LTC Properties Inc (LTC) 2008 Q4 法說會逐字稿

Good morning, my name is Sarah. I will be your conference operator today. At this time I would like to welcome everyone to the LTC Properties year-end conference call. (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 risks and uncertainties which may cause the Company's actual results in the future to differ materially from expected results. These risks and uncertainties include among others, general economic conditions, the availability of capital, competition within the financial services and real estate markets, the performance of tenants and borrowers within LTC Properties portfolio, and regulatory and other changes in the health care sector as described in the Company's filings with the Securities and Exchange Commission.

I would now like to turn the call over to Miss Simpson, Chief Executive Officer of LTC Properties.

Thank you, Sarah. Good morning and good afternoon and thank you all for joining us for our 2008 year-end conference call. I'll make some brief comments on our fourth quarter and our year and then Pam Kessler, our Senior Vice President and CFO, will give you more detailed analysis of the quarter and the year.

Basically we reported for, after the close of the market yesterday, a fully diluted FFO for the quarter of $0.42 per share and for the year $1.86 per year. That is not including- - if you did not include non-cash compensation charges, these amounts would have been $0.43 and $1.91, respectively.

Also in the quarter we have some expenses that could be viewed as one-time expenses, such as legal expenses for deals we did not consummate and for some lingering costs for our Sunwest properties. When Pam gives her analysis, she'll provide you with some more specific details on those amounts and other small amounts.

During the quarter we did complete our redeployment of the Sunwest properties. We had two owned properties in California. They were both assisted living properties. We transitioned those properties to the operated by Emeritus and Emeritus began operating those properties on December 1. So they are under a long-term master lease with Emeritus and we are very pleased to do have Emeritus as an operator.

We did foreclose on the one independent living property in Fort Worth, Texas, that Sunwest had a mortgage on. We have that being operated by a small local operator. Independent living is probably one of the most challenged levels of care at the moment because of the economic situation.

We've provided a certain level of capital to be available to this operator to remodel the property, to put up some security fences, to get it more into a defensive or competitive situation in that area. Right now the operator is - - has done quite a bit of remodeling in the interior and is working on the exterior fencing and is developing a marketing plan for that property. We foreclosed on it and so it moved from a loaned to an owned property during the fourth quarter.

The last property we had with Sunwest was an assisted living property in Mesquite, Texas. The TIC investors in that property assumed the loan and have paid the loan up to date, have paid all of the charges and late fees, and are current on their loan. So we have no further exposure to Sunwest other than pursuing our claims against the various entities for the defaults of those properties.

When we last had a conference call, I mentioned that we were looking at an acquisition in the fourth quarter that I estimated to be in the $25 million range, or so. We were fairly well along that acquisition path and the financial markets, as we knew them, came to a screeching halt. So we agreed with the other party to cease our negotiations. We agreed on very friendly terms. Neither party has an obligation or a commitment to restart negotiations, but I believe it's a possible transaction that we would look at in the future, and I am hopeful that we could look into that area of investments. It was [LTAC] rather than Smith's for assisted living. But we did stop that transaction at the end of last year.

As a result of not completing that transaction, we incurred some legal costs, of course, and some due diligence costs. And I think the result of those costs, and not having the acquisition and any increase in FFO may be a cause for us missing our FFO estimates by some of the analysts that follow us. During the quarter, we did not purchase any of our common stock or any of our preferred stock even though we do have still an open authorization to do that by our board. And as we have in the past, we do take the opportunity when the yields are high for us to repurchase our common or our preferred Fs in the marketplace.

Now, I'll ask Pam for her comments on the quarter, and then I'll come back after Pam's comments and talk about what I see for 2009 and give you some guidance.

Thank you, Wendy. I'm going to talk about quarter-over-quarter, since the year-over-year analysis is in the 10-K that was filed yesterday. Revenues decreased this quarter over last quarter $339,000 due to the following, rental income increased $143,000 primarily due to the fact that in the third quarter we wrote-off $124,000 of straight-line rent receivable due from Sunwest. In the third quarter we had one month of Sunwest rent at $208,000 and in the fourth quarter we had one month of Ermeritus rent of $150,000. That's $58,000 lower on a monthly basis and $700,000 on a annual basis. This decrease in cash rent was offset by $75,000 of normal rental rate increases due to step ups.

Same store rental rates increased 50 basis points quarter-over-quarter and for the year they increased 3.2% excluding defaulted leases. Straight-line rent net of amortization of lease inducement costs was $714,000 in the fourth quarter. In our supplemental, this quarter, you can see what we anticipate straight-line rent to be for 2009, and for 2010 we anticipate based on current leases in place assuming no new acquisitions, that straight-line rent would decrease $1.7 million from 2009. Mortgage - -

But then our cash would--

Cash increases, yes. For those of you doing the [fad] calculation. Mortgage interest income decreased $427,000, $251,000 of the decrease was due to the prepayment of two loans in the fourth quarter, resulting from sales of those properties. The prepayments totalled $5 million and resulted in $145,000 lower cash interest income and a write-off of $106,000 of effective interest receivable, that is essentially straight-line interest receivable. The remaining $176,000 decrease is due to the normal effect of amortizing loans, and our loans are amortizing about a $1.25 million.

Lower cash interest - - sorry, interest and other income decreased $55,000 due to lower interest rates on our overnight investments of cash. Legal expenses increased due to transactions that were terminated. Operating and other expenses increased $294,000 due to property tax escrow shortfalls from Sunwest and the Colorado property. Costs related to terminated transactions of $85,000 and changes in the bad debt reserve. We established a reserve for straight-line rent receivable of $140,000 this quarter, and our estimate is approximately 1% of the straight-line rent receivable which is similar to the reserve allocation we do on our mortgage loans receivable, about 1%. That's based on historical, what we have experienced historically over the past seven years.

Fully diluted FFO per share was $4.02 this quarter compared to $0.45 last quarter.

$0.42.

Sorry. $0.42. Excluding $630,000 or $0.03 per diluted share of one-time charges that were primarily related to Sunwest and Colorado property defaults and terminated transactions. FFO was $0.45 this quarter compared to fully diluted FFO per share last quarter of $0.46.

Geographically on the income statement where these one-time charges occurred was $100,000 in interest income from mortgage loans that related to the write-offs of the effective interest receivable from prepayment of a loan. $100,000 was in the legal expense line item, and $400,000 was in G&A, and that related to the property taxes and bad debt expense.

Moving to the balance sheet, we invested $112,000 in capital improvements at a weighted average yield of approximately 10% and $132,000 in capital improvements. That yields already reflected in the lease rate. We originated $1.4 million mortgage loan on an 84-bed skilled nursing property in Utah at an initial yield of 10%. We foreclosed on the $4.7 million mortgage loan in Fort Worth, Texas, that Wendy talked about with Sunwest. We received $5 million from two mortgage loans that paid off and $1.1 million in scheduled principal payments on mortgage loans receivable.

During the quarter we had 6,642 shares of the preferred E stock convert to 13,284 shares of common stock. At year-end, there were approximately 39,000 shares of preferred E still outstanding that could convert. And sorry. During the fourth quarter we paid $12.9 million in preferred and common dividends. At 12/31 we had $466,000 of gross unencumbered real estate assets on our balance sheet. This represents 93% of the gross book value of the properties that we own at December 31st. That's it.

Thank you, Pam.

You're welcome.

Right now looking at the year going forward, I can say that the deal flow seems to be almost non-existent. While we do get calls, mostly right now to consider loans, we're finding that the people looking for loans have not yet accepted the new reality of the changed market. We got a call the other day, somebody looking for a 90% loan-to-value on assistive living properties in New Jersey. We passed on that opportunity, but we are taking the calls, and we're looking at possible transactions. I don't see anything currently on our list of things we're following up on that I would say that we would complete in the first quarter of 2009.

We have had some additional inquiries from our SNF operators about investing in properties that we own and that they operate. These are inquiries that we hadn't had in the past, and so Clint is spending time with those operators and, in fact, is going out I think next week to look at some properties that we hadn't had an opportunity to invest in in the last couple of years. So I'm hopeful that we can spend a few million dollars in improving properties and investing money in our properties and getting some return on that.

Right now we're very focussed, carefully focussed on our assistive living properties to make sure that the repairs and maintenance of these buildings are being done by the operators. In a few instances lately we have seen heretofore inexperienced deferred maintenance. I will personally be talking to the operators about properties that need immediate attention. If the operator is having some cash flow problems, we'll offer funding under various terms, as it's appropriate in the circumstances. But all of our leases and all of our loans are current, and we have experienced no late payments.

Looking at Sunrise, which I've commented on for the last several conference calls. Sunrise continues to not cover their rents based on the financial information they've provided to us, and in former conference calls I've mentioned that if you apply a margin that other assisted living operators are experiencing to the Sunrise operations it would look like Sunrise would be profitable and would cover.

So what we did was we took the Sunrise properties and the analysis that they gave us, the financial information that they gave us, and we compared the costs with properties that are operated by Assisted Living Concepts in Ohio. We compared it on a per resident day basis and made some adjustments that we thought were appropriate relative to the fact that Sunrise is operating a slightly larger building than the Assisted Living Concepts building in the same state. I'm not saying that Assisted Living is the best operator, but they were the best operator financials that we had on a comparative basis.

So on that comparative basis, if we looked at the Sunrise properties on a cost-per-resident day, and adjusted their costs, instead of a .75 times coverage, they would have had a 1.68% - - 1.68 times coverage, and that's including a 5% management fee. I believe some other people quoting coverage used less than a 5% management fee on assistive living, but I'm using a 5% management fee. On an adjusted basis, Sunrise is just spending much higher in the terms of all employee-related costs and in administrative costs on things like utilities and insurance and that thing. And we didn't adjust for real estate taxes because of the relative values of the two types of properties. But all of the differentials seem to be an employee-related costs and in administrative costs.

We've had some unsolicited interest in those properties by other operators, but Sunrise has not defaulted. I experience - - I went out and looked at all of the Sunrise properties at the end of last year. They're well run, they're well maintained, they get back to us, and spend money in the properties. They don't cover, based on the financial information we gave us, I know they have some issues in front of them as a corporation. We're monitoring it and I'll continue to monitor the situation. So that's our Sunrise.

Assisted Living Concepts continues to not cover their rent. They continue to have very low occupancy in the northwest states as they continue their strategy of reducing their Medicaid population. They have recently released their annual results. They seem to have plenty of liquidity. I'm not concerned about their ability to pay. We have a couple of properties that we're going to be talking to them about relative to deferred maintenance.

Just to remind you, we have extended care as co-lessee on these master leases, and so I'm not concerned about Assisted Living Concepts' ability to pay their rent and we are going to be working with them very carefully to make sure that they're maintaining the properties and understand their strategy of increasing their occupancies in the northwestern states.

Alterra, which changed its name to Brookdale, still has very good coverage. Their coverage is 1.52 and that is using a 5% management fee and not adjusting any of their information that they gave to us. We have some deferred maintenance issues on some of their properties and we'll be following up with them to take care of these issues. We don't currently have any issues with the Brookdale properties. They have been always been very good operators.

For our large SNFs operator which is Preferred Healthcare, it is a non-public entity but it is ur largest SNF operator but it does show up in our financial information. So just to let you know, that they have excellent coverage of 2.01 times after using a 5% management fee.

As you know, we don't publish coverages. I comment on them with the understanding that the results are using their financial information as presented to us. This information is often not audited or independently verified by us in any way. If we made adjustments relative to the information to quote coverage, I'll let you know, and the only adjustments we made were to Sunrise that I commented on.

Moving to liquidity. We have approximately $20 million of cash on hand. We'll retire approximately $24 million of secured debt by the end of the year. In 2010 we have one maturity of $7.6 million. Of the $24 million we're paying off this year, we're going to consider - - we are considering doing some Fannie Mae financing, these same properties, if it's still available. I don't know what the loan to value or interest rate is, and I'm not sure what the climate will be when we look at this in the summer, but we are considering putting some more secured debt on these particular properties since they have been secured in the past. I think it's a good way for us to gain some more liquidity and it is also a good way for us to establish a relationship with this financing source, which we have not done any Fannie Mae financing in the past. And it seems to be a very good financing source for assisted living properties.

Additionally, we have our unused and unsecured $80 million line of credit. The interest rate on that is LIBOR plus 1.5. We'll also look at other liquidity opportunities as they arise, which may include a continuous offering program. This type of program is attractive to us because it provides us with a way to issue small amounts of common stock at a relatively low price. To 25, 250 spread , rather than a spread that is doing a very large equity offering.

I also understand how common shareholders may not like this type of a program because they could view it as creating dilution for them without advanced notice they would get from a larger underwritten offer. I can only assure you that if we implement this program, we have not done, nor do we expect to do, in the future, dilutive deals. We would use this program to issue common stock in small amounts. I mean, it would be impossible for us to issue $10 million worth of common stock in a fully underwritten deal and doing a $10 million transaction for us could be very accretive. And certainly it's very accretive drawing down on our line to do that $10 million deal, $20 million deal, whatever, but we always have to have a way of taking that line down, because it does expire in 2011.

So, I think that this continuous offering program would be very beneficial to LTC as a way of accessing the equity markets in small amounts to take out financing of an accretive transaction. So just to let you know, we are looking into that type of liquidity availability. Our bank line does not expire until 2011 and our banks are in relatively good shape. And I'm not sure what the market for bank lines will be in 2011, but right now I don't think we have any issues relative to our bank's ability to fund, if we make any draws on our bank lines.

Turning to 2009, at this time I give guidance between $1.87 and $1.91 on a fully diluted basis, and including our non-cash compensation charges. As a reminder in the first quarter of 2008, we had a $0.04 gain from the redemption of our preferred Fs, and so we're not including in our guidance any gains on any capital transactions relative to buying back any of our common shares or any of our preferred shares. The FFO run rate on our investments at this time is approximately $0.45 per quarter.

This guidance does not take into consideration any possible losses of rent or interest which I don't foresee at this point. It doesn't take into consideration any prepayments of loans. Our loans basically do not allow for prepayments unless the property has been sold. And we have experienced a couple of those situations where the properties has been sold recently, and so we have had some loan prepayments and so our interest income has gone down. My projections assume that all of our loans stay in place as they are right now.

We don't have any new acquisitions or any investments or any repurchases of any of our outstanding securities or any other unforeseen happenings in the guidance of $1.87 to $1.91. It does, however, include a reduction of our debt interest costs during the year. It will provide additional FFO as we pay off debt at 8.81% primarily using our cash on hand that's earning us almost zero interest. So we will get additional FFO in the second half of the year, as we pay off this debt. We've tried to pay off the debt early, but we can't find anybody who will take our money before its due date. So some of this debt will be paid off in June and some will be paid off in September.

We believe that we're positioned to be able to withstand the economic challenges as we understand them today. We're continually looking and talking to others about ways we can use our balance sheet and our abilities to complete opportunistic and accretive transactions. At this point I don't expect to have any change in our dividend during the year. Our board has not declared the second quarter dividend, but I can anticipate -- I don't anticipate in any way that this Company would be paying a dividend in stock as opposed to paying a dividend in cash.

I think the entire industry and the entire world is just totally on a wait mode to see what is going to be happening in the government stimulus and bailout programs. So far it seems like the Medicare/Medicaid programs are going to be supported. That's very good for our operators, certainly very good for LTC and our industry. And right now I can only say that we're watchful-waiting. We have our liquidity under control. We're looking at raising additional liquidity, and we're looking at opportunities in 2009.

Thank you for your time and listening to all of these comments, and I'll now open it up for questions.

(Operator Instructions) Your first question comes from the line of John Roberts. Your line is now open.

Hey, Wendy.

John.

First a little housekeeping. I think you mentioned $700,000 in lower rents with the Sunwest swaps. Is that on a go-forward run rate?

Were you just doing cash?-

I was just doing cash.

On a going forward run rate it is approximately the same because of straight-line, right?

Yes. It is. In the first year it is $700,000 lower than it was under Sunwest. In the second year it was $500,000 lower than under Sunwest and in the third year $100,000 lower than Sunwest and at the end of year 3 - -

But you're still doing cash?

Yes.

And on a straight-line basis it is not lower. Do you know? Do you have the straight -line?

No, I do not have the straight-line in front of me. Sorry.

Straight-line might be?

I believe straight-line is a push (inaudible) same.

All right.

(inaudible) more because Sunwest was coming in at the end of their lease, so their cash rent was higher than their straight-line rent where Emeritus (inaudible).

What is our accounting income from Sunwest as opposed to Emeritus?

From a straight-line, I do not have that in front of me.

We'll get that and we'll publish it somewhere.

Great. Thanks. You actually answered one of my questions, what happened to the $25 million investment? When you said both of you decided basically not to go along with the deal, and I'm surprised that you would have decided that given your liquidity. Did you have some reticence about using the credit line to finance it?

It was at an interest or at a yield of little over 9, and I thought that we would have opportunities in excess of 9.

Okay.

And so, no. It wasn't a reticence about - - about it was making a long-term investment at 9 at that point of the economy.

Got it. And any thoughts on what you would be looking at right now as far as cap rates go?

Yes, we're looking at 11 to 12 yields.

Okay. Boy, that's nice.

It is . And as I understand our competitors are quoting approximately the same thing in terms of looking at a deal. So we have always been in the double-digits and -

Sure.

And we've had to maintain our double-digits whereas I think it's comfortable that other people are now in our double-digit category.

As far as repurchases go, you mentioned you didn't do any repurchases in the current quarter. And it sounds like you're more interested in issuing stock rather than repurchasing at this point.

Well, for instance, John, if a loan advised me that they're going to prepay because they sold the property, and I was getting $2 million, $3 million, or something like that, our loans on a weighted average have about 11% yield. So I would look to use that $2 million to possibly buy back stock. Our preferred Fs are approximately yielding that. I haven't looked at market today.

But I would redeploy that money because it is long-term money, probably to buy back Fs. And if we had further softening of our common stock and the yield was in that area, I would buy back some common stock. Because the balance sheet assets are going down, and the equity should go down. I would only issue equity to take out a draw on the line for a large amount. I'm probably not going to issue equity for a million-dollar deal, but if we drew our line down by 10 or $20 million, I would start looking at maybe we should issue equity to make that a permanent investment as opposed to an investment under the line.

And you are going to do that depending on what the share price is, I take it.

Well, no, it would still have to be accretive to the transaction.

Right. What I'm saying is you would have to have the share price high enough. in order to make that call.

Absolutely. Absolutely.

Okay. You mentioned little bit that you're hearing from taking calls from potential borrowers, et cetera. Can you just go a little bit further into what these people are saying, what you're hearing, what they're looking for?

They're looking to take out often bank loans that they took in the last couple of years and the banks are not wanting to renew their loans. And so mostly it's local people who have financed using local banks, and they're still looking at very high loan-to-value ratios and very low interest rates. And a lot of them are - - they're looking for bridge loans, something like, well, what we want is we want a loan and we're going to try to HUD it or try to Fannie Mae it or something like that. And so people are looking for temporary money at this moment. And it would be a fairly unique situation where we would get involved with some temporary money.

Do you think potentially that creates some opportunities of some of these borrowers can't get financing for you to go in and swoop up some assets at good prices?

Yes. I mean , that's why we take the calls. It is always good to have a call, have a contact. And we we follow-up to see what they did. Where did they finally find the financing and we're very - - we don't do loss leaders. We say that this is what we need and we don't change what we need, and how we would view something. So we, yes, all of these are marketing opportunities, John,

Good. And, finally, I'll let somebody else ask some questions here. You mentioned the dividends. Obviously you've increased it now for four years straight?

Right.

My assumption there is no thought about increasing it this year in the current environment?

Correct.

Thanks, Wendy.

Thank you, John.

Your next question comes from the line of Karen Ford. Your line is now open.

Hi, good afternoon.

Hi, Karen.

First question is, you guys don't have any CPI-based escalators in your leases, is that correct?

We have - - I think Brookdale is a CPI escalator with a minimum of 2%.

Oh, okay. So you'll be at the floor this year, but you've got 2% in the bag there. Okay. Second question is does your guidance - - your guidance assumes that the mortgage receivable, the $7.6 million mortgage receivable is repaid in November, is that correct?

(inaudible) Yes, we do assume that.

Good. I just wanted to make sure that. Finally, just on Sunrise. Is a lease default the only opportunity that you guys would have to potentially replace them as an operator. Is there any other means by which you could do that, and have you had discussions with them, given their their issues, that since these properties don't seem to be profitable for them , that they would be interested in doing some kind of a deal with you

Yes, I've been reluctant to approach them, but it's something that I'm going to seriously consider. They would have to be proactive with us in doing that. I can't force them to do anything without a lease default. And I think that it might be, as you say, an opportunity to take a possible problem off of their plate. And they might be very accepting of an opportunity. And now that we've had some unsolicited offers to take a look at those properties, and I've got some other operators in mind that I would like to have look at those properties, it's something that I think I might be doing in the near future.

Thank you very much. Very helpful.

You're welcome .

(Operator Instructions) Your next question comes from the line of Rich Anderson. Your line is now open.

Hey, good morning to you, folks.

Hi, Rich.

Wendy, you mentioned double-digit returns. Can you distinguish between senior housing and SNF returns that you expect to get you interested in this story?

Yes, it's been so long since we've looked at assisted living because the prices have been really so very high. But it's really not - - it's a function of our cost of capital and a need to get a return. So it's - - I don't think I would be looking for a sub double-digit on an investment in an assisted living as opposed to a SNF.

I didn't think so, I just wanted to make sure of that. In the journal today there is a story, and talking about Obama looking at the Medicare Advantage plans, and trying to rein in some of what is perceived to be some waste in the Medicare business to private insurance companies. I know Medicare Advantage is different than Medicare reimbursement to nursing homes, but it is, after all, the same word, Medicare.

Right.

And I guess my question to you, you mentioned you feel good about the reimbursement outlook for your portfolio and for the business, but in light of balancing the budget, and all of that pressure that's on the system today, I wonder why you have that type of optimism?

Well, most of our operators are very tight into their states and into what's happening in Washington. We're not hearing they're all fairly comfortable with their reimbursement levels. Medicare - - I would be more concerned if we had a lot of Medicare-dependent SNFs. In the last several years a lot of people have invested in SNFs that are modeled, that they have to have a very high Medicare component. All of our operators, I'm sure, would like to have more Medicare coverage, but they - - I don't think we have any that are 100% or a high percentage dependent on Medicare. Right now I haven't heard anything, I haven't read that article, I don't know what Obama's budget plan is proposing.

I still think with our - - the margins that our operators are reporting to us in the SNF areas, and the fact that we have had these properties for quite a long time and our lease rates are very reasonable, that there is still a lot of margin between our rents and their profits. So I still think we have significant cushion in our operators if there is - - even if there are moderate cuts in the Medicare program.

Okay. Fair enough. And then , finally, I'm want to make sure I understood this. You talked about use of proceeds, or the potential to buy back stock, but then also the potential to issue small pieces of stock through those overnight or those pseudo drip things, I don't know what you call

Right.

But I mean does that not send a mixed signal? Explain to me why you can kind of talk or burn the candle at both ends of the candle.

Yes, I know. The underwriters wanted to know the same thing.

Yes.

I guess it is opportunistic. We have a certain amount of capital available and we need to deploy that to the best return to our common shareholder and the other stakeholders in our Company, as possible. And in certain situations, and we haven't bought back common stock recently, but in certain situations it is, I think it is appropriate for us to take money that's provided to us by an asset that pays off, like a loan, to buy back common stock. If I have no other place to put that capital, that will return to the common shareholders.

If the situation arises that our stock increases in value, and it makes sense to issue the stock to do a transaction, then for us to gear up to do an underwritten offering and to do an underwritten offering for 50 million, 75 million, when we don't generally have those transactions in front of us, or we haven't in the last couple of years. It's like I just think the Company should have every financing option available to it. And if we have the program, it's not necessarily that we have to use the program. But you have to get up to speed, you have to get it registered. You have to get all of these documents done, just in order to use it.

So I guess it's opportunistic, and I appreciate opinions on it. If it's going to cause a ripple in the market, and investors are going to find this untenable, that possibly we would be buying back stock or possibly we would be issuing stock, then I would take that under consideration. I was just thinking of the optimum way of having liquidity available to us to maximize a return to the shareholders.

Yes, I understand that, but I do think it's a tough spin to do both. I understand where you're coming from in theory, but I would guess you'll get some push-back on that, from people who think about it in more mathematical terms.

Yes.

Anyway, I just wanted to clarify.

Thank you, Rich.

That's all I have.

All right. Thank you.

There are no further questions at this time.

Thank you very much and thank you, everyone, for joining our call. Bye.

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