LTC Properties Inc (LTC) 2006 Q2 法說會逐字稿

Welcome to the LTC Properties' analysts' meeting conference call. My name is Minotia and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and answer-session towards the end of today's presentation. (OPERATOR INSTRUCTIONS)

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

Good morning, ladies and gentlemen. First, let me read you this forward-looking statement. 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, availability of capital, competition within the financial services real estate market, performance of tenants and borrowers within LTC's portfolio, and regulatory other changes in the health care sector (indiscernible) the Company's filings with the Securities and Exchange Commission.

We had another very good quarter and ended up with $0.47 of fully diluted FFO, as you have seen probably from your release. And if you didn't account for as an expense or as a cash expense the non-cash receipt of stock compensation, that number would have been 48.

The good thing about the quarter is we did two major leases - -actually it has become one master lease -- but on three properties in Ohio, total of 150 beds for $6.4 million. And we are closing another one at the end of this month, or rather on August the 1st, for $7.1 million, a 123-bed skilled nursing property. We are under a confidentiality agreement not to disclose exactly the details until the purchase closes, as I said, anticipated on August the 1st.

And of course we have continued our renovation projects. We have signed total agreements for $5.8 million to renovate six skilled-nursing facilities operated by four different operators. And of that, we have invested $1 million during the second quarter. These are done at yields of about 10%, some slightly less, some slightly more. But they really are very important to us because not only they allow us to make additional investment at a very good rate, but more importantly than that, they renovate and keep updated our stock of nursing homes. And it's something we will continue to do so that at the end of two, three years, we have a much more renovated stock of nursing homes that our operators lease from us.

With that, let me turn over for the details to Wendy Simpson. And then maybe after the question-and-answer I will come back. As you notice, the Company continues to get deleveraged and our cash position is excellent, which I think will start paying some results as I believe that big maybe peak of pricing in terms of assets should be behind us. I think some fairly crazy prices have been paid for assets; I don't know if that will continue being so. Not to mean that good assets won't always command excellent prices. Anyway, with that, let me turn it over to Wendy.

I had a few comments on the operations of the Company. As Andre indicated, we have increased our owned assets by the Ohio properties and by other properties (indiscernible) prior to this. So our rent income is slightly higher this quarter compared to last quarter; last quarter it was $12,775,000 and this quarter it is $12,923,000. And the increase over the similar quarter in '05, again, is the assets that we added during '05 that are there for the whole quarter of '06.

The other significant variation is interest and other income. We had three mortgages that paid off in this quarter. Two of those mortgages we allowed to pay off early, where we received fee collections for early payment of the debt, plus we were able to take into income the financing commitment fees that we had been amortizing over those properties. We took into income $337,000, which went into Other income for the early payment of two of these mortgages. And also in the $1,868,000 of Other income is approximately $495,000 of increased income from our higher cash balances.

Since we sold the assets in the first quarter and received the cash in February of the first quarter -- those were the properties that we sold to Sunwest -- and we have been able to receive approximately -- a little over 5% on the weighted average. Right now, we are getting 5.25 on our cash invested in available cash. So we had significantly higher interest income.

Our interest expense, of course, is down because we don't have any outstanding debt and just the payoff of our amortization of debt as we pay. Our operating and Other expenses are approximately the same as they were last quarter. Last quarter it was $1,329,000 and this quarter $1,386,000 -- a little higher than last quarter at this period. Last quarter at this period we had some expense reimbursements.

These are timing issues where sometimes we get paid for real estate taxes that we thought we would not get paid for, which create credits for us. So there is no significant variation; just timing variations in operating and Other expenses. And as Andre said, then that came down to a total of about $0.47 of fully diluted FFO. No other significant things that I want to comment on for the income statement.

On the balance sheet, you can see that we have a healthy balance of cash. We have $51 million of cash. Our assets are up, and as one of our Board members pointed out, they'd be up higher if we didn't have to depreciate them. So besides the increase in assets that we have, we recorded depreciation expense of about $3.4 million.

The marketable securities are up. We purchased 60,000 shares of another REIT, a publicly-held REIT, and so we have that in our marketable securities. We are getting a rate of return on the dividend from that REIT of about 8%. And we had an increase in the market value of that investment during the period of about $173,000. So that went into cumulative net income.

We also had, as I said, $5.1 million of mortgage loans paid off. And we purchased approximately 71,493 of our shares at an average price of $20.60. We made all of those purchases in May and we haven't made any purchases since then. I don't think that there is another variation on the balance -- oh, the distributions payable.

At the end of December, we had already declared our common dividend for the first quarter, so we had to accrue it. This quarter, in order to make it more comparative to the actual cash flow of the Company, we didn't declare our second-quarter monthly dividend until July. So in July, we declared our common dividend of $0.11 a month for that quarter and therefore we didn't -- I'm sorry?

12.

I'm sorry, $0.12 a month for our dividend payable for that quarter. And so we didn't accrue it at quarter end, but we did declare it in July. I don't have any other comments about the quarter, and I will turn it back to Andre.

Let's open it up for questions. I mean, I can make some comments about how our debt keeps decreasing. Probably on that senior mortgage participation payable that you see (indiscernible) that on two properties, we will be prepaying on October the 1st about 5 million plus or minus. So that should go further down.

Let's open it up for questions.

(OPERATOR INSTRUCTIONS) Tony Howard of Hilliard Lyons.

Good afternoon, I guess, our time, Andre and Wendy. Congratulations on a good quarter.

Somewhat confused, Wendy, on your comments on the interest income from loans receivable. There was a reduction on the balance sheet, and so I understand them. But as far as on interest income from mortgage loans and notes, there was a reduction sequentially. But then you said there was -- that was about 300,000. And then you said there was a significant increase in interest and Other income. Can you kind of go over that again for me?

Yes, that is all in interest and Other income. The $300,000 that we received for prepayment penalties is in the $1,868,000. And the increase that we had for invested cash is in the $1,868,000; it is not in interest income from mortgage loans and notes (multiple speakers).

And of course, the skilled nursing is in there, I believe.

Is in the interest income from mortgage notes or the Other income?

It is in Other income -- interest and Other income.

Right.

Yes. But shouldn't some of that have been reflected in the reduction from 4.3 to 4.0 in the interest income from mortgage loan line?

Right. The repayments of the --.

From last quarter, you mean -- right, Tony?

Yes. I'm saying on the interest income line, there is a reduction sequentially (multiple speakers).

From last quarter, yes. Of course, quite a few loans got paid off the first quarter, as well as the second quarter in the beginning.

Right.

I guess a good question then, Wendy, going forward, or Andre, for that interest and Other income line item, what was a good run rate going forward?

Did you bring that --?

Let me answer that in a bit. One second. Maybe we can call you back. Well, I don't know that we want to disclose that, though.

We don't give --

Tony, I was about to answer your question, but I'm afraid that would be making a disclosure of future projections.

Okay.

So let me not answer that. But as you see, it has declined.

Right. Also, Wendy, I have a question as far as you said you purchased 60,000 shares of another REIT.

Yes.

What was that REIT or can you disclose them?

Why not?

NHI.

NHI.

Okay. Now, they own about 10% of your common.

Right. So we figured -- asked why don't we own them. We think as highly of them as I hope they think of us. So when the stock was around 23.5 to 24, we thought it was a very attractive investment and we decided to take a small piece.

Nothing strategic other than --

Yes, yes. Please, Tony, it would be a true mistake to start reading more than that we thought that at that point it looked undervalued and --

Just looking for a place to get better returns.

Well, my question is, I guess you bought 71,000 shares of your own stock, right?

Right.

Right.

Is that the first time you have been buying shares? Because I don't remember you doing that (multiple speakers).

Well, from time to time, we allocate a certain amount and we buy some of our own stock when the price approaches an attractive level. What we are doing, Tony, is creating really synthetic investments here. I mean, if you look at what we are doing with our renovations, you can say, you've got these 19 -- say 70 beds, and you are spending maybe $1 million on a certain number of beds and now maybe you have 1990 beds in terms of renovation. And you buy some of your stock along the line.

And between the 10% that the renovation investment was and the 8% that you are getting on your own stock, or 8.5% on your own stock, you sort of achieve some sort of a synthetic investment -- without going into great detail.

I agree with that. But part of my question, I guess, is why buy NHI when you can be buying back more of your own stock?

Because of the prices at the days we bought.

Yes, we found it attractive at that point. NHI had a big investment in us. We thought, hey, why not sort of buy a little -- maybe we can trade it some day.

Yes.

But that was all Tony. It wasn't anything more spectacular than that.

Okay. Where does that show up on the balance sheet?

It shows up on the balance sheet --

-- as marketable securities.

Marketable securities. In the 11,549,000.

Oh, marketable debt securities?

Well, it should be marketable securities. I hope that our -- I guess our press release went out wrong. The one I have in front of me had debt taken out.

Okay, maybe I just didn't see that good.

Mine says marketable securities.

Okay.

Probably we keep the right ones for us, Tony --.

Okay. How much of the, Wendy -- the dividend from NHI, does that flow to the income statement?

The dividend from what?

NHI.

I don't think we accrued it this quarter. But it would flow into Other income.

Okay, to other income, okay. All right. Acquisitions, I guess in the past, we've talked about maybe a run rate of about 10 million per quarter.

We are very much on track for that. We've done, if you look at the numbers we released, probably about 7 plus this quarter. We are doing another 7 next quarter and a couple more. And as we said, we've signed renovations of 5.8. I mean, we are beginning to see little deals here, little deals there that sort of escape the big bidding wars, and therefore still have consistent prices with our overall philosophy. The market is perking up a little bit.

Okay, so you think it's becoming a little bit more -- or less competitive, I guess (multiple speakers)?

No, I don't want to say that. On the big transactions, it is still crazy. People are paying un acceptable, in my mind, prices for assets, and tying operators to leases that have rates that are just not sustainable. I mean, $900 to $1000 a unit a month for assisted living, of ordinary types. And equivalent prices of $400 a month for nursing home beds in some fairly low-paying areas.

But that is for big transactions. Small transactions don't gain the competitive fury. I mean, these three buildings -- you know, this $6.6 million or something like that, $6.3 million, $6 million actually had 350 -- clearly, that is three nursing homes that is not going, and it was two separate transactions that Wendy and Clint made at least two or three trips to finally nail down. It is not going to attract major competition for that.

Sort of it is like fishing -- there are three or four small fish; you go catch them. If that's all you are aiming at, you are going to get some very good catch. But if you have a factory ship, no, it's not going to be enough.

But we are --

We are beginning to see those small deals.

Yes. And we are happy that they are asset purchases rather than loans. That is not saying we're not looking at loans. In fact, we looked at a loan on properties in Texas and haven't done that loan. But we've been able to close and get very close to closing actual purchases of good assets. So we are happy to have that being the transactions that we can report, at least this quarter.

Okay. When do you expect to report your 10-Q? Publish your 10-Q?

Next week some time.

Yes. Let's see -- I have it right in front of me. We are going to file on the 31st.

Okay. Final question, Andre. I guess I was asking Wendy this -- is the inside selling -- the program selling -- that's the 10b1 program, I guess. How much more is that to go and where would be the only (multiple speakers)?

It is almost finished. It is almost finished, Tony. At the end of it, I will still own 3/4 of a million shares.

Was that a 10b1 program?

Yes. 10b1 -- I forget -- it's the one where it is on sort of an automatic. You select ahead of time the days at which the sales will take place and you turn them over to the brokerage house and they sell them. You can't tell them do it, you can't tell them not to do it, you can't tell them when to do it. I mean, on a certain date they will sell 5000, on another date they will sell 5000. So it is sort of on auto pilot.

One follow-up. Authorization, how much more authorization to purchase your own shares do you have?

You mean now the Company you are referring to? I think we have we probably have at least another couple of million shares.

Yes, I think we have.

When was that authorized?

I'm sorry?

It was authorized a few years ago.

Right.

Okay. That is all the questions I have.

You know, Tony, again, you said it yourself at times, when you can make an investment that has reasonable risk rewards, and sometimes if you don't find that investment and the risk reward is better on your own stock, you buy your own stock. If it isn't, you sell your stock and buy an investment. This is all which one has the better risk-reward ratio at the margin.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) Jerry Doctrow of Stifel Nicolaus.

Good morning for you guys. I had a couple specifics and then I wanted to come back a little bit broader. Just on the specifics. Can you just give us the timing of some of these closings? I guess the 6.4 million, do you know when that was closed? Because it does make a difference over the quarter as we go forward.

The end of May and the other the end of June. Clint?

One was at June 1.

One was June 1st.

That was the one property. The other two closed like June 28, I believe --

Yes, to be approximate, I think let's take half of it at June 1st and half of it at the end of June.

Okay.

You will be okay.

And the other one you said closing on August 1st. And then the renovations, are you actually generating any income yet on the 1 million or you won't generate until their projects are completed?

(multiple speakers) renovations. One where we increased the rent following the disbursement immediately. And one where we are capitalizing interest and adding it then to the principal at the end of the project and increasing the rent.

So, how should I be thinking about the $1 million? Is there income coming in on that or not, and when would the rest of it maybe come online?

Income coming in on that?

Yes, that particular group, yes.

That particular, yes.

The 1 million, there is income coming in?

Right away. On the other one, there is income to. And it is a bifurcated income. To the operator, Jerry, you charge 10% capitalized interest. But in terms of income in your own books, you recognize it at the marginal cost of your revolver, although we don't have drawings under the revolver, but that is what Wendy tells me the rule is.

So you charge him 10%, but in terms of what you recognize during the period while you are capitalizing interest, is probably something around 7%, Wendy?

Yes.

And in terms of the -- how long does it take to get the rest of that 5.8 dispersed out, do you think?

I am looking at that going over the next two to three quarters. Some projects will go into the next year. But in the meantime, Jerry, other projects are being signed on. We are working probably on a total of another $10 million in projects, which we are at various stages. Either Wendy and Clint or I and Clint or Wendy and I and Clint, if it's a big project, have gone, met with architects, with the operators, agreed on the project. And we are about to sign sort of the formal agreement. So there is another 10 million of that, some of which will go onstream now.

In other words, with the existing acquisitions and the August 1st acquisition, and the number of dollars we will spend on renovations, say, going back to April 1st, that 1 million, I think we will meet that $30 million that we said 10 at the end of June, 10 at the end of September, 10 at the end of December.

Okay. And that includes both the development or the renovations as well as the acquisitions?

Acquisitions. And anything else is on top of that now. I mean the fishing boat is still out there looking for fish.

Okay. I guess that's what I wanted to do then in terms of my broader question, just understand a little bit about your strategy and your thinking. You touched on some of this, but I wanted to kind of get a better just view of your thinking. I think you said that maybe pricing has peaked, the number of deals may be starting to pick up.

Asset pricing has peaked, I meant.

Asset pricing has peaked, okay.

I think. I'm not -- I mean, it's very hard when you are at a peak or you are a little bit past the peak to recognize that you are there. I think that we are there because I've seen some transactions about six months ago that I thought were done and I hear they are still not done, and I don't hear price increases on them and that is why the delay.

Real estate wise, I can tell you my own sign is Malibu. About six months ago when I drove from home to work, there wasn't a single land piece on sale. Today -- I mean last week, there were 11, today it is 12. And the Malibu house sale home went from being very, thin, thin document -- there were very few homes for sale -- to a very thick document. And you drive around and you have your pick of all the homes in Malibu seem all of a sudden to be selling.

We are not buying any of those.

We are not buying any of those, but --

Just to clarify that.

Yes, yes, this is just using them as an indicator of peak past.

Right. I was looking forward to the property tour myself.

And you know, I mean it is a very good indicator, because we all, especially some of the REITs, we have worked very hard to make assisted living become senior housing. It was good; it gave us housing type multiples. But then when housing starts going down, guess what, senior housing ain't exempt from that. So it will start going down inevitably. But --.

Okay. But just to understand your thinking, I mean, clearly you are going to continue to do sort of the ones and twos sort of small deals. 10% still seems to be your yield threshold.

Yes, because it is small deals and you can get at 10%; they are not going to be bidding them out there to (indiscernible).

Right. And you are going to be funding, obviously, the expansions.

Renovations and expansions, very frankly, I'm not happy -- although we are doing one boatful of them. It is certain operators are like telling me always, yes, that is a great idea. I'm going to get back to you, right. We need additional space; we could with it; and nothing happens. And we don't have enough time to go and -- you can't force somebody to do something. But I would like to see a lot more. I believe there is a lot more potential, all in the skilled nursing portfolio for the moment.

Okay. And you talked in general about the trade-off from buying stock. But right now, would you anticipate additional -- if the market doesn't change from where we are today, would you anticipate additional stock investments? Is that something we should be thinking about, or --?

I'd rather not say.

Okay.

But I mean, look, we haven't been shy. I mean, let's suppose you made you mean it's a pace you made $5 million in investments at 10 or 10.5% in renovations. And you can go couple that maybe with $15 million of 8.5% investment in your own stock, and you have a nice synthetic investment at a yield of 9.5 probably of $20 million. And it is a nicer nursing home. You can look at it and say I'm reinvesting in my nursing home.

How am I doing that? I'm buying the nursing home all over again by buying some of my stock, but it owns the nursing home. And then I'm putting new dollars on that nursing home, creating what we call here inside sort of a synthetic nursing home.

Okay. And in terms of -- I guess just a couple other things, if I could -- just broad thinking. Funding any new development for AL or SNF, is that something you guys would consider? Because some of your competitors have picked up the development (multiple speakers)?

We would. We haven't had any -- I mean, we are doing new development in a sense when we are building 20 more rooms here and putting another wing for Alzheimer's here. In a sense, that is new development.

We haven't done solo new development, if you mean a piece of land and put a building there. But in Ohio, we are going to do that. Oh, you are right. There is a potential -- we haven't signed it yet, but there is a potential with one client to close an existing nursing home, buy a piece of land and develop a brand-new one, and take the existing home and make it into a day-care center.

But we did, Jerry, just recently look at a development property in Arizona. And when you go through all of the numbers, the developers were getting a fee for this, a fee for that, and putting everything in it. And when you get down to the end, they have no money invested. And you would end 100% financing and not 100% owning the property.

So we've looked at quite a few opportunities, but just our conservative nature -- we don't like to fund people making a whole lot of money before they even open the property.

Right, okay. And --

But that will come down. I tell you, as projects disappear, as commercial -- as residential housing projects disappear --

Right.

-- or get canceled, I think we will find construction to become cheaper, and developers won't try to put such development fees.

But right now we have --

No, we don't have any.

And in terms of, I guess, Andre, do you feel any need or, given circumstances, to step up development levels or you can go on at sort of this general way for quite a while?

We have enough nursing homes to create synthetic new nursing homes, as I say, between renovation and purchasing of our stock. And it works very well if you look at the numbers. And the beautiful thing about it is it decreases your risk, which never, never happens in the --.

Right, because you are buying back stock.

Right, you are buying back stock and you are taking an existing nursing home and you are renovating it, making it more up-to-date -- maybe it is not brand-new, it never is brand-new. But as I said, you are taking a '70s nursing home and turning it into a '90s nursing home.

Okay. And last question, are your operators seeing pickup in Medicare or are more of them sort of the more typical --?

No. I mean, I'll give you an example. We had to foreclose on a home in Beaumont, Texas that had traditionally four to five Medicare patients. By the time we took it, it had one. Turned it over to Preferred Care, [Tom Scott] in Texas, 25 Medicare patients. I'm sorry we didn't charge him more. But I mean he really worked it -- and I'm joking when I say I'm sorry we didn't charge him more. He deserves to make that money and we are very happy. He does a very good job and does a very good Medicare thing.

And the people at Laurel in New Mexico, [Scott Athens] and Alan Zampini are the two other great players in that.

Okay. Thanks. I've got some other little nitty gritty stuff, but I'll come back to you off-line. Thank you.

(OPERATOR INSTRUCTIONS)

If there are no questions, let me thank you all for participating. Again, I want you to leave the conference call remembering what we said -- we feel very good about the future. The Company's cash position is excellent. Our debt position keeps getting smaller and smaller and smaller, and we like it that way.

We are very frankly ready for the time probably a year, maybe, from now or a little longer, where there will be, I believe, some undone transactions, some of the very aggressive transactions that were done today should begin unraveling. And at that point, even the smaller REITs like us will have something they can go and find and take advantage of the fact that we have such huge borrowing capacity.

In the meantime, we are on track with what we said to you. Thank you very much and have a wonderful week. Stay cool. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.