LTC Properties Inc (LTC) 2008 Q2 法說會逐字稿

Good afternoon. My name is [Ashley] and I will be your conference operator today. At this time I would like to welcome everyone to the LTC Properties second quarter analyst conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

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 risk 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 within LTC Properties portfolio and regulatory and other changes in the health care sector as described in Company's filing windshield the Securities and Exchange Commission.

I will now turn the call over to Ms. Wendy Simpson, CEO and President. Please go ahead.

Thank you. And thank you for joining us today.

I will have some brief comments on the quarter and then I will ask Pam Kessler our CFO to make some more specific comments on our financial results. After Pam, Andy Stokes and Clint Malin will briefly comment on our marketing efforts and our deal flow.

Our quarter was solid. We had no specific issues out -- when I was drafting this I said no issues but we can't have no issues but we can't have no issues, but the issues we had general were business issues. We have no specific issues currently in our portfolio that cause me a great deal of concern.

We did complete the renewal of our unsecured line of credit, two new banks were added and two previous lenders dropped out. RBC and Raymond James joined BMO and Key -- BMO and Key being our two lead banks in this new three-year commitment.

Merrill Lynch and Bank [Leumie] did not participate in this new line. The line is at $80 million. It is ten million less than our previous line, but this one has the ability to upsize to $120 million our previous line did not have an up sizing.

Since we have not drawn on the line in quite a while, we determined that closing the line and paying unused fees on a smaller amount was the advisable thing to do in this tight credit environment. The bank line has the same interest rates and covenants, they're basically identical and in all material respects to the previous line.

Again it is an unsecured line. The only covenant that changed was our minimum net worth went up to $400 million dollars which is a covenant change in any renewal. I will now turn the call over to Pam to comment on any specific financials in our quarter.

Thank you, Wendy. I am going to discuss the quarter-over-quarter results for the year-over-year results I will refer you to the 10-K in MD&A section. The revenues for quarter were essentially flat. Mortgage interest income decreased due to three loan payoffs and this is partially offset by one loan origination.

Straight line rent net of amortization of lease inducement cost was 917,000 in the second quarter, fully diluted FFO per share was $0.48 this quarter compared to $0.51 last quarter. Last quarter was $0.47 if you exclude the gain from the preferred stock buy back. We invested 872,000 in capital improvements at a weighted average yield of approximately 10%. We originated one mortgage loan of approximately 6.8 million, this is secured by six assisted living properties specializing in dementia care with a total of 108 units in Texas. This loan has an initial rate of 9.5% and matures in June 2018.

We received 6.8 million from three mortgage loans that paid off and 1.4 million in scheduled principle payments on mortgage loans. Prepaid expenses and other assets increased primarily due to an increase in the straight line rent receivable asset. During the second quarter reused 14.3 million of cash to pay off debt secured by properties that we own in Ohio.

Accrued expenses and other liabilities increased due to the timing of rent received in advance and property tax in pounds. And during the quarter holders of 18,905 shares of our preferred E stock converted to 37,018 shares of common stock. At June 30 there were 52,000 shares of the preferred E stock that's convertible into 104,000 shares of common. During the second quarter we paid 12.8 million in preferred and common dividends.

That's it for me.

Okay. Thank you, Pam. I am now going to ask Clint our Vice President and Chief Investment Officer to make some comments relative to our deal flow and our capital enhancement programs that we have been working on since 2006 when we made our first investment. Clint?

Thank you, Wendy. Regarding the on going investment activity, since the beginning of the second quarter, we have experienced a noticeable increase in deal flow. We have been very active in looking at a broad range of these transactions. The deals have been geographically dispersed across the country, and vary in size.

A few of the transactions have been 20 plus properties, some regional packages, as well as some one-off transactions which we looked at which is our preference but obviously we will look at others as well. In a number of these deals, it appears that the need to sell or refinance is due to debt considerations. In certain circumstances, these issues are related to actual defaults or others where lenders are simply not willing to extend loan maturities.

A lot of the deals that we have been seeing are actually coming to the market for the second time or in certain cases for the third time. Unfortunately we have not been able to capitalize on any of these, but we will continue pursuing, evaluating transactions as they come across our desk. In addition we have seen a general up tick in general inquiries coming into the company about financing products that we offer.

Numerous parties have indicated as we have all heard, financing is not as readily available as it once was. Although seller expectations in our opinion have not yet come down, we feel that given the mounting supply of transactions, as well as continued disruption in the credit markets, we believe these factors will hopefully culminate in adjusting sellers price expectations downward in the future.

Also, as I stated in the past, we have minimal schedule loan or lease maturities, which should free up availability of management to focus on new investments.

Okay. Thank you, Clint. Now I'm going ask Andy Stokes who's our Vice President of Marketing and Strategic planning to talk about some of the things he has been seeing as he goes around to state agencies and just generally keeps in touch with operators and other regulatory people. Andy?

Thanks, Wendy. There are many, many headlines with color maps describing state budget short falls, according to the media it's 28 or 27 or 29 states that will be in the red in 2009. That doesn't sound too bad.

If 30 states have deficits then 20 must be okay, but we should consider which states are in trouble. State budget problems are generally worse in the more populous states on the coast, for instance 2009 projections for California call for a $22 billion short fall. That is over 20% of general fund expenditures. New York and New Jersey and Florida each have projected short falls of about $5 billion which is about 10% of each their general current budgets.

Of course that all translates into pressure on Medicaid. All of the states combined are estimating an increase of 3% to 4% in Medicaid funding. Only seven states are projecting decreases and estimates of over 10% increases in Oregon, Ohio which are kind of outliers, I find unrealistic. Here at LTC, we spent time with current and perspective customers on the ground in their locations. In general, the mood is upbeat and it is much more subdue than it was a year ago, however.

Occupancy and reimbursement have been good for quite a while. Operating margins are okay. Specifically, Florida has its unique economic structure and so its own unique problems, which all seem to be hitting at once. At LTC we are pleased that many of your Florida buildings are assisted living and our rent per Medicaid bed is relatively affordable. Texas is notably optimistic. That economy is vibrant and growing on oil and agriculture.

In the words of one long-time Texas nursing home operator, Medicaid reimbursement has been in Texas so long -- so bad for so long, it can only get better. I think that is probably true. The energy states like Colorado, Texas and Oklahoma which get as much as 10% of their state revenue from oil and gas extraction taxes as thriving. But more state budgeters are turning red. In the last month, realistic estimates in Washington show a switch from a $2 billion surplus to $2 billion short fall for 2009.

All operators are concerned about a capital shortage, construction financing has all disappeared and some operators are alarmed. Those that have broken balance sheets or have refinancing options limited in more expensive than here to for our taking note. And we think that will be increasing opportunity for us. Assuming we keep our discipline, which we will.

Thank you, Andy. I mentioned that we continue to do our capital improvement program. We continue to work with our current operators to invest in properties to improve services or to expand the property and I am going to ask Clint to talk about some of the projects that we have currently going and we funded a bit so far this quarter already.

That is correct. As of June 30, we had $2.25 million of remaining commitments for renovation projects that were currently in process. Subsequent to quarter end, we have advanced approximately $600,000 in July and we anticipate advancing approximately an additional 800,000 in the third quarter.

At the end or during the second quarter we also entered into a lease amendment with Sun Health Care to provide a $2.5 million capital commitment to renovate a property in Alabama. We anticipate that project to commence in the next couple of months and we are currently anticipating that it should be completed within 12 to 18 months thereafter.

Additionally we are currently working with two lessees and starting additional renovation projects which should each be in the tune of about $.5 million should they come to fruition. In fact some of these have come from lessees on starting additional renovation projects which would each be in the tune of about $0.5 million, should they come to fruition. We've also noticed an increase in inquiries from our leesees about the concept of funding renovations projects.

In fact some of these inquiries have come from leesees that we previously had discussions with but at the time they thought our rates were too expensive but now would like to consider using our funds. The funding project has been very successful for LTC and its lessees and we continue to hope -- expanding this program.

Thank you, Clint. We still believe we will be able to meet our FFO estimates for the year. We have all of our line of credit available. We have on our balance sheet any time approximately, well right now about $15 million of cash.

We expect about $6 million of loan pay offs during this quarter. We have as I said, fully our fully undrawn letter of, line of credit for $8 million. We don't have any debt payments left this year. We have our next payment is due.

We can prepay earlier.

Yes. We have our next actual payment is due on 10/1. That's about $8 million. So we can prepay that early which we probably will do because the interest rate is fairly high. Then we have two other payments at the end of the year in December, one is $6 million the other is about $9.8 million.

So we don't have significant maturities coming up. We continue to have adequate liquidity, we continue to our standard underwriting criteria. We are very clear about our cost of money, which we are still trying to hold onto in terms of our standard. We believe that an investment rate of between 9% and 10% is where we will be able to make investments in the future. As Clint said, we have looked at some deals, some of them haven't had enough credit enhancement available.

Some of them have had problems such as unpaid payroll taxes that we have walked away from in the situation. But we are getting more and more deal flow and looking at more and more transactions, and we look far to converting some of these transactions into deals during the third and fourth quarter.

Thank you for your attention and I will now open it up to questions. Operator?

(OPERATOR INSTRUCTIONS). We will pause for a moment to compile the Q&A roster. Our first question comes from the line of John Roberts with [Hilliard Lyons].

Hi, Wendy.

Hi, John, how are you.

I'm fine. How about yourself.

I'm just great.

Good. First on your web site you still have Tony out there as the analyst.

We will fix that.

You might want to add me. I have a tough time with Tony since he's playing tennis all the time now.

And he still doesn't have a cell phone or e-mail or anything like that, right?

He has an e-mail but I don't think he has a cell phone.

Alright.

Operating other expenses they dropped significantly this quarter. What kind of run rate are you expecting there?

Pam, did you look at operating other expenses.

Yes. I think between 1.5 and 1.8 is a good run rate. That's typically, it is the timing of certain expense approximates. First quarter is always a little high because of the taxes and things that are associated with the annual bonus that gets paid in January.

Okay. On acquisitions you said 9% to 10% cap rate.

Right.

Properties versus loans.

We don't differentiate, we do either.

Okay.

And when you say cap rate, the way we look at cap rate, we take our interest rate.

Yes.

It is different.

Right. But i Mean on properties you're probably looking at the low end of that versus mortgages the high end, would you say?

Yes. And property definitely properties with an operator that we are comfortable with and know and a newer property rather than an older property. Again, we would like to look at a property that can use additional capital once we acquire it. So those are all taken into consideration.

Do you have any thoughts on the amounts going forward for the remainder of the year?

We are still hoping to do 40 million for the whole year. Our target was ten million a quarter. We did 6.4 this quarter and then the capital that we put into our own properties.

Yes, all close to 900,000.

So we got a little short on this quarter for the ten million a quarter. So we'll have to make it up in the next two.

Do you expect to still do 40?

I hope so. I mean I really, I really think the deals are coming around. But we are, I don't see ourselves reducing our underwriting standards.

Keep doing that. We don't want to see you put anything on the balance sheet that's going to end up bad.

Right.

Financing for those are you going to use the credit line or more likely to fix them?

Initially I'll use the credit line because of the quick closing process but I can fix it fairly quickly after that if possible because the credit line even at 80 I am hoping we blow through that in the next year or so. But we don't like to have debt outstanding.

True.

And so we'll -- the Capital Market seem to be available to us right now and to other REIT's of course right now and while we probably couldn't do a straight debt, an unsecured straight debt or it would be more difficult, we are told that the convertible debt things are still available.

We have been looking at ways to raise money if we need to. Plus I think as we get the deal flow going we will be able to upsize the line from 80 to 120. We will get other banks coming in.

That sounds good. Any thoughts on what you would get on a fixed rate debt right now?

We looked at a fixed rate debt, no. Nobody has asked us or nobody's talked with us about a fixed rate debt. So no we looked at a convert and they gave us three different it was like 5% and it convert up 20%.

So I think it was five and 20. So at that point I think our stock was at 26, 27 and so they were saying with a 20% increase or 20% premium on the convert, the interest rate would be between five, 5.25 something like that.

Okay. And what you would have to give, it would be a convertible piece of debt where -- ?

Yes.

Up 20% they would you would convert into stock?

Correct.

Okay. You mentioned $6 million in loan pay offs this quarter. That's any thoughts on what you are going to lose on an interest basis on those pay offs? What type of interest rates are we getting on those loans?

The origination, the rates were somewhat similar, so I think the origination.

T think he's asking about pro forma.

Right.

We're getting six million paid off this quarter.

Right.

And what was the interest rate on that?

Anything.

You probably, I think the blended rate would probably be around 10% on those. If we can't put that six million back in place we will be losing about.

Yes, 600,000 dollars annual.

Yes.

Now, you mentioned you had $8 million in potential payments on debt October 1st. That's October 1st of this year?

No, no. Next year.

I thought, bechase I was looking at the debt schedule and you basically paid off everything this year, right?

We have.

Right, and that $8 million is at what rate?

8.43.

8.43.

Okay. Then you have another six and 9.8 also in December of next year?

Right.

Is that potential early pay offs or is that due in that point?

It is due in December. We can pay it off in.

6/1.

We can pay it off half the year, six months earlier.

Okay, and I assume you will.

At 8.81% probably.

Yes. All right. Very good, thanks, Wendy.

Thank you, John. And we will fix the web site.

All right.

Our next question comes from the line of Peter Costa with FTN Midwest Securities.

Hi, Wendy and Pam.

Hi, Peter.

Can you tell us a little bit about the transaction that were open at the end of the first quarter? Are they still open or are they not things working on anymore? There was a $2.5million facility in Georgia and $8 million of other SNF facilities. And are there any other facilities out there you are working on you can talk about?

Yes. The $8 million we stopped working on because of problems such as employee. Payroll taxes not being paid as we were doing due diligence we found some of those issues. The 2.5 million we have signed up that's the Sun transaction.

Currently we are getting information from a couple of calls that came in the last couple of day, properties, I think they are all -- well there are [ALF] properties. I am not expecting that we will be able to do much in the terms of [ALF] properties because the prices are still have been high but the SNF properties seem to be coming down.

I wouldn't put a number on anything we are currently work on but we have a lot of things we are looking at right now.

So more likely something in the SNF area than assisted living area?

Absolutely. We will be doing SNF deals before [ALF], but anybody out there with [ALF] assets do not be deterred to call us.

The reason for the greater likelihood of SNF deals is that because of the prices are closer to where you would want to be investing in them or is that because of the number of deals out there?

Well, both and the fewer people interested in investing in SNF. I think even though there's a couple of REIT's that is are coming to market that are going be SNF oriented, still the bigger players are not, have not changed their strategy to look at SNF activity very much.

And I think that some of the banks have decided that as the loans come due they would prefer getting paid off rather than re-up on the SNF properties. So that's why I think we are going to be seeing and just based on the number of calls we are getting more SNF calls than [ALF].

Has there been any changes from FHA financing and anything like that in any of the areas in terms of either your own financing or the financing creating opportunities for you?

No, not specifically, that we have recognized.

Okay. Thanks.

Okay. Thank you, Pete.

(OPERATOR INSTRUCTIONS). Our next question comes from the line of Jerry Doctrow with Stifel Nicolaus.

Hello.

Hello.

A lot of the stuff has been answered. I guess a couple of things, just overall sense you've clearly have a bigger line in place. and that sort of thing, Wendy. If you go out sort of thinking further, even at least start thinking in '09, you have got the capacity more. Is ten million kind of just a comfortable number or you think you can ramp up? I know it is all dependent on deal flow.

Absolutely. I think ten million is a comfortable number. We have looked at bigger transactions this year, Jerry and I am not adverse to doing a bigger transaction but they're not quite where we want them to be yet. So, yes I am not adverse to doing a larger transaction and we are looking at larger transaction but we seem to be able to do close to ten million and that is sort of the comfort I want to be able to give that we will be able to do.

And again I think you addressed this before but anything you would do on the debt side, credit line and then you talk about rolling to convert or some of other sort of debt sort of debt instrument rather than doing equity. Is that the right way to think about it?

I'm not sure. It would be based on the market at the time.

Okay.

So, I'm not adverse to doing what's the best thing for the Company in terms of finances. We certainly can afford the balance sheet, and I would think based on it would be a function of the return to the shareholder. What I think is the best return to the shareholder

Okay. We have a couple -- just you talk about a couple of the pay offs. We have a couple of pay offs built into our numbers, just a little further out. I want to confirm they're still there. There is like a 3.3 million loan pay off in 2Q '09, a $12.3 million 4Q '09 Those still accurate?.

Loan pay offs or mortgage pay offs.

Yes, mortgage pay offs.

I am sorry. What did you have, Jerry?

It was like 3.3 million 2Q '09, 12.3 million 4Q '09.

2Q '09. We don't have anything in 2Q '09 and 4 Q '09 we have 12 million.

12 million, okay. Great. Okay. And I think the only other thing was sort of bouncing around was interest and other revenue. Maybe if you could just -- Pam could just clarify, what's in that? Whether it is just interest on cash or securities or what's going on and last the right run rate maybe for those lines?

It is most of it is the interest on our invested cash balances. We have our interest income from the skilled health care bonds. I think probably 500 to 600,000 a quarter is probably a good run rate.

Okay. Per quarter And last thing I have is just, ALC, I mean that was the one in your portfolio where coverages and stuff were a little thin as a public company. Just any color that you can give us on sort of their performance?

I think they have a little bit, we had our property review person go out and look at the properties that he looked at last year. They've had a bit of an increase in census with some properties. I haven't seen their -- I tried to get a meeting with [Lori], who's the CEO of the company. She was on maternity leave when I called not that I was concerned or anything but I was in the Midwest and thought I would go in and talk to [Lori].

I just generally think that we, I don't think we have gotten their quarterly financials yet so I can't say. I know somebody was on a conference call with [Extenda Care] and asked [Extenda Care] whether they were on the lease with assisted living and they said no and then CFO corrected them and said yes. So I know [Extenda Care] recognizes the fact that they're a credit enhancement to our lease with assisted living concept. They continue to put money into our properties.

We get evidence that they've replaced carpeting and painted rooms and that sort of thing. So until I see their quarterly financial information I don't have anymore information on them. I don't have anymore concern other than the fact that they're just not doing that well in some of our properties but they still seem to have a good balance sheet and don't seem to be in financial distress just operational.

Okay. Thanks.

You're welcome, Jerry.

And there are no further questions at this time. Do you have any closing remarks?

No. Thank you very much for attending. I guess I do.

Thank you very much for attending again our conference call and we look forward to talk to go you in the third quarter and I look forward more to being able to issue an 8-K about a large transaction. But I'm not saying we are I'm just saying I'd look forward to it.

We will talk to you or give us a call if you have any other specific questions. Thank you and have a good weekend.

This concludes today's conference call. You may now disconnect.