LTC Properties Inc (LTC) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LTC Properties analyst meeting. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). And as a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Andre Dimitriadis, CEO. Please proceed, sir.

Good morning or good afternoon, everybody, depending on where you are. First, my forward-looking statement reading. This presentation may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of '95. 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 markets, performance of tenants and borrowers within LTC's portfolio, regulatory and other changes in the health-care sector, as described in the Company's filings with the Securities and Exchange Commission.

And with that, welcome to our earnings conference call. We released earnings, and at least we here were very pleased with our quarter. We did $0.46 of funds from operations compared to $0.40 from last year. I know, when you look at your release, you don't see that $0.40 except at the bottom, and you see instead a fully-diluted $0.88. But for those of you that have been following the Company, that was because we had a lot of out-of-period items last year this quarter, when we did all the cashing out of the ALF notes and the various things related to that.

Otherwise, this was very, very good quarter. We continued strengthening the Company. If you look at our balance sheet, it really is a very unleveraged balance sheet, and in a period where we had rising interest rates -- you all have seen the ten-year now is fluctuating around 5%. I know we have been or at least I have been saying rates are going to go up, and they haven't been going. Finally, I believe that they have been going up, and that going up, I believe, will further continue.

I was telling someone a minute ago that the Federal Reserve has the very unenviable task of having to choose between raising rates to protect the dollar, which is dropping, or keeping rates as they are and seeing the dollar drop, which, of course, given the amount of imports we have, would create further inflationary pressures, which in turn would raise rates anyway. The person I was talking to was 30 years old, so he couldn't remember the '70s, when we had both increased interest rates and inflation and decreasing economic activity -- something that at that time was called stagflation. I do believe we are headed in that direction. Oil prices never failed to disappoint; oil at 75 does marvelous things to an economy in a negative sense.

But the good news is that LTC is sitting on top of close to $55 million of what I call variable cash, variable in the sense that the more rates go up, the more we benefit from that. So we are one of the few ones that don't have variable rate debt; we have variable rate cash.

With that, I would like -- I will add some remarks later on. I would like to turn it over to Wendy to give you details on our performance this first quarter.

You can get these numbers out of the press release, and we will be filing our Q later this week. And so the detail will be in the Q. But just as a reminder, as Andre said, in our first quarter of '05, we had some additional revenues related to the collection of old rents, or collection of rents that we had not accrued because the collectibility we thought was somewhat suspect. But we did collect them in the first quarter of last year, and that amounted to about $3.7 million of additional rental income last year, which we didn't have, of course, this year.

We also had properties that were sold this quarter, which was the Sunwest properties, which we actually have a significant gain on, which, of course, doesn't add to FFO. But was sold those in the first quarter, and we had a press release relative to those. We had about $857,000 of additional rental revenue this quarter over the prior quarter of last year, the same quarter of last year. And those were for additions made during the year last year. And we had $369,000 of step-ups. So, while if you just look at the top line, the rental revenue of 14,776,000 compared to 12,775,000, a significant difference in that reduction is a one-time benefit last year.

If you look at the interest income for mortgage loans and notes receivable, the comparative is to add the 2,682,000 and the 1,494,000 because we have converted all of our REMICs into owned mortgages. So a comparative basis is 4,146,000 of interest income last year on the same group of mortgages as compared to this year's income of 4,321,000.

Interest and other income last year included, again, a benefit from this collection of additional rent and interest on a note that we had, which was part of this collection. And that interest amounted to approximately $2,335,000 last year, which we would not have had that additional revenue last year, but for this one-time pickup of interest. A lot of our interest income this year, this quarter, is from the $10 million we invested in December of last year in bonds that pay about 11.1%. And so we expect to have that quarterly interest as a run rate.

Our interest expense is down because our relative debt levels are down. We have legal expenses. Our comparable depreciation and amortization expenses are up because of acquisitions we made last year. Our operating expenses were higher last year because at the first quarter of last year, we accrued a bonus of $1 million for that transaction for the collection of those notes and the back rents, somewhat offset by $500,000 of reimbursement we got in the quarter for taxes we had paid on behalf of some operators.

So, on a comparative basis, we were approximately 1.3 million of overhead this quarter and approximately 1.3 million last quarter. That is what we reconsider our run rate. The non-operating income of $6,217,000 last year, again, was related to that one-time benefit we had in the first quarter for the collection on the note.

Income from discontinued operations is exactly that, for the assets that we have sold. And the gain on the sale of assets this quarter is for the sale of the four Assisted Living properties that we sold in February of this year.

Moving to the balance sheet, we have nothing specifically unusual on our balance sheet to talk about. As you can see, our debt -- we have virtually -- well, we have no bank debt. We have $54 million in cash today. Some of it is invested at 4.75%, and some of it is invested at 4.8%, so we are getting a fairly good return on our invested cash. We have only about $[67] million of debt. If you include our senior mortgage participation, we had $70 million of debt. Of that, I think about three -- I had you give me the total. 3 million is variable. $5 million of our debt is variable interest. The rest is fixed interest.

But it's a [weekly setting] tax-exempt.

It's a weekly setting tax-exempt, but that's (multiple speakers).

So it doesn't fluctuate much.

Right, so we don't have variable. We had a few of our Series E's convert this quarter. We had a few convert after the end of the quarter. We have a total of 316,529 Series E preferred shares outstanding as we speak, unless something converted and our transfer agent hasn't told us about that yet. Other than that, we don't have anything significant to talk about in our balance sheet.

As Andre said, we have relatively no debt. Our debt-to-book capitalization ratio, which is an analysis that we will put in our 10-Q -- we're at 13% book-to-cap ratio; we're at 8.8% debt-to-market-cap ratio. Our interest coverage ratio is 9.1%, and our fixed-charge coverage ratio is 2.8%. All of those ratios have improved since 12/31/05, which at 12/31/05 it was strong, at that point, too.

But the progression is fascinating, isn't it, Wend? We seem to be going up every quarter in that respect.

Yes, as we continue to pay down debt. It's all of function of paying down debt.

As Andre said, we have a $0.46 FFO. The only other number that I think I provide quarterly is our straight-line rent number, and this quarter it was 601,000. Last quarter it was 605,000. Last quarter in '05 it was a little over -- it was 196,000, so we've had an increase in our straight-line rent during the year, but not a significant increase over the prior quarter.

I have no other further comments on the financials.

Let's come back. People have called us from time to time and say, what is LTC's strategy? You seem to be paying down debt and have lots of cash. What is going on? Let me see if I can sort of summarize what do we see as our strategy.

I will first tell you what our strategy is not. It is not to do deals at 7 or 8%, which I can demonstrate to you, even for the REITs that have tremendous debt access, if you look at the 50/50 debt-to-equity to provide the additional capital, 8% is kind of the cost of capital. So, when we are doing a deal between 7 or 8, you are really doing a deal at your cost of capital or, worse, below your cost of capital.

Now, I know a lot of REITs will say, but, you know, we have a 2% or a 3% increase, and with that increase we're going to catch up. I think those deals don't make any sense to us, especially given the per-unit or per-bed prices that we see attached to them. But you know, again, those who do them maybe know something we don't know. Maybe there is gas or gold under these buildings or something like that.

We continue to be chasing the small transactions that are not so competitive. We are working on a total of about $30 million plus of small transactions, anywhere between 2.6 -- is it 2.6, Clint -- in Ohio, to deals as large as 7 or $8 million. Mostly sale leasebacks, but also pursuing a couple of loans.

At the same time, we have given tremendous impetus to do a whole slew of renovations on all the properties that we own. We have gone lessee by lessee and told them that we have capital available between 10 and 11% price, which is very good for us, because if we assume that our cost of capital is 8%, that leaves us anywhere at 200 to 300 base points margin, with no increase in risk because we are spending money on buildings that we already know are doing very well, that are well anchored and positioned out there. And the incremental dollars don't increase the rents by any significant amount to create an increase in risk.

And we have about 30 to $40 million of such projects that are -- some of them have begun, some of them are in the permit stage, and some of them are purely in the conceptual stage. Although the returns are excellent and the risk/reward ratio is absolutely good, unfortunately, they take both a lot of time and a lot of management resources, if you want to make sure that they are done right. We don't just hand the money to the operator and say, here, Mr. Lessee, go spend it as you like; we'll just increase your rent and come tell us when you're done. We have an engineer or engineers that we send out there. We visit the buildings ourselves and we supervise the construction and disburse as things are done, and make sure they are done per a budget and so on and so forth. I believe, in a period where buildings are changing hands at exorbitant prices, improving your existing buildings and being able to get 10 and 11% on your marginal dollars with no competition -- nobody else is going to give that operator money for a building that they lease from us -- is the best thing we can do.

We have made some bids for bigger transactions. There was a transaction on which we made a $100 million complicated structure bid with (indiscernible) units, with a lot of sort of bells and whistles to make it difficult for a competitor to match. And, given our very low debt structure, we were able to create some profile that was hard for a higher-debt company to match. Unfortunately, following the Hearthstone transaction, we got a call from the entity representing this transaction, saying the owners now, having seen what Hearthstone went for, went 20% more. Bless their heart. If they can get it, they should take the money and run, because there won't be tomorrow.

I'd also like to address the question. I am selling stock, according to a 10b5-1, where every week 10,000 shares are being sold. I don't control those shares. Whether the stock is up or down, those shares get done independently of me, based on the 10b5-1 rule.

And you have been telling the market for the last several quarters (multiple speakers).

And we signaled that we intended to do that, that we have done that. As you know, we filed an S-1 -- S-3? Was it an S-3? S-3 on my behalf, for 0.5 million shares and so on and so forth.

With that, I think --

Open it up for questions?

Yes. Can we open it for questions?

(OPERATOR INSTRUCTIONS). Jerry Doctrow, Stifel Nicolaus.

I just had a couple, Andre. And again, I understand the strategy; I appreciate you letting that out. In terms of us thinking about modeling -- and again, I don't know if you want to get this specific or not. But any sense of timing or whatever? I assume the deals that are in the hopper for acquisitions are potentially this year, but no assurance as to whether you will land them or not. And any sense of timing on the development [assets]?

What we have tried to do is -- and I know this is not exact, but if you said that in each of the ends of the quarters this year and through next, we would do about $10 million a quarter, I think -- I am sure we will never match it exactly. Some will be higher, some will be lower. But I don't think you will be off the reservation. In other words, looking forward, if we said we have about 30 to 40 million in new deals and 30 to 40 million in renovations -- and it's the renovations, very frankly, or the expansions or the things, the add-ons that are harder to pin down, because a lot of times, one cannot predict the permits and the construction difficulties and so on and so forth -- you would not be wrong. In other words, we are looking for another 30 million for the remaining of this year and another 40 million for next year, sort of -- you know.

And then, on the expansion projects you were talking about, 10 to 11 yields. How about on acquisitions? I'm assuming maybe most of these are [snips] at this point.

9 to 10. Where there is something special that needs to be worked out, we can try a 10. It's much more of a vanilla, and it's a small enough deal that doesn't interest any of the big people, we can probably get a 9.

And one of the things we look at, and the one that we're looking at in Ohio is somebody we already have a relationship with. So it's going to be hard to become part of a master lease. But with somebody that we were just getting to know, we probably would want a little bit more. But we have been fortunate in some of the deals that we're looking at are deals with existing operators and relationships.

And then, lastly, Wendy -- and I probably should know this, but wanted to just check. On the asset sale that you did -- I think it was four properties -- can you just remind me of the timing on that, and then what is kind of the investment value that you gave up and maybe the yield on that? And then also, what were maybe net proceeds that you received?

The sale of the properties was $58.5 million. It was $4 million -- approximately, 3.9 or something -- of [Oregon] bond on that, with 8.75, I believe, rate on them. So we were very happy to get rid of that. The buildings originally had been acquired for 31-point-something, so we had, really, a gross book gain of $26 million before depreciation. With depreciation, again, of course, it was much bigger. But it makes sense to look more at what we paid for these assets. We had paid $32 million, and we were getting about $4 million of revenue on that.

So it was a 7% yield.

So it was a 7% yield. Our attitude -- and why did we sell them? Three of these assets were new, 1998 construction. One of them was a 1978 construction. As a matter of fact, that building was the first one that Karen Browne Wilson rents, and that's where she decided to go to the smaller assisted living model. The place was called Park Place, up in Oregon. And collectively, those four buildings were good buildings.

But very frankly, what we asked ourselves when the lessee came and said, I want to buy these -- we asked ourselves, would we be making a lease at $58.5 million at 7%? And answer was, hell, no. But if you're not making a lease at $58.5 million at 7%, and you don't have a tax situation, given that we are an REIT, not selling them would have been absurd. It sort of would have not made financial sense. I know that that decreased our revenue, and I know that growth-wise, that is the opposite direction of what one wishes to go. But very frankly, I don't think increasing revenues is the objective of the company. Increasing FFO per share with a secure balance sheet, a balance sheet that has very little debt, to me, is much more valuable than increasing revenue, increasing levels of debt and having earnings the same. I mean, a recent transaction that we saw from a competitor was increasing revenues and assets by 20%, increasing earnings not at all. To us, that's -- there might be some of ultimate logic to it; we just fail to see it.

This is a bank, and it is nothing but a specialty bank. If you increase your assets, you've increased your risks. If your earnings have not increased commensurately, your incremental dollars, that's had negative returns. That's all one can say. So that sale was a -- we are not planning to sell things. I mean, if somebody else basically comes and says, sell it now at 6.5, we may have to eat our words. But thank god, nobody came.

And just, again, to clarify, so basically the net cash to you is the $54.5 million. Were there transaction costs or anything?

That is correct. No, we were represented by no one. We were represented by ourselves.

We had a real estate attorney.

Did you remember the dare, offhand? Or if not, I'll just check it on the press release.

I'm sorry?

What was the closing date?

That closed February the 2nd?

I think so, yes.

And, Andre, just to follow up -- I can't resist this. So if somebody comes with a 7% rate for the whole portfolio, you are a seller? Is that --?

Yes.

I'm sorry? What rate?

7% for the whole portfolio. That's --

You got it, Jerry. You got it. Sold.

The check is in the mail.

Wendy and I are coming with a private jet to take (multiple speakers).

Tony Howard, Hilliard Lyons.

Good quarter. Wendy, several questions, first. On the rental income top line, it actually was basically flat sequentially with the fourth quarter?

Yes.

Given that you were selling the four properties, which is about, if I remember correctly, about a little over 4 million in rental income, what was the difference in the sequential number?

You are going sequential from last quarter or from --?

No, last year's fourth quarter.

Last year's fourth quarter. Okay, let me give you the specific details. If you start with last year's -- last year's fourth quarter?

Right.

Oh, last year's fourth quarter. Okay.

Last year's fourth quarter, I think we had 18,183,000 in rental income, total revenue. This quarter, we had 18,179,000. Now, remember, it still had one month of this $58.5 million at 7%. Do you know what I'm saying? In other words --

But you had two months where you lost out, so I'm wondering how you picked up on the first quarter on a sequential basis.

If you are comparing to last quarter --

I'm talking about rental income, Wendy.

Rental income last quarter I show --

12,468,000.

The Sunwest properties sold accounts for $685,000 of reduction, and then we have step-ups, our leases and our -- have step-ups.

Plus ASLC, Assisted Living Concepts, that special 250,000 comes up.

But that's amortized; that doesn't happen in just one (multiple speakers). So we have $233,000 of step-ups, and then we had $49,000 that was associated with acquisitions.

So, Wendy, the run rate would be -- without adding any more acquisitions or any of that kind of stuff would be kind of in this kind of range?

Right, in this range.

Can you go over again -- you mentioned the difference in the straight-line rent. It seemed like it was flat sequentially, but it was down from the fourth quarter? I mean, it was up from the fourth quarter?

Yes, it was only up $4,000 from the fourth quarter. Nobody came online for straight-line.

Do you remember what the number was for the full year of 2005 and what you expect for 2006?

Straight-line for the full year of 2005 was 1.6 million, and we're expecting about 2.3 for '06.

Going to the balance sheet, Andre, the proceeds from the sale of the four facilities increased your cash position, obviously, substantially. Was there the possibility, other than paying down your bank line of credit, to pay down some of your mortgage debt? Because if you are getting 4% [banked] on your cash --

4.8. 4.8 we're getting, right.

Would you have done better by using the proceeds and paying down debt more?

We would love to pay down the debt. Unfortunately, the remaining debt is not prepayable.

So there would be a prepayment penalty. Is that what is, Wendy?

Yes.

Some of it is just simply there's yield maintenance on the [backup bill] on Bakersfield, the [Arcon] loan has the yield maintenance, the [two K's] have yield maintenance. But at the end of this year, we've got a $9 million loan we're going to repay; it matures. And in a couple of years, we will be repaying the rest, assuming we don't borrow new amounts. I mean, at some point we believe these crazy rates and the crazy prices are not going to be around. The dot-com era didn't last too long, so the 7 to 8% investment rate shouldn't last too long, either.

Good point.

We have scrubbed all of our debt, and if there's anything we could pay down, we've paid it down.

The only thing we could pay down would be the Washington variable-rate bonds, but they are tax-exempt, and they cost us 5.5. And that doesn't make any sense to pay 5.5% debt.

I agree. Question on G&A -- you were accruing in 2005 for the bonus?

Yes.

Is there any need to recruit for bonuses this year? And what do you expect? Because you mentioned, Wendy, that your run rate is going to be 1.3 million.

Yes. We do have in that overhead -- we've got some amortization of or expense of restricted shares. So that's sort of a bonus. That's all -- that's in the 1.3 million.

So we are not facing a situation like you did in 2005, where you have an actual cash bonus accrual?

Yes we had it in 2005. We accrued the 750 in 2005, and would we accrue more by the end of the year? We don't have the authority of the Board to do that, but we might. I don't think we have ever paid bonuses over $1 million in a year of cash bonuses. So, if we did, it would probably be less than $300,000, $400,000.

We don't believe in overcompensating our top executives. We are well compensated.

Andre, I think, to kind of go along with Jerry's questions as far as acquisitions, you didn't do any acquisitions in the fourth quarter and you haven't done any in the first quarter. But you still adhere to maybe 10 million per quarter for the rest of this year and next year.

Well, in the fourth quarter of last year, when you say we didn't do any acquisitions, we bought the $10 million of bonds, 11% (multiple speakers).

I have got to tell you, buying a $10 million sub debt with 2-to-1 coverage and 11% plus coupon much better than doing an 8% [reduction]. So we did a 10 million acquisition.

But I understand what you're saying; we are a REIT, and we should be buying properties and stuff. But you know, we take advantage of other opportunities that we can to get some yield in. But yes, we did not buy six Smiths or five ALFs or whatever. But we have been progressing through the last couple of quarters and getting closer and closer to acquisitions. Just yesterday (multiple speakers).

But we bought, actually, a maturing loan and bought the nursing home in Beaumont, where we had -- how many acres? 15 acres? 15 acres, and we are planning to expand it into some form of a CCRC. We buy buildings -- it's a 160-bed nursing home. We plan to put an assisted living next to it as the operator gets ready and maybe some independent living. We are also looking also some Alzheimer's there, sort of create a campus concept. But that comes under that expansion that I was mentioning prior to this to Jerry.

I just (indiscernible) most recent proxy statement, and it shows where, I guess, the last of the date that they measured this was February 28th. And you mentioned about the insider selling. How much more of that do you have left? And I guess that doesn't reflect in the latest proxy statement.

Well, we had an 8-K basically say that I was engaging in 10b5-1 sales for a total of 200,000 shares at the rate of 10,000 shares a week. I believe, if for no reason -- I mean, if they continue as planned, which they should, we would be done sometime the middle of August.

And your plans after that?

None, at this point.

It also shows where National Health Investors still owns like 10% of the stock?

Well, they would if they converted their fees, which they haven't converted.

Not sure, exactly. They own the $38.5 million, 19.25 convertible fees. And they own, I think, another 700,000-plus shares outright.

Is there an [indiscretional] for them to convert that? Or I'm not sure what, to you, the requirements are from buying back their stock?

We don't have the right to buy it back. They don't have an obligation to convert at any time. We've talked to Andy several times about whether he would like to sell any of this, and he's happy getting the dividends he is getting on the shares and he's happy getting the 8.5% that he's getting on the converts. So we are sort of --

He's a happy shareholder.

Yes. If we could go back and do the deal again, we might have put a few different things in it. But it was a good deal at the time.

Unfortunately, we didn't at the time.

So you're kind of stuck with him owning it.

Well, I wouldn't say stuck with him. Andy is a good guy. NHI is a good company. NHC is one of the best nursing home companies that we know, so we don't see our stock in NHI as a negative at all.

At this time, there are no further questions in queue.

Thank you, everyone, for attending. And we will talk to you next quarter.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.