LTC Properties Inc (LTC) 2008 Q3 法說會逐字稿

Good afternoon, my name is Laura and I will be your conference operator today. At this time I would like to welcome everyone to the LTC Properties third quarter 2008 analysts conference call. After the speakers' remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS)

As well, I would like to read this to you, 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 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 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.

Miss Simpson you may begin your conference.

Thank you. Good morning and afternoon. Thank you for joining us for our third quarter 2008 earnings call. With all of the financial market destructions we continue to be cautious with our balance sheet and our leveraging. We are waiting, as it would appear most of the financial world in REITs are waiting, for someone to do a deal to establish a market again and I'm not sure when that's going to happen. Right now it would appear that cap rates of the last few years are definitely too low and will need to change upward, as we have been saying consistently in the past. This quarter we missed our projections due to defaults of operators associated with Sunwest Management. During previous earnings calls, I have discussed our concern over the financial viability of Sunwest businesses. In mid-August we issued a form 8K and disclosed the defaults on the master lease and the two loans with entities controlled by Sunwest Management. I will now ask Pam Kessler, our CFO, to comment on our third quarter and then I will comment on the current status of the Sunwest investments and what we are seeing for the fourth quarter.

Thank you, Wendy. As Wendy eluded to, revenues decreased $852,000 during the quarter due to the following. Rental incomes decreased $545,000, primarily due to Sunwest. $416,000 of August and September rent was not paid and we wrote off $124,000 of straight line rent receivable due from Sunwest. Straight-line rent net of amortization of lease inducement costs and the Sunwest write-off, was $585,000 in the third quarter. Excluding the Sunwest writeoff, our straight line rent net of inducement costs was $709,000. Cash rent from a Sunwest master lease of Bakersfield and Vacaville was approximately $208,000 per month. Mortgage interest income decreased $131,000 due to the Sunwest default on a loan secured by a 140 unit independent living property in Ft. Worth, Texas. Interest from Sunwest mortgage was approximately $44,000 per month.

Interest and other income decreased due to lower interest rates on our overnight investments of cash and lower miscellaneous income. Operating and other expenses increased $104,000 during the quarter due to timing difference of miscellaneous corporate expenditures. Fully diluted FFO per share was $0.45 this quarter, as compared to $0.48 last quarter, almost all of that decrease is due to Sunwest. Going to the balance sheet, we invested $1.6 million in capital improvements at a weighted average yield of approximately 10.3%. We received $2.3 million from three mortgage loans that paid off and $1.1 million in scheduled principal payments on mortgage loan receivables. We paid $838,000 in debt issue costs related to the renewal of our three year $80 million unsecured credit facility. That was done in July and we discussed that in the last conference call.

Prepaid expenses and other assets continue to increase due primarily to the straight line rent receivable asset increasing. During the quarter we had 6,968 shares of preferred E stock convert to 13,936 shares of common stock. Subsequent to September 30th, 6,642 shares of preferred E converted. So at the end of October there was 39,000 shares of preferred E Stock still outstanding. During the third quarter we paid $12.8 million in preferred and common dividends.

Thank you, Pam. Pam will be available for any specific questions when we get into the question and answer period. Turning to the Sunwest investments that we had, we are close to having a new master lease signed for the two Sunwest assisted living properties in California. I will not give any details on this lease because it's still in negotiations and during these times I'm not -- I'll not be surprised with parties back out of deals. If this goes as we hope, the new operator will be in place as of December 1st. We will commit CapEx dollars that has no increase in rent and CapEx dollars that does have some increase in rent. Sunwest did such a dismal job of operating these properties that the pro forma's done by potential bidders and operators did not come close to the rent paid by Sunwest. There are census building needs in both properties and in this economic environment a new operator would be ill advised to take a jump to an aggressive projection of census building in an assisted living.

The operator we're negotiating with is a well established and credit worthy operator, who we do not currently have an association with. When these properties are leased, we'll consider issuing another 8K in order to give investors adequate disclosure. I do not want to get into the vortex of issuing 8K's for everything we do, but with counsel's advice, if this is not going to cause us to establish a pattern, I think we will probably do the 8K and hopefully we can get that out before the end of this month. We also had two mortgages with Sunwest. One of the loans was for $1.5 million and it's been assumed by the individual investors in that property. They're called TIC investors. So the TIC investors came to us and asked us to allow them to assume the mortgage on the assisted living property in Mesquite, Texas. We got their financial statements, Clint worked with them over a weekend.

They all faxed in their financial statements, they got the loan including all of the default fees and costs current, they prepaid the November mortgage and we have finalized all the documents and they have assumed that loan. They're working with Sunwest to bring in a new operator and we are very hopeful that that loan has been assumed by the appropriate people and we will not have another problem with that loan. Relative to our investment in the independent living in Ft. Worth, Texas. We foreclosed on that property in early October. The loan was approximately $4.7 million, that represents a $33,600 investment per unit in that property. Because it's an independent living property, we did not have any licensing issues, so we've reached a verbal agreement with a small Texas operator to take over operations on an at-risk basis. We're currently working with this operator to establish a budget and a rent stream.

Right now, as in the two lease properties, census is very low and there are CapEx dollars that will be be needed. Rooms need to be renovated in order for them to be ready for the lease up. We've had our consulting engineer and a local contractor go over the building and we're working to establish a CapEx budget. We do not anticipate that to be a significant CapEx budget. And significant I mean less than $750,000. We are impressed with the administrator of this property, who is most recently brought in by Sunwest. She's very eager, she's very hopeful on the property and she's very happy to have a source of funds to pay vendors and staff and that will go a long way. Moving to non-Sunwest matters, we've been notified by a borrower that they will be paying a mortgage early. We expect to receive proceeds of approximately $2.4 million this month. The loan had a rate of approximately 11%.

This is a loan that had been on a property where the operator, I'm trying to think of the name of the operators, California operator went bankrupt a couple of years ago and so we were very happy to have the new operator come in and assume the risk. But not as happy to have them prepay the loan. However, we gave them that option when they came in and took over the property and they are exercising that option. In 2009, looking forward to 2009 we still have just $23.7 million of debt that comes due. We currently have cash on hand at any point of between $18 million and $20 million dollars. We still have our unused line of credit of $80 million. We talked to you last quarter about the fact that we renewed that line of credit in July. It's for three years, it's unsecured, and we have a $40 million accordion. But with the credit availability the way it is, I'm not counting on spending that really soon. However, we do have sufficient liquidity to meet all of our obligations.

What I'm worried about now, you may be asking. Well, it's Sunrise. I think back to the dark days of 2000 and the beginning of our problems with Sun Healthcare, which is now doing great. Then we have Sunwest. And now I'm looking askance at Sunrise. We may delete anything with sun in its name. Specifically about Sunrise, we have six properties, five in Ohio and one in Pennsylvania. I know I've mentioned them as a concern before, but now with the market value of Sunrise and it's possible financial issues, I'm even more cautious about these properties. On a good note, we have Sunrise's parent -- the parent is full effaced credit and the properties have fairly high census. For instance, the lowest census is about 76%. The highest census is 99.78%, with the rest in the middle in the high 80s. The 99.78% census property reported on the internal financials given to us that they lost in nine months $450,000 dollars after management fee and rent. This is astounding.

And I've commented on the comparison of Altera's cost structure to that of Sunrise. These properties should not be losing money. Of the properties we have with Altera, they report their costs to revenues are about 63% before rent. Sunrise is 77.5%. On Monday I'm leaving with our property inspector consultant to visit each of these properties. To be clear, Sunrise has not defaulted nor have they asked for any concessions. They promptly pay rent, they submit their financials and respond to all of our letters about maintenance. We just are going to be more vigilant on these properties. We are seeing more deal flow, but have not signed any binding transactions. A couple of the current operators have approached us about capital to improve properties that they were not interested in improving previously.

These are all snip properties, we haven't been approached by any of our assisted living operators to invest any dollars in their properties. We are working with an operator on a transaction that might close this month. The transaction is in the $25 million to $30 million range, depending on CapEx and other issues. It's a new operator for us and I don't want to give any more specifics about it. I am finding that transactions where operators who have financed their operations with lines of credit that require subordination of the lease to the line of credit are difficult and tricky to underwrite. This is a relatively new issue to us and we're going to go carefully into this underwriting. In summary, we continue to be poised to take advantage of these markets and will raise capital when we need it and it is reasonably priced. We are still looking to get returns higher than 9%. We would look at assets in the LTAC and acute care area.

I have a background in both LTAC financing and operations and in acute care financing. I think we could successfully underwrite either. We might be interested in establishing a TRS, but only on a small basis. I believe it's not advisable to expose LTC as a REIT to material operational fluctuations. But given this as a opportunity to take on another type of business, I think we might establish a small TRS with a operator to establish some new business. We continue to be open to other transactions, such as purchases or mergers of us with other REITs. We've not been approached. We have not approached anybody and I'm not announcing that we're for sale. I'm just saying we're open minded as we always have been. I will now open it up for questions. Operator?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of John Roberts. Your line is open.

Hi, Wendy.

Hi, John.

How are you doing?

Doing all right, how about you?

Not bad, thanks. You answered most of my questions, unfortunately, you were very thorough in your presentation. I was going to ask you about Sunrise and then about acquisitions.

Okay.

It looks like the only acquisition potential in a near-term is this $25 million to $30 million deal, I would assume.

That's all I think that we would probably be able to close before the end of the year, yes.

How about -- I know it's a big if, because you don't know when the credit market is going to open up properly, but any thoughts on what you might look to do next year? What you would be pleased to do next year?

What I'd be pleased to do next year? I think I'd be pleased to do between $30 million and $50 million. But I think we would have the opportunity to do a lot more. I do think that the pricing is coming our way. But if the capital's not available, I mean -- I'm somewhat peeved that we have minded our store appropriately and the capital markets -- we knew this would happen, we knew that when the capital markets closed they'd be closed to everybody.

Yes.

So if the capital markets opened, hopefully, we would be as competitive as everybody else coming back into the markets.

Well, the capital markets may be closed, but you seem to have all the liquidity necessary. Are you uncomfortable drawing down on the line, is that the problem?

No, I'm not uncomfortable drawing down on the line. But I will have to use -- if I use $25 million to $30 million for an acquisition, than I'll have to use $24 million to pay down debt next year and that will leave us with just $50 million without going into the accordion.

Yes.

And we're not -- we don't generate that much free cash flow, $2 million a month. We do have some maturities coming due next year on some loans, so I factored that in. But I wouldn't like to be strung out at the last dollar on my line of credit.

Sure, especially not -- who knows when this credit market is going to open up. You wouldn't want to get into that type of situation.

But our banks, Bank of Montreal, KeyBanc, Royal Bank of Canada and [Ray J], I think they are all in pretty good shape. So I'm not too concerned. Maybe when we want the $40 million or can use the $40 million, they'll step up. I would just be reluctant to say now that we would issue equity or we would be able to do any public debt.

Fair. I know you've been -- you had bought back preferred in the past. And I noticed it had gotten pretty low here over the past month or so. Have you been buying back any preferred?

No, I haven't bought back preferred or common. And I looked at the common again today, because when we're in quiet periods we can't look. Again, if I do the $25 million transaction, I wouldn't buyback as long as I have anything outstanding on our line. So I wouldn't use borrowed money to buyback our stock.

Finally, you threw a little curve ball in there, that looking for deals or potentially -- although, you're not putting yourself up for sale, would potentially talk to people if they came. Do you feel that at this point, given the situation in the capital markets, you just need to be bigger to really be able to do what you'd want to do?

No, I -- well, I don't think so. It's just the question that has been asked. We take calls from people during the time -- between the times that we have these calls and they just asked us, so I said, we're -- we have always been willing to talk about transactions, but we've always come to the point where, unless somebody's paying cash for our shares, it's difficult for us to evaluate doing a deal for our shareholders or recommending to our shareholders anything but getting cash that they currently have. So, if -- I can't conceive of who has enough cash to do the transaction, enough appropriately leveraged cash to do a transaction to buy us, but it's -- I want to say that as a Company, we're open to maximizing our shareholder value.

Sure. Obviously, in this environment, nobody has the cash to be able to do that, I don't think.

No, but -- well, I don't think so.

Yes. All right, Wendy, thanks.

Thank you, John.

Your next question comes from the line of Peter Costa, your line is open.

Hi, Wendy.

Hi, Pete.

I was a little surprised at the Sunwest properties, you weren't able to get those back at the same rental rates. I guess I'd been under the impression that those facilities were still running at a pretty good rate before. And that when Sunwest defaulted it was not specifically tied to those facilities. You've had them for a while now, so I think the lease rates would be something you can match. How many other properties do you have that problem and it seems like maybe you lost track of them a little bit or that they got a little away from you in terms of performance?

No, we've been disclosing that they weren't covering, so they weren't -- we -- what we did say was they're good assets in terms of the physical properties. But when a property is run down in terms of its -- what Sunwest did was overpriced their product in the market. So there has to be a little reduction. They were cash flow positive before rent in these properties. I don't have -- my concern, as I said, is on the Sunrise properties right now. They have much better census than the Sunwest properties had. But I'm -- I'm going out to look at the properties. I'm not sure that many people could lease the Sunwest properties or anybody could lease the Sunwest properties at the rate that we were getting for them?

Are you building in something as the census improves in those facilities so you can capture some of that?

There's a very big step-up after this first year and then after the second year.

Okay.

But as I said --

And can you describe what that step-up is and how it exactly works?

It's a stated amount. So let's say, and I'm going to use these numbers and it won't be anywhere close. Say it is $500,000 a year, the next year it's $750,000 a year, but those aren't close to the numbers, the numbers are much higher. But then in the third year, it has another step-up that's just a stated step-up, so in that range it might have been 75 -- 500 to 75, and then 1.1 or something like that and then after that there's a stated 2.5% or 3% -- 3% increase every year. So the first year is like a lease-up year and an additional cost for the operator type year, then there's a step-up closer to what the Sunwest, what Sunwest was paying us, and then in the third year it's almost what Sunwest was paying us.

That's helpful. Thank you very much.

You're welcome, Peter.

Your next question comes from the line of Jerry Doctrow. Your line is open.

Hi, it's actually Dan Bernstein filling in for Jerry.

Hi, Dan.

Hi. I just wanted to go over the Sunrise properties a little bit more. Are those properties now covering their rents?

No.

And are they all assisted living -- I assume they're not the mansion styles?

The mansion styles?

Sunrise AL mansion style properties?

No, these were all Carrington properties. They're not covering after their -- even before -- no, after their management fee. They covering before management fee? I don't have a calculation of covering before management fee.

What percentage of the rent is that for you?

What percentage of the rent?

What percentage of your total rent is Sunrise.

7.9%.

Are there any other operators without the name Sun in them that you are worried about?

No, we still have this operator in Colorado, who I talk about every earnings call. I referred to as this valiant -- well she has given up the fight and we have got a new operator in there who's going to be bringing that back on stream. Very very small number, like $15,000 a month rent, or something like that. Very small.. But other than that, we don't have any other operators. Altera seems to be doing well. Assisted Living Concepts. I read your reports about Assisted Living Concepts and I'm happy to see that their census seems to be going up. But again they're underleveraged. They seem to have good census. Improvements in our properties, they put money into them, they've never been a concern relative to their financial viability. So that Assisted Living Concepts is not covering very well. But I'm not as concerned about them as I am concerned about Sunrise.

And just turning to the investment side. When you say 9%, is that low 9% or high 9%. Has that range moved for you? When we talk to a lot of the other REITs their range for what their threshold might be has moved up significantly in the last few months.

Yes. Well, I think for the right deal that a lower 9% would be accretive to us, with what our capital structure is right now and our borrowing capacity. We can borrow at 1.5 over LIBOR or 50 over prime. And so at those rates and taking a guess that we'll be able to finance them on a long-term basis before the end of three years, we can still do a certain amount of transactions in the 9% to 10% range. If the other REITs move the bar up to 10% or better, we'll be happy to move with them. But with our current capital structure, availability of cash and leveraging, I think we might be able to do some accretive deals in the low 9s to 10s.

That's all the questions I have. Thank you.

Thank you very much.

(OPERATOR INSTRUCTIONS) At this time there are no further questions. Do you have any closing remarks?

I do not have any closing remarks. Thank you, Laura. I just want to thank everybody for being on the call and look forward to seeing anybody who's on the call that's going to the NAREIT conference in San Diego in the next couple of weeks. Thank you very much and we'll talk to you after our year-end results. Bye-bye.

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