LTC Properties Inc (LTC) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the LTC Properties analyst meeting conference call. My name is Lacey, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

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, the availability of capital, competition within the financial services and real estate markets, the performance of tenants and borrowers with LTC Properties portfolio and other regulatory and other changes in the healthcare sector as described in the Company's filings with the Securities and Exchange Commission.

I would now like to turn our presentation over to our host for today's call, Ms. Wendy Simpson, President and CEO. Please proceed.

Good morning or afternoon and thanks for joining us for our first-quarter 2008 conference call. With me Pam Kessler, our CFO, and Clint Malin, our Chief Investment Officer. After my initial comments, I will turn it over to Pam and she will have a few more specific comments on our financial results.

Net results wise, we had an as expected quarter and we really commented on most of the activity during our year-end call. But we continue to be conservative with our balance sheet and with our investment criteria. We are however experiencing a reduction in interest income from our uninvested cash. Last year, at this time, we were getting about 5% on our uninvested cash. And this year, we're getting about 2% on our uninvested cash. So our interest income has been going down.

We do believe that we should have cash available in this credit crisis market. In that vein, Pam and I will be working during the second and third quarter to renew our line of credit which expires in November of this year. We are confident that the credit will be available to us. But right now, we cannot quote rates or terms at this time. We will evaluate the costs with other financing alternatives that might be available to us during the summer.

During our first quarter -- in summary again, during our first quarter besides investing the $14.3 million at an 8.9% yield to buy back 636,300 shares of our Preferred E, we invested about $400,000 in our existing properties which is a program we have talked about on other conference calls. We had an average yield of about 10% on this.

We purchased one small SNF property in Ohio for $1 million with a yield of 10% and that became part of the master lease with that operator. And we're working with the operator to identify land to do a replacement property. But right now, we're getting the return on the $1 million. We also loaned $1 million on an ALF in Florida at a yield of 10.5% and that loan is crossed with two other existing loans.

In the second quarter, we are actively working on a $6.4 million loan on some Alzheimer's property so that is all private pay and an $8 million purchase and lease of a SNF. Right now, it looks like these will close late in the quarter. Both involve some HUD debt and currently the properties we're working with are working with HUD about either paying off that debt or having LTC assume it. So I'm not sure how that will go. It takes a little longer negotiating with HUD or getting HUD responses.

But we believe these two transactions will close during the second quarter or at the very end of the second quarter. We will give you more details when the purchases are closed.

We aren't currently seeing a lot of deal flow in term of deals we would be interested in. I could say we have got several hundred million dollars worth of books that have come out. The transactions -- individual transactions are sizes that we might do in the $50 million, $25 million, $75 million range. But they're still at prices and in age of properties that we are not quite willing to do.

We're not being stubborn. We have looked at initial yields below a 9% range. We've looked at changing our lease terms to include upside participation in net revenues rather than just our standard increases during the year. So we are trying to adjust to the market but we still do not want to disadvantage our current shareholders with any more substantial risk. So we are looking at a lot of transactions but our initial look at these transactions are -- and I have not heard of any of these transactions in the books that have closed so maybe there will be another round of those.

Our strategy for acquisitions is still focused on the smaller SNF operator and the two transactions that we are working to close this quarter are both operators that operate small properties or are operators who have been in the industry and are going off on their own to operate a property. So we are looking at the smaller operators and the smaller deals still and I believe that is where we can convert to a closed transaction for LTC Properties.

Our strategy of our current portfolio continues to be to invest dollars in the properties that have high census and opportunities for our operator to profit and for us to get a return. We had several small projects in process but we have a large project, a $2 million project in processing and close to approving another $2 million to $2.5 million expansion of a SNF that is full but it might take about 18 months to close that or spend all of that money. Because the property is full and they have to accommodate residents as they move things around and that sort of thing.

But again, we're very happy to be able to invest this money in our current properties and to get a decent return on that. I think that is about between a 9% or 10% return on that property.

We have other dollars committed but the operators have not quite approved those transactions yet. We do not have any operators that are currently having a problem other than this one small operator that I know I commented about last quarter or for year end. It's is just an individual, valiant woman working in a small town in Colorado. We have got less than $1 million investment in that property.

So our operators are doing well based on the information that we get. The ones that are not doing well, I think everybody knows like Assisted Living Concepts is having their challenges in transactions in census. But they seem to have a lot of cash. They seem to have a lot of debt capacity and we have extended care as a co-leasee under the lease, so I'm not concerned about our ability to continue to collect rents from ALC even though they are not doing so well in the marketplace.

And other than that, our SNFs seem to be doing well. As I mentioned in previous conference calls, we believe our rent per patient day is one of the lowest if not the lowest. So any Medicaid/Medicare cutbacks that may be happening probably will -- well of course it will hit everybody in the industry -- but our operators have a bit more cushion between our rent and their profits than maybe some other transactions that have been done recently.

I will now turn the call over to Pam, who will give a summary of the results.

The year-over-year analysis, you can read in the Q, so I am just going to detail that quarter-over-quarter analysis. Revenues decreased approximately $175,000 from prior quarter primarily due to the lower interest income from our overnight investments as Wendy discussed. This is partially offset by an increase in rental revenue due to our contractual rental rate increases.

Straight line rent decreased $252,000 this quarter and that straight line rent number was $953,000 for the quarter. And the lease inducement cost amortization was $162,000.

Operating and other expenses decreased to the lower restricted stock vesting. In the first quarter, we had a gain on the sale of some vacant land, a vacant parcel, part of a skilled nursing property in New Mexico. And the gain on that was $92,000. Fully diluted FFO per share was $0.51 this quarter compared to $0.46 last quarter. If you exclude the gain from the preferred stock buyback, fully diluted FFO was $0.47 this quarter.

We received $1.2 million in scheduled principal payments on mortgage loans receivables. And during the quarter, shares of Preferred E stock that were converted was $91,300. At March 31, we still had 71,000 shares of the preferred stock remaining.

Just to reiterate, we have still our unsecured line totally available that is $90 million. It expires in November of this year. There are no restrictions on us drawing on it for any reason right now. So if we had a large transaction that we wanted to do, the line is totally available or I believe that the capital markets are still smiling on REITs and healthcare REITs. I understand Omega did a deal this morning in the equity sector and we would raise equity if it paid and we can see where the money was going.

So in terms of the credit crisis or the credit crunch right now, I don't see it impacting our Company. At this point, we still have about $30 million on our balance sheet. Closing these two transactions by the end of the quarter will use up a significant amount of that cash. I would be happy to draw on the line to do other transactions and we're not reluctant to do that. We are reluctant to do an equity or a debt issue right now without use of proceeds and absorb the negative arbitrage until we could invest the money.

So we have opportunities in front of us. The Company continues to be cautious. We are making -- we are making what we thought we would be able to do at approximately $10 million a quarter. And at this point, I see no reason to change the guidance of the Company and we just look forward to being able to convert these opportunities into closed transactions. Lacey, I will take any questions now.

(OPERATOR INSTRUCTIONS). Tony Howard, Hilliard Lyons.

First, a clarification, on the 10-Q on page 8.

Okay, hold on. Pam? Moving it.

Yes.

You mentioned then the acquisition of the Ohio property and then you mentioned at the same time that there is an agreement to spend up to $2 million to rebuild I guess this facility. I guess part of my question is how should we model this $2 million as far as near-term projections?

I'm going to have Clint answer that because he's working with the operator. I know the operator had identified several pieces of land in Ohio. We contacted KeyBank who is familiar with Ohio about the value of land in Ohio but Clint, would you--?

Tony, I will give you some guidance on that. Ohio is a certificate of needs state. So there's a regulatory process that would have to go through. And right now, the plan is to file that certificate of need application by June 1. I think it's usually a three or four-month process gain approval. But I would imagine that construction will probably begin probably say six months to seven months from today when it will start being used. So it will be the latter part of fourth quarter.

The latter part of the year, the latter part of the fourth quarter.

In that same paragraph then, you mentioned as of March 31 you have remaining under these agreements $2.5 million. I am a little confused as far as what that represents?

That's just what remains of the existing commitments we have outstanding.

Are you wanting to know how to model that? Is that your question?

Not only that but where is this $2.5 million? Is that part of the $2 million you are talking about as far as rebuilding this building?

No, we have got about $1.6 million of that is one property in Ohio that is currently under construction and that will probably be done -- or it's remodeling.

That is a remodel project and that probably should be completed in the next probably three to four months.

Then the rest of it are little, little transactions.

And then under Section 7, I guess is page 12. Pam, you have like 10 or 15 different commitments. What is the total commitments that LTC is required to finance over the next several years?

Our total commitments is it -- you are using this schedule, Pam?

Yes, the total commitments are $14.9 million if you're looking at what total commitments are outstanding. But as you will notice in the footnotes, several of those like Alterra that has been a commitment for a long time and they have not given us any indication that they're going to exercise that commitment. However, the SEC rules require that we give you all of our commitment.

If you're just looking at modeling, the $2.5 million that we had in that footnote on page 8 that you discussed, that is what we believe is going to be spent over the next nine months. So I would use that number for modeling. The commitments in contingencies on Footnote 7, those are really just regulatory required (multiple speakers) --

But we are committed.

Yes, we are committed.

We are committed, so we have to keep that in mind with our cash flow.

Exactly, I would agree.

But all of them are at 10% or higher commitment yield.

Wendy, you mentioned as far as the outlook for acquisitions and this was a lot better. You mentioned some fairly large numbers of $200 million or so. But if you were to narrow that down to what you would consider your area of comfort, what would be like a good dollar amount for that?

We still like the smaller transactions, the $5 million to $10 million transaction. But I think we would do between $50 million and $75 million if we came across the right transaction. We are willing to look at -- I know we can raise money to do a $200 million transaction. But it would -- we still would like to work on these smaller transactions where you can convert them, take less risk under one transaction and add FFO to the Company.

Final question is, can you give me the rationale for repurchasing a Series F versus repurchasing the common stock?

Yes, we were getting a better yield on the Fs at that time. It was just a yield issue. There was a block. So if somebody had come to me with a block of common with the same yield, I would have done the common. Because the preferreds can stay out there forever if we want to but it was price and yield at that time.

But the Series F I guess is callable sometime next year?

It is callable late February of next year right.

And what is your idea of what happened for the rest of the Series F?

I don't know. It will depend on our financing costs as it goes forward. We have run a couple of models. We have run a model of if we issued equity now and held the equity and waited to call them in February and it is highly dilutive at this point. So even though our equity is high, our stock price is -- I don't want to say it's high based on everything else. But it is a good price at which to issue equity. I just would not do a dilutive -- that big of a dilutive transaction for our common shareholders.

So we are looking at it all the time Tony. We know it's out there. We know it is 8% money. And if we can get better percent money when it gets closer, we certainly would consider calling them, calling a part of them.

Peter Costa, FTN Midwest Securities.

You talked about on the last call a facility in Georgia that you were getting close to on a $2.5 million facility.

Yes, that's the one we are talking about that we're almost --

Actually, we've had conversations with the tenant in the past couple of weeks and we are working on finalizing a lease amendment to make that happen. And we are hopeful they can commence the project probably in the next month or so.

So that is the same (multiple speakers).

Yes, that's the same one.

That's correct.

And then we talked about the prices of facilities versus what you would like to pay versus where the rents are in this $200 million book that you're talking about of transactions that are out there. Are you seeing anything move at this point even if it's not exactly in the book at prices that you find attractive? Or do you think there's going to be a softening anytime soon? How close are we to where the [bidass] comes together?

We look at every transaction that comes out and certainly Omega's recent announcement of the deal that they did in Maryland and -- Ohio and Maryland, I have not seen those properties but I am not sure we would have paid $80,000 a bed and had debt service of how much did we calculate about $751 per bed month?

But they have done a transaction that is a high per bed transaction so people -- that is the latest comp out there. We know have a $50,000 a bed or $60,000 a bed. And it is certainly on a market by market. But as I said, people have told us that there is a lot of transactions people are working on but nothing has -- not nothing has closed. Omega obviously closed something but we don't hear about a lot of closes. The operators I think are still looking for a high price. I am hoping it comes -- if we are willing to come down a little on our hurdle rate and they're willing to come down a little on their price, we're getting closer. I think we are getting closer.

How much lower would you go on your hurdle rates? What would you let that get to?

Well, you know, we would probably get to about 9% and we are looking at adjusting as I said our lease provisions. Because for the last several years, we've had a standard up and that is why we have got straight line lease payments and negotiating with the operators and saying let's peg something at your net revenues. So if you win big, we will win a little and put a floor and a ceiling on it.

So we are looking at those opportunities to maybe the deal is not going to be hugely accretive initially. But the upside would be a little better than our 2% to 2.5% upside yield. So I think that gets us closer to what the people are looking for. We just still want our operators to be very successful. We don't want to set a lease or a loan where they don't have an upside. So, we are willing to come down a little and we are willing to work with them on lease terms a little. So I think we're closing the gap.

The last time percentage rents worked well is when you go back to nursing homes getting paid extra money for Medicare for rehab and the whole sub-acute thing started up. Do you see some kind of phenomenon in reimbursement that it's going to make percentage rents attractive again?

That would be in a facility that wants to buy on the future because it is not 100% occupied or 90% occupied. We would not do it on a facility that was 93% occupied. So it would be based on a facility that somebody wanted to buy because they saw an upside and wanted us to pay a little bit of that upside in the price.

So, you are right. It would not make sense and it would not be a proper risk underwriting to just base it on a property that is already full or what would be full for a [sniff] is over 90% because of the man/woman issue of putting people in the same room and that sort of thing. So no. Right now, people are looking to sell properties the next two years of projections which are just phenomenally profitable even though they've never been able to be that profitable themselves.

So that is a good point. We would not base a price on something that is almost full and hoping they can bring in new types of revenue or that Medicaid will not cut the rates when you look at the states who are projecting huge deficits. But we want to put all of these things in our negotiating ability so that we can be there in the market.

(OPERATOR INSTRUCTIONS). Jerry Doctrow, Stifel Nicolaus.

I just wanted to cover a couple of things Wendy. A lot of it has already been gone over. Just on Medicaid/Medicare a little bit. You sort of touched on it just now saying some states running big deficits. It was discussed on the ACP call the other day. I think you also had said your rent per bed basically is low enough that you don't think you are going to be impacted.

I was wondering if you can just give me a little more color and so your sense of Medicare/Medicaid reimbursement and maybe a little bit more color on why you don't think you guys are at risk.

We are at risk because everybody is at risk but I think we have less risk than most people because of our lower bed rates and that is basically why I am saying that. Plus, we have many different states. We don't have a -- our concentration in SNFs is with Preferred Healthcare who has properties in many different states. They seem to be doing very well on our properties.

What I am hearing relative to the Medicaid cuts, we had of course an Audit Committee call before we did this call a couple of days ago. And talking to Boyd Hendrickson, who is an operator of Skilled Healthcare, he is not predicting any Medicaid cuts in the states that he is working in which includes California. Even though California has a huge deficit, he is still comfortable in California. I'm kind of glad we don't have a lot of investments in California.

We have heard that of course the State of Florida is proposing some changes and we don't have a lot of SNFs in Florida either. But the SNFs we have, I know the operator is making a great deal of money. So, a cut would not be considerable to him.

I have not -- the State of Texas seems to be fine, an oil state. We have got quite a bit of SNFs in Texas, Kansas. We have not heard anything on -- we don't have a lot in the industrial states like Michigan or Illinois or Indiana. We do have a concentration, not a concentration, but we have a few SNFs in Ohio that Ohio is experiencing probably one of the highest foreclosure rates. We have not heard and our primary operator of SNFs in Ohio is so tied into the state -- I think he gets up and reads the minutes from the day before -- and he has not at all indicated that he expects that Ohio is going to cut their Medicaid rate.

But it's where the states are going to look and where the federal government is going to look, whether the federal government is going to include or continue to do the bed tax which is something I hear they're going to look at. But nobody has indicated that there is a definite cut coming. I think everybody is poised to prepare for a little bit of a cut as well they should. Almost everybody is going to have to contribute. I do not think -- I don't think the government is going to do something as drastic as they did back in the late '90s.

And you guys do not disclose coverage because I understand you have got a lot of -- there are smaller operators that are unaudited. If I am thinking about that where coverage numbers we've seen for others are probably between 1.5 and as high as 1.8, 1.9.

If we added back everything those others add back, we would be comparable.

You got my question.

We would be comparable on an overall -- now maybe not so much on the ALFs with Assisted Living Concepts. If I gave you the coverage ratios on my ALFs and I could take out Assisted Living Concepts, I would say great. But Assisted Living Concepts as I mentioned they are not doing all that well in terms of the properties. At one group of properties is doing well. The other group of properties is not doing so well. I'm not concerned about our ability to collect our rent or get value on those properties.

Just two other things. Dividend policy, you popped up the dividend earlier in the year. How frequently would you say it gets reviewed and do you look at it in terms of just a ratio of FFO or FAD?

We look at it more as a ratio if for some reason we get a lot of transactions. But I think our policy is probably once a year which would be in January again we would talk about it. Right now, it looks like this is a good ratio and a good payout for this year and we still do it monthly. So I am not predicting any dividend changes.

Then the last thing I had for you or for Pam. The level of G&A was a little bit higher first quarter I think than we had expected and I was just wondering if there is a good run rate either quarterly or for the rest of the year?

The first of the year, we have all the payroll taxes. We had a lot of state taxes that we paid and we do not amortize them over the 12 months of the year. And I think our run rate is $1.5 million.

So from here on, we would be at $1.5 million a quarter.

1.5 to 1.6.

(OPERATOR INSTRUCTIONS). At this time, we have no questions in queue. I would like to turn the conference back over to Wendy Simpson for closing remarks.

Thanks everybody for joining us for this call and we look forward to talking to you at the end of the second quarter. Have a good day. Bye-bye.

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