LTC Properties Inc (LTC) 2010 Q1 法說會逐字稿

Greetings and welcome to the LTC Properties first quarter 2010 analyst call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

This presentation may contain forward looking statements as defined in the Private Securities Reform Act of 1995. Forward looking statements contain 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 healthcare sector as described in the Company's filings with the Securities and Exchange Commission.

It is now my pleasure to introduce your host, Ms. Wendy Simpson, President and CEO for LTC Properties. Thank you. Ms. Simpson, you may begin.

Thank you. Good morning and good afternoon. Thank you for joining us for our first quarter 2010 earnings call. With me are Pam Kessler, our Senior Vice President and CFO who after my opening comments will give more specifics about our first quarter call and the earnings and some of the coverages that we're seeing from our operators. Also with me is Clint Malin, our Vice President and Chief Investment Officer who will comment more specifically about investments that we've announced and about opportunities we're seeing in the market. Additionally in the room with me is Andy Stokes, our Vice President of Marketing and Strategic Planning, and Cece Wong who is our Vice President and Controller.

A couple of weeks ago we did announce that a private school to whom we had a mortgage closed its doors and we took a reserve of $852,000 against the mortgage balance. That impacted our earnings that we released last night by $0.03. We're optimistic that this property can be sold before year end or a new owner can assume the debt. And we could redeploy that cash from the sale or begin getting interest from somebody assuming the debt at that time. We will not be receiving this interest income unless one of those things happens. And that's at about $230,000 of projected interest income that we had at the beginning of the year that we don't have currently in our projections.

On the plus side, we've made an additional $22 million of investments and one of our operators has begun a $4 million addition to property that we do own. Clint will be discussing some of the specifics of these transactions after Pam's comments. At this point I'm going to ask Pam to comment on the financial results, some of the coverage information, and then Clint will talk about our most recent acquisitions and what we're seeing as opportunities. Pam?

Thank you, Wendy. I'm going to be discussing comparison of first quarter 2010 to fourth quarter 2009. I will direct you to our 10-Q that was filed yesterday for a quarter over quarter comparison between 2010 and 2009.

Revenues increased approximately $400,000 this quarter due to a rental income increase of $547,000 due to the acquisition of three assisted living properties in the fourth quarter of 2009, the first quarter 2010 acquisition of two skilled nursing properties located in Florida and Texas, capital expenditure projects and step-up in leases that don't qualify for straight line rent. Straight line rent was $930,000 this quarter and amortization of lease inducement costs were $166,000 for a net of $764,000 in noncash rents this quarter. Mortgage interest income decreased $41,000 due to a payoff of a loan at the end of last quarter and also due to the normal amortization of mortgage loan. Interest and other income decreased $100,000 due to one-time receipts received in the fourth quarter of 2009 that we did not receive first quarter of this year. Interest expense increased about $30,000 due to an increase in outstanding balance on our line of credit related to the acquisition of the three assisted living properties in the fourth quarter and the two skilled nursing properties in the first quarter of this year.

The provision for doubtful accounts and notes increased $859,000 primarily due to a specific loan loss reserve recorded on a mortgage loan secured by a private school in Minnesota that ceased operation. Operating and other expenses decreased $129,000 because transaction costs were higher in the fourth quarter of 2009 than in the first quarter of this year. Net income available to common shareholders decreased $476,000 due to the provision for doubtful accounts recorded on a mortgage loan that we discussed which was partially offset by the increases in revenue that I previously discussed. During the first quarter of 2010 we sold 365,000 shares of common stock under our at-the-market offering program which resulted in net proceeds of $9.7 million and weighted average price including commissions and offering costs of $26.45. Fully diluted FFO per share was $0.45 this year compared to fully diluted FFO per share of $0.046 last quarter. Excluding the provision for doubtful accounts related to the mortgage loan, the private school in Minnesota, fully diluted FFO per share was $0.48 this quarter compared to $0.40 last quarter.

Moving to the balance sheet we acquired two skilled nursing properties for $16.9 million this quarter and under the new accounting guidance $83,000 of costs associated with this transaction, such as closing costs, legal fees, transfer taxes, et cetera, we're expensed as part of G&A, which is the operating and other expense line item on our income statements. We invested $550,000 in capital improvements at a weighted average yield of approximately 10.5% and $77,000 in capital improvements at yields already reflected in the lease rate. We received $967,000 in scheduled principal payments on mortgage loans and recorded an 852,000 share provision for doubtful accounts related to the mortgage loan secured by the private school in Minnesota.

During the quarter we had net borrowings of $15 million under our line of credit to fund the first quarter acquisitions. During the first quarter we exercised the accordion feature of our credit agreement and added another bank to our line of credit bringing the total capacity to $110 million. We have another $10 million remaining under the accordion feature. At March 31st, we had $81.5 million available under our line of credit. During the first quarter we paid $12.9 million in preferred and common dividends.

Subsequent to March 31st, we paid off a $7.6 million mortgage loan secured by an assisted living property in California. The retired debt for an interest rate of 8.7%. Subsequent to this payoff we have no mortgage debt outstanding. Additionally. today we paid down $5 million on our line of credit. Subsequent to this paydown we have $23.5 million outstanding on the line of credit and $86.5 million available for borrowing. Also subsequent to March 31st, we entered into an agreement to purchase two properties in virginia that Clint will discuss in more detail. This transaction is scheduled to close on or about June 1st. And we anticipate initially funding this transaction with our line of credit. During the second quarter of this year, we broke ground on an expansion of a property which was previously disclosed in our capital commitments, but because the project was in regulatory approval process we had not given guidance as to the timing of this $4 million expenditure. Including this project, we anticipate investing $6 million over the next nine months in capital improvement projects at a weighted average yield at approximately 10%.

On to the operator statistics. In discussing operator statistics, I'll give the general caveat that these numbers come from our operators, they're unaudited and have not been independently verified by us. Almost all of our operators with the exception of ALC experienced occupancy increases. Occupancy in our out portfolio, excluding ALC, Sunrise and lease-up properties, these are the former SunWest properties that Ameritus is now leasing, increased 340 basis points in the first quarter of 2010 to 90%. ALC's occupancy remains flat at almost 60%. However, Sunrise increased occupancy by 268 basis points to 89%. Lease coverage for the ALF portfolio excluding ALC Sunrise and the lease-up properties, increased to 1.7 times after a 5% management fee. Before management fee the coverage was two times. Although ALC's occupancy remains flat, their lease coverage increased to one time after a 5% management fee. Before management fee they cover 1.2 times. And while Sunrise occupancy increased, lease coverage remained essentially flat at one time before a management fee and not covering if you assume a 5% management fee. SNF occupancy remains stable and lease coverage for our SNF after a 5% fee assumption increased to 2.5 times. Before management fee lease coverage for our SNF portfolio with 3.2 times.

I'll turn it over to Clint.

Thank you, Pam. As we announced in yesterday's earnings release (inaudible) in the first quarter as well as executed purchase agreement to acquire two additional SNFs. The first closed transaction was for a 120-bed skilled nursing facility in Florida for a purchase price of $9 million. This property was leased to a third party operator under a 12-year triple net lease agreement with two ten-year renewal options. The second closed transaction was for a 166-bed skilled nursing facility in Texas for a purchase price of $7.9 million plus a capital improvement allowance and a lease inducement payment totaling $300,000. Which will be leased under a ten year triple net agreement with two five-year renewal options. Upon acquisition of each property we leased it back to the same operating company which had operated the facilities prior to our acquisition.

The purchase agreement we have executed for the two additional skilled nursing facilities are located in Virginia and have a total of 227 skilled nursing beds, 46 assisted living units and 47 independent living units. The purchase price is $22 million and we have entered into a 12 year triple net lease agreement to be effective upon closing with the same operator that currently operates the facility. The terms of the sellers current financing requires a 30-day prepayment notice which was given by the seller concurrently upon execution of the purchase agreement. This transaction, as Pam mentioned, is scheduled to close on or about June 1st of this year. This is an opportunity that came about in conjunction with our recent acquisition of the Florida property in the first quarter. The two Virginia properties have common ownership with the entity from which we purchased the Florida property. The two Virginia properties will be leased via a single master lease and will be cross defaulted to the Florida lease. One of the properties is operated as a stand alone skilled nursing facility and the other property offers a continuum of care on a campus setting. We are excited about this transaction as it is in a state known for high occupancy and strong barriers to entry in skilled nursing via CON protection.

Additionally, the standalone skilled nursing facility was constructed in 2005 adding a high quality asset to our portfolio. Although a portion of the SNF on the campus style property was constructed in the 1970s it has been very well maintained with additions and renovations occurring in the late '80s and mid '90s. Regarding asset quality the two properties purchased in the first quarter were both constructed in the late '80s adding newer skilled nursing physical plants to our portfolio.

As Pam mentioned we are pleased that funding has finally begun in the long anticipated capital improvement project at a skilled nursing facility in Kansas. The pre-existing $4 million commitment is for construction of an 18,000 square foot addition to the building which will be used primarily by our lessee for the facilities specialized traumatic brain injury program for closed head injuries. We anticipate that this construction will be complete by January 2011.

As it relates to the acquisition front, we continue to see more and more opportunities in the marketplace. Our pipeline of transactions that we are evaluating includes both single asset transactions as well as portfolios in the five to ten property range consisting both of assisted living and skilled nursing assets. Portfolio transactions being marketed appear to be priced at a premium and attract a fair amount of interest from potential buyers. However for the portfolio transactions in the five to ten property range which we have passed on, we are not aware of any deals actually closing at this point in time which leads us to believe that a pricing disconnect continues to exist between buyers and sellers. Single asset transactions that we have looked at offer better pricing metrics compared to the portfolios. Therefore as previously stated we see our investment niche being in smaller transactions ranging in $5 million to $20 million which is consist with the three transactions we have closed since fourth quarter 2009 as well as the Virginia transaction scheduled to close in June.

Although we have capacity to finance larger transactions I anticipate most of the investments we focus our efforts on for the remainder of this year will be in this range. We are targeting our initial investment yields in the mid to high 9% range. 2010 investment guidance given on last quarter's earnings call was for an additional $60 million of investments over the $17 million closed in the first quarter which we continue to maintain. Upon closing the Virginia transaction, it will account for $22 million of the $60 million dollar target. Although we are hopeful to close at least an additional $30 million of investments this year, the actual amount may be more or less depending on opportunities available in the market meeting our underwriting criteria. Furthermore, our focus on marketing efforts is paying dividends as these four transactions are leased, or will be in the case of Virginia, to operating companies that are new to our portfolio. These transactions showed diversity in relationships with operating companies new to our portfolio as well as a mix in geographic location and asset type. We hope these new relationships will continue to expand into additional opportunities as evidenced by the execution of the purchase agreement for the Virginia properties.

Now, I will turn the call back to Wendy.

Thank you both Pam and Clint. Since Clint finished his comments relative to marketing efforts and the success we've seen in the ground that Andy has covered in the last couple of years, I'm going to ask Andy to make some brief comments about what he's currently seeing and how we're approaching our current marketing efforts.

Thank you, Wendy. Our current marketing efforts are in some sense a continuation but a change from what we've done in the past. Clint mentioned that we focused on smaller transactions, they tend to have better margins and be better assets overall. They tend to be with smaller operators and so we have gone out to find those people. It's a research and execution cycle, in a way. And for the last two or three weeks, we've been really focusing on research because you have to identify people that you want to meet, and then go find them. We tend to do it, of course, at meetings, which is very productive, and also with calls, the way everybody does. However, we focus on the smaller local setting. We do go to national associations, but we also go to regional and state association meetings. And we found that to be a good way to do it. The reimbursement for our assets is pretty much determined at the state level and so that's where folks congregate.

We are meeting extensively with CFOs and increased our effort in that case to educate them about our transactions. Sale and lease back is a foreign transaction to many people. They don't understand it. They don't understand that there are advantages and they don't believe reflexively that it could be of use to them. It's our job to sit down and explain to them why they might want to use it. In a sense sell it, sell the kind of deal that we do. It does have very significant advantages in many cases as is evidenced by a fairly broad range of successful deal efforts that Clint has executed. We are attending about the same number of conferences as before. We have not focused in California Texas or Florida, frankly, because we know a lot of people there. We've maintained our relationships with those people and tried to nurture them. But we've done more greenfield marketing development in the last six months than we had before that. As I said, we think it's working and we're excited about it.

Thank you, Andy. As Pam mentioned during the quarter we did utilize our ATM program to issue 365,000 shares and we generated $9.7million in proceeds. Yesterday we paid off our secured debt on an assisted living property in Bacaville, and we used some of these proceeds to make that payment. Granted, we could have used our line of credit and we could have had more accretion on this because our line of credit is at 2%. But I believe we will have more accretive uses for our line of credit in the future. And as Pam mentioned, we're very fortunate that Bank of America joined our credit line this last quarter with a $30 million commitment.

LTC now has investments in 206 properties, including owned and mortgaged. We have 44 total operators and we have approximately a 50/50 investment in SNF and ALF properties owned by LTC. It's not a specific strategy of ours, if we buy a SNF we have to buy an ALF to keep our balanced portfolio. It just happens that that has been the opportunities that we've seen and certainly this Virginia opportunity was a combination independent living, assisted living and SNF in one of the properties.

We believe that investment opportunities, the supply side, and the demand for skilled assisted living services which is the demand side, benefit our investment strategies and our experience. And as of today we have $537 million in gross book value of owned properties. That's not market value, that's not not capped value, that is historical invested dollars. Only $3.7 million of that is encumbered with floating rate debt currently at 2.08% and that's not due until 2015. Approximately $157 million of gross book value is allocated to our borrowing base with our banks. After paying for our $22 million investment, we will have about $50 million drawn on our line. That's enough for me to say that we might be out there looking for more permanent debt financing in the very near future. With so much unencumbered book value, not market value, I remind you, but book value, I would not expect that we would be entertaining any secured debt, but I don't close the door to agency debt if it's the right thing to do at the time of financing.

LTC has maintained a long view on acquisitions and has a proven track record of only making investments that fit within our strategy and our underwriting standards. During the majority of 2009 we did not make investments, for the reasons I've mentioned many times. Prices were too high, returns are too low. Then in the fourth quarter of 2009, we began to see an increase in investment opportunities and made an investment of 3 ALFs for a total of $13 million. This year so far including the $22 million deal we have or will have invested $43 million in four transactions which will include the $4 million expansion project we disclosed.

We think our pipeline right now is in the $50 million range. But I caution you that we don't give any assurance that any of these current discussions will lead to a completed acquisition. If prices start going up again and we're not able to make investments within our underwriting criteria, we will again step aside rather than do non accretive high priced acquisitions.

We continue to maintain one of the strongest balance sheets in the REIT industry. Our balance sheet ratios compare favorably to investment grade peers. For instance, as of March 31st, 2010, not pro forma for our subsequent events, LTC net EBITDA to debt is 0.3 times. The next best is NHP with 4.3 times and then Ventas with 4.5 times. And I'm comparing us only with the investment grade healthcare REITs right at this moment. LTC's net debt plus preferred stock to enterprise value is 31.2% which fits in the middle of the peer investment grade healthcare REITs. Our preferreds are considered debt in this analysis. And the majority of preferreds are at about an 8% yield. These are perpetual preferreds but are fairly high yield in today's market. Our fixed coverage ratio, including our preferred dividends, is 3.6 times, and the next best is Healthcare REIT with a 3.5 times.

Our only near term debt maturity is our line which matures in 2011. As I said, we're going to be looking at some more permanent financing in the near term future. We believe we have access to the public debt markets, the private debt markets, agency financing, public equity and our ATM. So liquidity is not an issue for LTC. We have not increased our common dividend this year, but look for transactions that will provide us with the opportunity to do so. Since 2002 we have grown our annual dividend from $0.40 to $1.56 which represents an 18.5% compound annual growth. Our dividend yield as of yesterday's close was 5.5% and the average REIT yield, not necessarily the healthcare REITs, but REITs in general is 4%. Additionally we've had a strong historical stock performance in the REIT industry. In the last three years we've had a total return of 35.6% and this ranks sixth in all REITs. We've had 109.6% total return in five years and that's seventh in all REITs. And we are second in ranking in all REITs at 109.6% over ten years. And during all that period we've paid down debt, delevered the Company and paid consistent well-secured dividends to our common shareholders.

2010 looks like it will be a growth year for LTC. And we will be active in the coming months in the financing and acquisition arenas. I'm only confirming guidance that I gave at the beginning of the year which was $1.92 to $1.96 at this time. We will provide updated guidance as reality changes.

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

Thank you. (Operator Instructions). Our first question is Karin Ford with Keybanc Capital. Please go ahead.

Good morning. I wanted to ask you if you can handicap the different alternatives that you mentioned you had for terming out some of the $50 million you'll have out on the line, and just talk about what some of the different costs are for some of the different debt options that you mentioned.

It seems private debt market is still very attractive. I would be looking at something sub 7% yield. We could be doing things at a $25 million issue to $50 million to $75 million, whatever. So we do like, as we said before, we like the laddered type of debt so that we can have payments control over future payments. Also, the convert market looks pretty good right at the moment. And I think we'd have less of an interest rate on convert maybe in the 4% to 5% interest rate on a convert, so we can also do smaller transactions in that. Pam's done a lot of work on agency financing, so we've got a lot of paperwork already done in providing for that. And as we're seeing some of the occupancies and the coverages come up for our assisted living portfolios, that might be attractive in the future, but the interest rates on those don't seem to be as attractive right now as the other two options.

That's helpful. Then regarding the ATM and equity, should we look at, the way you financed your 1Q transactions you did, call it, $17 million with $9 million of ATM issuance in the quarter. Are you expecting that to be relatively consistent, that ratio going forward?

I think so. I'd prefer that we have a fairly good percentage of our acquisitions being done with equity. But, again it's got to be accretive.

Final question is just on ALC's occupancy, it's striking to see all of your other tenants, including Sunrise, get a big occupancy jump. Is ALC's new strategy still holding them back or are there any other issues that you're worried about with ALC?

I read somebody's -- it might have been Jerry's -- early analysis of ALC's performance and I think from what he issued this morning they were saying they had year over year either flat or slightly improved occupancy. They are experiencing more revenue because they've 'been able to increase their private pay base, the people moving in are private pay, and they've been able to get some rate increases. They seem to be, again, maintaining the highest margins because they control cost. So on the overall basis, I don't see that our properties are out of line with what ALC is doing in their total portfolio. It seems to be not harming her ability to make money at the moment.

Thank you very much.

Our next question is from the line of Jerry Doctrow with Stifel Nicolaus, please go ahead.

Wendy, thanks for that plug. Andy must be teaching everybody marketing there, we've got lease coverage, we've got all the stuff about your past performance. It's good to hear. I didn't pick up the yield on the investments that you made. I think you gave the range of what you're doing, the couple that you've closed and the one you're going to close June 1. What was the initial cash yield or GAAP yield?

They're around 9.7%, and I think our GAAP yield is 10.48%.

10.48% is the cash?

Yes.

And that's true for the ones that have closed and the one that will close?

Yes it's approximately, yes.

Okay. Great. And the mix of stuff you're doing is more on the skilled side than assisted. Can you give a little bit more color on the acquisition pipeline?

I would say we've looked at about 50/50. We've had some really good activity with this one operator that Clint was saying and he happens to do more SNF than ALF. We've seen quite a few ALF opportunities. One of the things we have found to be difficult is that if there is an ALF that is not being well operated and is for sale, and they're trying to sell the operations also, it's difficult for us to compete with an owner operator who might be buying it. So I think ALfs that might want to do sale leasebacks and keep the management in place is what we would be targeting mostly. But right now, yes, I think we're going to have more success in the SNF area in the very near future.

And competition from that, do you run into OHI or other REITs, or you'e not really competing for deals, it's just a matter of sourcing and negotiating?

I don't think that we have identified any specific competition. The one that we were very interested in in Pennsylvania, I think they're going to be sold to a local operator. So it's not competition from another REIT that I see. Though, I was a little perplexed at Jake buying a $9 million SNF. If he wants to come down and shop in our area, I'm going to have to look for another area.

I wouldn't worry about it too much. Great. That's really all I have. Nice quarter. Thanks. Actually I do. I just want to make sure on the school that I understood it, the $850,000 or whatever it was that you wrote off, that's the entire loan balance?

No. No. We had a recent appraisal of the building, so we wrote the mortgage down to the appraisal, just building appraisal. And that included, we had a deferred gain and we had some normalized interest and so the value of the building didn't go as much down as we had to do book to clean up what we had on our balance sheet. This accounting concept of normalizing income over the whole life of your property.

Okay. So you've not recognized obviously any interest earnings for it.

No.

So when you sell it, the most likely outcome is it will be a wash, you're hopefully realizing the current book value.

Right.

And it goes away. And any sense of whether a sale is more likely, or you also talked about perhaps somebody assuming the mortgage.

We've been contacted by charter schools. The charter schools have to start taking in admissions fairly soon, so we've been contacted by charter schools, and we've been contacted by some churches that would be interested in the property. So my best wish is that we just got the money out of it and redeployed it. But if there is a creditworthy tenant that's willing to assume the debt then we would probably do that too.

What's the current written down balance that we're talking about?

$2.9 million. It was a private school. The one in New Jersey is the charter school.

Okay, thanks.

(Operator Instructions). Our next question is from Mark Lutenski with BMO Capital Markets, please go ahead.

Hi, how are you. Just a quick bookkeeping question, how much of acquisition expenses were in operating and other expenses for the quarter?

$83,000 this quarter.

Okay. And then on your balance sheet as part of your overall portfolio, I guess your loan portfolio has trickled down over time. I was wondering if that's part of an overall larger strategy to downsize that or is that just hose being paid off and looking instead to owned property investments?

It's a couple of things. One is they are being paid off because they do have amortizing payments within them. And we haven't made as many loans as we had in the past because we want to maintain our equity REIT status and we have recently experienced some competition in terms of rates. So our loans are fairly high in terms of interest. However, just yesterday we had one of our borrowers who called us up and wanted to extend and increase his loan even though his interest rate right now is 11%. So it's not that we won't do loans or we would turn down a loan, it's just the opportunities that have been presented to us most recently have been sale lease backs rather than loans. We're happy to do a loan on the right property for the right percentage and right interest rate. But we won't go back to being a hybrid REIT.

Got you. And I think I got a little confused. Did you say the pipeline for potential acquisitions is $30 million or $50 million?

$50 million right at the moment.

Are those of the same nature as some of the transactions that you've done this year or are there any other characteristics about them?

They're the same. Mostly sale lease backs to current operators.

Thank you.

We have another question from the line of Karin Ford with Keybanc.

Just a couple of follow ups. Has there been any ATM issuance since the quarter end?

No.

On the guidance you're maintaining the current guidance for now and that's in spite of losing the interest income on the school so did you make up income somewhere else to keep the guidance unchanged?

We have the new $22 million investment.

Got it. Okay. And are you feeling more confident today based on the pipeline and the environment that you might exceed the $60 million investment guidance number that you had given us in the past?

No, I'm going to stick to that $60 million, so we're at $38 million.

Okay. Thanks very much.

We have no further questions at this time. We'll turn it back over to management.

Thank you. Thank you for joining us and spending the time. As I said we look forward to an active year and we'll talk to you in about three months. Thank you very much.

Ladies and gentlemen this concludes today's teleconference. You may disconnect the lines at this time. Thank you very much for your participation.