LTC Properties Inc (LTC) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2005 third-quarter LTC Properties earnings conference call. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Andre Dimitriadis, CEO. Please proceed, sir.

Good morning, ladies and gentlemen, and thank you, Devon. This is the moment I wait for with great anxiety and looking forward because I'm going to read that forward-looking statement that Wendy always sticks to my nose and threatens me what will happen if I don't read it.

This presentation may contain forward-looking statements as defined the Private Securities Litigation Reform Act of 1985. 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, availability of capital, competition within the financial services real estate market, performance of tenants, borrowers (ph) within LTC's portfolio, regulatory and other changes in the healthcare sector as described in the Company's filings with the Securities and Exchange Commission. I will learn to say that with one breath in the future.

We really had a very good quarter. As you see, we did $0.44. The major investment during the quarter we commented on in the conference call in September was the New Mexico deal that we were very pleased with. But I think that the quarter in terms of balance sheet, when you look at our balance sheet you don't see any more of those confusing and dreaded REMICs. Much as we enjoyed very much the high-income, we got out of those REMIC certificates. It's good not to have to explain to anyone how REMIC accounting works anymore.

The balance sheet itself shows some very nice strength in the Company. I remember not a long time ago when Wendy and I were marketing the convertible E preferred, I believe. And we were in New York in July and August of 2003, sort of two years and three months ago. I think our fixed charge coverage ratio stood at 1.55, and now it is 2.6. I remember saying at that time we will work very hard to get it over 2 times, etcetera, over the next couple of years. I think we did better than that. We are at 2.6. I think you see our interest coverage is about -- let me see, Wendy -- 7.7. Even a little bit like last year same time we were 5.5 versus 7.7, 2.2 on fixed charge coverage versus 2.6.

The total debt of the Company, I think, on the balance sheet is 89 million. But if you subtract the $4 million of cash that we have, we have a net debt of $85 million. So -- and market equity of 500 million on the common, 200 million on the preferred. So, you've got a company with tremendous financial strength and flexibility. Our $65 million line is drawn only to $6 million approximately right now. And basically tremendous liquidity as we are getting, I believe, in a period with rising interest rates, probably there will be some more opportunities out there.

We find the environment very, very competitive. I see deals being done at 8.5 or as low as 8.25, and that is for skilled nursing. And we are not about to go do some deal at that sort of rate. I think interest rates are going to tend to increase and, therefore, I wouldn't want to be tied to an 8.25 or 8.5 at this point. That's my opinion. And we have been wrong in the past in terms of I would have expected now rates to be a lot higher than they are. But who knows? We'll see what happens in the future.

Let me turn it to Wendy and let her take you through a bit more in detail the income statement, the balance sheet, and then you can ask us whatever questions. But before I do that, I would like also if you have seen the announcement, we have a very happy event. The Board recognized Wendy's accomplishments. And frankly, this is something she has been doing for the last year, year and a half; she has been acting as the President. And we finally recognized her achievement and gave her the formal title of President, Chief Operating Officer and Chief Financial Officer as well. And

And with that, let me turn it to Wendy.

Thank you. Just in summary, we reported $0.44 of fully diluted FFO this quarter. Fully diluted for the year is $1.72. But as a reminder, in the first quarter of this year we had $0.48 of onetime earnings pickup. It is described in our press release and I'm not going to go over it again. But it was for the collection of old receivables of rent and the collection of a note receivable. So, on a normalized basis, we have for nine months $1.24 in fully diluted FFO.

In our rental income for the quarter, we had only one month of our New Mexico purchase. We had a press release out on that and I think we discussed previously on a conference call. But it was three properties that we purchased in New Mexico for $27 million, getting about a 10.5% return on those. So, for the quarter, we had just the September rent, which was approximately 252,000. So, for the third quarter we are going to have that rent for the entire three months.

In this quarter, we also have $622,000 of straight-line rent as opposed to $190,000 in the previous quarter. Unfortunately for us -- because my view of straight-line rent is anti-GAAP, but we do follow GAAP -- Extendicare kicked in. And so, we have to account for our Extendicare rent. When I say kicked in, based on our policy of when we would recognize straight-line rent. And Extendicare passed all of those criteria. So, we had to start accounting for our lease with Extendicare on the straight-line basis. So, we had a pickup in straight-line rent for the quarter.

As Andre indicated, we effectively have eliminated the confusing for the public REMICs. So, our interest income from mortgages and notes receivable on the income statement is significantly higher, $3.9 million, and our interest from REMIC certificates is significantly lower about 800,000. And that's because the REMIC certificates -- the loans represented by the former REMIC certificates are now loans that we own directly. So, that interest income is now in the interest from mortgage loans. And in the future you will not see any current REMIC income. It will be there historically and we'll have to have all that disclosure for historic purposes, but we will no longer have REMIC income unless for some reason we go out of our minds and do REMICs again.

We have an $843,000 loss on sales. That effectively is the book value that we had for a closed property in Texas. The name of the property was Whitewright, and we sold it to a church organization who wanted to use it to convert to a shelter for Katrina people -- Katrina people -- people who were affected by Hurricane Katrina. So, we sold it to them for a nominal amount of money and we wrote off the book value of that property, which was sold and had already been impaired in prior years. There's nothing else unusual on our income statement unless somebody has some questions later during the question and answer.

On the balance sheet as of today, at the end of September we had drawn $4.7 million under our line. As of today we have drawn approximately $6 million under our line. And that is because we have paid off $3.5 million of Kansas City bonds, and those were at 7.6%. So, we were able to pay off those Kansas City bonds and reduce our interest expense. And we have had a temporary draw on our line. I'm not expecting that line to be significantly drawn at the end of the year.

As Andre said, we have done quite a bit in terms of acquisitions this last quarter, the New Mexico most specifically. He have -- on our statement of cash flows we show that we have done about $30 million of investments in real estate so far this year. And I think that was approximately what we were giving in guidance for the year. Andre had already pointed out the statistics. I think it's important to point out that our credit statistics are really extremely high and we see improvement in those even going forward.

I don't think that there's anything else specifically. In terms of our capital structure, we have 23,187,000 shares, common shares outstanding. We still for whatever reason have 356,875 Series E outstanding that converts to 713,750 common shares. So, we still have some E's. They're converting very, very slowly. Every few weeks we will get somebody who has converted 1500 shares or something like that. But we still have a nominal amount of those outstanding.

I will turn it over to Andre.

One clarification. The 30 million Wendy mentions is in terms of acquisitions. We did another 38 million in terms of mortgages. Any questions?

Devon, we will go to questions.

(OPERATOR INSTRUCTIONS). Jerry Doctrow, Legg Mason.

This is actually John Wallace calling on behalf of Jerry Doctrow. My question is more just a general question on the acquisition market. And where do you guys see yourself into 2006, 2007? Are there going to be more smaller mortgages-type acquisitions or more real estate-type properties? Is it going to be just skilled nursing? What are your thoughts?

John, if you're asking are we going to do any 8.25% financings or 8.5% financings or 7% financings, no. No, we're not. Therefore, clearly since our competitors are willing to offer these prices, we're not going to be able to compete in the big deals and do big transactions, which are always some sort of an auction with the lowest price -- I mean, the lowest interest rate or the lowest lease rate. And the highest price paid per bed (ph) are the winning things, I think, that ultimately would lead you to do some investment that probably, at least for us, would not be appropriate. I don't want to comment on others.

So, we will continue looking for these special niche opportunities. I mean, the thing that we can do that others can't do is we can move incredibly fast. The $27 million transaction would not have come our way, we would not have been able to get a 10.5% rate on it, because the buildings are very good and the operator is excellent, unless it was a transaction where in 10 days we had to give an unconditional commitment of $27 million, an (indiscernible) commitment. The operator was putting down $1 million and was going to lose that $1 million if we had found later on that no, we didn't want to do that. We gave a commitment after tremendous due diligence for 10 days. We knew the operator. We had somebody working for us that knew the building (indiscernible) special situations we will do very well. (indiscernible) where everybody comes and you bid your interest rates down to zero, and you bid your debt prices up to infinity, no point for us showing; they don't fit our (technical difficulty) they don't fit our portfolio.

When you price a transaction, do you price it on a per-bed basis, cap rate basis, coverages? What kind of (multiple speakers)

Comparing to what the Medicaid rate can be, looking at the building, how much Medicare it has, how new it is; what's the private pay component? How are the competitors? Is a new building about to go up? What are the demographics of the place? You know, John, if anybody takes a P&L and on the basis of that makes a commitment, I have a bridge in Brooklyn and it's a great bridge. It's for sale and LTC has the rights for it. So, don't try to simplify life. When you try to simplify a complex business as a nursing home, where you say I'll do on cap rates or on (indiscernible), I think (indiscernible) for three years.

Let me tell you what you can do in a prospective state to make a P&L look tremendous. You ramp up expenses during one year, which determines your next year's reimbursement. During that year you cut expenses. Now you've got an incredible P&L. Somebody comes and buys that building from you for that incredible price, a multiple of cash flow. And now, since you have lowered expenses, the next year's reimbursement is lousy. And now all of a sudden those profits disappear. We haven't done anything dishonest. It's just that the buyer was dumb. So, to make these rules is very hard. You have to look at the totality of the thing. Okay, John? I wish I could give you one of those magic formulas.

Where do you see your growth? I guess my question is from --

Exactly where we have seen it in the past.

I'll tell you, John, we feel very good at being very liquid right now. We have tremendous liquidity. And I think in the face of rising interest rates, some of those deals -- I mean, when real estate catches fire, it doesn't stop in one sector of real estate. It starts probably at the condo level, where all these things have been financed with nothing. And then it starts spreading throughout. And anybody that has done a variable rate deal based on assumption of the LIBOR at 3.5, and you have LIBOR by the middle of next year maybe be at 5, will find the financials not working anymore and things come unglued. And at that point you come in and you refinance the deal. But like every year we can't specifically tell you where it is coming from, nor can anybody else, John, tell you. But somehow every year we end up doing a lot of transactions.

John Robert (ph), (indiscernible) Capital.

Tony is going up to NAREITs, so I am taking over for him. First, any thoughts on the dividend?

We like it.

We haven't made any announcement, but it's likely that we will make an announcement in December about the next year's dividend. So, without being able to say anything since our Board hasn't approved anything specifically -- but it is likely that the dividend will increase, I just can't tell you how much. There's a bit of a debate about how much and when and that sort of thing. But we expect that we'll have an announcement in December.

To follow-up a little bit on the last question, I know it's impossible to tell, but any thoughts on what your acquisition activity might be the latter half of this year and next year?

We're working on several little things. In this crazy market we have found instances -- and I don't want to quantify them for you -- but Andre and Clint and I went out and met an operator who has a master lease. And they have one property that isn't performing that well and wanted to close that property. And we said fine; you buy it from us, you close it, and you still pay us the same amount of rent in terms of the entire master lease.

There's another property that we had that another master lease wanted to close the property, and we just have completed sort of a little bidding war on who was going to succeed in getting that property. So, the original master lease lessee is still paying rent on that property because it's part of a master lease, and we're going to get rent from somebody else from that property. So, you know, it's these sort of unique situations that we are spending a little time on.

Another situation is we looked at some properties in Texas that were in -- I don't think they were bankrupt, but they were in a receivership. And we turned it this way and turned it that way and couldn't figure out a way to do it. And we advised one of our borrowers about the situation, and he is probably going to come to us to get a mortgage to buy these properties. So, there are these little things, and they might all add up to $10 million in value. I can't say they're all going to close in this third quarter, but they keep us busy and they're going to provide a really nice little return for us.

Another situation is totally unrelated to assets that we currently have is a property in Texas that came to our attention that we're working on with somebody to purchase. Again, I'm not sure any of the other healthcare REITs would spend any time on this, but certainly added to that, we might have 8 or $10 million of transactions in the fourth quarter.

John, I don't believe this is the time to do transactions just to add the revenue. I mean, to do a transaction to add 10% to your revenue, 1% to your FFO to -- because you have to be very concessionary financing. You know, at least for our balance sheet and our strategy it doesn't fit. Id you can find ways to increase your FFO and, therefore, to increase your dividend without increasing your risk profile, that is the smart thing to do. I don't think growth for growth's sake is a great idea.

I agree. Totally, I agree. You know that.

This is a very risky period right now. It reminds me of the '70s. I went through that oil shortage. A lot of people are too young to remember that. But once inflation starts coming through -- I know we talk about core inflation at 0.5 and total inflation at 4.7. But as someone reminded me the other day, we drive our COGS (ph) (indiscernible) so you can't have core inflation. Only core people must be using that core inflation. So, somewhere there you have got higher interest rates coming. It's good to be liquid. It's goods to be very careful where you invest.

I agree.

And postulating an investment objective and saying I will do 13 million of deals or 40 million of deals, and then making sure you do that by doing deals that really do not fit your risk reward profile is wrong. The objective is for the secured dividend increasing over time. If you can achieve that objective without making heroic investments, so much better.

Are you likely to see more property acquisitions or mortgage type investments?

Whatever fits the risk reward profile.

I would say right now we are looking 50-50.

(OPERATOR INSTRUCTIONS). We have no further questions.

Thank you very much, Devon, and thank you for everybody on the phone. Bye bye.

Ladies and gentlemen, this concludes your presentation. You may now disconnect.