complex this particular negotiation was going to be. I think its proceeding as we expected. And as we indicated, we’re hopeful that we’ll have some progress to report soon. Daniel Bernstein – Stifel Nicolaus: Okay. It sounded like the tone of negotiation were positive but I was just wondering whether all of the problems in Europe and U.K. is just kind of hindering their decision process. Is that the sense you get or is it just simply progressing as it is?

We think it’s just as Greg said it’s a practice that we expect. I don’t know whether that was directly tied to Europe. But again we're very hopeful that we will conclude this one. Daniel Bernstein – Stifel Nicolaus: And when we look at the occupancy on the stabilized assets, they were really flat. Sequentially, you had very good rate growth on your stabilized assets. If you could talk a little bit more about the trends in the quarter, was there a point where the occupancy trough and continued to trend up when you talked about July being very good. So although that an average number of occupancy was flat, what could you tell us about the trends in occupancy in the quarter?

I made a comment in my comments, that we see differences regionally and that varies by quarter. So there was no particular trend to call out during the quarter. It was mentioned we were very pleased. We have a big investment in footprint on the West Coast and we had increased strength there. So it does vary quarter-by-quarter regionally as there are different changes. Our first quarter was a little bit stronger than we expected. We were really disappointed by the results in the second quarter. We were pleased as you noted that that we’ve achieved our results with increased rates. And yeah, we are also very pleased that that the third quarter was off to a very strong start. We had several positive weeks and we have a terrific sales team and leader. And I think they are doing a great job, making sure that everybody knows what a strong value it is to have your mom and dad at Sunrise. Daniel Bernstein – Stifel Nicolaus: Are you able to provide the occupancy at the end of the quarter on those assets and may be where they are today. Just putting some more numbers on the trends that you noted?

In which the… Daniel Bernstein – Stifel Nicolaus: You could just do to stabilize it, where you ended the quarter and where you’re today or where you’re at the end of July?

We don’t break that out separately but we could think about that. Daniel Bernstein – Stifel Nicolaus: Okay. And then in terms of the rate growth you absolutely did push the rate growth in the second quarter. If you could talk about -- is that something that level, something we continue to expect the rest of the year in response to the higher acuity that you may be having in your facilities just trying to understand the push in rate?

Well, I’d say a few things. It’s obviously a composite number. We are very need driven, number one. So a lot of this has to do with the care that we provide for our residents. The second is, as I said all these things are regionally driven. We don't set rates as a company. We look at our first-off market and within our markets, we look at our communities. So there were times, when it's not advantageous at all to increase rate. There were times when it makes sense. So I don't have a projection for the year. I think we -- I think we’d become fairly good at managing this part of -- this part of our business. And I think because over 30 years now, we understand what it takes to take care of seniors who whose needs are more acute. I think it put us in a good position. But -- so we balance the factor if it’s need driven by the factor would be their economic realities. And those vary market-by-market. Daniel Bernstein – Stifel Nicolaus: Okay. But generally, as your occupancy has improved, you’ve been able to push rate a little bit better?

No indication of that change. Daniel Bernstein – Stifel Nicolaus: Okay. And on recurring CapEx, I guess, it was about $3 million or so in the quarter. Is that expected to trend up a little bit in the next coming quarters. I would think it would be, may be, more of $4 million, $5 million a quarter range but how was that to you to. Tell me whether I think that characterization is right or wrong?

Hey, David. It’s Marc Richards. You’re correct. We typically, historically incurred the bulk of our CapEx in the third and fourth quarters of the year. So I would expect an upward trend moving through the remainder of 2012. Daniel Bernstein – Stifel Nicolaus: I guess, that’s all for me at this point. I’ll see if anyway. I don’t have any questions.

Dan, thanks very much.

(Operator Instructions) Okay. And it appears that we have no further questions at this time.

I will let everybody go to Hamptons with the beach and we’ll continue to manage our communities. So thank you everybody for your support and for listening this morning and we’ll talk to you soon.