LTC Properties Inc (LTC) 2009 Q3 法說會逐字稿

Greetings, and welcome to the LTC Properties third quarter 2009 analysts call. All participants are in a listen-only mode. The question-and-answer session will follow the presentation. As a reminder, this conference is being recorded. 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. Now I'd like to introduce you host, Wendy Simpson for LTC Properties. Ms. Simpson, you may begin.

Thank you, Diego. Good morning and good afternoon. Thank you for joining us for our third quarter 2009 earnings call. I have with me Pam Kessler, our Senior Vice President and CFO who, after my opening comments, will give some specifics on our earnings and balance sheet. Additionally, Pam will comment briefly on our activities in identifying capital raising opportunities in addition to our ATM program that we put into effect last quarter. Also with me are Clint Malin, our Vice President and Chief Investment Officer and Andy Stokes, our Vice President of Marketing and strategic planning who will briefly comment on our deal activity.

Yesterday, after the close of the market, we released our results for the third quarter. We reported fully diluted FFO of $0.47 per share, and that brings us to $1.42 of FFO -- fully diluted FFO for the first nine months of 2009. In the quarter, we had no investment activity other than our continuing provision of capital for renovation and improvement projects at our properties. In the quarter, we further reduced our debt as we spoke to in the last quarter call by paying an $8 million secured loan. At the end of the quarter, we had no amounts outstanding under our line of credit and just $7.8 million in a mortgage on one property that's due in August of 2010 and $4.2 million in Washington bonds that are due in 2015. We continue to be very unlevered.

On the operational front, generally, our operators continue to do well with the usual suspects continuing to be the exceptions. Assisted living concepts, ASLC, continues to have low occupancy. On a year-to-date comparison, they're down to 59% occupancy from 62.5% occupancy at the same period last year. However, lease coverage has gone from .86 to .94 after a 5% management fee, which is really good to see.

Again, I want to point out that ASLC has a strong balance sheet, they're not late in paying rent, they maintain our buildings and we have Extendicare as a peri pass-through leaser -- lessee. And I will explain their strategy as it was recently explained to me. They will not take Medicaid residents, period. End of strategy. The reorganization of Sunrise continues, and nothing has really changed in our properties leased to Sunrise. They have an occupancy dip this quarter from 88.5% to 86.1%, and the coverage has gone from .76 perc -- .76 to .75. We're very hopeful that their recent successes with reorganization and asset divestures will give them more time to concentrate on the operations in the near future. I just want to remind everyone that we do not publish coverage in occupancy statistics, and we provide it based on unverified information that we get from operators and make no representation as to its accuracy.

On the acquisition front, we've had several projects in various stages, but have not entered into any non-cancelable areas as of today. Clint and Andy will provide more comments on our possible transactions. At this point, I'm going to turn the call over to Pam, and then I will ask Clint and Andy to comment before my closing comments and your questions.

Thank you, Wendy. I'm going to be discussing quarter-over-quarter results, and I will guide you to the Q for prior year comparison. Revenues decreased approximately 57,000 this quarter due to a decrease in mortgage interest income resulting from the payoff of a mortgage loan and a normal amortization and mortgage loans. Rental income was flat quarter-over-quarter. Straight line rent was $1 million this quarter and the amortization of lease inducement costs was $164,000 this quarter. Interest and other income were comparable between the third and second quarters. Interest expense decreased $474,000 due to the early payoff of mortgage loans.

On June 1, we paid off $15.8 million of loans and on July 1, we paid off an $8.1 million loan. Operating and other expenses decreased $150 to $1,000 this quarter due to lower legal fees and lower property tax expense in the third quarter. In the second quarter, we paid property tax on a property that we took back from Sunwest last year. Net income available to common stockholders increased $588,000, primarily due to the decrease in interest expense discussed previously. Fully diluted FFO was $0.47 this quarter compared to a fully diluted FFO of $0.45 last quarter.

Turning to the balance sheet, we invested $723,000 in capital improvements at a weighted average yield of approximately 10.6% and $91,000 in capital improvements at yields that were already reflected in the lease rate. We received a mortgage loan prepayment of $1 million this quarter and $952,000 in scheduled principal payments on mortgage loans receivable. During the quarter, we paid off the $8.1 million mortgage loan. Also during the quarter, we repaid $5.5 million on our unsecured revolving credit. At September 30, we had no amounts outstanding and $80 million available on our line of credit. In the third quarter, we issued 20,000 shares of common stock through our after-market offering program at $25.09 or weighted average price including commissions of $24.53 per share. Net proceeds from the sale was approximately $491,000. During the third quarter, we paid $12.8 million in preferred and common dividends.

In terms of capital raising, we continue to look at agency financing, Fannie Mae and Freddie Mac and occupancy increases in our assisted living portfolio as -- occupancy increases in our assisted living portfolio, we may pursue this option. We are also watching the new HUD lien program for REIT, but it is still more cumbersome and with more reporting requirements and restrictions than Fannie Mae or Freddie Mac. Last week, I met with a representative from an insurance company that is doing unsecured ten year debt at competitive rates, so we will continue to look at those options as well as it seems the insurance companies are back in lending marketplace. And then we have $80 million available on our line of credit, which is the first place I would look for any short-term financing.

Thank you, Pam. I want to point out that the fact that we issued 20,000 shares under our ATM was a function of us just testing that the system worked, not that we think at $25 we're going to be issuing stock. So I don't want anybody out there thinking once our stock gets to $25 that we will be in the market with our ATM raising capital through that. It was just the program was put in place and we just wanted to test to make sure that when we called and asked for stock to be sold, how it got sold, when we got the funds and that sort of thing. So that one day we issued 20,000 shares, not to be construed at $25 is our spot to issue equity. Thank you, Pam. I'm going to now ask Andy to give some comments on what he sees out in the marketplace for this last quarter and maybe looking into the future.

Thanks, Wendy. First of all, deal prospects have significantly increased since summer. Price expectations are far more realistic, so more deals work. We continue to see many transactions for the second or third time with the ask lower each time. We especially see prospects from customers with needs that LTC can meet. Things like estate liquidity, our expansion capital, refinancing term debt and turnaround situations.

Another factor that has changed is competition. As we travel around the country, we do not run into our competition as often as we used to. In that competitive landscape, the federal government is our biggest competitor, and those rates do look good. But HUD is not invincible, even the HUD lien program. HUD is not cheap to initiate, it is not cheap to maintain, it is painfully slow and ongoing restrictions are very onerous. Having said that, many of our operators do use it, and well they should where it works for them. But many, many transactions do not qualify for government financing under any circumstances.

Finally, as you may recall, about two years ago, LTC focused its efforts on marketing in areas of the country where we already had a significant presence. We did this for two reasons, to enhance our network on the ground in case we had to replace an operator and to find new business with current customers and operators we did not know yet. So that strategy was both defensive and offensive. We have continued this approach with a greater emphasis on selling, calling on prospects and explaining LTC to them. We -- and we think it is working. Now, Clint will talk to you about some specifics of our deal flow.

Thank you, Andy, I appreciate that. As Andy mentioned, we have seen a significant increase in the deal flow since summer. As a result, we are actively in the process of evaluating a number of potential transactions. Of these transactions, there are five which are farther along in the process than others. Of these five transactions, we have non-binding letters of intent signed on three deals and are near execution on two others. Since we did not have these deals obviously finalized, I will talk about these five potential transactions in general terms as opposed to providing you with specifics on each individual opportunity.

Given that we do not have a finalized deal, obviously, at this time I cannot give you any guidance as to the likelihood of consummating these transactions or a potential closing date. What I can tell you is that we are diligently pursuing these transactions and are committing resources to evaluating the deals in hopes of converting all five transactions into closed deals. All five deals are lease transactions. Four deals are sale lease backs, two with existing operators and two with new operators. One deal is an acquisition of a property subject to an existing lease. All five letters of intent are with companies that are not current customers of LTC. The five deals consist of nine properties, three assisted living facilities and six skilled nursing properties.

The ALS consists of 192 units. On average it's 64 units per property. On the SNFs, it would be 740 beds with an average of 120 beds per property. The properties are located in five different states, of which we currently hold investments in each one of those states. The average yield we're looking at on these transactions is 10%. The average price per unit on the assisted living buildings is $75,000 per unit and on the SNFs, it's $52,000 per bed with a high of $75,000 per bed and a low of $37,000 per bed. The approximate construction dates for each of these properties on the assisted living side, they were constructed in the mid to late 1990s and on the SNFs, four were constructed in the mid to late 1980s and two in the 1970s.

On these transactions, we feel like we're getting adequate security that we haven't seen in the past. We are getting personal or corporate guarantees on many of the transactions. Most include security deposits of six months or more and in the majority, people are escrowing dollars for repair and maintenance reserve. Again, as I mentioned, we don't have any finalized document, so I can't give any guidance on the likelihood of consummating or the actual closing date.

I also did want to talk a little about the capital improvement projects that we have underway. At the end of September, the third quarter, we have -- of the projects that were actually in construction or renovation, we had $4.9 million of funds that were remaining open. We have advanced in the fourth quarter already $500,000 of that, and I would expect the remaining amount to be advanced over the next six to 12 months. We've previously mentioned that we are working on the tenant to start a project for $4 million in Kansas for an addition onto the building. Right now, they are working on getting architectural drawings for that, and I expect in the next two to three months that we hope we will be able to begin that project. Now I would like to go ahead and turn the call back over to Wendy.

Thank you. I'm very excited about the fact that we are seeing so much activity. I think the fact that we have been patient and that we have been very clear to all the companies that we've talked to about what our underwriting is has paid off for us. We're very open about what our cost of capital is and what our deal structure looks like, and I'm very happy to see that. It seems like the acquisition environment is looking up for us in the fourth quarter and into the first quarter of next year. But again, as Clint said, we can't guarantee that any of these will close, but I can say that we are closer than we've been in many quarters.

At this time, based on our current revenues and costs, I estimate that our FFO for the year will be between $1.87 and $1.89. This high end is $0.02 lower than the range I gave at year end and at the end of the last quarter. During the second quarter of the year, we began reserving for the straight line rent from Sunrise and on an independent living property that was previously operated by Sunwest, and this property is taking the new operator a little bit longer on the turnaround than we had projected. So we're not counting that revenue stream. The revenue stream is up in revenues, but we're reserving for it on a conservative basis. Also, we've decided that we are going to reserve the real estate taxes on that property that Sunwest used to operate, and so that's causing our expenses to go up a little.

Because we have so few shares outstanding, again, $200,000 of additional expense in any quarter is a penny. It's possible we'll have higher administrative costs in the fourth quarter because of deal costs that need to be expensed rather than capitalized, but right now, I think the $1.87 to $1.89 is a good range. So at this point I will thank you for your attendance and ask Diego to open up the lines for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Karin Ford with KeyBanc, please state your question.

Hi, good morning. First, just a question on investments. Thanks for all the detail on that. What type of coverage are you underwriting on leases for assisted living and skilled nursing?

Right now, the assisted living properties we're looking at as -- regarding the ones that I mentioned, it's between 1.2 to 1.3 initially and on the skilled nursing projects, what we're looking at right now, coverage is fairly decent, 1.3 or --

Okay. And the 10% number that you gave, that's a lease yield, not a cap rate, right?

That's correct.

Okay. And it's the same on both? Are you guys not looking for a risk premium on the SNFs over the ALF?

We quoted that just because nothing is finalized yet. We quoted that just as an average for those five transactions.

Okay. And then just finally on the reserve on the Sunrise straight line, what drove the decision to do that, and what would trigger the stoppage of the reserve on that?

Because we had -- we had a default that if they had debt to equity greater than 60% debt to equity, they had to put up the deposit. They did put up the deposit and until Sunrise as a corporation reduces their ratio, we'll continue to look at that conservatively. Not because they're not paying or anything like that, but the fact that they defaulted even though they've "cured" the default by giving us the deposit, they still have too high a debt to equity ratio.

And do the recent strategic transactions that they've done help them get to no longer be -- to complying with the ratio?

I'm not sure. I haven't done a pro forma of what their application of funds for their sale of the assets and that sort of thing. So if -- when they are able to report a better ratio, we would probably start doing the straight line again.

Do you -- would you guys still also consider or like to potentially replace them as operator on some of those properties?

Yes, we would. And I think the fact that they're selling all the other Carrington assets, I believe, and these were Carrington assets, they probably would be now paying more attention to these assets and helping us transition them to a different operator.

Thank you, okay.

But we're not talking to them currently about that.

Great. Thanks so much.

You're welcome, Karin. Thank you.

Our next question comes from John Roberts with Hilliard Lyons. Please state your question.

Hey, Wendy.

Hi, John.

Does that $1.87 to $1.89 exclude the impact of the non-cash compensation?

No.

That's $1.87, $1.89 were assets. That would indicate about $0.40 to $0.42 in the fourth quarter?

No. That indicates $0.47 in the fourth quarter.

Okay. Where am I? All right. I must be --

That includes non-cash.

Yes, we don't add it back.

Okay. That's before the non-cash. Okay, got you.

Yes.

All right. That's where I'm -- that's where I messed up. Okay. That's the only question I got. Thanks.

All right, thanks, John.

Our next question comes from Daniel Bernstein with Stifel Nicolaus, please state your question.

Good morning, just filling in for Jerry here.

Good morning, Dan.

Hi. Just on a more detailed question on the loan commitments, I guess capital commitments that you have with your operators. It sounds like it's going to pick up a little bit from where it is now, going into next year. I noticed in the Q that some of those commitments expire next year. So would you think that the commitment number is going to be higher, $1 million, $2 million a quarter instead of, say, $500,000 a quarter?

I would say that -- what's active right now is the commitments that are -- the projects that are currently underway, those are being funded fairly quickly and the offers are making a lot of progress on that. So I think that component, as I indicated, the next six to 12 months, those would be fully funded. As far as new commitments, we have a few open commitments, but one of those, the one I mentioned for $4 million, that's getting close to commencing, and I see that starting in the next, I said two to three months, hopefully. Outside of that, we continue to work with our operators to try to find additional projects, but right now, we don't have any firm commitments for new projects starting other than what we've already committed.

Okay. And in terms of like a bigger picture question, we heard from a lot of REITs earlier in the earning season that they're -- not just deal flows picking up, but you may see a lot of, say, private operators or private REITs maybe coming public sometime next year or looking to monetize some of their assets. Do you think you'll be able to participate in any of that in some form or fashion, whether it's property or loans or whether that's probably just not a place you're going to compete in?

We'd be happy to participate. We haven't talked to any private REITs that are trying to diversify any of their assets, but that type of deal would not be something we wouldn't be interested in talking about.

And then the last question I had is on the agency debt, HUD debt, the insurance -- potential insurance financing. What are you thinking of in terms of size there? Is that something that depends upon your acquisition flow, or are you looking to do a set amount at this point, raise some capital?

It really depends on our acquisition flow. But one of the things that we find advantageous to this type of debt is it doesn't have to come in big chunks because we're not needing big chunks of capital in the $100 million range. And also in the -- we're very preliminary in discussions with the possible funding from insurance companies, but the terms that they're talking and the structure that they're talking is very attractive to us because we like debt that amortizes rather than debt that is bullet and they're very amenable to this type of debt structure right now. So we haven't put a dollar amount on it. And I'm not sure that we would be very interested in doing a one type of debt for $100 million or something like that.

And just one last question, if I could. Do you have any thoughts on the -- on Medicaid reimbursement within your states that you operate?

We don't have any of our operators currently being concerned about Medicaid reimbursement on a global basis. We have one operator in Florida that Florida just put through a bed tax, but they also put through a Medicaid increase. So net/net, Florida is just slightly better than it used to be, which is contrary to the economics of the world. Ohio still has its challenges, but none of our operators have experienced a significant reduction or are expecting a significant reduction and none of our other states have mentioned anything. I don't know if Clint's heard anything or Pam's heard anything?

No.

So no Medicaid disruption at this point.

I appreciate the color. Thank you.

Thank you.

Thank you. (Operator Instructions) Our next question comes from Rich Anderson with BMO Capital Markets. Please state your question.

Hello, folks. Good morning over there.

Good morning.

I guess I wasn't doing the math fast enough. These five deals that are sort of in the hopper right now, how large in total dollar value did you say?

We didn't say.

You gave per bed and you gave the number of beds, right?

Right.

So you're just saying leave the math to us?

Well, I'm just so reluctant to have people put into their models what they think we can do, but okay, Rich, you're right, we gave enough information to give you -- that you could do it yourself. So the total dollar value is 50.

Okay. About 50.

About 50.

Okay. So if -- if now is not the time to raise equity at these levels or you're not going to do it unless you have an opportunity in front of you, how do you go about financing this -- say you're able to get all five. Is it a combination of debt and equity? Do the GSEs get involved on the outside? How do you propose to finance these, assuming that they actually come to fruition?

Well, first we'll use our line of credit.

Okay, right. But then after -- I'm talking more --

After that, it will be a combination of debt and equity.

Okay, 50/50 kind of thing or --

No. I'm not really quite sure right now. That, I think, would give us a good -- still a good leverage level at 50/50, but it's depending on the cost of each side.

Right. Okay. At the time when you're ready to pull the trigger.

Right.

Okay. Switching to the dividend due, you're obviously covering it fine, but any comments on the future for the -- for dividend policy at LTC?

No. We'll talk about it with the board at the beginning of the year, and definitely the results of our acquisition activity would be taken into consideration.

Okay, and then finally, what is -- what was the yield on the mortgage payoff during the quarter?

8.8 --

And what --

The loan that we paid off? Was it 8.8 --

Yes.

I was thinking the loan that came back to you.

Oh, the $1 million?

Yes.

Was that at 11%?

Yes, I think it was the Bank of Louisiana deal.

Yes.

Oh, gosh.

What was it?

11%.

11%, okay. So what is -- is there a defined kind of pipeline that you see in terms of payoff in the future, or is it not a big deal with going forward?

We just got notice that someone is going to pay off a $600,000 loan because they're selling the property, but other than that, we expect that the maturities will happen as they become payable.

Right.

And right now on page six of our supplemental, we're showing what we expect the maturities to be.

Okay. I missed that. I'm sorry. I just got back from the Yankee celebration parade downtown Manhattan, so. And -- okay, that's it for me. Thank you very much.

Thanks, Rich.

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to management for closing comments. Thank you.

Thank you. And thank everybody on the call for participating and, again, we look forward to talking to you about our year end and possibly we look more forward to talking to you about closed deals. Have a good weekend. Bye-bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.