Aviv REIT's (AVIV) CEO Craig Bernfield on Q1 2014 Results - Earnings Call Transcript

| About: Aviv REIT (AVIV)


Q1 2014 Earnings Conference Call

May 08, 2014 12:00 pm ET


David Smith - Managing Director, Investor Relations & Capital Markets

Craig Bernfield - Chairman and Chief Executive Officer

Steven Insoft - President and Chief Operating Officer

Mark Wetzel - Chief Financial Officer


Tom McDonough - Green Street Advisors

Michael Carroll - RBC Capital Markets

Juan Sanabria - Bank of America


Ladies and gentlemen, thank you for standing by. Welcome to the Aviv REIT First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Thursday, May 8, 2014, at 12:00 pm Eastern Time.

I will now turn the conference over to Mr. David Smith, Managing Director, Investor Relations and Capital Markets. Please go ahead.

David Smith

Good afternoon, everyone. Earlier today, we issued a press release providing an update on Aviv's first quarter 2014 results. If anyone has not reviewed a copy, you may retrieve it by visiting Aviv's website at www.avivreit.com under Investor Relations.

To begin 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

Thanks David. Good afternoon and welcome to Aviv’s first quarter and 2014 earnings call. I will provide opening remarks and a review of our first quarter highlights as well as our acquisition activity. Steven Insoft, our President and COO, will provide an overview of our portfolio performance as well as our reinvestments in new construction activity. Mark Wetzel, our CFO and Treasurer, will discuss our financial results.

We are extremely pleased with our first quarter results, which included the following highlights $104.4 million of acquisitions and initial cash yield of 10%, and $7.5 million of property reinvestments in new construction which Steve will discuss in a few minutes.

We completed a new $6.2 million SNF in Eagle Lake, Texas, with an initial cash yield of 11% and we also completed a new $12.2 million SNF located in Chatham, Pennsylvania, with an initial yield of 11%.

As Mark will discuss in just a few minutes, our AFFO was $23.6 million or $0.46 per share, an increase of 12% over Q4 2013, and we had adjusted EBITDA of $37.6 million. The SEC also declared effective our $1 billion universal shelf registration statement, which will facilitate our capital raising ability in the balance of the year and beyond.

In April, we raised $212 million of net proceeds from our first follow-on equity offering. Our offering was well received and oversubscribed, reinforcing our belief that investors are confident in our company and our business plan. We would like to thank everyone that invested for their participation and continued support of the company.

Again, as Mark will discuss in detail shortly, we are reaffirming our 2014 FFO per share guidance of the $1.89 to $1.93, even though our recent equity offering was dilutive.

In regards to our acquisition activity, we have continue to be active in 2014 by growing our portfolio through accretive and attractive acquisitions while also maintaining our focus on disciplined underwriting in addition to continuing to focus on the quality of the operators, real estate and market.

Year-to-date, which includes the acquisitions we announced last Friday, we have acquired $181 million of properties at a blended initial cash yield of 9.9%, consisting of 22 properties in eight states, in eight transactions with five operators.

Three of the five operators are existing relationships, Fundamental, Trillium and Trinity, and we added the following two new operator relationships to our portfolio. Providence Group, an operator of 12 properties in two states with 10 properties currently triple-net leased from Aviv, and Mission Health, an operator of 15 properties in four states, with three properties currently triple-net leased from the company. As Steve will discuss, we are focused on continually enhancing the quality of our portfolio by investing in our existing properties as well as building new properties.

As I mentioned during the first quarter, we completed the construction of a $6.2 million, 80 beds skilled nursing facility in Eagle Lake, Texas, with an initial cash yield of 11%. This property is operated by Daybreak, our largest operator.

In the second quarter as I mentioned, we also completed the construction of a $12 million, 120-bed SNF in Chatham, Pennsylvania, also with an initial cash yield of 11%. This property is operated by Sabre, our second largest operator relationship.

We remain committed to our strategy, focusing the majority of our efforts on acquiring post-acute and long-term care skilled nursing facilities that are triple-net leased to knowledgeable and experienced operators. We also remain committed to opportunistically acquiring other healthcare properties by focusing on the quality of the operator, real estate and markets as we do with our SNF investments.

We will also continue to diversify the portfolio by adding new operator relationships and expanding our presence across the United States. Our pipeline continues to be strong with new and existing operators and cash yield consistent with those we had historically achieved.

We are able to identify a significant number of attractive and accretive opportunities as our operator relationships source deals and bring them exclusively to us because of our relationship and our business development team continues to source yield to bring to our operators. We look forward to continuing our growth during the balance of 2014.

I will now turn it over to Steve to review our portfolio performance, property reinvestments and new construction activity.

Steven Insoft

Thanks, Craig. Thank you for everybody listening in today. At the end of the first quarter, we owned 295 properties, diversified across 29 states and triple-net leased to 39 different operators. Our properties are leased to some of the largest and most experienced operators in the country and our top 10 operators now represent 68% of our rent.

We remain committed to owning the portfolio diversified by operator, geography and reimbursement consistent with the fourth quarter. Daybreak remains our largest tenant with 13.4% of our rent and Texas remains a large estate with 17.5% of our rent.

We continue to have strongly coverages. Rent coverage for the entire portfolio for the 12 months ending 12/31/2013 was 1.9 times EBITDARM and 1.5 times EBITDAR. Rent coverage for our SNF portfolio for the 12 months ending 12/31/2013 remained constant at 1.9 times EBITDARM and 1.5 times EBITDAR.

Our operators' occupancy Q-mix and margins for the 12 months ending 12/31/2013 was consistent with last quarter. Occupancy for the portfolio in its entirety was 78.5%; Q-mix was 47.6%. Total portfolio EBITDAR margin 15.2% to and our SNF EBITDAR margin was 14.3%. I would ask you to refer to our supplement for more detailed information about these metrics.

We continue to have a small amount of our rent expiring in the near-term with only 8% of our rent expiring through the end of 2017 and our average remaining lease maturity is eight years.

The Medicare and Medicaid reimbursement environments remained stable. Last week, CMS issued a proposal for SNF Medicare rates for fiscal 2015, resulting in a net increase of 2% and no change in the rule. We believe that the government will continue to support and recognize the value low-cost post-acute and long-term care that SNFs provide and provide adequate reimbursement to our Asian SNF operators to continue to provide quality care to the elder ones.

We continue to invest in our property through our portfolio reinvestment and new construction program. During the first quarter, we invested $8 million into our properties and achieved yields consistent with those on our acquisitions.

Our property reinvestment and new construction initiatives have been and will continue to be an important part of our business as it is designed to provide our operators with best-in-market real estate that will be competitive over the long run.

During the second quarter, we sold one assets and recognizing impairment of $862,000 during the first quarter. We will continue to assess our real estate, markets and operators to selectively divest for transition where needed. This will be a key part of our strategy going forward to maintaining the quality of our portfolios that we own.

With that, I will hand it over to Mark to review our financial results in detail.

Mark Wetzel

Thanks, Steven. I plant to update you on four main areas today, our 2014 first-quarter results, our balance sheet, dividends and our 2014 guidance.

Total revenues for Q1 were $41.9 million; an increased 21% compared Q1 of 2013. Sequentially, quarter-over-quarter, we were up 9%. This growth for both comparable periods was driven primarily by our strong acquisition activity.

G&A for Q1 totaled approximately $4 million compared to $13.8 million in Q1 of 2013. The Q1 of '13 included a non-recurring non-cash expense of $9.9 million associated with the IPO. Our 2014 guidance continues to assume approximately just over $5 million a quarter for G&A.

Adjusted EBITDA for Q1 was $37.6 million compared to $31.2 million for the first quarter of 2013, an increase of 20%. This increase is largely attributable to the acquisitions completed during 2013.

Interest expense for Q1 totaled $12.1 million, a 3% decrease over the first quarter of 2013. Sequentially, interest expense increased 8%, primarily due to a full quarter of interest on the unsecured bonds issued in October of 2013.

Q1 2014 AFFO was $23.6 million as compared to $15.7 million in Q1 of 2013, a 51% increase. On a sequential comparison to Q4, on a per share basis, AFFO increased 12% to $0.46 per share compared to $0.41 per share in Q4 of 2013. This growth, similar to our revenue and EBITDA growth, was driven by our acquisitions.

Moving on to the balance sheet, we ended the quarter with $19 million of cash, $98 million outstanding on our line of credit and $302 million of line availability. As of March 31, our total debt was $764 million of which 85% was unsecured and 87% is at a fixed rate.

Our weighted average interest was 6.5% with an average maturity of 5.8 years. Our net debt to annualized adjusted EBITDA was five times at quarter end.

With the equity offering Craig noted earlier, our net debit to annualized adjusted EBITDA is at 3.5 times on a pro forma basis. We expect to maintain a net debt to EBITDA at our below 5 times as we growth the portfolio.

In general, the capital markets continue to be attractive to our ability to generate high cash yields. We will continue to work to improve our borrowing spreads and fees as we acquire additional properties.

Our financing strategy will continue to emphasize on secured financings, expand our unencumbered asset pool and maintain credit metrics consistent with an investment grade rating and financing flexibility that comes with that as we continue to grow.

As of today, we had $44 million of cash on hand, nothing outstanding on our line of credit and $400 million of line availability. We ended the quarter with an annualized dividend of $1.44 per share, a yield of 6% and an AFFO payout ratio of 78%.

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 reaffirming our 2014 AFFO guidance and annual guidance of the $1.89 to $1.93 per share provided on our 2013 year end call. This reaffirmation is in spite of issuing $9.2 or 18% of additional common shares in early April as compared to a fully diluted share count.

We fully expected to deploy the excess cash we have as of today on additional 2014 acquisitions. We update our 2014 guidance again on our second quarter call, in early August.

Operator, we will now open the call to questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen, we will now conduct a question and answer session. (Operator Instructions) Your first question comes from Tom McDonough with Green Street Advisors. Please go ahead.

Tom McDonough - Green Street Advisors

Good afternoon, guys.

Craig Bernfield

Hi, Tom.

Tom McDonough - Green Street Advisors

At the time of your IPO, a large portion of your shares were run by a private equity partner, Lindsay Goldberg. Obviously, those shares unlocked in March and even that several members of Lindsay Goldberg remain on the board, can you provide any visibility into the strategy going forward with regards to longer-term SNF exposure and maybe sort of how they are thinking about their investment?

Craig Bernfield

I would say, first of all, we are really not - about exactly what they're going to do. They are great partners as long as they continue to own their shares. They are really strategic value-add as board members. In connection with the recent equity offering, they along with management agreed to a short lockup, so at the moment they are specifically locked up.

Once that ends in a couple of months, I think they are just going to behave as rational investors. They are strongly behind the company, the management, the strategy the SNF center at some point they lagged it because in their best interest to do so, but I don't really have any specific entail for you of the Aviv strategy.

Tom McDonough - Green Street Advisors

Okay. That's helpful. Thanks. Some of your peers noted SNF cap rates have started to tick down in recent months. Are you seeing this in the assets you are targeting and is there a point at which asset prices rise enough to warrant putting a larger focus on development, rather than acquisitions to drive external growth?

Craig Bernfield

Well, when it comes to development, we are not doing a lot of that, so new construction that we do tends not to be what the market describes as development, because any new construction project we do, we do with the triple-net lease in place always with new existing operator relationship.

As I mentioned in my prepared remarks, we recently completed two new SNFs, so we might have a handful of those going on at any one point in time, but it's not a big part of our overall investment strategy.

We are much more focused on acquiring existing facilities, high-quality properties as well as properties that we can buy at disciplined valuations and use our capital and our resources to be able to enhance the quality of the properties through the reinvestment program that Steve spoke about, so we are not seeing a wide variation in cap rates or lease rate.

As I mentioned, most of what we are buying, we are buying in a very consistent in the SNF asset class consistent with what we have been buying not only in the recent past, but for a long period of time.

On the senior housing side, we also are being more opportunistic perhaps than our concentrated focus on buying senior housing, so I would have to really less to say about cap rates when it comes to those assets, because again it's really on an opportunistic basis that we are acquiring them.

I think for the balance of the year, I would expect that the acquisitions you see us do, that's their lease rates or the cap rates will be plus or minus in the range of what we have been indicating in our press releases.

Tom McDonough - Green Street Advisors

Great. That's really helpful visibility. Then just last for me. I know you touched on the Medicare reimbursement picture a bit. Thank you that.

You know, about 40% of your revenue comes from Texas, Ohio and California. Do you have any visibility on where you see Medicaid trending in other states or how do you think about that?

Craig Bernfield

Specifically, the Texas, we do, because as many of you know, Texas sets their rates two years in advance, so it is reasonable to expect that will get a 4% increase in Texas starting in Q3, but Texas in that expected a little bit unique.

Our other states set them on a year-by-year basis with July 1 being the start of the rate year in fiscal year for most states. It's probably a little too early to prognosticate about what might or might not be come July 1's other states, but we are guardedly optimistic right now that the overall economy creeping back in the fiscal health of the states in general would probably lead to more upside opportunity than otherwise.

Tom McDonough - Green Street Advisors

Okay. Great. That's all for me. Thanks, guys.


Your next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

Michael Carroll - RBC Capital Markets

In terms of past, I guess, several months, it seems like your investment activity has really accelerated. Is that pace sustainable for the rest of the year or was that just a big bulk of activity that kind of built up and just completed, I guess over the past few quarters?

Craig Bernfield

Mike, first of all, I think, we want investors to believe that we have tremendous opportunities to continue to grow, but we always have [enthusiasm] about near-term, mid-term, long-term visibility.

We had a lot of acquisitions in the fourth quarter. That was in part attributable to kind of the delayed impact of our acquisition activity resulting from being down kind of the first quarter because of the IPO, so we had a buildup and it just manifested itself with a locked up fourth quarter, but that some of it is just going to depend on timing and the timing of acquisition should continue to be something that you may see as enclosed, but we were really strong in the fourth quarter, we were strong in the first quarter.

We have already announced an acquisition in the second quarter and we are working on a lot of deals. We see a lot of yields. We don't want to quote numbers for our pipeline, but it's a significant volume of opportunities that we see as I mentioned both, from inbound from our existing operators we have dedicated business development team that's out there sourcing opportunities.

We have identified transactions that we are currently working on that we just won't speak to specifically until we actually close the deal, but as Mark mentioned we raised a specific amount of proceeds in our follow-on offering and we do intend and believe that we will be able to successfully deploy those proceeds, so I would say, yes, overall, Mike, we expect to continue to acquire during the balance of '14. Whether it will be as consistent in terms of volume quarter-to-quarter, that's just hard to predict.

Michael Carroll - RBC Capital Markets

Okay. Then you can you kind of highlights some from the different investment characteristics with some of your acquisitions, I guess, that are coming in a 10 and maybe some, I guess, the trend of cap rates were typically between 9 and 11. I mean, what's different about your investments that are 10 versus some that have been trading around 9.

Craig Bernfield

I think, it's deal-by-deal. We are very disciplined. A number of the acquisitions we have done this year have been proprietary. Our operators have (Inaudible) and brought them to us and they are not widely marketed, so we are not overpaying. It's still real estate, investing, there might be healthcare properties, but it's still real estate 101 if you're clever that savvy and have contracts and resources and relationships that we do all over the country we are able to buy things at reasonable prices and then it's a win-win, where we are able to get an attractive yield in our operators we can still maintain a strong brand coverage, so it is win-win for us and the operators, so I wouldn't read too much into comparing what we do to other people do. Can't really comment on the specifics of the transaction that other people are doing in the marketplace, I can tell you that we are very focused on buying properties with strong operators, with high-quality real estate in markets that we think the operator can succeed over the near-term and long-term, so we are very excited and proud of the fact that we are able to continue to acquire with the accretive results that we have been disclosing.

I would kind of like let Steve also give his own commentary to that really helpful question.

Steven Insoft

I think a little bit of it is just sort of reinforce one of the points Craig made, perhaps this is entirely you need to reveal, but certainly lead to the SNF sector and that is a lot of other transactions we look at are not widely marketed, somewhat is located in the market, so it's probably, as Craig said, I wouldn't read too much into any specific transaction one quarter over the next, but there is not enough efficiency in the trade in this sector, but clearly the more broadly marketed and larger transaction can become more efficient that seller is going to expect in the price point.

Michael Carroll - RBC Capital Markets

All right. Great. Thank you.


(Operator Instructions) Your next question comes from Juan Sanabria with Bank of America. Please go ahead.

Juan Sanabria - Bank of America

Hi. Good afternoon, guys. Just a couple of questions, I guess, first off on the reimbursement side. What are you thinking on the medium-term or long-term basis with regards to some of the commentary or studies that both, CMS and MedPAC are dong to with regard to therapy coding. How do you see that playing out in terms of operator strategies or what may change or may have to change as a result of those initiatives that CMS and MedPAC are looking at?

Craig Bernfield

Sure. I am going to pass it over to Steve. You want to say it in our quarterly remarks, we consistently make the statement that our macro theses about those industries is that the government is going to continue to pay, but the government bonds to take care of at the elderly population in those countries, but I think Steve can give you a little bit more of a micro answer than that.

Juan Sanabria - Bank of America

Thanks, Juan. As you know and as you mentioned, there's been some discussion between MedPAC, CMS one point of encouragement as far as ultrahigh high-res categories, there is nothing in the preliminary rule that CMS released last week. Although we do know or have reason to believe CMS is still thinking about the consideration, but I think we are going to take a wait-and-see attitude.

We invest in SNFs. We don't really invest in operators who are therapy company-driven, so a lot of that will be small signal noise around our performance going forward. I think that if there was one theme that is coming out of CMS, and I think it's a positive theme, is you will see some sort pay for performance for lack of a better word perhaps tied to hospital readmission rates, and that we look forward to, which I think will reward the high-quality operators who invested.

Juan Sanabria - Bank of America

Great. Thanks so much. That's helpful color. Then just time with regards to the pipeline, can you commented at all about any changes in the competition? Have you seen any of your diversified list peers kind of creeping back into the skilled nursing arena with the outside cap rates that's gotten on medical office building, senior housing, has there been any pickup in the level of competition at all?

Craig Bernfield

Juan, this is Craig again. That's a great question. Not really. I mean, I would say, because we are able to source the substantial majority of our investments either by finding them and bring into our operators. Our operator bring in them and - we are not in as you mentioned a lot of widely marketed deals and something I probably could have added earlier is continue to reiterate to you guys is incredibly fragmented marketplace, so you don't have individuals or companies that have large concentration of assets. It's lots of singles, doubles, triples relative to the size and scale of transactions in our sector.

Once in a while do we bump into some of our publicly peers? Yes. Not very often. In the widely marketed deals, we do and I would tell you that it is a very competitive marketplace, but our main street, the competition tends to come from local investors, so many of the deals that we work on, they maybe brokered, local brokers and they are a bit stiff. We are not buying things for nothing. We are either paying plus or minus prices and once in a while on a proprietary situation, we are able to get a bit of a break it will generate a little bit of more yields, but I think consistency is really our message. Internally, we expect consistency in the kind of accretive results we have been able to produce and believe in the near-term I don't foresee a change.

Juan Sanabria - Bank of America

Thank you. That's very helpful.


There are no further questions at this time. I will turn the call over to Mr. Bernfield for any closing remarks.

Craig Bernfield

Thank you again for listening to today's call. Our team will be available as always for any follow-up questions. Have a great day.


Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.

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