LTC Properties Inc (LTC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 LTC Properties analyst meeting. My name is Melanie, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of this conference. (OPERATOR INSTRUCTIONS) And as a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Miss Wendy Simpson, CEO and President of LTC Properties. Please proceed, ma'am.

Thank you. And good morning, and thank you for joining us this morning or early afternoon as the curvature of the earth allows. After reading our cautionary statements on forward-looking statements, I will briefly talk about our first quarter activity and the outlook for the year as we see it today. And Pam then -- Pamela Kessler, who is our CFO --- will discuss more specifically the financial results for the quarter and give some additional detail of the reported numbers. 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, the availability of capital, competition within the financial services and real estate markets, the performance of tenants and borrowers within the LTC Properties portfolio and regulatory and other changes in the healthcare sector, as described in the company's filings with the Securities and Exchange Commission.

During the quarter, despite working on several possible acquisition transactions, we did not close on any purchases. There were two specific transactions that looked very promising at the beginning of the quarter and the beginning of the year but further due diligence on these transactions precluded us from doing a deal. I can tell you that we've adjusted our rate of return goals slightly to better coincide with what we think is the market, and we've dropped them in some cases to the 9% range, however, we still factor in a risk for the structure of the deal, for the operations and for the operator. Right now, we're looking at relatively large SNF acquisitions that we were looking at the beginning of the year.

Our operator has done significant due diligence on this transaction and should we be the winning bidder, we will invest above the purchase price several million dollars into the properties to refurbish and renew the properties. Our total investment would be in the $40 million range, and our return would be in excess of 9%, including the additional investment we would make in the properties. However, we are aware there are other interested parties, and the sellers may decide to break up the portfolio. But right now, we are working actively on this transaction. We did invest, in this quarter, $1.2 million on capital improvements in owned buildings during the quarter. We're getting return of approximately 9.8% on these invested dollars. We've committed an additional $2.5 million on these active projects, and we expect we'll spend a significant portion of that in the second quarter. And those additional dollars will also be invested at approximately 9.8%.

While we're still working on acquisitions, we started actively working on building new SNF properties. This is relatively new for us. I don't think we've built anything since we built assisted livings back before 2000. We are currently working on three specific building projects with operators who are currently lessees of LTC assets. These opportunities are fairly unique to LTC because of the operators and the situations. And I'll briefly explain the three opportunities. In one instance, we're doing a replacement property in a CON state and negotiating to buy the beds that a local hospital has to add to our existing beds in the new property. The replacement SNF would be larger and the census, when opened, would be a combination of our operator census and then the census at the hospital-run SNF. This property could be about 125 beds. In another instance, our operator has a relationship with a prestigious local hospital who would like to have a rehab SNF built on campus. We are currently working with a local architect-builder to scope out and cost this project, which would be a non-Medicaid SNF. At this point, it is now expected to be about a 75-bed property.

Additionally, the same operator has identified a nearby growing community that is underserved. It has a local university that has a nursing program and a local hospital that is undergoing significant renovation. We've commissioned a feasibility study of the project and the market and hope to start working with the architect-builder on costing out the project. We are currently expecting this to be about a 75-bed property also. Right now, I estimate that the properties would cost individually in the $7 million to $10 million range. I also believe that we will have another operator begin to utilize a total of $6 million of commitments we have to them to remodel two leased properties. These dollars are committed at 11% rate of return.

Basically, for the rest of the year and for our strategy, I think we are going to spend more of our time on these building and new project opportunities because they are somewhat captive to us at this -- at this time. I believe our best opportunities are in that area and in the renovation and expansion of properties because we have operators already generating significant profits from their operations in these properties. Right now, based on our cash on hand and principal payments due, I do not expect that we will have to draw on our line of credit in the second quarter, or third quarter, but if activities accelerate including acquisitions, we still have our $90 million line of credit available and can draw on it at any time. I'll now turn the call over to Pam, who will discuss more specific information on our results, and then after Pam's presentation, we'll open it up for questions.

Thank you, Wendy. I'm going to go over the results as disclosed in the press release from this morning. Revenues increased approximately $700,000. This was comprised of a $1.7 million increase in rental income, which $400,000 of that was due to the lease we entered into with Preferred Care in the fourth quarter of last year. $300,000 was due to normal rental rate increases across the portfolio. $560,000 was due to acquisitions that we had made last year, and $450,000 was due to an increase in great line rent which is net of the activation of the lease cost associated with the Preferred Care master lease. The increase in rental income was partially offset by an $800,000 decrease and interest from mortgage loans which was primarily due to payoff and a $200,000 decrease in interest from other income which was primarily due to the path of our A.R. loans. Great line rent was $1.2 million this quarter.

Interest expense increased approximately $600,000, due to payoffs of mortgage loans payable and of senior participation payable which was paid off last year. Operating and other expenses increased $260,000. Approximately $100,000 of this increase is due to restricted stock vesting, $50,000 was due to accounting fees related to the IRS closing agreement that we had this quarter and $100,000 was due to the increase in franchise taxes across various states. This quarter we sold a closed and previously impaired skill nursing facility in Texas and recognized the gain of $149,000. In the first quarter of last year we had sold four properties to Sunwest for a gain of $31.9 million, and we had approximately $570,000 of income from discontinued operations related to the properties sold in 2006. Fully diluted FFO per share was $0.48 this quarter compared to $0.46 on the same quarter of last year and the fully diluted share accounts for this quarter was $26,117,000.

Going to the balance sheet, as Wendy had discussed, we invested $1.2 million at an average of 9.8% this quarter under various CapEx agreements. We have $2.4 million left to invest under these agreements, and we have $6.1 million under agreements that have not yet been funded. We have one mortgage loan with a principal balance of $1.1 million payoff this quarter. Prepaid expenses and other assets increased primarily due to the increase in straight-line receivable assets. We've received $600,000 in principal pay downs from other notes receivable and A.R. loans. Debt decreased due to normal principal payments that were made this quarter. Accrued expenses and other liabilities decreased due to the payment of property taxes that we impounded from certain operators and the payment of the IRS settlement that we had accrued in the prior year, and that was $950,000. And we had 3,387 shares of Preferred-e convert into 6,774 shares of common stock this quarter. We have approximately 190,000 shares of Preferred-e remaining to convert. That's all I have.

Okay, thank you, Pam. As I said, we are working on development projects. We would be happy, and we are working on a couple of acquisitions including that large one that I commented on. I think the development projects are going to be a real home run for us as we get them started. We have developed a group of experts to help us, architects and building consultants. I think during the rest of this year we'll be spending some dollars and being able to give you more specifics relative to that strategy from our company. That's all the comments I have on our quarter, so if you have questions, would the operator please open it up for questions.

Yes, ma'am. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Jerry Doctrow with Stifel Nicolaus. Go ahead.

Thanks. Hi Wendy.

Hi Jerry.

I just want to check a couple of numbers. They went by sort of quickly. The streamline rent was $1.2 million?

Yes it was.

And what was the share count? I think that one -- got by me.

Fully diluted was 26,117,000.

Okay, thanks. And I guess I wanted to just try and understand a little better some of the developments and that sort of thing -- trying to think them through for modeling. It sounds like you'll commit the $2.4 million of left to invest on the existing expansions. You've got $6.1 million. You expect to start, and I think you said, or Pam said, most of that would be second quarter, you think, or are we spread out further?

The $2 million probably will be the second quarter.

Okay.

And the $6 million probably won't be until the third and fourth quarter.

Okay.

I would wait it more into the fourth quarter.

Okay. And then on the construction projects, yield on those would be sort of in the same range, sort of the nine-ish percent range or perhaps better for development?

Yes. I would -- for modeling purposes -- I would do 9% right now, though, the operators who were doing the development for are currently at a higher yield.

Okay.

But assuming yields keep coming down.

Okay. It might be closer to nine. And then will those -- there's a couple different ways you can theoretically structure. If added to a master lease, you could get it as current pay or more typically for development project, you'd be capitalizing costs, maybe it's your cost of funds or something during construction period. So --

Right.

And -- so -- should we -- if you get commitments on those, should we be thinking about them as starting to be funded sort of second half of the year or something and then should we expect current pay or would you actually start getting current pay later in the next year? I'm just trying to understand how it might --

I think we would begin spending some dollars in the fourth quarter, and we would be capitalizing the interest and not getting current pay.

Okay.

So we would not be getting cash flow on those right away.

Okay. And obviously, you haven't started yet so it may be a little premature, but are these a year buildout or something like that, so then in terms of really starting to impact the earnings, it would be sort of later '08 or is it shorter construction time?

No. I think at least a year buildout. Both of these, well, one of them is in a state that -- or two of them are in states that don't have particular weather problems. The third is in Tennessee, so they might have some building weather problems. But I expect about a year. Clint's here, and he can be more specific --

Jerry, in regard to the one property is in Tennessee which is a CON state. So you have to go through the whole regulatory process.

Yes.

And there could be objections. You don't know, which I think are unlikely, but -- It's just more detailed on the other two projects. One is on the hospital campus. So we'd have to go through the aspects of that, but I think that a year is very realistic.

So it would be late '08, maybe even into '09 for the construction?

Yes.

Okay. And then, I think we've been running, Wendy, something on the order of just $10 million a quarter. Obviously, it's, in terms of acquisitions, it's obviously lumpier than that.

Yes.

Any -- you start about the $40 million specifically but I assume you are still looking at some other acquisitions. You expect to do some for the quarter. Again, I don't know if I'm asking you for a particular number, but just a feel that acquisitions are as likely to still be out there, maybe yields around 9. Is that -- you could get the $40 million, you could get nothing, I guess. I'm just trying to get maybe a little better feel for the acquisition environment. Is that the right way to ask the question?

Yes, I'm not -- I'm not predicting anything for this quarter, for the second quarter unless -- unless this 40 million, which we've done a lot of work on, comes through. And so I would probably, move that down to 10 possibly in the third and 5 in the fourth.

Okay. Okay. Okay.

We'll be spending a lot of time, I think, on these construction projects.

Okay. And just in terms of acquisition environment, sort of more broadly, you talked about Cap rates being or lease rates I guess being down sort of to 9. Are there volumes of transactions out there you're just sort of being more careful about what you sort through or maybe a little more color on sort of what you're seeing?

Sure. We're seeing -- we're seeing businesses that want to sell the entire thing as opposed to just the real estate. So we're not seeing many operators who are trying to finance their real estate for growth type of things.

Okay.

And we're seeing things in markets that we don't have a lot of presence like the Upper East Coast.

Okay.

So when we get those projects, it's -- we don't have an operator we've got a lot of confidence in. Well, we've got one operator we've got a lot of confidence in, but we can't keep running to him for opportunity. So we're seeing more things on the East Coast than we are out here. Everything in Texas seems to be for sale, and we've got plenty of presence in Texas. But right now, we're not seeing -- we saw one deal that was in Texas, wasn't it was overpriced and 70% occupied and all of the ones around them were 70% occupied. So we're just not seeing a great deal of activity that is the type of thing that we would be significant bidders in.

And so basically you have to team with an operator to do a financing on one of these business deals. And it's industry consolidation more than anything else.

Correct.

Okay. Okay. Okay, I think that's all for me. Thanks.

Thanks, Jerry.

Our next question comes from the line of Tony Howard with Hilliard Lyons. Go ahead.

Yes, good morning, Wendy, or good afternoon Wendy and Pamela.

Hi, Tony.

I guess Andre may be fishing or whatever.

I think he's on the line.

Okay, good.

I don't know if he'll comment but I believe he's on the line.

Before we get into some first quarter questions, I want a clarification about if [N.H.I.] gets acquired, are there any provisions or agreements that you have as far as their approximate 10% ownership of their deferred incumbent?

N.H.I.? N.H. I.? Okay. No, I don't believe that there's anything in the [C's] -- anybody who would acquire N.H.I. would get our [C-piece] and they'd also -- they'd own 774,000 or something like that shares of our stock. And I guess they would get those, too. We don't have a -- we don't have a buyout option with N.H.I. relative to those shares.

So you wouldn't be first come basis, it would be first one to acquire the stock if needed?

Yes, we don't have that agreement.

Okay. Also, Pamela, is there some way you could either publish or send information because you went kind of quickly over the increase in revenues year-over-year what made up those increases or if you can either e-mail it to me or something, I would appreciate it.

Sure. We'll do that.

Okay -- and -- yes, and it'll be in the q coming out shortly.

Yes, but we'll send it to you so you can do your report.

Okay. I do want a clarification on the number of SNFs. The press release says 119. So that includes there was one sale plus one mortgage?

Yes. We have 62 SNFs that we own, and then we have loans on 57 SNFs.

So there is a difference of two sequentially, right? Or what was the difference sequentially?

Year end over quarter?

Right.

Oh, sold one SNF.

And I thought you mentioned there was one mortgage.

Got paid off, yes. Yes, you're right.

Okay. Wendy, as far as operating expenses, as the percentage of revenues, the number I look at is on the percent term has increased. Was there any unusual items this time?

Yes. Because of Andre's change in his status and contract, we're amortizing his restricted shares at a higher rate.

Yes. It's about a 100,000 more.

It's about 100,000 more a quarter.

And on page three of the press release you'll see the non-cash compensation charges that is primarily divesting of restricted stocks. There's still a little bit of option expense in there. But most of it is restricted stock. And that was 343,000 this quarter as compared to 252,000 in quarter last year.

But is that -- would that be an ongoing thing going forward?

It will be for the year.

Yes.

It's just for this year.

So if it's -- the number for this quarter, is that a good run rate for us to use for the next several quarters then, Wendy?

Yes.

Okay. You mentioned the share buyback. There was no share buyback in the first quarter?

No, there wasn't.

And there was only 3,000 shares at conversion for the Preferred?

Yes. We're still perplexed.

Yes, because that has come down some. I mean, is there -- why is not more of that being converted?

I don't know. We had a fund manager call and he seemed relatively new to his job and he was asking several questions, but he seemed to believe that he was required to hold these shares of stock based on his fund parameters. So I don't know.

Okay. A follow-up on Jerry's question as far as acquisitions and stuff. On one hand Wendy seemed somewhat pessimistic as far as being able to get some acquisitions at a decent price that you are willing to pay.

Right.

But on the other hand, you bring up this $40 million potential portfolio and to express that in public before the deal's closed, must show some kind of optimism. So I was wondering the difference between the two.

Well, this one we've done a lot of work on and our operator has been out and done a lot of due diligence on it. So we have -- I think we've gone quite a ways in terms of finding that we've got an operator who is incentivized, and we -- it fits into our portfolio, and so the only thing is the pricing. And I'm sure the other side would like to have a higher price. So we're at that position right now. We certainly can close it. We've got the cash. The operator has the operations familiar with the state, and so we think that this is a good possibility.

But again, there still could be somebody who comes in for a higher dollar amount, or they could -- the broker could break up the package. Our operator would be interested in some of the properties if he doesn't get all of the properties. So I think we've done a lot of work on it, and it's gone back and forth, and it was worth mentioning in terms of opportunities for the company. But it's certainly not a done deal.

Okay. You mentioned that there's going to be no need for the line of credit in the second and possibly third quarter, but the possibility towards year end. I guess that's precluding on one, I guess, this acquisition and two whether how quickly you start up on this new construction?

Right. If we don't get this acquisition, even with the construction dollars we probably wouldn't draw on our line of credit. So if we got this acquisition, it would eat up quite a bit of money. Other than that, we're not going to have to draw down on our line.

Okay. Thank you. That's all the questions I've got.

You're welcome, Tony.

(OPERATOR INSTRUCTIONS) Ladies and gentlemen, I show no further questions at this time. I'd like to turn the call back over to management for any closing remarks. Please proceed.

Thank you for spending time with us this morning. We're looking forward to the rest of the year. I think we're very excited about the opportunity to build some new properties and we -- they would be with operators that we have a lot of confidence in, and I look forward to our second quarter and talking about the successes that we may have to tell you about and about the plans to go forward with these construction projects. So we will talk to you next quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude today's presentation. You may now disconnect your lines.