LTC Properties Inc (LTC) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the LTC Properties analyst meeting conference call. My name is Audrey, and I'll be your coordinator for today. (OPERATORS INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

Forward-looking statements. 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 may include, among others, general economic conditions, availability of capital, competition within the financial services and real estate market, the performance of tenants and borrowers within LTC Properties portfolio and regulatory and other changes in the healthcare sector, as described in the Company's filings with Securities and Exchange Commission. At this time, I would now like to turn the presentation over to your host for today's call, Ms. Wendy Simpson. Please proceed, ma'am.

Hello and thank you for joining us for our third quarter 2007 earnings call. Yesterday we reported a solid $0.46 of FFO for the quarter which makes our year-to-date FFO $1.44. Pam Kessler, our Senior VP and CFO, will comment about specifics of our operating results and will also make some comments on our balance sheet. After her comments, I will be talking about what we see in the current environment and what we're anticipating for the year end. Thank you and I'll turn it over to Pam.

Thank you, Wendy. Revenues increased this quarter over a quarter year earlier $115,000. This increase was comprised of the following -- $1.3 million in rental income comprised of $427,000 due to Preferred Care lease which was entered into toward the end of last year, $400,000 due to normal rental rate increases across the portfolios, $140,000 due to acquisitions we made last year, $509,000 due to an increase in straight-line rent which was partially offset by the amortization of lease inducement costs associated with the Preferred Care master lease of $157,000 for the quarter. Interest in mortgage loans decreased $985,000 due to prepayments this year. Interest and other income decreased $223,000, primarily due to the early redemption of 35% of the face value of the Skilled Healthcare bonds that we held. Interest expense decreased approximately $550,000 due to debt pay offs.

Operating and other expenses decreased $457,000. This decrease was due primarily to a $950,000 accrual for an IRS settlement in the third quarter of last year which was partially offset by increases in restricted stock and option vesting of $382,000 -- and, I'm sorry $75,000 of post retirement healthcare benefits that were accrued and vested during the quarter. In the third quarter of last year we had $59,000 of income from discontinued operations which was related to properties sold in 2006 and a gain on sale of $619,000. Fully diluted EPS per share was $0.31 this quarter compared to $0.29 last year, and fully diluted FFO was $0.46 this quarter compared to $0.41 last year.

Going to the balance sheet, year-to-date we have invested $3.5 million at an average of 9.8% year to date under CapEx agreements with eight different operators. We have $3.5 million left to fund under these agreements and $6 million under contingent agreements that are at the option of the operator, and those would be at an 11% yield.

Year to date, we have had 11 mortgage pay-offs totaling $28.5 million. Prepaid expenses and other assets increased primarily due to the increase in straight-line rent that I've discussed above. We received $1 million in principal pay downs from other notes receivable and AR loans. Marketable debt securities decreased due to the partial redemption of the Skilled Healthcare bonds that I discussed previously, and that was at 111% premium, or $3.5 million. Debt decreased due to normal principal payments we made during the year. Accrued expenses and other liability decreased due to the payment of the IRS settlement which we had accrued in 2006.

Year to date, 28,209 shares of our preferred E converted into 56,418 shares of common stock. At September 30, there were approximately 165,000 shares of the preferred E stock outstanding. During the third quarter, we used $7.3 million of cash to repurchase $825,017 -- what did I say?

Seven.

That would be a great buy. I'm sorry, $17.3 million of cash to repurchase 825,956 shares of common stock on the open market. At September 30 we had 22,932,000 shares of common stock outstanding. The average cost of our purchase, which includes commission, is $20.97. Year to date, we've paid $39.1 million in dividends. That's $12.7 million in preferred dividends and $26.4 million in common dividends. I'll turn it back to you, Wendy.

We continue to work with our current operators to provide them with capital to improve our properties and to improve the services they can provide. As Pam said, we invested approximately $3.5 million this year, year to date, at a rate of about 9%. Of these opportunities, we still have five projects in process with the committed dollar amount of about $1.3 million. Most of the projects have been about a year's duration. That additional $1.3 million is at a rate of 10%. We continue to look to our current operators to add services and to invest in our buildings. To that end, we recently got a call from a SNF operator who brought a project to us to add services to a property that we don't currently have on our active list. That project is between $1 million and $1.5 million.

We recently talked to an assisted living operator who has plans to add a unit to a property that we own and they lease. That project is estimated to be $3.7 million. Right now we do not have terms with these operators, but look forward to being able to do these deals with the right return for both the operator and LTC. Both of these deals look like they could be completed in 2008.

As Pam said, we did invest $17.3 million of our cash in our own common stock. With an annualized FFO of $1.90, which is just taking our year to date FFO and adding a $0.46 fourth quarter, that would be a return -- a virtual zero risk return for the Company of about 9%.

We will continue to take opportunities to buy back our stock on its weaknesses if there are any. We would also look to buy back our Series F that traded weakly yesterday. We don't know why it traded so low. The problem with us of getting in to buying back our F is we have volume restrictions that are regulatory restriction. It would vastly limit our purchases of our Series F. However, with the high trade of yesterday, we might take some opportunity in the next couple of weeks, but we certainly will keep track of that.

One of our challenges this year has been to reinvest the money that is being paid back to us on mortgages. Earlier in the year it looked like we might have as much as $40 million of mortgages pay. Right now, it looks like that total is more in the $30 million range. To that end, this morning, we funded two new loans on two SNF properties in Texas. These are two separate loans. Both are at 9.75%, increasing 15 basis points yearly, ten year maturity with 20-year amort. One property is a 230 SNF licensed bed property with 172 Medicaid licensed. That loan was for $4 million and was approximately 71% of the purchase price. We have quite a bit of equity ahead of it.

The second loan was for $2.2 million on a Texas property which is about 59% of the total purchase price, for 117 SNF beds of which 114 are Medicaid licensed. Additionally, we have escrowed a total of $130,000 out of those loan amounts for capital improvements on these two properties. These loans are with an existing borrower. He has leased these properties to an operator with whom we already do business. We have extended two loans on two ALF properties in Texas. These loans were both at 11% and were scheduled to mature on November 1 of this year, today, but will now mature in 2009. We have no other loan maturities or lease maturities this year.

We will shortly be signing a commitment letter to purchase for $1 million a 30-bed SNF in Ohio. This deal is with an existing operator and will be part of our master lease. The investment will return 10% and is scheduled to close no later than January 1. This investment is a strategic move for this operator who wants to close this property and build a new combined SNF and ALF in the same area. We will finance this construction and are working with the operator to scope out the entire cost. Until the new property is built, the current 30-bed property will be operated as is.

We have no -- as I said -- no further loan maturities or lease maturities this year. Right now, we're talking to several parties about several different transactions. I continue to believe that we should invest in new properties and to that end we are talking to operators we currently have relationships with and some new operators. There are no deals that I would say are 100% sure will happen, but I can say we are working on more in numbers than we have since the beginning of the year. I attribute this somewhat to the current market conditions, but more to the efforts of Clint Malin, our VP Chief Investment Officer and Andy Stokes, our VP Marketing and Strategic Planning. Andy has been with us since May and he and Clint have worked the market through their individual contacts and through going to state association meetings and making new contacts.

For our year-end call, you'll be hearing directly from both Clint and Andy about what they see in the pipeline and where we will be putting our focus in 2008. We will be filing our 10-Q either today or tomorrow. In that document, in the business section, we have added disclosure of how much mortgage interest comes from SNF mortgages and how much from ALF. This was requested and we're now providing it.

Our credit strength table shows the we still have great ratios. This table takes each quarter and annualizes that quarter for this particular quarter. This particular quarter we had a decrease in interest income due to the mortgage maturity. But if you annualize year to date, we would have a fixed charge coverage ratio of 3.1 and an interest coverage ratio of 13.78, which is very comfortable for us. As always, I appreciate the time you've taken to hear our report and now I will open it up for questions. Thank you. Audrey?

(OPERATOR INSTRUCTIONS) First question comes from the line of Tony Howard with Hilliard Lyons. Please proceed.

Good afternoon, Wendy and Pam. For what it's worth, Wendy, if the 10-Q came out before the conference call it would help us, as far as being able to ask more intelligent questions.

Right. I wanted to put in the close of that loan to make sure that it closed so I held it, but I will do what I can to make that happen, Tony.

Because it would help the [poor] dumb analysts figure some of these things out. Pam, you mentioned -- can you go over the stock buyback again? I got lost in the equation.

Yes. Okay. During the third quarter, we used $17.3 million of cash and we repurchase 825,956 shares of our common, and that was at an average price of $20.97.

Okay. Did you also mention how much of Series E was converted?

Yes. Year to date, 28,209 shares have been converted.

Okay. Is there, Wendy, any reason why more had not been converted? It seems like it would make sense.

Yes. We don't know. We get a list and most of it is held by individuals. I think they just put it somewhere, in maybe a vault or something and are not paying attention.

Also, for what it's worth category, Wendy, our clients were buying a lot of that Series F yesterday.

Were they? Good.

We noticed for some reason it went down a couple points even and there were a couple large volume blocks. They seemed like they were just being dumped. I wasn't able to buy because it would take me forever to get permission.

You have our permission, but that probably isn't --.

No. We have to go through compliance and [legal]. Wendy, let's talk a little bit about the acquisitions. Obviously, in the third quarter there was not much of anything. We keep talking about a run rate of $10 million per quarter. That seems like it is not happening.

It is not happening because the prices are not where we thought they would be. But we closed these two loans and we're going to close the Ohio deal. That will get us $7 million at least for this fourth quarter and there might be some other things we have got going. But we have a target, Tony. We just are not going to do them at the bad returns.

You mentioned as far as the -- and I thought this might help you as far as the current credit market crisis that we're experiencing, that people like yourself with basically zero net debt and with cash available and opportunity, there would probably be an increase in sellers out there that you would be take advantage of.

We're hoping so. Some of our competitors are still giving away what we'll look at as free money. But we have -- as I said, we're working on more deals than we have since the beginning of the year, so the activity has definitely picked up. We talked to an operator just the other day who had closed a deal. It was a marketing call that Andy and I were making. He had just a deal financing a property in Maryland for 9.75. We think that our interest rate and our interest levels are back in the market.

Okay. A couple quarters ago, though, you did mention the possibilities of some larger deals. Said at least one or two $3 million or $4 million kind of deals. But are you seeing any possibilities of say $10 million plus kind of deals happening for you guys?

We are but they would be development deals, building deals. The Ohio property that we are going to buy and we are signing our commitment letter on, it is for $1 million but the estimate to build the new property would be between (technical difficulty) and $3 million. I think that's low, but for the right return, we'll invest more money. This one property that we were talking to the assisted living operator about, they think that would be about a $3.7 million addition. Now that would be a deal we would really like to do but that operator is looking for an interest rate that is something that we're not willing to invest our money at that low interest rate. They can't do it because it's our -- they can, but it would be illogical for them to do it on our property with their own money. But we are talking to them. We just had a discussion earlier this week. We will try to convert that into a real deal at a rate that is good for us and a rate that will provide them with a decent return. Other than that, we are talking to people about building property. Those will take more dollars and take more time. But buying old Skilled Nursing properties, I think it's going to have to be a unique opportunity for us to find that as a good way to invest our money to position LTC for the next several years.

Okay. A couple more questions. A clarification, you mentioned there was $30 million in mortgage loans.

As paid off.

As paid off. Now was that year to date or what was that number?

That is year to date. $28.5 million.

How much was that in the third?

Nine hundred -- I am sorry. $1.8 million.

Okay. Final question, as far as was there a particular reason why operating expenses were lower year-over-year?

Operating expenses? Well, in the third quarter of last year we had accrued $950 million for an IRS settlement. There was a big decrease due to that and then it was partially offset by the increases due to the restricted stock and option investment.

Okay. So the $1.8 million for the third quarter should be a good run rate then?

It is a good run rate.

Thanks.

You are welcome, Tony.

See you at the NAREIT Conference.

Yes. Looking forward to it.

Next question comes from the line of Jerry Doctrow of Stifel, Nicolaus & Company. Please proceed.

How are you? Some of this has been covered but a couple things, there weren't. There was, I think, a $7.5 million development deal, if I remember correctly, that you already had underway that was I think going to close maybe late '08 or possibly into '09, I just wanted to clarify maybe is that still under way and maybe a closing date because as we're starting to look at 2009 estimates it starts to matter.

That is not going to happen because that operator was purchased. The person who purchased or the company that purchased that operator is probably going to fund it themselves.

Okay. I guess again -- you kind of answered this, but the $10 million quarterly investment buying we've been talking about, it sounds like you've got something between $7 million maybe and $10 million, looks like it will definitely happen in the fourth quarter. I know you don't necessarily want to talk about '08 yet but does a $10 million quarter number seem reasonable at this his point to you?

I would say this quarter we invested $17 million from our stock at least.

Okay. So if it is not -- if we don't have it at the top line, it may be stock buybacks. Okay.

Providing a return to the Company.

Right. A couple of other things. Dividend policy, we have it kind of stepping up, keeping a similar kind of payout ratio. Is there kind of a rule? I know it is probably subject to Board opinion, Board decision, but is there a rule of thumb or comfort range where you guys have been in historically?

We would probably stay with the same payout ratio. We expect to have a dividend increase next year. The Board has to approve that but --.

When you think of payout ratio, you think about it as FFO or you think about it on FAD?

We look at it as FFO.

FFO. Okay. On the share repurchases, what's remaining under the current authorization?

Over 4 million shares. I really asked the Board for a lot. We had 5 million shares left. That's 810,000. We've got 4,174,044. We haven't purchased any more in the fourth quarter.

Okay. There is no restrictions on that in terms of debt covenants or anything like that? If you decided it was a good thing, you could buy that whole amount out?

Yes.

Let's see what else I have. NHI, they were one of the holders I think of some of the converts and I think they were holding some common. Any developments there in terms of their willingness to sell? I know buying their stuff is something you have been interested in over time.

They've never been willing to sell the Series C back to us. That is really what I would like to achieve. I haven't talked to them, to Andy, about the Series C since their last press release. Maybe I will let them settle down a little. I don't know, but we haven't broached the subject of buying them back.

Okay. I was just wondering now that they -- it looks like they are not going to be sold whether anything had changed there. I think that is all for me. Thanks.

(OPERATOR INSTRUCTIONS) Next question is from Rich Anderson with BMO Capital Markets. Please proceed.

Good afternoon. One question I have is on cap rates. I don't know if this was brought up. But how have cap rates moved in Q2? When we talk about our cap rates in other property sectors and talk about then trickling up And for nursing homes in particular, a lot of the underwriting standards that have to be addressed revolve around Medicare and Medicaid and what not. That probably clouds the picture relative to other property sectors, so with that as a backdrop, how have cap rates on property acquisitions and property transactions changed over the last six months for you -- particularly nursing homes?

Nursing homes, they've probably stayed in the same 9 to 10% cap rate. They haven't gotten back up to the 11% cap rate. We've talked to people who see a 50 basis point move. But we do see them moving up a little bit. But I think there has been a deal that is closed that was really more around an 8% cap rate. It is not a public deal, we're looking at it privately. I mean we were looking at it and we think a private buyer bought it. So, I'm not sure that having not been committed a couple months ago to buy it that they would closed that, but we see them coming up a little bit.

And how would you quantify the range if you were a fairly nice asset in a decent area versus something that's a little bit shadier and looking like some place that might have problems?

I'll tell you what we're looking at right now and what would temper my interest in a property is, as you say, a nice one, a nice property in an area that has a good market share and also has already developed a separate Medicare unit. We're seeing a lot of competition for de novo projects to build Medicare only, Medicare private pay only smaller facilities, 30 bed, 50 bed facilities that would capture that line of business. So in a property that would be a fairly new property that has a good Medicare provider environment, I would say that the cap rate could be around 9%. Or a SNF that is a little bit older and maybe needs some CapEx, I would look more at a 10% to 11% cap rate before I would be comfortable investing our money.

Okay. Do you have a guess of what your NAV is?

Yes. If you take a 6 cap rate on our ALFs and a 9 cap rate on our SNFs, and sort of like a face value on our mortgages, I would say it is anywhere between $26 and $28 a share.

Good. Thank you very much.

(OPERATOR INSTRUCTIONS) Next question is a follow-up question from Jerry Doctrow with Stifel Nicolaus. Please proceed.

Wendy, just a clarification. On the stock that you are committed to already in the fourth quarter, whatever it is, $6.2 million, maybe an additional $1 million as well, what are the yields on that stuff? Are we closer to 9, closer to 10?

Two loans were 9.75, and the $1 million is 10.

Okay. Great. Thanks.

Your next question comes from the line of William Edith with Edith and Company. Please proceed.

Wendy, what is the book value per share at this time?

Book value per share? Well, if you include -- take out the preferred --. How many shares do we have outstanding? (multiple speakers). The book value per share, not including preferred, is about $11.91.

Okay. I wanted to ask you, what is the outlook for the dividend to be increased in the near future?

I can't announce that or make any amount specific because we haven't brought it up to the Board for approval. All I can say is we anticipate a dividend increase next year.

Next year? In the past it seemed like it has occurred in December or January.

We expect it will occur in January.

Okay, thank you.

You're welcome, sir.

At this time there are no further questions. I would now like to turn the call back over to management for closing remarks.

Thank you very much and thank you for taking your time out of your day to listen to what our Company is doing. I look forward to having Andy and Clint join Pam and me in the earnings call for year end so we can give you hopefully more specifics about how we're moving the Company forward. Again, thank you and have a great day.

This concludes today's presentation. You may now disconnect. Everyone have a great day.