LTC Properties Inc (LTC) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2005 LTC Properties earnings conference call. My name is Angela, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]. Now I would like to turn the presentation over to your host for today's call, Mr. Andre Dimitriadis. Please proceed, sir.

Thank you very much. Good afternoon. This is Andre Dimitriadis, I'm Chairman and CEO of LTC Properties. Wendy again sticks in front of me that forward-looking statement that I always need to read. And let me go ahead. This presentation may contain forward-looking statements as defined by 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, availability of capital, competition within the financial services and real estate markets, performance of tenants and borrowers within LTC's portfolio, regulatory and other changes in the healthcare sector, the weather, and other unknowns. Anyway, as described in the Company's filings with the Securities and Exchange Commission. I can't help, I always need to add something to that statement. We had a very good year, and certainly a very good fourth quarter. We did $0.45; which, given that we had done, excluding the [INAUDIBLE], which, nevertheless, were very real, we had done $0.40 in the first quarter, $0.41 in the second, $0.44 in the third and $0.45 in the fourth, which comes roughly to $1.70. In real life, we did $2.17, because if you recall in the first quarter, we had interest and rent that we had not collected in the past, we had not [forgiven], though we hadn't accrued either, being conservative, when we got paid, though that amounted to an additional $0.47 or $0.48 in the first quarter.

Thus, we really finished a very good year, and we finished it on a very strong note. During the first quarter, we sold four properties. One in Oregon, one in California, one in Arizona and one in New Mexico. These were packaged in a master lease and leased to affiliates of Sunwest Management. We purchased these properties for $32.7 million in 1998. Three of these properties at the time were brand new. One, the Oregon facility, had been in existence for a long time. As a matter of fact, for those of you that have followed the fortune of Assisted Living Concepts, a Company we helped launch back in 1994, this was the first building that Keren Brown Wilson, the founder of Assisted Living Concepts, had managed. That [INAUDIBLE] older building. In 2005, we had $4.1 million of rent out of these properties or a 7% yield. Now, we don't make investments today at a 7% yield, nor do we intend to make investments at a 7% yield.

But the major reason that we sold these properties was a very strong way of demonstrating the hidden value of the properties in our portfolio. We don't intend to do more of that. We, as you know, have 37 assisted living properties leased to Extendicare. We have 35 leased to Brookdale. The -- which resulted from the merger of Alterra in provident -- Alterra in [INAUDIBLE]?

Brookdale.

Brookdale, right. And ended up being as Brookdale. But all those properties, including two more in California leased to affiliates of Sunwest, Vacaville and Bakersfield, both tremendously fast growing areas of California, are worth significantly higher amounts than the gross book value. Gross book value defined as net book value plus depreciation. This was a good way of unlocking value; and furthermore, very frankly, we are planning to redeploy these funds at a much higher rate, around nine, ten or higher than ten, in various projects that we are undertaking currently. Also, I need to add that although we like Sunwest very much as a group, these four properties were not the best performing in our portfolio. As a matter of fact, their [INAUDIBLE] was below one.

We always, however, maintain that properties have intrinsic value. If a property is a good property, is positioned from a competitive point of view in a nice location and is a good property in terms of the physical plan, regardless of how well it might be doing during a period, that property is still worth a good price if it's a good property. And I think that sale of these we were hoping would prove to everybody how strong and how valuable our portfolio of properties are. In addition, today your Company has about $650 million in gross assets -- again, being net assets plus depreciation. And if I take the amount of debt that we have left and subtract from it the cash that we have on hand, our net debt, our debt less cash, is somewhere around $32 million. That is amazing. I was looking at our 1999 or our 2000 balance sheet, where we had $720 million of gross assets and $260 million of debt. We have come a long way from there.

And, of course, we've achieved that while at the same time increasing our earnings, which is a nice thing to have done. I want to reaffirm, despite this sale, the $1.80 to $1.82 that the analysts -- the many, many, many analysts that follow us, two mainly -- out there [INAUDIBLE], and we are very comfortable with that number. And also, as the fed keeps increasing rates -- right now, the fed fund rate is at 4.50. I read yesterday in the "Wall Street Journal" that based on the futures market, the probability of a raise to 4.75 in March stood at around 92% -- based on the futures market, of course. That necessarily isn't always true, but it's a pretty good indicator, and the probability that there will be a second increase in June to 5% is about 59%. Again, based on the futures market. With that said, you can't feel too bad that we are holding cash in our hands.

I mean, we gave up 7% yield, but right now we are getting around 4.5, even for short-term investments, and we hope that number will increase. But the more important thing is that we have liquidity to redeploy. And where are we redeploying that liquidity? Both in new projects that we are currently working on, as well as expanding, renovating and adding to existing lease buildings that we have. There, of course, you have got a captive market; no one else is going to give an operator money to expand, renovate or add on or change a building that we own and they lease. Therefore, there we can command rates of 9 to 11%, and we do. And we have many projects currently on the way. Some as little as $250,000, some as much as $3 million.

With that, let me turn our conference over to our President, Wendy Simpson, to take you over the actual results.

Thanks, Andre. I just want to make some comments about the fourth quarter and give some more details to what Andre said. In the fourth quarter, we did not make any new investments. That's not to say we didn't come in to work. One of the things we did is we repackaged a skilled nursing facility that was in Virginia and that was part of a master lease. The lease held properties in several different states; and Virginia was not a state that was a concentration of assets. And this operator couldn't seem to make this property worthwhile.

So we went to them proactively and said if we find another operator -- and they were losing money on it -- if we find another operator for this, will you take it out of the master lease, and we will not allow you to reduce your rent, but we will take this loser off your hands. We found a new operator for that property. We agreed to put in $2.5 million to improve and renovate the property. The rental under the master lease did not change. The new operator began paying us a base rent of $145,200 annually immediately, even though the property is closed and under renovation. And they will pay 9.5% of the $2.5 million as we spend the money. So we took this piece of property and we're basically collecting revenue on it twice. But a win-win for everybody. The old operator stopped losing money on it and the new operator is somebody who is Virginia-based or very, very strong in Virginia and really wanted this property.

We have available cash. We are improving the value of this asset for the Company. A very good deal for us. As Andre said, we sold the four assisted living properties in the first quarter of '06. That is -- the effect of that is what you will see on financial statements in assets held for sale. We don't have any other assets held for sale. So all of that disclosure in the fourth quarter are those four properties. Additionally, we converted -- well, we didn't actually convert. We had a mortgage property in the Texas hurricane area, in Beaumont, Texas. The operator was a non-for-profit who had been struggling along for several years. And we bought the property basically for its mortgage balance. And have released that -- leased it to an operator, a very good operator in Texas.

We had been generating about $146,000 annually in interest income, but the rent on it starts at $225,000 annually and increases to 2.5 -- increases by 2.5%. Now this operator is a for profit -- not to say that the operator -- non-for-profit operator wasn't good, but the non-for-profit operator that was just year by year doing this business. It's a very large piece of property that has a few -- I think there are three or four -- outbuildings on the property. We will probably demolish those buildings. And we are encouraging this current operator, the new operator to consider other levels of service, and we will commit money to build assisted living, skilled nursing additions or Alzheimer's property on that property. So again, we are looking at what we have in hand and enhancing that. We sold one property in a small town in New Mexico. Again, it was part of a master lease. We sold the property. We got the cash. We didn't reduce the rent under the master lease. It was, again, a win-win for us and for the operator.

We didn't generate any new loans in the fourth quarter. We did invest $10 million in 11% senior subordinated notes due in 2014. The effective yield on those notes are -- is 11.1246, and I heard recently that they are trading at 105%; but we are holding them for -- through maturity. The notes are an obligation of Skilled Health Care Group, underwritten by Credit Suisse and JP Morgan. One of our board members is the CEO of Skilled; however, we purchased at the full market price and were giving no preferred treatment. In fact, we wanted more but we didn't get as much as we wanted. The bonds are to be registered within 240 days of issuance. And if that doesn't happen, there are provisions for interest rate adjustments.

But we expect that those bonds will be registered and will sit happily with the 11% interest. So that's about $10 million of that 50 we just recently received. Also during the fourth quarter, we paid off approximately $3.5 million of capital lease obligations that were at approximately 7.6%. So we, again, as Andre said, have reduced our debt. After the sale of the four properties in the first quarter and payments of amounts outstanding under our bank credit line, we will have total debt of about $64.8 million -- not net of cash. And $11.5 million to the Beal Bank participated loan. The weighted average on this debt is approximately 7.8% without Beal and 8% with the Beal. Only $5.9 million is recourse to the Company, and none of it is floating rate.

The only maturity we have this year in '06 is $9.6 million on the 31st of December. In '07 we have no maturities. In '08, we have $15 million maturing on September 1, and the tough year, the really tough year is '09, when we have to come up with $26 million between October 1 and December 1. Right now, we think we can do that. We have -- right now, as we speak, we have $6 million outstanding on our -- under our line because it was a 30-day borrowing when we did it. And we are paying that off this Friday. We have approximately $52 million in cash in the bank today ,and we will pay the $6 million on Friday.

In November, we increased our line of credit from 65 to $90 million and renewed it for three years. We have the same four banks, and we were able to decrease our applicable margins in addition to making other helpful modifications. We are very pleased with our relationships with our banks and lenders and continue to thank them for their support. In this quarter, we provided some receivable backed secured lines of credit to certain operators. We don't expect to make this a major portion of our business or our use of funds, but we recognize it as a tool in negotiating deals with certain operators. We are very careful not to trigger FIN 46, but there is no guarantees. We certainly try to vet everything through our accountants, and we all know sometimes mistakes are made. But right now we don't expect -- well, the audit is over or we wouldn't be having this call and we hope to be as careful in the future; but we are very cognizant of FIN 46. We've loaned approximately $4 million, and the rates are between 10 and 11%; and generally, they are one year terms if not shorter. So that's some use of our funds.

Other specific items on the income statement that people generally like to know -- Our straight line rent for this quarter was $605,000 compared to $622,000 for the last quarter. It was $1.614 million for the entire year. And Sunwest was not in the straight line. As Andre said, they didn't cover. So we would not straight line a lease like Sunwest, because they weren't covering. Operator -- operating and other expenses are approximately $1.2 million higher than they were last year. Last year, we had reimbursement for real estate taxes from operators where in prior periods we had expensed those real estate taxes as we paid them, not assuming that we'd get paid back. So that is part of the swing. And we have -- yes, that was part of the swing that we had a $95,000 expense this year and $256,000 reimbursement last year. And in the fourth quarter of this year, we accrued $750,000 for bonuses. And so that hit the fourth quarter.

Other than that, I would like to point out that on the balance sheet, as I said, the assets and liabilities and held for sale were just those four properties. As we mentioned in our third quarter call, we have effectively removed the concept of the REMIC investment from our financials. And now the remaining loans that had once been part of the last REMIC, our obligations owed directly to us and are reflected as mortgage loans. The marketable debt securities on the balance sheet are the Skilled Health Care bonds that I mentioned earlier. The reason our distributions payable is much higher on the balance sheet than last year is that in December we declared our first quarter common dividend for 2006, because we pay it monthly. So we -- last year in 2004, we didn't declare the '05 first quarter dividend until actually '05. So we had to accrue it.

About 2006, a few comments. We already mentioned that we have very little debt. We have approximately $20.5 million of loans receivable that matured throughout the year in 2006. So that's additional liquidity that we're going to have to look at redeploying. We are taking certain -- talking to certain parties about extending and renewing these loans. But at this point, we believe that most of these loans will pay when due. The weighted average interest rate on those loans is approximately 11.25%. Part of that is -- part of those loans are due to the Beal Bank, where we pay them 9.25%. So the spread on that we'd be losing is only 2%. We don't have any leases that come up for renewal in 2006.

So as Andre said, right now, we have a lot of initiatives in front of us. We are working on a lot of deals. I can't say that I'm not jealous of some of our competitors who are looking at billions of dollars of deals, even hundreds of millions of dollars of deals. But when we hear they are comfortable right now with the concept of covering doing a deal that just covers their cost of capital and looking at the accretion in the future years, it's a little more than we are comfortable with doing right now. And we could be proven wrong, but we will have cash if we're not proven wrong.

Nobody died from having too much cash and too little debt.

That's all my comments for this. Andre, let's turn it back to you.

Let me open it for questions. Just want to tell you that that $10 million we invested in Skilled Nursing -- I mean, we bought the senior subordinated -- has a [covenant] among others that said the senior debt plus the senior subordinated debt must cover 2 to 1. And it does cover currently better than 2 to 1. So although it's a senior subordinated, it's a much better coverage than a lot of senior loans that I have seen around there. In terms of risk reward, it was an excellent piece we would have liked to have gotten more, but unfortunately it was sold or subscribed that we were only able to get $10 million. I would have liked to have 20 or $25 million of that piece. We just couldn't get it. With that, let me open it for question.

Angela, if you would open it for questioning?

[OPERATOR INSTRUCTIONS]. And your first question will come from Tony Howard from Hilliard Lyons. Please proceed.

Good afternoon, Andre and Wendy.

Hi, Tony.

Congratulations on a good quarter and a good year.

Thank you.

Obviously, a lot of questions. Wendy, on the G&A expense, I'm curious about the accruing the 750,000 for bonus. Now, is that a one time event? Or is that going to be a quarterly amount?

No, it's a one time event.

Just for --

We are [INAUDIBLE], sorry. No, it's a one time event.

What was that based on? I mean, some kind of performance measures or what?

Yes, it was -- it's based on the performance measure related to asset realization, mostly associated with the gain that we received in the first quarter on the assisted living properties.

We love to be able to buy for 32.7, and 7 years later sell for 58 1/2.

So the gain that was done in first quarter of 2005 was for -- triggered a reserve for fourth quarter of 2000 -- or for first quarter 2006 required a reserve for 2005?

Yes, because the Board had -- the Compensation Committee of the Board had hay proved the bonus. So we had to accrue it.

I guess, Wendy, going forward then, what would be kind of a good run rate for that area and especially if you plan to maybe sell other properties later in this year?

We don't have any plans.

We don't have any plans. Our -- you know, open the doors and turn on the lights and do good business is approximately 1.3 to $1.4 million a -- a quarter.

Okay. That's a going run rate you are saying, Wendy?

Correct.

Okay. Andre, you talked about the selling of these four properties. I mean, very attractive 7% cap rate. And you part of your rationale to be able to get investors and people like myself to understand the value of your total Company. What keeps you then from selling other properties?

There in addition to that, why these properties? First of all, they were in one master lease that had four properties in four different states. That's not the ideal master lease, Tony. I mean, you want a cluster. Should you be deciding some day to change operators, if you had one property in one state and if you cannot lease all four, so you have to find an operator that would be willing to take four properties in four different states or else you are looking for two or three or four different operators. Number one. Number two, the coverage of these properties was .61. In one review we had with a bank that was looking at entering our syndicate of landing, one of the major comments was, look, you have got four properties that give you $4.1 million and they are not even covering, and our contention with them was nonsense. These properties have intrinsic value back and forth. And just about that time, the folks at Sunwest approached us and said, hey, we would like to buy these properties. We said okay, you can buy them at a 7% yield.

And they said all right, we will buy them at a 7% yield. I said, well, look, you can do something better with these properties at a 7% yield, we can do something much better with our money at a 7% yield. Win-win on both sides. These were properties that, at least to the unknowing eye, looked like a weakness. And by selling these, we demonstrate how much the other portfolios that significantly [INAUDIBLE] like the [INAUDIBLE] Extendicare coverage portfolios are worth. And you can look at some of the prices, for example [INAUDIBLE] for the Altura properties included in the Providence transaction; or you can look at how much NHP paid for the JR properties which were identical to the Altara properties and judge how much ours are worth. It was a way for us to say, look -- look at what the properties are worth. We always maintain that properties have intrinsic value, Tony. It was a strong way of demonstrating that.

All right. I grant that. But my question is, why not realize intrinsic value?

I'm sorry?

He wants to know why we don't realize --

Because then we would liquidate the Company. I mean, if we started selling everything, then we are liquidating. And what your question is, why not liquidate at 7% yield? Well, we aren't liquidating the Company. We believe we can grow it and return it to our shareholder with better numbers without liquidating. But it doesn't hurt to redeploy money in an environment which at least I am convinced rates are going higher. People are very reassured, Tony, that all the oil prices will not inflame inflation. They forgot the '70s. I lived through that period. It takes 12 to 18 months for inflation to filter through, and it has begun coming through. About nine stations using in excess of 3%. Remains so. I don't believe interest rates will stop at 5%. I know I have been wrong in the past; but you know, you can delay the effect of gravity that long. Utterly, you haven't dispelled the law of gravity.

Okay, kind of switching gears, I guess in the -- I haven't seen the final proposal, but I guess in the Bush 2000 Fiscal Purchase Plans, maybe you can comment on that, that there was talk about some amount of a cut back in Medicare, Medicaid payment for long-term care. I just wondered if you had had an opportunity --

He was just reminding me today how incorrect your statement is, Tony. Because there were no cutbacks in Medicare. There were cutbacks in the growth of Medicare. There is a big difference.

From what I've read, Tony -- and indeed, I am not, you know, qualified to sign a cost report or anything like that -- but what I have read in things that have come across in press releases, they are freezing where they are now, and they are cutting back -- and excuse me if I have gotten the numbers wrong. They are cutting back from like a 8.9% increase over the next several years to a 7.7% increase over the next several years. So the -- indeed, if you are planning on their increases and you are getting less of an increase to you, it's a cutback.

To us, it seems like the nursing homes are doing an incredibly profitable business these days and it doesn't appear to me that it's the tsunami that happened in the '98 period. Right now. And you know, in an article I read, the person who was writing the article was sort of in awe of our President's ability to come up with these hugely unfavorable suggestions and be unphased by them being beaten down and then come up with another one, so.

However, you know, let's remind people that '06 is an election year; and as you know, the job of every senator and every congressman is to get reelected. First and primary and sole purpose. So with that in mind, I do not think that the Bush Administration's proposal will sail through Congress an altered.

But there is -- there is -- seems to be some -- based on the market today and all of our comparative companies, seems to be some uncertainty because of the fact that this has just come out and people haven't really pushed the numbers. It doesn't sound that alarming to me; but again, I'm not an expert and we will be spending a lot of time looking at it.

Okay. Good. Final question, Andre. You mentioned that as far as using some of the proceeds and stuff to -- for new projects. Can you clarify whether that would be through development, because you talked to the extent about some development of some of your existing property but also can you kind of clarify a dollar amount on what you expect as far as acquisitions in 2006?

I would like not to, because I am not sure when these projects all finished; but nevertheless, in terms of the dollars of projects that we are looking at right now, that in one form or another I have either started or about to start or will be starting somewhere in between 20 and $30 million. And I got to tell you, Tony, you take money out 7 and redeploy at ten, you be surprised that the effect on your bottom line. And furthermore, because you haven't increased your risk profile. If anything, you have decreased your risk profile. A simplistic way how many new dollars people invest. if you are investing at 70 to $100,000 bets, at 8% or less, you have increased your risk profile tremendously for a [INAUDIBLE] increasing your reward profile. I remember all this happening in '97, '98 before the bottom fell out.

We will not invest in 70 to $100,000 bets. It's easier to redeploy that money in small projects. The type of things that Wendy outlined was when you take one out of a master lease that had maybe 25 buildings, where the old lessee continues paying you full rent. Then you rehabilitate that building, which as we are doing now in one building in Virginia where we are putting another $2.5 million, and you receive rent on the old [INAUDIBLE] plus the renovation. That's straight to the bottom line. So the effect of that dollar is maybe equal to 10 or $15 million new investment at 8%.

Okay. Final question, Wendy --

[INAUDIBLE] margin and risk a reward ratio.

Thank you. Final question. Wendy, when do you expect to file the 10K?

Around the 23rd.

Okay. Thank you; and again, congratulations.

Thanks, Tony. Thank you for your support.

Once again, ladies and gentlemen, if you like to ask a question, please key star-one now.

Well, we must either have done a very good job or a very lousy job talking about things that are no questions, so --

Thank you again.

With that, thank you very much, and talk to you in about three months. Thank you. Bye.

Ladies and gentlemen, we would like to thank you for your participation in today's conference, and this does conclude your presentation. You may now disconnect. Have a wonderful day.