LTC Properties Inc (LTC) 2009 Q2 法說會逐字稿

Good afternoon. My name is Krista, and I'll be your conference operator today. At this time I would like to welcome everyone to the second quarter 2009 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 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 the LTC Properties portfolio, and regulatory and other changes in the healthcare sector, as described in the Company's filing with the Securities and Exchange Commission.

I would now like to turn the call over to CEO and President, Wendy Simpson. You may begin the conference.

Good morning and afternoon. Thank you for joining for us our 2009 second quarter earnings call. I have with me Pam Kessler, our Senior Vice President and CFO, who after my opening comments will be providing some additional specifics about our earnings and balance sheet. Also I have with me Clint Malin, our Chief Investment Officer, who will have some comments about investment opportunities and the investment environment.

Yesterday after the close of the market, we released our earnings for the second quarter. We recorded FFO of $0.45 per share. We had several small expenses in the second quarter that amounted to approximately $0.01 a share, and Pam will give you the details during her comments.

Also, yesterday we filed and announced an at-the-market program that we commented on at the end of last year and also on our first quarter call. We included this option in our capital structure to give us some flexibility if we need to raise relatively small amounts of capital for growth. Be assured, and we cannot conceive of an instance where the use of this tool will dilute our current shareholders for any length of time or in any material amount.

Unfortunately, in our push to both do the Q and the ATM documents, we had an error in the reconciliation of the FFO schedule in our earnings release, and needed to issue a revised schedule in a separate press release. We had share numbers on two lines that should have had dollar symbols. We immediately issued a corrected schedule, and I hope this did not cause any concern.

In the quarter we did no investments, other than providing capital for renovation project. In the quarter, we further delevered when we paid two mortgage loans totaling $15.8 million, and subsequent to 6/30 we paid an additional mortgage loan in the amount of $8.1 million. As of today, we have $3 million outstanding under our line, and this is scheduled to be paid by the end of this month. That would leave $7.8 million in a mortgage on one property that is due in August of 2010, and $4.2 million in Washington bonds that are due to be paid in December 2015.

On a pro forma basis, not including our preferred as debt, we have $15 million of debt and $215 million in common equity. I don't include preferred in this total because one could look at it, and I look at it, basically as permanent equity that never has to be paid back. I realize we have the dividend to pay on it, and we do assuredly have the ability to pay that dividend. I realize that people do look at preferreds as debt in some leverage calculations, but this is leverage that has no maturity, and I think LTC is in a very enviable position in its debt to equity capital structure. We still have our unsecured line of credit in place, and we are working to use it as needed to fund growth.

During the quarter, Sunrise paid us to an amount that equals three months of rent. This amount can be used by us to apply towards unpaid rent or other obligations under the leases. Additionally, Sunrise is currently escrowing real estate taxes with their monthly rent payments. Sunrise is current on their rents. We are working with them regarding capital expenditures that are needed at the properties. We continue to discuss with Sunrise options for us to bring in another operator, but we have not reached any agreement to date. At this time, I cannot predict when or if we will reach an agreement or resolution, but this is an active goal. Their lease coverage, after a 5% management fee, has improved just slightly from 0.73 to 0.76. However, occupancy has slipped very slightly from 88.7% to 88%.

ASLC, assisted living concepts, continues to have low occupancies. They have reported a combined 58.3% occupancy, which is down from 58.6% occupancy in the prior quarter. However, lease coverage has increased from 0.79 to 0.89, and that again is after a 5% management fee. Again, I want to point out that ASLC has a strong balance sheet. They are never late in rent payments. They maintain our buildings, and we have Extend-A-Care extended care as a carry -- pass through leaser. That means we have the entire credit of Extend-A-Care, in addition to the entire credit of ASLC for our lease. I have scheduled a time to sit down with ASLC's CEO, to see if I can get any more clarity as to their strategy for improving occupancy.

On the acquisition front, we continue to have projects to work on, but have not committed to make any investments. It would appear that sellers are not shying away from the 10% to 11% yields, but they're still looking for prices that would not provide reasonable coverage. I can't predict at this time when we'll be able to close that gap.

We've had two of our operators request capital that we had not planned on spending. But this is a good thing. Our one project is further along, and is in excess of $1 million, with a yield of 10.5%. We will probably begin disbursing some of this capital before year-end. The other project is larger, and it amounts to about $4 million with an 11% yield. We may be able to get our agreements in place by the end of the year, and begin disbursing some amount of money on this project by the end of the year, but this project will probably be completed mid-next year, 2010, and that's at an 11% yield. Both of these expenditures are on SNP properties, skilled nursing properties.

We have two crossed mortgage loans totaling about $7 million that bear interest at approximately 11%, that come due in the fourth quarter of this year. We've been talking to the borrower, and are drafting documents, which we expect will be signed soon, to extend that mortgage for five more years at the 11% rate, with increases every year after that.

At this point, I would like to turn the call over to Pam. I'll have some closing comments and have Clint make some comments before my closing comments, and then we'll open it up for questions.

Pam?

Thank you, Wendy.

I'm going to address my comments for quarter-over-quarter results. I will refer you to the 10-Q for year-over-year results.

Revenues decreased primarily due to a decrease in mortgage interest income. In the first quarter of this year, we had $226,000 of one-time income, resulting from the prepayment of a loan. Interest expense decreased, due to the early payoff of two mortgage loans secured by 10 assisted living properties, partially offset by the write-off of debt issue costs related to that payoff. The provision for doubtful accounts increased $70,000, because in the second quarter we began reserving Sunrise straightline rent on a go-forward basis.

Operating and other expenses increased $185,000, due to increases in legal and accounting fees related to the new accounting rules that went into effect at the beginning of the year, and the at-the-market offering program. Restricted stock vesting also increased, due to stock grants earlier in the year, and we began accruing property tax on a foreclosed property.

Net income available to common shareholders decreased $1.1 million, due the changes discussed above, and because in the first quarter we had one-time income of $626,000, resulting from the purchase of 109,484 shares of preferred stock. Fully diluted FFO per share was $0.45 cents this quarter, compared to normalized fully diluted FFO per share of $0.46 cents last quarter. Normalized diluted FFO excludes one-time items, which in the first quarter were $0.02.5 cents from the preferred F stock repurchase, and $0.01 from the loan prepayment.

Moving to the balance sheet. We invested $838,000 in capital improvements at a weighted average yield of approximately 10.4%, and $255,000 in capital improvement; that yield is already reflected in the lease rate. We received $1.1 million in scheduled principal payments on mortgage loans receivable. During the quarter we paid off the two mortgage loans, totaling $15.8 million. At 6/30, we had $5.5 million outstanding on our unsecured revolving line of credit. In July we repaid $2.5 million, and plan to repay the remaining $3 million later this month.

Accrued expenses and other liabilities increased during the second quarter, primarily due to the receipt of the $1.1 million from Sunrise. In the second quarter, we paid $12.8 million in preferred and common dividends.

Thank you, Pam.

Now I'll ask Clint to make some comments about what he sees on the acquisition and development front, and he'll comment on the coverages that we're seeing in the skilled nursing properties.

Thank you, Wendy, I appreciate it. As Wendy said earlier, the -- there still tends to be a variance between the bid amounts between sellers, but it seems like that is somewhat closing in, and people are getting more expectations of getting into the 10.5%, 11% lease rate range. We are getting an increase -- we are seeing increase deals flow, we're getting more phone calls and more potential deals. We've been looking at quite a few, but again the pricing still has not been where we feel that it's appropriate to be able to close a transaction.

What we've been seeing is on the assisted living side, there have been -- the transactions we have looked at have been more distressed properties, challenges on occupancy rates, over-bedded markets, and on the skilled nursing side, it's really been one of two situations. One of where people are trying to sell older, antiquated properties, maybe in markets that have reduced or dwindling populations, and on the opposite side of that, we've seen people who have properties that are performing quite well, and are looking at sale leasebacks, or selling, but the prices they're looking for are very much at a premium, and priced back to what you would have seen maybe a couple of years ago.

But again, I think it's encouraging that we're seeing more interest, getting more phone calls, and we've been very active with Andy Stokes and myself going out and meeting with different existing tenants, new clients, and really trying to generate an effort of letting people know that we are open for business, and interested in looking at transactions.

Wendy?

We -- we have just this morning gotten in some information on our Smith operators, our largest operator. Preferred Care has given us their financial information, and their coverage has improved again, and I think it's at about three times after a 5% management fee. So the skilled nursing portfolio seems to be doing very well, seems to be very healthy.

At this time, I think everybody is aware about the changes in reimbursements, the net 1.1% decrease. We don't know, and I can't find anything who would say they do know, what might happen if the Obama medical changes in the healthcare environment happen, and they need to look to reduce Medicare spending in order to balance the budget. I can't predict what might happen, but it's logical that cuts may come in the future.

In our case, as I've said before, and I want to say again, we have very, very good coverage from our lease payments to the profitability of our operators, so I still believe that our operators have the ability to sustain some additional cuts in their reimbursement before there's any danger to our rent stream. So I wanted to point that out in terms of what our skilled nursing portfolio is doing. We still see them as very strong.

As you've probably seen, we added Debra Shapiro to our Board. Debra has had years of experience with healthcare-related companies. She's a CPA, and is currently the CFO of IPCM, The Hospitalist Company, which is also a publicly-traded company. Debra was one of the early executives to join IPCM. She was instrumental in developing and designing all of their accounting systems and controls, as well as negotiating their credit lines and being a financial executive taking IPCM public. Debra's experiences with Boards, as well as being a CPA and a CFO, brings additional depth to the financial expertise on our Board. Debra thought she might be able to be on this call in the listening mode; so if you are, Debra, welcome again, and thanks for joining our Board.

At this time, I want to reiterate our FFO guidance of $1.87 to $1.91. This is range I gave at year end, and at the range of the first quarter. Consensus numbers may be slightly higher, but we have never varied from this range. Because we have few shares outstanding, an additional $200,000 in expenses, or a function of revenues of about $200,000, is about $0.01 a share.

And as Pam pointed out in this quarter, because of our ATM program, because we're conservatively accruing real estate taxes for the property that we foreclosed from SunWest, we have an operator in there, the operator is doing his best to cover his expenses. It's an independent living facility in Fort Worth, Texas. We just conservatively are accruing the real estate taxes, just in case he doesn't have the wherewithal when the real estate taxes come due. Those little things easily add up to $150,000, $200,000 in a quarter.

Possibly in the third quarter -- not possibly, but in the third quarter we'll have additional legal expenses for this ATM filing. I can't say that that will impact us by $0.01 here or there, but possibly it might. It's also possible that we'll have other accounting expenses if we access the ATM program for this quarter, because you have to get a comfort letter and all that sort of thing. But I believe that this ATM program and the fees were necessary to provide us with the flexibility to take advantage of investments and financing opportunities as they may arise.

Thank you for your attendance, and I'll now open up the call to questions.

(Operator Instructions)

Your first question come from the line of Karen Ford from KeyBanc. Your line is now open.

Hi, it's Austin [Worshman] here with Karen. What size investments are you guys seeing cross your desk right now, and what size would you be most interested in?

Austin, this is Clint. We've seen a broad range of investment size. I mean, there's been some transactions upwards of, you know, $50 million to $75 million. Those may not be marketed transactions, but people who have called us about potential opportunities, strategically looking at things that they may want to do. And then alternatively, you know, down to the one-off assets for -- in the $5 million range.

And that's both in the skilled nursing and assisted living?

That's correct. What we're looking at -- we've seen a little bit of both, skilled and assisted.

Do you guys have more of a preference towards one asset class or the other?

Not necessarily a preference towards one or the other, but from a pricing standpoint and, you know, just the cap rates available, or what people have experienced in the past in the market, we're more inclined to do the skilled nursing from a pricing standpoint as opposed to assisted living, but we have looked at a few assisted living transactions that we got close on. We weren't able to finalize a transaction, but in certain cases, we were able to almost get there on assisted living.

And then how wide of a spread are you seeing from where sellers are willing and where you're looking to buy?

I mean, it's hard to say. It's probably -- I mean, 150 to 200 basis points, probably.

Okay. Thank you. And then do you guys have any interest in buying back any additional preferreds this year? Have you been looking at those, and at what price do you become interested?

We become interested when the yield to us would be approximately 9 or better. So, you know, I would tend, because we are not in a -- in a positive cash balance right now, I mean we'll be building up cash as the year goes on, but I would not be interested in drawing down on a short-term line of credit to buy back long-term capital, unless -- I mean, unless something really strangely happens in the marketplace, and our preferreds went way, way, way down, we might have to reconsider that.

But, again, if we had a loan that prepaid and we got $1 million on a mortgage loan that we hasn't anticipated getting because they sold the property and they had the right to prepay, and -- you know, I might -- I might use that to buy back some preferreds in the marketplace, to take out, if we could get a 9% yield or better on that. So I would eliminate the negative arbitrage of having that cash on the balance sheet, but we're not item actively, aggressively looking to buy back either our common or our preferred at this time.

Okay. And then for the remainder of the year, how much do you estimate in CapEx dollars that you'll spend, and at what yield?

Go ahead.

Well, as far as this year goes, I mean under the current contracts we have -- or agreements we have in place, we have about $2.5 million remaining under those commitments, which we have already started funding on. I would think that -- I would have to get back with you on the specifics, but I would think that a fair amount of that should be funded over the course of the remainder of the year.

So somewhere between $2 million and $2.5 million, and the yield on those is what?

That's going to be about 10%.

10%. Okay. And then just lastly, previously you guys had talked about looking into potential agency financing. Are you still kind of working through that? I know that there are some occupancy parameters you had to meet, but do you still anticipate that sometime in the future?

Well, I think we have to wait for occupancy to get a little bit better, because they're -- the agencies are still looking for 90% occupancy for 90 days, and while Brookdale is getting close to that, it's not -- you know, we've got to wait for it to get there for 90 days.

Right.

Unfortunately, the best -- the best package we have with them is at 89% occupancy. So Brookdale is very close, and hopefully they'll get over that and we can possibly look at that.

We're also looking at working with another group, because they're trying to create a package where HUD would finance skilled nursing properties owned by REITs. This is a new idea of getting some financing from agencies. So that's in very early stages, but Pam has had several meetings, and we're putting packaging together to look at these types of things, and we're looking at every opportunity to put in place, so that if we need the money, we have it available.

And what size would you anticipate?

Of the HUD?

Yes.

Well, again, you know, it would depend on what we could see in terms of need in the future.

Right.

If we had -- if we had an opportunity to spend $50 million quickly, we might do that. Our problem is -- not a problem, but one of the balancing issues is it's going to have to be based on lease by lease, of course. So if we use the preferred care portfolio, it would have to be a very high financing, in terms of maybe $100 million or better. I have no idea.

But in order to do that, we would have to have some confidence that we could turn around and apply that $100 million in some transactions. We might do a smaller group of assets. We could look at the assets that are operated by SkilledHealthcare, or either by Sun, because they would be well known operators to HUD, and that would be smaller packages.

So we're looking at all of those, but, again, it's use of proceeds that keeps us from going out and doing these things.

And what type of pricing?

Well, actually, I think --

5.5.

5.5 to 6.

Yes.

All right. Thank you very much. I appreciate the color.

You're welcome.

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

Good morning.

Good morning.

I just had a couple of things, Wendy. I guess there's been a lot of movement, obviously the stocks have moved substantially. We've seen certainly costs come down on the debt market, at least on the unsecured side, and so I guess I was wondering whether beyond the things we've already talked about, looking at the packages, looking at the bid ask, whether either because your cost of capital is starting to change or, you know, we're starting to see some other opportunities out there like, you know, the deal that HCP did with Manor Care, and I know you guys have bought distressed debt and even securities if other companies before, whether there are other things that you're sort of thinking outside the box in terms of the investments? Because you obviously have this great balance sheet, plenty of dry powder to put money to work.

The frustration that I think you guys have had and some investors had, and I've had is, you know, the lack of opportunities to really do it. And I appreciate your wanting to be disciplined on the pricing and yield, but I was trying to think if other things are changing, or there's other opportunities kind of beyond what you've looked at, you know, historically?

Well, in terms of moving up the risk ladder, I really don't see us doing anything like HCP has done, in terms of buying distressed debt. You know, in terms of moving up the risk ladder, we've talked to operators who are trying to put together deals that would include some development capital. I consider development capital fairly risky, but in terms of some deals that we've looked at, we've looked at financing or doing a sale lease back on a property that currently exists for this operator and, in addition, providing acquisition or development capital for projects that they already have started work on, and their other capital backed out, things like that. I consider that somewhat more risky than we've done in the past.

We've looked at making investments that don't cover immediately, because they're in distressed situations and, you know, we can see that they have a good business plan to turn the operations around; so that would, I think, increase a little bit the risk profile of what we've made investments in. So I don't see us right now, Jerry, going out and buying any distressed debt. We -- as I said, we might buy some distressed properties which don't cover right away, but we would be the owner of the bricks and mortar.

And then just two other things I was curious if you guys have thought about. One is investments in the hospital area, because I know you've got a lot of background there, and [MBW], I was on the call earlier, indicated they're seeing lots of -- you know, lots of potential investments. They're not really doing any at this point, and with yields that are above your kind of thresholds.

Yes, we haven't looked at hospitals. Last year, of course, you know we looked at an LTAC, but we haven't looked at any acute care hospitals. The acute care hospital environment, if you're at all competing against a not-for-profit in your area and they have access to very low financing, it's difficult in the for-profit area, having come from there. We would be interested in looking at opportunities, and I think we could underwrite them, but we would be looking in smaller markets, maybe a town of 50,000 or 60,000 people that have a local hospital, but they would be non-for-profit hospitals and probably have access to other financing.

I am not sure -- I would have to spend in some time talking to somebody who is reimbursement savvy relative to what they're looking for in terms of the healthcare changes of legislation and how that might impact hospitals. So I'm not afraid to look at hospitals, but we haven't had a lot of them brought to us, other than this one LTAC.

Okay. And are you feeling that your cost of capital is moving down at all with the stock price and stuff, or --

Yes, it has been moving down. And when we were at 25 -- I don't know where we are today, I think we're a little down -- but those are prices that if we had the opportunity to issue some equity and use it to do some investments, we might be -- might be interested in doing that.

Okay. All right. Thanks.

Thanks, Jerry, and thanks for pointing out the -- Jerry was the person who pointed out the error in our press release. So we had a -- okay, we had an opportunity to get the correction right out. Thanks a lot.

All right. Well, you know we're watching, so thanks.

We'll send you the drafts so you can tick and type. Okay. Other questions?

Your next question comes from the line of Mark [Letensky] from BMO Capital Markets. Your line is now open.

Good morning. Just a quick housekeeping item here. The increase in operating expenses with the legal fees, is that a recurring in nature?

Well, it might recur for the third quarter, because we had the final legal fees, hopefully final, yesterday. So we'll be getting the legal bills in for the third quarter, but we don't anticipate that that's an ongoing quarterly expense.

And I'm just curious if you could comment on the Sunrise properties in terms of upkeep. Are they keeping up with that? Just in light of HCP's, you know, impairment charge?

Yeah. Clint's had the most recent experience with dealing with that, so I'll ask him to make the comments.

Sure. We've been very active in monitoring the properties. I took a tour of the buildings probably about three months ago. We have a consultant that we hire to inspect all of our properties, and he went through the buildings probably about a month ago, and we're in the process of working with Sunrise on those improvements.

A lot of what we see, it's not so much structural issues, it's -- I mean, simple things like buying furniture, putting something carpet down. So one or two buildings may need a roof replacement, but it's not major structural issues, it's just the routine items that you need to do to keep up from a marketing standpoint.

Thanks.

You're welcome. Any other questions?

(Operator Instructions) Your next question comes from the line of Karen Ford for KeyBanc. Your line is open.

Hi, it's Austin [Wershman] again. Just a quick follow-up. How about any other potential loan opportunities? Are you seeing anything in that arena?

We have seen opportunities where people are looking for loans, but not as much probably as sale leasebacks, or just outright sales. But on a rare occasion, we do see loan opportunities here and there, and I think we would look at it in the right circumstance.

And then how much could you do before you would push up against your REIT requirements? Do you have a sense?

Yes, about $40 million.

$40 million? Okay. Great. Thank you very much.

There are no more questions at this time.

Thank you. Again, thank you for listening to our conference call, and we look forward to talking to you in about three more months. Bye-bye.

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