LTC Properties Inc (LTC) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. We'll now start the quarter three 2004 LTC Properties Earnings Conference Call. [Operator Instructions]

At this time, I'll turn the call over to your host, Andre Dimitriadis. Sir, over to you.

Good morning, ladies and gentlemen, I apologize for the delay but whoever is organizing this call, the so-called operator had us disconnected for about six, seven minutes. My apologies, otherwise, Wendy and I were here ready. Thank you for participating in I believe what is our fourth conference call now.

We had a good quarter. FFO per share was $0.39 as we expected it to be. And our balance sheet, I will comment on that maybe after Wendy takes you through the various numbers. But our balance sheet now looks terrific. We have about $100 million of non-recourse debt since the end of September where the balance sheet you see pertains to. We have paid off another $12 million of debt, and now total non-recourse debt is about $105 million.

There is no bank debt outstanding. On the balance sheet we have about $45 million of cash. We spent about $20 plus million of that since the end of the quarter, spent it in good deeds. And very frankly I remember a year and three months or four months ago where people were questioning how we were going to meet our various debt maturity.

Well, the good news is we haven't got any left. In 2005, we have a total of $4 million in debt maturities. In 2006, we have $9 million of debt maturities. In 2007, we have none. And in 2008, we have $14 million, and as I said, our bank line, which we were able to increase from $45 to $65 million.

Of course, we remember it's an unsecured bank line. It is completely undrawn at this point in time. Let me turn it over to Wendy and then we'll both try to answer questions and maybe make additional comments. Wendy?

Thank you. Starting with the income statement, the consolidated statements of income, total revenue quarter over quarter, and the year to date over year to date are up. The components of our revenue, primary components, rental income is up in the quarter by approximately $1.7 million, and year to date by approximately $5.1 million.

Again, as we stated in previous conference calls, primarily the increase in rental revenue is associated with the nine properties previously operated by Sun Health Care and now operated by other operators and the 23 facilities -- I think are down from 19 now -- that were operated by CLC, currently operated by CHC, and they are now all contributing income, rental income, whereas last year, at this time and year to date, they were not generating any income.

So on a quarter, they had generated $1.1 million, and year to date they had generated $3.9 million. In the quarter, this quarter, we had $262,000 of straight line rent. We didn't have straight line rent at all last year, and year to date it's $847,000 of straight line rent. We anticipate that in the fourth quarter it will be approximately $260,000 of straight line rent also.

Other rent increases are generally the regular step ups we have, year to date, that approximated about $432,000, and we had 2004 acquisitions of properties in the first and second quarter that generated additional rental income.

Going to interest from mortgage loans, interest from mortgage loans is down quarter over quarter and year to date. These reductions are because of mortgage payoffs, mortgage loan payoffs.

They will be somewhat offset by opportunities that Andre will talk to a little later in our conference call. REMIC income also is down quarter over quarter and year over year. We have been retiring REMIC as we've had REMIC loans paid off or, we have converted REMIC loans to our mortgage loans.

We now, as I speak, have just two REMICs remaining and we're looking at the 96 REMIC, I needed to see Alex shake his head, the 96 REMIC and hopefully we will have retired that by the first quarter or within the first quarter of 2005. In one of our REMICs, we allowed a mortgage holder to pre-pay some significant debt.

One of the mortgage holders had an opportunity to sell their properties at a princely sum per bed, and it was such a large amount that they were willing to pay our yield maintenance to pay off that debt early. So they had to pay us about $750,000 of yield maintenance on the loans that they wanted to pay off.

That's primarily the difference in interest and other income variants for the quarter, that $750,000 of additional income as to results of yield maintenance and paying off those loans. As we stated in the past, the majority of our REMIC loans do not have the right to pre-pay.

If they want to pre-pay, they have to pay yield maintenance which generally, is economically not feasible for the operator. However, in this instance, the operator has a unique opportunity, and found that paying that yield maintenance was worthwhile. And we found receiving that yield maintenance was worthwhile.

Going to expenses, our interest expense is down quarter over quarter and year after year. As Andre said, we have been deleveraging this company at a rapid pace. We will continue deleveraging, and Andre will talk about those deleveraging actions soon. We have no bank line outstanding. We have, as Andre indicated, now, a $65 million unsecured line, and it is not drawn at all.

On the minority interest line, we have had some partnership units convert and then since year end, we have had all partnership units, except for one partnership convert, and we believe the last partnership will convert.

We just contacted the partners yesterday. We believe they'll convert, and we have every hope that at the end of the year, we will no longer have partnerships. We will have converted all of those to fully owned properties. We won't have a minority interest on our balance sheet.

We won't have a minority interest expense further simplifying the balance sheet and the operations of the company. On the balance sheet, I'll talk further about the effect of those partnership shares. The fixed charge coverage ratio, which we have talked about I believe on prior conference calls, and we talked to people as we've discussed the operations of the company.

For this quarter, our fixed charge coverage ratio is 2.1, last quarter it was 2.0, year to date it's 2.0, and last year to date it is 1.6. We will continue improving our fixed charge ratio, as we indicated was our target in our last conference call, and previous conference calls. Going to the balance sheet, before we get to any questions.

Going to the balance sheet, and I know Andre wants to talk about deleveraging on the balance sheet. He indicated that we have cash of about $45 million and indeed we do. One of the things that we talked about in past are, the notes that we have that are collateralized by shares of assisted living concepts.

Andre is going to maybe talk about that in, when he does further comments. But in our notes receivable line of the $15.9 million, the face value that we have actually, the book value that we have of those notes is approximately $9.5 million. The face value of those notes is approximately $20 million.

The last share price of assisted living concepts on the market was $12.50, and we have collateral on over a million shares of stock. So that, at the market price, those - that collateral is worth over $18 million. So we believe, we were adequately secured on those notes, and look forward to assisted living successfully completing your strategic alternatives, and us receiving the proceeds from that stock.

We had an issuance of additional preferred S (ph) in July that generated approximately $62.1 million of proceeds. Later in July, around July 20th, we paid approximately $22.2 million mortgage loans with those proceeds. And additionally, we paid some other mortgage loans later in the quarter about $5 or $6 million.

So in the quarter, we reduced, quarter over quarter, you can't see it here because we don't show comparative quarters, but quarter over quarter we reduced our mortgage loans by $28 million, and year to date we reduced our mortgage loans by $35.4 million, the deleveraging is noted there in those lines.

In the equity section, holders of 370,700 shares of our series E converted during the quarter, and then we issued the series F shares in the quarter, which explains the variation in our preferred stock. One thing is the analysts and other investors who are following the company closely, when we had our secured line of credit, we gave our bank what we referred to in our footnotes as BVUs, book value units.

And those banks were to receive an additional payment which could have been at least $1.5 million. If the book value of our common shares, at the end of this quarter, September 30, 2004 was in excess of $10.92. Unfortunately for those banks, even banks who are still with us, our book value is not in excess of $10.92.

So those BVUs, which was a potential liability to the company have expired, and we will be sending them our regrets by official notice as soon as our queue is issued. I know there are a couple of analysts that are interested in the components of our shares outstanding.

So the basic weighted average shares outstanding, common shares for the quarter, 19,960,000 shares. For the quarter, dilutive effect for our options are 123,000 shares. The diluted effect of the series E is 2.5 million shares, and the dilutive effect for the partnerships in total are 27,000 shares.

So the total dilutive for the common shares is 22.610 million. Going to the quarter or year to date, you start with the basics, the same stock options, 123,000. The fees, our convertible fees become dilutive, that's 2 million. The E's are still dilutive at 2.5 million and the partnership units become dilutive to a total of 684,000, so a total of 25.267 million shares to get our basic and fully diluted quarter and year to date number.

At this point, I'm going to turn it back to Andre to talk about more on the balance sheet, and we will take questions, both operational questions and balance sheet questions, after his comments.

Let me touch first, the one area that I'm sure is of interest to all of you, and that is what investments have we made or are we making? As Wendy said, during the third quarter, there were no investments.

However, since the third quarter ended, we have been very active because we had begun working on a lot of things. Mainly, we are in the process, and we should be closing over the next two weeks, about $12 million of loans.

In addition, and by December the first, we should be closing about $6 million of leases. So, we've got about $18 million of investment that should be happening. If you recall, we had said that on October the first, we expected to do $10 million, and on January the first, we expected to do another $10 million. The way I see it, over the next two months, we should be closing a total of $18 million.

In addition, we purchased the minority interest. We invested $8 million by purchasing the minority interest in five of the six remaining partnerships. As Wendy said, they were coming to the point where they might have been interesting in converting.

We simply proactively went out there, and purchased the minority interest, and spent about $8 million doing that. That's where we are using that cash. And in addition, we are trying to buy the remaining about $3 million minority interest. So, if you look at that as $8 million to the extent that we purchased minority interests, I view that as an investment.

And so, hopefully, between now and the end of the year, the fourth quarter should see the $8 million of minority interest purchases that we've done, $12 million of loans, $6 million of leases, and hopefully eliminate the remaining minority, which would consist of another $3 million.

That so greatly simplifies the balance sheet, as Wendy said, that it will bear no resemblance to what you would have seen two years ago, for example. And, as Wendy commented, the third REMIC, the 96-1 REMIC is melting away very happily.

By the - by the end of the year - no, by the end of the first quarter, if we are able to convince one more holder of debt of a mortgage to, either refinance or pre-pay, and allow them to do so, we could terminate the third REMIC as well, and be left with only one REMIC.

What it takes to terminate the REMIC is, when the outspending total mortgage loans under that REMIC are less than 10% of the original amount of mortgage loans that we had. At the end of the third quarter - in the end of the first quarter of - at the end of the first quarter of next year, on - the amount will exceed that 10% by about $1 million.

So, we need to convince one more loan either, to prepay or, to be willing to be refinanced. If we can do that, we will eliminate the third REMIC as well, and we will be left with only one REMIC. So, at that point, if we are lucky enough, there will be no minority interest, i.e. no down REIT left. We would have invested and purchased all of them. And second, there will be only one REMIC left. So, what used to be a fairly difficult to understand balance sheet, will have become very simple and very clear.

And in addition to that, as I said, what used to be an incredibly - not incredible, but what people considered a balance sheet with debt coming to -- now will end up being very deleveraged. And we will simply have, as I said, $105 million of non-recourse (ph) debt, and about $230 million of total preferred, of which, hopefully, about $30 million of additional preferred will come back.

Thank you. With that, maybe - oh, Wendy said I would comment on the assisted living concept. The company's continuing its efforts to finalize the strategic alternatives, and successfully complete its option. And, at this point, nothing has yet been decided. So, we are waiting.

We are fairly confident that, soon enough, that in the fourth quarter of this year or, in the first quarter of next year, the option will be completed, and centers for healthcare will receive the money from its investment in assisted living concepts, and we will be paid back, as Wendy said, about $20 million.

Let me open it to questions.

No, before you do, Andre ...

Oh, I'm sorry, I - Wendy's very upset at me. And I can see her frowning, and I can't afford that. So, may I, like the student who didn't do his homework, may I read forward-looking statements. This presentation may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include known and unknown risks and uncertainties, which may cause the company's actual results in the future to differ materially from expected results. These risks and uncertainties include, among others, general economic conditions, the availability of capital, competition within the financial services and real estate markets, the performance of tenants and borrowers within LTC's portfolio, and regulatory and other changes in the healthcare sector, as described in the filing with the Securities and Exchange Commission.

And with this reading, I hope I will be forgiven by Wendy, and all the rest of you for not doing my homework properly. My apologies.

Very good.

Now you've been enlightened.

OK.

Yes.

Now we can open up ...

Now Wendy is smiling. I was trying to figure out why she was not smiling, but I'm (inaudible) on this one.

Jane (ph), you can open it up to questions, if you would, please.

[Operator Instructions]

And your first question comes from Jerry Doctrow of Legg Mason.

Good morning.

Good morning, Jerry. How are you?

Good. Thanks. Just a couple things. On acquisitions, Andre, I wanted to - if we could get a little more color on what kind of properties - I guess you're making mortgage loans and doing some leases. Are these on sniffs or alfs, and what kinds of yields and stuff are you getting?

Sure. The $6 million in acquisitions is in sniffs. They are, three of them, all intact. Two go to one company, and one goes to another company. The yield on one is about 11, and on the other is about 10.5.

OK.

The loans - three of them - all three - one loan is on three assisted living - on two assisted living facilities impacts us. And another loan is on three sniffs in Florida.

OK.

No, I'm sorry. Two sniffs and one out in Florida. So, there's one loan on two sniffs in Texas, one loan on two sniffs, and one out in Florida.

OK. And what kind of yields on the mortgages?

About 11 - 10 - between 10.5 to 11.

OK. And do you see investments climates, sort of next year, you're going to be able to find the deals and maybe continue about this pace? I don't know if you want to specifically comment on next year, but what's the acquisition environment or investment environment look like?

I mean, you know, we are - we are coastal fishermen or, fisherwomen, as we said before. And we are looking at these small acquisitions and you do find these small acquisitions. We have not been as aggressive and busy this summer, because we were occupied with some other issues, investment-related issues, chasing bigger fish. But normally, I would say, that they can continue. And I would think $10 million a quarter is certainly something we would feel comfortable with.

OK.

Excluding any big catches.

OK. OK. And just a couple things. On the - I just wanted to sort of understand, on the minority interest. I mean, right away, I think about that as sort of like repurchasing your stock. I mean, you're just taking out these - the partnership unit.

Well, if you let them convert - as Wendy said, they were coming to the point where they could convert - or you can go and buy for cash the whole minority interest, and not allow them to convert. And we prefer to do that. In a sense, you can look at it as an investment, because ultimately, the only piece of the nursing homes that underline that minority interest ...

OK.

Then you come in and you complete. And whatever you pay really increases the basis that you had in those nursing homes.

And basically, the way it shows up now - I mean, obviously, you've got a minority interest line, but they're also - the OP units are showing as additional shares, so it's reducing your shares outstanding - the diluted shares ...

No, they would be showing as additional dilutive shares ...

Yes.

... on the 9-30 balance sheet, and now those will disappear, except for very few, the one remaining partnership nine (ph), which has three partners - one would be willing to sell his partnership interest. The other two, we need to find them an ask them...

OK. And basically, what it is, is just like those 27,000 shares that you had on the diluted is basically winding itself down. Is that the right way?

Yes, correct.

OK.

It's correct.

On - just one or two more, if I could. On the ASLC, you know, the final amount was basically determined by what the sale price is, but whatever it is, it basically all flows through to you. So, if it's 18 or 20 or ...

No, not correct. Not correct. I think, after a certain price per share, center self (ph) keeps the remaining.

Right.

We are owed between $20-21 million.

OK.

I'm not sure of the exact amount. We get that - anything above that stays with us.

OK. So, up to 20. OK. All right. OK. That's fine. Let me just - I think that's - and thoughts about sort of just overall direction, sort of, for the company. I mean, is it - you see yourselves as able (ph) to compete with the big guys, sort of down the road. What's your - any comments on sort of longer term strategy?

Well, first of all, I think what we've done this year is to really have completed the restructuring. While you used to have a leveraged complex balance sheet, somewhere the end of this year or certainly by the end of the first quarter, you will have a highly unleveraged - I mean zero worries about the next four or five years in terms of maturities and that, I think, is a very unique situation for us to find ourselves.

OK.

And second, at the same time, a very simplified balance, easy to understand and, certainly, for the investors, easy to grasp. Therefore, we have put the company on a very secure footing. There is no more any doubt about the viability of this company nor of its portfolio. Going on forward, I think we can continue our strategy of increasing FFO slowly by making investments. That's where we see ourselves.

And I think that's a very viable strategy. I mean, we have a low payout ratio. We are paying 30 cents out of 39 cents. That's about a 72 or 73% payout ratio. In that 39 cent, there is only about one cent of straight-line rent. So, the payout ratio is very low. That gives us an opportunity to look into the future for potential dividend increases. And we become what it is we required of REITs, and that is a stable dividend-paying company.

What extraordinary things may happen depends on the circumstances. I mean, you know, there could be some transaction we may go after, and increase significantly or, some other external factor may influence our lives. But at this point, I think we have put the company on a very solid footing, the balance sheet is secure, the dividend is secure, and we can look to the future, and say we can continue like that and increase the dividend at the measures pace (ph), and provide the investors with steady income, which is what the REITs are supposed to do.

OK.

I think we will eliminate a tremendous amount of the so-called risk factors that people saw in us.

Right. I concur. All right. Thank you.

Thank you, Jerry.

Thank you, Jerry.

[Operator Instructions] I'm showing no questions at this time. I'd like to turn it back over to the presenters for closing remarks.

Well, thank you again very much for attending our conference call. If you think about things later on and you want to call us, please, you are welcome to do so. And otherwise, we had a very good quarter. We are very pleased at the direction the company has taken, and where we are today, and we'll look into the future very, very optimistically.

Thank you.

Thank you.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect your telephone lines.