LTC Properties Inc (LTC) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for your patience and welcome to the LTC Properties first quarter analyst conference call. [OPERATOR INSTRUCTIONS] My name is Bill, and I will be your conference coordinator for today. As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's presentation, Mr. Andre Dimitriadis, CEO. Please proceed, sir.

Good morning. I'm here with Wendy Simpson, our Vice Chair and Chief Financial Officer. And we'd like to make some quick comments on the first quarter, but Wendy points out that I had not read the forward-looking statements, and I shall, again, be on the penalty box for not doing that properly.

Okay. Here we go. This presentation may contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve 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 area, with state markets, the performance of tenants and borrowers within LTC's portfolio, the weather in Malibu, and regulatory and other changes in the healthcare sector, as described in the company's filing with Security and Exchange Commission. The weather in Malibu, because, if it rains a lot, we can't get to work.

All joking aside, this was a really wonderful quarter, as you would expect, given that during this quarter, we were able to finally monetize our note receivable from Center Healthcare to the tune of $22 million, the details of which was in our release.

As you know, it represented close to $6 million of rental income, and interest income that we had been owed to us but we were conservative and did not book in the past. That was, of course, the CLC Healthcare branch that they had not paid, to the tune of $3.7 million, and $2.3 million of interest income that related also to the note they had us. As a result of that, this quarter, of course, we will have $0.88 cents of fully diluted FFO, $0.95 cents of primary.

Net income was fully diluted 74 and $0.80, respectively, and I hope we will have another good quarter like that, but at our growth rate, it will be, I must say, a little while. Without the effect -- Wendy will take you through the details, but without the effect -- of these out-of-period payments of some sort, we would have been, on a fully diluted, $0.40, compared to the fourth quarter's $0.38 on a fully diluted basis.

So we had a good quarter, even without these gains which, again, make me very happy because you don't know how hard did we work here on the assisted living progress, and make sure that that company was going the right way.

One other thing I would like to mention about our results of this quarter is, if you have your thank you and you open it to page 18, you will notice that the second half, the bottom part of the table entitled "Credit Strength" and you will see there EBITDA to fixed charge ratio, improving from 1.9 times as of March 31 of last year, to 2.3 times, excluding the effect of the, again, out-of-period earned payments, which there's no reason to exclude, but just to sort of show on a continued basis we are now at 2.3.

That's a strong company. I remember when Wendy and I were road showing our first offering two years ago, or beginning to do that, we were at 1.55 and we were telling people we would strive to get to two times coverage. Well, within the next couple of years, I think, it was what Wendy and I were saying, and it's good to see that we got to 2.3 in practically less than two years.

Wendy, should I talk about the investments now? In terms of investments so far this year, we had close to $22 million, of which about $4.5 million were in leases and the balance was in loans. The loans varied between -- between 5 years and 10 years, in terms of maturity. And the rates were, in all of them, in the double digits. The overall yield, as released in our April 18 release, was 10.9.

Another good thing we have done is we started -- we increased -- our dividend effective the second quarter, and started paying it monthly. I think it is a great idea, although I must tell you, initially I wasn't so sure people would like it. We got a lot of kudos from people, people are very enthused about it, and we'll try to let the shareholders know, if there are any that are not aware, that we had a monthly dividend.

And with that, I would like to turn it over to Wendy.

I will go, starting with the income statement. I will go down the line items and point out specifically where our one-time adjustments were, for the collection of the notes. Our rental income includes 3.7 million, 3.667 to be exact, of rent that was from CLC, that they owed us in previous years, that we had not booked. So rental income has an increase of $3.7 million relative to that. Without that benefit, our rental income would have been 12.2 million, or about 750,000 more than the same period last year.

The two largest components of that increase are $107,000 more under our Extendicare lease from the Extendicare purchase of Assisted Living Concepts, than we had on the Assisted Living Concepts lease, as it stood. That's partially from the $250,000 more a year, for the first four years, that we got under the Extendicare lease, plus its normal step-up on January 1st. We also had 326,000 more from the center's CHC leases than we had last year, again, a step up, and a couple of new leases with CHC, that we didn't have last year. Additionally, we had $200,000 in the first quarter, which are just normal step-ups for our leases, in place.

Interest income for mortgages increased $544,000. On a growth basis, $858,000 was additional interest income from mortgages that we had placed in 2004 that were not in the first quarter of 2004, and from the year-to-date 2005 mortgages. So actually, interest income increased by $858,000 for new mortgages. However, it was offset by about 142,000 for mortgages that were paid off in 2004, or mortgages that matured. And also, it was offset by 172,000 for a mortgage that we converted to an owned property.

Interest on REMIC certificates is down by 927,000. We have a love/hate relationship with our REMICs. We love them. The market hates them, and they are slowly going away. In 2004, we had 598,000 from our 1994 REMIC, that was fully retired in 2004, with no default. Interest from our 1998 REMIC is $313,000 less, due to low maturities and payoffs and mortgages, in accordance with the terms of the mortgages.

In June of this year, we will eliminate our 1996 REMIC. By June, it will be down to a balance of 10% or less of its original value, the total amount of the mortgages that went out. So we will eliminate the REMIC and take those mortgages on our balance sheet and we will have just one REMIC left. And the 1998 REMIC goes out quite a few years, has a lot of strong mortgages in it. But, again, our balance sheet will be even less impacted by the REMICs.

Included in interest in other income is $2.3 million of interest from the CHC HHI note. So taking that out, it's comparable -- interest and other income -- is comparable.

Going to other expenses, interest expense is down, primarily as a result of low payoffs in 2004. At March 31st of last year, we had $116.998 million in mortgage debt. This year we have 70.905 million, which is a $46 million reduction. That reduction then translates into a significant reduction in our interest expense, and into leveraging the company.

In operating and other expenses is a $1 million bonus related to the realization of the note, which increased our expenses in that line item. Offsetting that is $477,000 for a payment that we received along with the note payment, for real estate cap that we had previously paid on behalf of the CHC HHI facility, and expensed through that line item in the past. So when they paid them back, we took the contra-expense through that line item. Without these amounts, that line item would have been 1.392 million, compared to 1.251 million of last year, so comparable.

The non-operating income is all from the collection of the note. The history of the note goes back to 2002, when Assisted Living Concepts emerged from bankruptcy. At that time, we held Assisted Living bonds, or notes, and after the bankruptcy was over, we were entitled to new bonds and stocks. We weren't able to hold the stock, so we sold the right to receive it to HHI.

Because of that transaction, GAAP and Ernst & Young, required us to book the receipt of the new bonds at some fair value, which resulted in a charge to comprehensive income, of $3.6 million. The collection of the note, for the full face value of the note, including all accrued interest and everything, resulted in a $3.9 million gain and the recoupment of the 3.6 million out of comprehensive income. Offsetting that, we paid 1.3 million in legal fees and investment advice fees, regarding the realization of the note. So all of those, those three components, make up the other operating income of $6.2 million.

Andre told you what normalized FFO was, without the note, and the -- the fully diluted is impacted by the conversion of our series C preferreds, which have not been a dilutive security for quite a few years. They pay an equivalent of $1.636, and so when our common stock -- when we have more than $0.41 a share -- they become dilutive. So they were certainly 2 million shares dilutive this quarter.

During the quarter -- oh, also we have 391,565 shares of series E outstanding, and we don't know why. These series Es are convertible into two shares of our common stock for every one share of series E. The series E shareholders are receiving two dollars -- 2 and an eighth dollar a share -- when they could be getting $2.64 a share, on an annualized basis. So we're hoping that they -- well, we're not hoping. I mean, it cost us more cash, but it -- we have the dilution anyway. So there's these people out there holding these shares that possibly should be advised that they are -- they are losing money.

Since the year end, we purchased 167,600 shares of our own common stock, at an average of $17.65. During April, was it, that we saw the stock -- March? It must have been March. We saw the stock, like, every -- every evening the stock -- somebody would be putting 10,000 shares in the market, at the end of the day. And the stock price kept whittling down. We were on the phone with our specialists trying to figure out what was going on, and we thought it would be a benefit to the company, and a good investment of our own money to jump into the market and buy the shares. So we -- we bought 167,600 shares since the end of the year, and we still have a board authorization to buy 2,484,200 shares.

I'm told we are at 1901 now, Wendy -- the stock price.

I was telling Andre, I wanted to exercise options this morning.

Me too.

Anyway, back to the income statement, there's no other significant numbers. We're currently, I guess, not in the market, buying our shares. In the balance sheet, we had no significant changes from year end, that are not related to the collection of the CLC HHI note.

We have no outstanding draws on our bank line, so the entire $65 million is still available. We have cash in the bank, as I speak, of -- I haven't seen cash this morning - but it is probably around $7 million.

So, we don't see a need to draw on the line in any -- any current period, and we don't have any maturing debt this year. And we're -- as Andre said, showed on the 10-Q -- we put additional disclosure in there about the credit strength of the company, and we're feeling very good about the progress in acquisitions and in the balance sheet of the company. That's all, Andre.

Good. Maybe I will make one more comment. As you know, we said we were going to do about 30 million in acquisitions. We have completed 22 clearly, although we have not changed the goal post vis-a-vis our board of directors and our plan. Clearly, we would like to exceed this number. We are working on a number of deals, leases as well as loans, and we certainly would hope we would exceed the $30 million target. That's about it.

Bill, we will turn it over for questions.

Thank you very much, ma'am. [OPERATOR INSTRUCTIONS] The first question comes from the line of Mr. Jerry Doctrow of Legg Mason. Please proceed.

Good morning.

Hi Jerry.

Hi, Jerry. Good morning.

I just had a couple of things. On the acquisitions, Andre, I wonder if you could give us a little more color about timing of those, and was there any significant difference in the yield between the mortgages and the -- ?

You know, I got myself in trouble last time by giving extraordinary detail, because among the listeners were a few customers.

Yeah.

They started calling me back, why did he or she get this rate and I got this rate? So I don't want to get into any explicit detail, because our competitors don't, and we tend to give too much data. All I can say is they were in the double digits, all of them, except one, which was slightly just below that. We are working on a few deals and my guess is that we would probably complete a couple of deals within the next two, three months.

Okay. And in terms of the stuff that you did in the first quarter, you know, was it mid-quarter, end of quarter, just in terms of trying to phase in our model?

End of quarter, more or less.

Okay.

Intended to bunch at the end of the quarter.

Okay.

Like we saw -- you will see more of the effect in the second quarter, rather than in the first.

Right.

And mostly skilled nursing, and just maybe if you can give us a little color on the acquisition environment?

No, out- as well as skilled nursing. I would say half and half.

And on the out- stuff, you are buying stuff that is sort of turn around, or whatever, at those kind of yields? You are not getting fully stabilized properties or -- ?

No. Some of these were fully stabilized properties.

Okay. Because the yields, I mean, are a lot better than --

I still find that the prices -- and, I mean, we did a nursing home deal, and private pay and Medicare, very little -- practically no -- Medicaid, and that was in the $48,000-a-bed range.

So there was a lot of trepidation my heart as I did that. I mean, we all went and saw the building and it is an excellent building. It is in a very good location. It's in Georgia. Extremely well positioned next to IL and AL apartments and good feed line, and very high, private pay component. And the home looks excellent.

So we did venture in that direction. Some of the deals that -- I mean, one of the reasons that I think we got the deal, and we were able to do it was, because from the time we were given the deal to the time of closing, was 17 days. And we trooped out there, all of us, and quickly completed our studies, sent out engineering advice, and nursing home inspectors, and our environmental guys.

I mean, companies don't mobilize so quickly to do a deal but we are small. For us, a $5 million deal was very important, and we were able to drop everything and go do it.

And -- and --

And that deserves a special pay. Trust me. If it had gone to a competitor, I think, it would have taken them, probably, two months.

And you are getting yields somewhat better than your competitors, Do you think that's because you are doing mortgages, or because you are speedier or -- ?

This one -- this one, if the person had not closed by April -- when did he we close it? We closed on the 22nd, I think, or something. But if we hadn't closed on the 25th, they would have lost this deal.

Okay.

And they were working with someone else, the deal fell apart, and they came to us, last minute, and we were able to do it.

Okay. Just the environment and sort of in general, you are seeing things out there. Are you still expecting double digit deals and -- ?

Well, I mean, not -- with difficulty. We -- we have entered the single digit on a couple of those deals, during the quarter, the high nines.

Okay.

Yeah, I mean, the thing that bothers me, Jerry, more than the rate, is the price per bed, and what people are asking for a bed. I think that annoys us more than the price itself.

Okay.

As you can see from not having used the credit line, and having cash on hand, that we still expect rates to go up, but, you know, I have been expecting that for a year and a half now. I think I will be waiting for Godot.

Right.

And Godot don't seem to be arriving, but at least I'm in good company, because the chairman of the federal reserve says he has a conundrum, how can short-term rates go up from 1 to 3 and long-term rates come down from 4.60 to 4.20? I don't remember having seen that happen in the past, and it is happening. Maybe it will change.

I still believe in our position -- our Company's position -- not to be caught short with a lot of variable rate and the need to refund it.

And then, just one or two other things. On the -- Wendy, I think on the shares, the repurchases, it was 166,600 in '05, and what was the average rate that you said? I just didn't pick up some of that.

167600.

-- 67600? And what was the price that you ended up buying them at, on average?

The average was $17.60.

Okay, and you have got 2.2 million still available, or what was the authorization?

Two four eight four two hundred. The authorization was $5 million.

Okay.

It's been, I think, about a three-year authorization and the board let us keep it open.

All right. Great. Thanks.

Mm-Yes.

Thank you very much, sir. [OPERATOR INSTRUCTIONS] The next question from line of Philip Martin of Stifel Nicolaus.

Good morning, Andre. Good morning, Wendy.

Good morning, Philip. How are you today?

Oh, not too bad. Not too bad. One of these days we will get the name of Stifel right. But that's okay.

A couple of quick questions. In terms of then investments on a go-forward basis through the end of the year, are those shaping up to be more, say, lease-back mortgages? Can you break that down in terms of estimated percentages?

Oh, God, you know -- I mean on the number of deals we are working, probably I would say 70% are loans and 30% are leases. But what level of completion and what happens -- you know, what will be the mix, given the deals that we realize, I am not sure.

Okay. And can you quantify that pipeline that you are looking at right now, in dollar terms?

You know, quantifying pipelines is like, when we tell you that we have looked at $2 billion of transactions, and have liked none.

Mm-Yes.

Philip, I mean, yeah -- let me try to -- in my head, to sum them up. About $20 million. About $20 million, and probably about 12 or 13 in loans, and about 6 or 7 in leases.

Okay. Okay. Fair enough.

And in terms of structuring the transactions that you have, year-to-date, or even that you are in process or negotiating on right now, are you able to structure in some where you participate in some of the upside, possibly?

We don't do that, Philip. And I will tell you why.

This so-called -- well we had one deal, which is very interesting, yes, where we had a 10% participation between -- it was a loan to an owner that we leased the building to, to a company and we had a 10% spread between the lease rate and the amount he will pay when he refinances. I mean, but that's a very unusual deal.

Excluding that, and really don't think that's a path. And that was an unusual situation. We hope we will make some money on that one. Normally, we do not do participation and incremental revenues. We simply have a fixed increase.

The reason for that, Philip, is it takes the thing out of someone doing a great job and then having to take a lot of that incremental profit that they make, as well as having to fight with your tenant to see -- what revenues are they now conveniently excluding?

Let me tell you, when you get participation, all of a sudden, Philip, your revenues somehow go elsewhere, but it's not included, and you start arguing what is included, what's excluded. You never want to argue with your customer.

Mm-Yes.

And because we do a lot of small deals, Philip, unlike, let's say some of our competitors that may have one $200 billion deal, which is easier to audit -- auditing all these deals to make sure that there's no revenue leakage is difficult, time consuming and, I said, counterproductive, because it argues with your customer.

So we prefer the fixed decreases between 2 and 3%. It makes life easier for us. And makes the customer know what they are paying.

Okay. Okay. Fair enough. That's -- now. in terms of coverages that you are seeing on the investments year-to-date, can you talk about that, before and after management fees -- on the leases, and even, on the loans, et cetera?

Okay. Let's start with that. On the leases, the leases that we did actually had very good coverage, about, I would say, 221 before management fee. I have not computed what the -- the management fee.

Okay.

The loans -- that private pay loan I was mentioning before, excellent coverage, I couldn't remember, 1.8, 1 point -- I was venturing into the 1.8, 1.9 level and the home was not even doing Medicare, because it didn't want to bother. It was owned by the seller who was a private individual, and did not want to bother. Now they'll do Medicare, as well, and they have begun doing Medicare, and that would improve the coverage further.

On the other, Dixon and Sea Breeze, I would say, also, about two-and-a-half to one. Sea Breeze was a loan we had for ten years. REMICed, and the loan came due, and we refinanced it. That's a very good building in Alabama.

Where is sea breeze? Alabama. And it's tied to another property in Georgia, Dixon, which had also, about a 1.5, 1.6 coverage, but they are cross-collateralized.

Okay. Okay. That gives me a good indication there. And then lastly, in terms of -- looking out a couple years here, I mean certainly we haven't seen any new development to speak of, really, on the assisted living side, and given some of these prices that are out there, which --

Oh, yeah, yeah. We talk about prices. We are ready to sell our Alterra buildings, Provident, 170,000. So we are ready to sell.

That's right.

Anybody who wants to give us 100,000 or more, send them our way! In Malibu, we'll make it sunshine.

See, that's true, you have the Malibu sales point there, that you can bring.

Right now it's raining and the weather is very lousy but anyone comes to buy, for 100,000 or more per unit, we will give them a discount and a dinner -- get the sun to shine. I mean, clearly the portfolio has 37 of those, assisted living to Extended Care, 35 of those assisted livings to Alterra. Given the prices we have seen paid on those, we feel incredible.

But on our books they sit at a modest $60,000 a unit. So, you compare that to some of the prices that are paid, you see a lot of hidden value, I would hope in this stuff.

And when -- and as we think about new development going forward, and the risk that that could pose to the existing portfolio, could you talk about how the portfolio is positioned to deal with potential new development, going forward, and some of the -- what that might due to occupancy?

Philip, I mean, if I could do that, I would be an incredibly wise, intelligent, bright, and glorious man and I'm not. Because, you know, a portfolio is as solid as the buildings it encompasses. Our Assisted Living Concepts and Alterra buildings are mostly 40-unit buildings in rural communities.

Mm-Yes.

But, one would not necessarily rush to build another building. Furthermore, the same operator has limitations as to what they can build within a certain radius next to our building.

And further more, let me tell you, trying to replicate some of these buildings may cost 85, 90,000, $100,000 per unit. So that is the best defense, if you are sitting on them at a very good price, and the competition, if any, has to come at a significantly higher cost, then that is a natural defense mechanism for you.

And also, I mean, look at the companies that operate -- Extendicare, who operates Assisted Living Concepts, very solid company, fully guaranteed. And the same thing, Alterra is backed by Fortress, a very powerful, reputable hedge fund, very successful company, Fortress is. I mean every deal they do is very successful, and so, they are a well-financed entity. And that's another very strong defense.

Okay. And are you seeing any of -- are you seeing any development pressures, to speak of, in any of your markets at this point? Or operators looking to, or talking about, development?

I mean -- Yeah.

Mark told us they are looking at building on the properties.

Yeah, I mean, I -- Wendy reminds me that we've been told by Mark Ohlendorf, the chief executive officer of Alterra, that they are looking to extend some of our buildings and both extend -- I hope Extendicare will do the same too, but certainly Alterra and the chief executive officer, whom we have a extremely high regard for, Mark Ohlendorf -- he has been a terrific guy. In the last two years, he's done as good a job as Steven Vick at the Assisted Living Concepts. You people don't see it because Alterra is private, but Mark has turned around that company and made it very, very successful. And he's doing a very smart thing. He's building additions to the buildings where he sees potential competition coming in.

Thank you. I appreciate it.

Thank you, and come see us when it's sunnier.

I will. I will. It's starting to get sunny in Chicago finally, so --

Thank you very much, sir and I apologize for the mispronunciation of your company name.

Oh, no. I was just joking about that.

[OPERATOR INSTRUCTIONS] And at this time, we have no further questions. I would like to turn the call back over to our speakers for any closing remarks they may have.

Nope. Wendy, anything?

Nothing. We'll be at -- actually, I will be at NAREIT a couple of days. Andre will be at NAREIT only one day.

I think I will be there on Wednesday, Wendy

Whatever appointments we can make, let's make them early, and we look forward to seeing everybody at NAREIT.

If you can, meet with the two of us on Wednesday. If not, Thursday, Wendy will be there, and you can meet with Wendy, who whispers all the numbers to me, anyway, and reminds me I didn't read the proper statements. Thank you very much, and we appreciate your support.

Thank you very much, sir. And thank you ladies and gentlemen, for your participation in today's conference call. This concludes the presentation. Have a good day.