Aviv REIT's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.20.14 | About: Aviv REIT (AVIV)

Aviv REIT, Inc. (NYSE:AVIV)

Q4 2013 Earnings Conference Call

February 20, 2014 14:00 ET

Executives

David Smith - Managing Director, Investor Relations and Capital Markets

Craig Bernfield - Chairman and Chief Executive Officer

Steven Insoft - President and Chief Operating Officer

Mark Wetzel - Chief Financial Officer

Analysts

Juan Sanabria - Bank of America

Jeff Theiler - Green Street Advisors

Michael Carroll - RBC Capital Markets

Greg Van Winkle - Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Aviv REIT Fourth Quarter 2013 Earnings Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Thursday, February 20, 2014.

At this time, I would like to turn the conference over to David Smith, Managing Director, Investor Relations and Capital Markets. Please go ahead sir.

David Smith - Managing Director, Investor Relations and Capital Markets

Good afternoon, everyone. Earlier today, we issued a press release providing an update on Aviv’s fourth quarter and year end 2013 results. If anyone has not reviewed a copy, you may receive it by visiting Aviv’s website at www.avivreit.com under Investor Relations.

Beginning today’s call will be Craig Bernfield, Chairman and Chief Executive Officer; Steven Insoft, President and Chief Operating Officer and Mark Wetzel, Chief Financial Officer. They will provide a brief overview and then we will open the call to your questions.

Before we begin, we would like to remind participants that the matters we will be discussing today include forward-looking statements. And as such are subject to risks and uncertainties, including those that we have discussed in filings made by Aviv REIT, Inc. and Aviv Healthcare Properties Limited partnership with the SEC, which identify important risk factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. We do not undertake any responsibility to update any forward-looking statements provided during this conference call. Also discussions during this conference call will include certain financial measures, including adjusted EBITDA and AFFO that were not prepared in accordance with Generally Accepted Accounting Principles.

Reconciliations of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in our earnings release today. These measures should be considered in addition to not as substitute for measures of financial performance reported in accordance with GAAP.

At this point, I’d like to turn the call over to Craig Bernfield for his opening remarks. Craig?

Craig Bernfield - Chairman and Chief Executive Officer

Thanks David. Good afternoon and welcome to Aviv’s fourth quarter and year end 2013 earnings call. I will provide opening remarks and a review of our 2013 highlights as well as our acquisition activity and Steven Insoft, our President and COO, will provide an overview of our portfolio performance as well as our reinvestment in new construction activity. I am also pleased to have Mark Wetzel, our CFO and Treasurer, join us for his first Aviv quarterly earnings call and discuss our financial results. Mark joined us in November just prior to NAREIT and we are pleased to have him with us.

We are very pleased with our 2013 performance and results as we achieved what we hope to accomplish in our first year as a public company, including closing $167 million of investments in the fourth quarter. The following is an overview of our 2013 highlights. As you are aware, we completed our initial public offering in March raising over $300 million. We raised $400 million line of credit in connection with our IPO. We completed $239 million of investments, which included $197 million of acquisitions and $41 million of property reinvestment, new construction and mortgage loans.

Our acquisitions produced a blended initial cash yield of 10% and our other investments produced yields consistent with our acquisition. We completed our fourth unsecured notes offering in October raising $250 million at 6%, our first notes offering as a public company. Our portfolio maintains stable rent coverage at 2.0 times EBITDARM and 1.6 times EBITDAR. And finally, our 2013 AFFO was $1.69 per share beating our guidance range of $1.66 to $1.68 by $0.01. We conducted ourselves with a commitment to transparency, disclosure, communication and performance, and we intend to continue to do so. As Mark will discuss, we are announcing our 2014 guidance range of $1.89 to $1.93 per, a 13% year-over-year growth at the midpoint.

In 2013 we acquired 30 properties in 17 transactions with 13 operators at a blended initial cash yield of 10%. We continued to diversify the portfolio with the addition of four new operators. Fundamental, an operator of 104 properties in nine states with 12 properties currently triple-net leased from Aviv. Better Senior Living, an operator of nine properties in Florida with three properties currently triple-net leased from Aviv. Peregrine, an operator of 16 properties in Ohio with four properties triple-net leased from Aviv. And finally Cardinal Care, an operator of nine properties in Ohio with two properties currently triple-net leased from Aviv.

Our pipeline has continued in 2014 with the closing of $56 million of acquisitions in January. These acquisitions were completed in two separate transactions with the existing Aviv operator Fundamental and new Aviv operator Mission Health. Both of these transactions were brought exclusively to us by our operators. The Mission acquisition is campus of skilled nursing and senior housing, which we purchased for $40 million. The initial cash yield is 9.5%. And Mission is an operator of 15 facilities in four states.

The Fundamental acquisition is a brand new state-of-the-art post-acute and long-term care skilled nursing facility, which we purchased for $16 million. The initial cash yield is 9.1%. This was our third transaction with Fundamental since last summer. In 2013 consistent with our focused strategy over 80% of our acquisitions were post-acute and long-term care SNFs. We will continue to be principally focused on acquiring SNFs, but we will acquire other healthcare properties when presented with attractive opportunities based on our assessment of the quality of the operator, the real estate and the market as we do with our SNF acquisition.

On investment strategy also continued to be focused on identifying knowledgeable, experienced and trustworthy operators along with thorough underwriting of the operations, real estate and markets, while maintaining our commitment to disciplined valuation. We will continue to diversify our portfolio by operator and by state to expand our national footprint. We remain excited about the pipeline of attractive opportunities we are currently seeing in the market which has continued to increase as a result of our public company status, our operator relationships which are growing and our overall recognition as industry leaders dedicated to post acute and long-term care SNF. We intend to devote the majority of our efforts to growing our high quality portfolio of skilled nursing facility. In addition to the $56 million of acquisitions we have closed year-to-date, we feel confident about our ability to close a significant amount of attractive and accretive acquisitions in 2014.

Steve will now review our portfolio performance, property reimbursement and new construction activity.

Steven Insoft - President and Chief Operating Officer

Thanks Craig. At the end of the fourth quarter we owned 282 properties diversified across 29 states and triple-net leased to 38 operators. Our properties are leased to some of the largest and most experienced operators in the country and each of top ten operators which represent 71% of our rent operate on average 92 facilities. We remain committed to earning a portfolio diversified by operator, geography and reimbursement system. Consistent with the third quarter Daybreak remains our largest tenant with 14% of our rent and Texas remains our largest state with 17.5% of our rent.

We continue to have a portfolio with strong rent coverages. Rent coverage for the entire portfolio for the 12 months ended September 30, 2013 remains stable at two times EBITDARM and 1.6 times EBITDAR. Rent coverage for our SNF portfolio for the 12 months ended September 30, 2013 remained constant at 1.9 times EBITDARM and 1.5 times EBITDAR. Please refer to our supplement for more detailed information on our coverages.

Our operator’s occupancy for the 12 months ending September 30, 2013 was 79.2% and Q-mix was 47.3% materially consistent with last quarter. Our operator’s trailing 12 months EBITDAR margin was 15.7% and our SNF EBITDAR margin was 14.6% also materially consistent with last quarter. We continue to have a small amount of our rent expiring in the near term with only 8% of our rents expiring through the end of 2017 and our average remaining lease maturity is eight years.

The Medicare and Medicaid reimbursement environments remain stable. We believe that the government will continue to support and recognize the value of the need-based low cost post acute long-term care that SNFs provide and provide adequate reimbursement for Asian SNF operators to continue to provide quality care to the elder ones. During 2013, we invested $31 million into property reinvestment and new construction including $6 million during the fourth quarter achieving yields consistent with those on acquisition.

Our property reinvestment and new construction initiatives have been and will continue to be an important and growing part of our investment activity as it is designed to provide our operators with best in market real estate that will be competitive for the near term and over the long run. During the fourth quarter we sold two assets generating a GAAP gain of $1 million and prepared one asset for $500,000. The assets sold were located in Little Rock, Arkansas and Benton Harbor, Michigan and the third asset was in Searcy, Arkansas. We will continually assess our real estate markets and operators with the goal to selectively prone where needed. This will be a key part of our strategy going forward to improve the portfolio.

Mark will now review our financial results in detail.

Mark Wetzel - Chief Financial Officer

Thanks, Steven. I am excited to be here. Growth I’d see in the healthcare sector over the next decade as well as the vision that Craig has for Aviv were the primary drivers for me joining an already talented team. It’s great to be back in Chicago in spite of the coldest winter in 30 years.

I plan to cover four main areas today. Our 2013 fourth quarter and year end results, a balance sheet update, a dividend update, and a summary of our 2014 guidance. Total revenues for Q4 were $38.5 million, an increase of 18% compared to Q4 of 2012. Sequentially quarter-over-quarter we are up 17%. Year-over-year we’re up 11%. This growth across all periods was driven primarily by our strong acquisition activity.

G&A for Q4 totaled $5.7 million compared to $4.9 million quarter-over-quarter. Sequentially quarter-over-quarter we are higher but Q4 includes several one-time items. Our 2014 guidance assumes approximately just over $5 million a quarter for G&A. Adjusted EBITDA for Q4 was $33.5 million compared to $27.8 million for the fourth quarter of 2012, an increase of 21%. This increase was largely attributable to the 2013 acquisition.

Interest expense for Q4 totaled $11.2 million, a 10% decrease over the fourth quarter of 2012. The majority of this decrease was due to the IPO debt pay-down in Q1 of 2013. On a sequential basis, sequential comparison to Q3, interest expense up solely due to the October unsecured notes offering pre-fund the Q4 acquisition. 2013 Q4 AFFO $20.9 million as compared to $12.4 million in 2012, a 69% increase. On a sequential comparison in Q3 AFFO was lower due to higher interest expense for the unsecured notes offering.

For the full year 2013 AFFO was $79.5 million as compared to $52.1 million in 2012, a 53% increase. This increased primarily the 2013 acquisitions. On a AFFO per share basis, we are the $1.69 per share, $0.01 higher than the full year guidance we provided on the Q3 call due to the timing of the Q4 acquisition.

Moving onto the balance sheet, we ended the year with $51 million of cash, $20 million outstanding on our line of credit and $380 million of line availability. As Craig noted, we issued $250 million of 8-year, 6% unsecured notes due in October 2021. The proceeds we used to entirely pay down the line of credit and to prefund our fourth quarter acquisitions. As of December 31, our total debt was $686 million of which 95% was unsecured and 97% is at a fixed rate. Our weighted average interest rate is 6.9%, with an average maturity of 6.5 years.

Our net debt to annualized adjusted EBITDA was 4.7 times at quarter end. This is up compared to end of Q3, but a number of the Q4 acquisitions closed towards the end of the quarter. We expect to maintain a net debt to EBITDA at or below five times as we grow the portfolio. In general, the capital markets continued to be attracted to our ability to generate high tax yields. We will work to improve our borrowing spread and fees as we acquire additional properties. Our financing strategy continues to emphasize unsecured financing, contain credit metric consistent with an investment grade rating, financing flexibility that comes with that as we continue to grow.

As of today, we have $12 million of cash on hand, $40 million outstanding on our line and $360 million line availability. We ended the year with an annualized dividend of $1.44 per share, a yield of 6% and an AFFO payout ratio of 85%. We will continue to monitor the size of our dividend throughout the year balancing an appropriate payout ratio with our expected future acquisitions and capital needs. As Craig mentioned, we are introducing 2014 AFFO guidance of $1.89 to $1.93 per share. At the midpoint this would represent AFFO per share growth of 13% over 2013.

Our guidance does include a positive impact of the $56 million of acquisition that were announced in January, but does not include the affect of any additional acquisitions, dispositions or capital market transactions. We do expect additional 2014 acquisition, but cannot predict the timing. We will review our 2014 guidance and update quarterly based on the pace of 2014 acquisitions.

With this, operator, we will now open the call for questions.

Question-and Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Juan Sanabria with Bank of America. Please go ahead.

Juan Sanabria - Bank of America

Hi, good morning guys. I was just hoping you could speak to the size of the pipeline maybe give us a bit of context about kind of where you are now and where you were sort of at different points last year, just so that we can get a sense. How that have evolved over time and if you could comment a little bit on pricing and if you are seeing any pressure and if you expect cap rate to kind of hold firm or if you tick down from here?

Craig Bernfield

Juan, hi, this is Craig. Thanks for calling and thanks for your question. First of all, pipeline is very strong. We do have the benefit this time, this year as compared to last year when we were mired in the SEC process. We have this ongoing momentum in the pipeline. So I think as we mentioned in our prepared remarks, we were able to already close a meaningful amount of acquisitions this year. As you know it is not our practice to talk about deals that we haven’t closed, but we are actively working on a number of transaction some of which were sourced and worked on during the fourth quarter, mostly at the end of the fourth quarter, but some that we have sourced already in the first quarter of this year. So I think we feel very confident about our business development team’s ability to generate attractive and accretive acquisition opportunities, plus as we mentioned I think we are very consistent about this. We have very a close relationship with our operating partners and many of our deals come to us off market, because they are brought to us by our operators, because they know that our capital is behind them and they would like to work with us.

In terms of yields and then if there is something that I didn’t address, Juan, please feel free to jump back in and prompt me, but in terms of yields where I think saying what I would call very little if any change in the marketplace, the yields are really deal by deal based on the operator, the real-estate, the market, the competitive dynamics, whether it’s a processed-oriented transaction or something that you buy off market. So we are certainly benefiting from decrease in cost of capital, which is making up putting us in a position to do more accretive transactions, but we are not seeing downward yield pressure if that was your question.

Juan Sanabria - Bank of America

Okay, great. And you mentioned that there was some dispositions in the fourth quarter if you could just comment on the proceeds and the cap rate and if you expect to do any sort of pruning in the portfolio in 2014, I know nothing necessarily baked into guidance, but just maybe what we should expect?

Steven Insoft

Hi, Juan, it’s Steven Insoft. I think the best way to think about our dispositions that will happen from time-to-time is really us working collectively with our operator base in pruning non-strategic assets. To view them in terms of cap rates is probably in my mind not the best way to do it, but it would be just the net proceeds that we are going to reinvest. We are generally looking to prune the part of the portfolio that is the least exciting from a performance standpoint. So, it probably is not that simplistic in terms of giving you cap rates. And we will do that from time-to-time as we have in the past.

Juan Sanabria - Bank of America

Okay. And I think this is referenced, but is there any guidance on sort of a run-rate for G&A, I apologize if I missed it?

Mark Wetzel

Yes, Juan, this is Mark Wetzel, roughly $5 million a quarter as we go forward.

Juan Sanabria - Bank of America

Okay, great. That’s it from me. Thanks guys.

Craig Bernfield

Thanks, Juan.

Operator

Thank you. Our next question is from the line of Jeff Theiler with Green Street Advisors. Please go ahead.

Jeff Theiler - Green Street Advisors

Good afternoon. A question on your portfolio strategy, you talked a little bit about it upfront, but we have seen a number of different types of acquisitions from you in ‘13 senior housing, MOBs, LPAC, why do you think that’s the right thing to do, especially when you look at the public market which seems to be favoring SNF REITs over the other types of healthcare REIT? Why not just continue to maximize your value proposition just focus on skilled nursing?

Craig Bernfield

Hi, Jeff, this is Craig. First of all, I want to reiterate as I think we have been consistently saying since the IPO that we are a company that intends to principally focus on buying the asset class that we like the most. We have experienced in other healthcare real estate asset classes. And our strategy is very outside of that asset class is opportunistically frankly first and foremost on an operator strategy, if we meet an operator that’s doing something outside of skilled nursing. So maybe is concentric circle or two around skilled nursing, principally still something that’s very need driven. We will do an occasional investment, but if you look at the magnitude of what we did in 2013, for example, more than 80% of it was devoted to acquisitions and investments specifically related to post acute and long term care SNFs. I think if you look at our portfolio on a rent basis, we are still in the high 80s, probably 87%, 88% of our rents comes from triple net leases on skilled nursing facilities, the balance from other stuff and that other stuff again will be explained by investments that we made with operators that we need. We like what they are doing.

Jeff Theiler - Green Street Advisors

Okay. So when you look five years down the road, you’d still expect to have almost 90% of your NOI coming from SNFs?

Craig Bernfield

I have been looking five years down the road is like predicting the weather in Siberia is really tough, but I think our near-term strategy is definitely going to be, I think you should expect performance very similar to what we produced in the last few years, including 2013. And again, I emphasize that we are – I think widely been recognized as being primarily dedicated for investing in this space. So the opportunity set that we see in our pipeline is still dramatically not exclusively, but dramatically weighted in favor of skilled nursing.

Jeff Theiler - Green Street Advisors

Okay. And then I just have a couple questions on equity issuance. You had one set of selling stockholders register shares in January and then you have another lockup, I think expiring in March for Lindsay Goldberg, can you talk about the status of the Karkomi shares and whether you would expect additional selling pressure from the lockup expiring in March. And then finally, what you plans for equity issuance going forward to fund acquisitions because it sounds like you are bumping up against your acquisition targets you are talking about in the third quarter before you thought like you would need to issue some equity?

Craig Bernfield

Sure, Jeff, this is Craig again. I will take the first part of the question and let Mark Wetzel take the second part. Specifically related to the lockup expiration, we have had sno direct conversations with the Karkomi Estate. And I don’t know specifically whether that’s going to be a magic date for them. There are rational people and they will liquidate their position over time. But anything more frankly would be speculation because we don’t have regular dialogue with them.

As to other folks that are impacted by the expiration of a lockup, again we have no direct knowledge of anybody’s plan to be selling, but again people myself excluded I have no plans to be sell any of my share and management is not material. The only other party indirectly that’s affected that you’re mentioning indirectly is Lindsay Goldberg. And again I will give the same answer about the Karkomi Estate that we got no information about any plans on their part to sell any of the post lockup. So I am going to let Mark talk about the acquisitions.

Mark Wetzel

Yes, Jeff. I mean I think the idea of equity in the future is obviously on the table, but we can buy probably about 100 million of assets over the course of this year with our line of credit maintaining the right kind of debt to EBITDA ratios. So it really is a function of timing and the size of any one deal. So if you buy $10 million, $15 million deals over the course of time, we can absorb that. Our free cash flow for this year is probably $30 million after the dividend payouts. We have obviously some reinvestment we are spending. So the line availability is there, so we feel pretty good about where we are at, but if we buy north of $100 million then that’s on our line, so that’s on our radar in terms of an equity raise.

Jeff Theiler - Green Street Advisors

Okay, thank you.

Operator

Thank you. (Operator Instructions) And our next question is from the line Michael Carroll with RBC Capital Markets. Please go ahead.

Michael Carroll - RBC Capital Markets

Thanks Craig. Given you recent comments and the company’s strong pace of investments in the fourth quarter, it sounds like Aviv is going to exceed its traditional $220 million annual investments. Is there are new goal that we should think about on annual basis?

Craig Bernfield

Mike, not only did I expect the question, but I think about this over time and the way we think about it internally is our opportunities that is increasing all the time, among there are many reasons why I thought investing in the skilled nursing sector it has been so good over the last 25 years is because there is so much opportunity. Shifting through it and deciding in a disciplined fashion with a focused strategy like we have with operator first and real estate market close second in terms of how we prioritize the way we look at our investments. I think it’s entirely possible that not only this year, but in any of the previous five years that we could have grown much more significantly than we did. Making deals is difficult, the marketplace frankly is very fragmented as you know and is competitive. We work really hard to make the deals that we do. So I would say don’t be surprised if we end up having another great year, but we had the last few years and don’t be surprised if we do better.

Michael Carroll - RBC Capital Markets

Okay. And then, Mark, can you remind us on what your leverage targets are?

Mark Wetzel

Probably in the 4.5 to 5 times on a net debt to EBITDA range.

Michael Carroll - RBC Capital Markets

So then once you get to five times, that’s when you start thinking about issuing equity or would you be willing to go over give times in the near term?

Mark Wetzel

I think anyone quarter depends on if you buy them at the end of the quarter, you sometimes can hit it. So, it just depends. You get a five handle on it, definitely mid 5s, then you’re – we’ll act that just it depends.

Michael Carroll - RBC Capital Markets

Okay, great. Thanks guys.

Craig Bernfield

Mike thanks for the question. What I would add to what, this is Craig, what I would add to what Mark said, we’ve been fortunate with good planning and good preparation, capital raises before the IPO in the debt market and since including the IPO and since the IPO, we’ve been opportunistic so, Mark is right, we’re going to be ready at all time, we have capability that we didn’t have before. So being able to act with timing being and influencing factor is a new luxury that we have and it’s one of the many reasons that we brought Mark here to be in the front seat making those decisions.

Operator

Thank you. The next question is a follow-up from the line of Juan Sanabria with Bank of America. Please go ahead.

Juan Sanabria – Bank of America

So, just a follow up to an earlier question, guys, I apologize to that. I was just wondering if that extra $100 million of acquisition you referenced with regards to your equity needs would be on top of what you’ve done in the first quarter or inclusive?

Mark Wetzel

I think I was just use an example, Juan, that we have line availability that we could absorb that during the course of this year with free cash flow still maintain the kind of debt to EBITDA ratios that we like, but he does mean on top of the 56.

Juan Sanabria – Bank of America

Okay, great. That was it for me, thanks.

Mark Wetzel

Okay, thanks, Juan.

Operator

Thank you. Our question is from the line of Haendel St. Juste with Morgan Stanley. Please go ahead.

Greg Van Winkle - Morgan Stanley

Hi, guys. It’s actually Greg Van Winkle standing in for Haendel. So how are you guys thinking about the redevelopment opportunity within your portfolio given the average age is over 30 years old? Can you guys ballpark what you think is the appropriate amount to invest there and what kind of yields you’d expect?

Craig Bernfield

This is Craig. I’m going to made the comment and then really pass it over to Steve for him to respond to your question. We have built and developed an infrastructure more collaboratively with our operating partners for almost 10 years so, we’re really in a position to pick and choose when to reposition an asset that’s based on our assessment of the market and our operators assessment of those prospects for success in the market. So, Steve was right in his prepared remarks saying that it will be maybe not on a percentage basis like our acquisition, it still be an important part of what we do so…

Steven Insoft

Yeah, I mean, just to follow on what Craig was saying, it’s an important part of our business plan, we’ve got a dedicated infrastructure through which we can channel this reinvestment. As I’ve said on previous calls, it is by far our best risk adjusted return that we can invest in, all we need in the (indiscernible) is the cooperative nature of our relationships with our operators. We screen every market we’re in by building so, we have a real-time expense of what’s going on and as time goes on that will become a big part of our competitive advantage.

Greg Van Winkle - Morgan Stanley

Okay, great and do you guys have any kind of estimate of what you may spend on that this year, or no?

Craig Bernfield

We say, this is Craig, consistent with last year, it’s like acquisitions, lot of it depends on opportunities and discussions with operators and as Mark said about our phase of acquisition I think you can look at last year is a good guide and the course for the year as that money goes out the door, if it impacts our guidance, and also what we do in that regard is accretive with yields consistent with what we get in our acquisition so, if we’re enhancing our earnings, we will – Mark will be talking to you about it during the course of the year.

Greg Van Winkle - Morgan Stanley

Alright. Thanks, guys. That’s all I got.

Craig Bernfield

Okay, thanks.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. At this time, I’d like to turn the conference back to Craig Bernfield for closing remarks.

Craig Bernfield - Chairman and Chief Executive Officer

Thanks everyone again for listening to today’s call. Our team as always will be available for any follow-up questions. And we hope you have a great day.

Operator

Thank you, sir. Ladies and gentlemen, this concludes the Aviv REIT fourth quarter 2013 earnings conference call. Thank you very much for your participation. You may now disconnect.

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Aviv REIT (AVIV): Q4 AFFO of $0.41 beats by $0.02. Revenue of $38.46M beats by $0.99M.