LTC Properties Inc (LTC) 2011 Q3 法說會逐字稿

Good afternoon and welcome to the LTC Properties third quarter 2011 analyst call. All participants will be in listen-only mode. (Operator Instructions).

This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some of the forward-looking statements by their use of forward-looking words, such as believes, expects, may, will, should, seeks, approximately, intends, plans, estimates, or anticipates, or the negative of those words or similar words. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions, and financial trends that may affect our future plans of operation, business strategy, results of operations, and financial positions.

A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, the status of the economy, the status of capital markets, including prevailing interest rates, and our access to capital, the income and returns available from investments in healthcare-related real estate, the ability of our borrowers and lessees to meet their obligations to us, our reliance on a few major operators, competition faced by our borrowers and lessees within the healthcare industry, regulation of the healthcare industry by federal, state and local governments, compliance with and changes to regulations and payment policies within the healthcare industry, debt that we may incur and changes in financing terms, our ability to continue to qualify as a real estate investment trust, the relative illiquidity of our real estate investments, potential limitations on our remedies when mortgage loans default, and risks and liabilities in connection with properties owned through limited liability companies and partnerships.

For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and in our publicly available filings with the Securities and Exchange Commission. We do not undertake any responsible to update or revise any of these factors or to announce publicly any revisions to forward-looking statements whether as a result of new information, future events, or otherwise.

Please note this event is being recorded. At this time, I would like to turn the conference over to Wendy Simpson. Please go ahead.

Thank you, Laura. Good afternoon and thank you for joining us today. With me are Pam Kessler, our EVP and CFO, who will be commenting on our 2011 third quarter earnings; and Clint Malin, Senior Vice President and Chief Investment Officer. We'll begin with Pam's presentation.

Thank you, Wendy. I'm going to be discussing quarter-over-quarter results. I will refer you to the 10-Q that was filed yesterday for year-over-year analysis. Revenues in the third quarter increased approximately $250,000 due to acquisitions, which was partially offset by loan payoffs and a normal amortization of mortgage loans.

Interest expense increased $251,000 due to the sale of 50 million senior unsecured notes to Prudential in July, which termed out acquisitions we were holding on the line of credit. This increase was partially offset by a lower amortization of debt issue costs. The second quarter was abnormally high due to the write-off of debt issue costs related to the previous line of credit that was replaced during the second quarter.

Operating and other expenses decreased $177,000 due to timing of certain marketing and franchise tax expenditures and higher costs in the second quarter related to the preferred stock redemption. Expense from discontinued operations relates to an independent living property in Texas. GAAP requires that we reclassify income and expense related to properties sold or held for sale to a line item discontinued operation.

Excluding noncash interest expense related to the earn-out liability, fully diluted FFO per share was $0.54 this quarter compared to $0.54 last quarter. Fully diluted FAD per share was $0.52 this quarter compared to $0.52 last quarter.

Turning to the balance sheet, during the quarter we purchased a 140-bed skilled nursing property located in Hewitt, Texas, for $10 million. Subsequent to September 30th, we purchased a 196-bed skilled nursing property in Texas for $15.5 million and a vacant parcel of land in Amarillo, Texas, for $800,000.

We have committed to fund the construction of a 120-bed skilled nursing property in an amount not to exceed $8.3 million. This new property will replace a 90-bed skilled nursing property in our existing portfolio. We believe construction will take 12 to 18 months and upon completion, the lessee intends to relocate the residents from the existing skilled nursing property to the new skilled nursing property and the existing property will be held for sale. At September 30th, the net book value of the existing property was $533,000.

Additionally, on November 1st we acquired a 156-bed skilled nursing property in Colton, California, for $17.5 million.

We invested $630,000 during the quarter in capital improvements at a weighted average yield of approximately 10%. We received $649,000 in principal payoffs on one mortgage loan and $717,000 in scheduled principal payments on mortgage loans receivables.

We paid a $4 million earn-out related to the first quarter acquisition of four skilled nursing properties in Texas. The $6.2 million earn-outliability on the balance sheet at September 30 represents the net present value of the estimated $7 million in additional earn-out we anticipate paying in 2013 or 2014.

On July 20th, we sold 50 million or 4.8% senior unsecured notes under our shelf agreement with Prudential. The notes mature in ten years and have a seven-year average life with amortization beginning in 2016. We used the proceeds from the sale to pay down the line of credit.

At subsequent to September 30th, we amended our shelf agreement with Prudential, increasing availability by $100 million. At September 30th, we had $28.4 million drawn on our unsecured line of credit. Subsequent to September 30th we borrowed $29.6 million to fund acquisitions. Currently we have $58 million outstanding and $152 million available under our line of credit. Additionally, we have $100 million available under our shelf agreement with Prudential.

Turning to operator statistics. In discussing the operator statistics, I will give the general caveat that these numbers come from our operators, are unaudited, and have not been independently verified by us. Additionally, the occupancy and lease coverage information is for the trailing 12 months second quarter 2011 compared to the trailing 12 months first quarter 2011. Occupancy in our same-property ALF portfolio was 77%. Excluding properties leased to assisted living concepts, occupancy in our ALF portfolio was 88%.

EBITDAR lease coverage after a 5% management fee was 1.4 times. Before management fee, our EBITDARM coverage was 1.6 times. Occupancy in our same-property SNF portfolio was 78%. EBITDAR lease coverage after a 5% management fee increased to 2.2 times. Before management fee, our EBITDARM coverage for our SNF properties was 3.0 times.

Occupancy in our same-property portfolio of properties that provide independent living or a combination of independent living, assisted living, and skilled nursing was 81%. EBITDAR lease coverage after a 5% fee was 1.9 times. Before management fee, our EBITDARM corporate was 2.4 times.

Quality mix for the second quarter of 2011 for our same-property portfolio, which includes skilled nursing, assisted living, independent living on properties with a combination thereof, was 63% private pay, 14% Medicare, and 23% Medicaid. The quality mix for the second quarter of 2011 for our same-property SNF portfolio was 23% private pay, 27% Medicare, and 50% Medicaid.

Thank you, Pam. We're having a terrific year. Earlier this year, we accomplished the redemption of the balance of our 8% Preferred F and put close to four million new common shares in the marketplace. We arranged a new $210 million four-year unsecured line of credit, added a new major bank to our existing strong bank partners, and we also arranged for additional 100 million shelf with Prudential.

Year-to-date, we have closed on slightly over $100 million worth of acquisitions with GAAP yields in excess of 10%. Our supplementals will give you more detail on each of the acquisitions.

Additionally , as Pam mentioned, we committed to spend $8.3 million to construct a replacement facility and those dollars will be counted in our 2012 investments. We continue to discuss with certain operators additional capital expansions investment opportunities for remodeling our existing portfolio.

At this time, we have available almost immediate liquidity of $252 million between our current line of credit and our new Prudential shelf. This does not include the $40 million accordion feature of our unsecured credit line or any availability under our ATM program.

If you include our 38.5 million convertible -- remaining convertible Preferred as debt, our pro forma debt to market capitalization shown in our supplemental is 20.6 times and we cover interest 12.1 times and fixed charges 6.1 times. So we have at least $150 million of additional balance sheet debt capacity before we reach a leverage of approximately 30%, and that assumes no increase in the market value of our stock. We continue to have a conservative balance sheet and very well-spaced maturities of our debt.

Prior to the CMS announcement of the 11.1% Medicare reimbursement reductions and the mandate to the supercommittee to produce legislation that reduces the national debt where there will be an additional Medicare cut of 2% in 2013, at most points in 2011 we had been working on what we defined as a pipeline opportunity of approximately $150 million. After the announcement of the reductions, we experienced a pause while buyers and sellers evaluated their respective business valuations.

Even though we've closed two transactions so far in the fourth quarter, I cannot say that we have much of a pipeline right at this moment. We're actively looking at a few opportunities, including some existing assisted living properties, but none of them have passed our hurdle of pipeline and I do not expect that we will close any additional deals this year.

And to remind people on the call, our definition of a pipeline is that we have done our preliminary underwriting, we have seen the property, and there are properties that we would go forward with acquisitions. We of course will continue to be working on a pipeline and hope to have a pipeline development for 2012 by the time we do our year-end call.

During the quarter, Pam and I spent several weeks on the road meeting with current and potential investors. The primary question was the impact that we see from the CMS cuts. Our supplemental report provides certain detail of coverages based on our operators' operating results.

Because of the benefits of RUGS 4, our coverage has been increasing from 1.9 times in the third quarter of 2010 to 2.2 times in the second quarter of 2011. We did a calculation taking just the first quarter of 2011 which had full -- a full quarter of RUGS 4. We annualized that. We reduced the Medicare revenue by 13.1% and found that the pro forma coverage was still 1.9 times, including a 5% management fee, not including any cost savings that might be implemented by our operators.

We have spoken with all of our primary operators, and while none of them are happy with the cuts, none of them are evidencing any serious issues that would cause them to miss rent payment. We have no delinquent rents at this time.

We are somewhat pleased that quite a few of the deals that we have recently seen announced in the skilled area are deals that we either looked at this year or in years past and we took a pass on. Though we are not overjoyed to see private REITs in the space and paying what we consider relatively high prices, we have always had competition and are confident that the right deals for LTC will be identified by our marketing and network strategies.

At this time, I'm slightly increasing our low-end guidance and maintaining our upper-end guidance for 2011, so my guidance now is somewhere between 200 -- 200 -- in my dreams -- $2.12 to $2.14 of fully diluted amortized -- normalized -- I mean normalized FFO.

Thank you, Laura, and I'll open it up for questions now.

(Operator Instructions). Our first question is from John Roberts of Hilliard Lyons.

Hey, Wendy.

Hi, John.

This is a big picture question and you covered it a bit with the private REITs coming in, but are you at all worried that the decreasing number of large portfolios, large party portfolios, that the big guys have been targeting may result in them putting together groups that target the smaller type deals that you guys are looking at and that that might push prices up?

I really don't think so because of the time that it requires to do it. I see them diversifying into other areas rather than just the SNF areas. There's still a few packages out there. We were out looking at a package that preliminarily the seller wanted some $58 million or something like that. Clint just looked at him a couple of weeks ago and they don't fit into our underwriting, but they might be a fine tuck-in for a larger company who can take the risk on these smaller rule properties and do a $50 million deal.

And do you think that -- obviously a lot of the big guys are going after the operating end of things through [REGIA].

Right.

But that's something you're not going to go after, I take it, so that might take them away from what you're looking at as well, you think?

I think so.

All right. Great. Thanks, Wendy.

You're welcome, John.

Our next question is from James Milam of Sandler O'Neill.

Good morning to you guys out there.

Hi, James.

My first question, it looked like G&A was a little bit lower in the third quarter. Is that a sustainable run rate for you guys now? Or was there something else in the third quarter that brought it down a little bit?

No. I think if you're looking at a sustained run rate, that our average has been typically about $2.2 million a quarter and I think that would be right. $2.2 million to $2.3 million. So yes, I guess the third quarter would be more normal.

Okay. And then I guess taking off from that then. Wendy, why, if you do $0.54 in thefourth quarter, that would bring you guys to $2.14, but you have these acquisitions that closed in October. Is there a reason why, something that I'm missing in terms of the guidance, the upper end not coming up a little bit as well?

No. I'm just providing for additional possible costs in the fourth quarter. We're doing the Analyst Meeting and all that sort of thing, so that may cost a little bit more money than --

And there will be the acquisition costs.

There be will the acquisition costs.

Back to your first question, the $2.2 million, $2.3 million range does not include the acquisition costs, so I think fourth quarter, because we closed acquisitions this quarter, you'll see more acquisition costs.

Okay. So --

Yes.

$2.14 includes a little bit of acquisition costs and maybe a little bit extra for the analyst -- the Investor Day?

Yes. In the fourth quarter, yes.

Okay. Great. Thank you. And then this question -- I know you guys don't need equity by any means, but as you look at where the stock is moving, what are your thoughts about maybe accessing the equity market as opposed to pulling down more on that unsecured debt? Is that something that you would consider at all or -- ?

We would definitely use the unsecured debt at this. Even though our stock has moved up, it's still in a cost of capital that's in excess of what we would issue equity.

Okay.

So it's got to have a three plus in front of it before I would think that equity would be a reasonable thing for us to do based on everything we know today.

Okay. That makes sense. And then my last one. Is there any mortgage maturities or loan repayments that may be coming up next year or anything that can get repaid a little bit early? I know that's not typical for you guys but -- ?

You mean that we would repay or that -- ?

No. They would repay.

That they would repay. Yes.

They're minimal. If you look in the supplemental, there is a table on it, but they're somewhat minimal.

Just that one small one. Okay. Perfect.

But, James, that's something that is a challenge to us in that every year, as you can see, our mortgage interest income is coming down because the loans do mature and amortize. So we have to replace that with -- hopefully we're replacing it with rental income, which is much more long-term than mortgage income.

Right. Right. Okay. Perfect. That's it for me. Thank you.

The next question is from Mark Lutenski of BMO Capital Markets.

Wendy, in your conversations with the operators, have you gotten an idea at all where they might be able to gain cost savings? I guess in relation to CMS.

Yes. You've heard from -- I'm sure from Guild and from Sun what they're doing, a little bit of overhead and a little bit of operational adjustments. Most of our non-public operators really expected that they had not significantly increased their costs. Our non-public operators generally did not have therapy companies, so they're not going to be hit with that issue. They have therapy contracts. Our operators, they had some costs that they could take out, but they -- RUGS 4 was actually in existence for such a short period of time and most people didn't expect that it would be lasting. I'm thinking that if they don't find any cuts that they're still going to be fine. So talking to Preferred Care, who is our largest operator, they're not anticipating that they need to do any significant cost cuts.

I guess your sense is that they might not have already implemented a lot of cost savings yet?

Well, they -- I don't think they -- they ramped up costs because of RUGS 4.

Okay. And just a housekeeping question. Can you share with us what the coverage levels are for Assisted Living Concepts and Sunrise?

Yes. Assisted Living Concepts is one -- 1.3 times after a 5% management fee. And Sunrise, as we have discussed in the past --

It's 0.3. (multiple speakers)

Yes. They don't cover, but at Sunrise, we have the corporate guarantee of Sunrise and it's -- that portfolio, the coverage has not changed over the past five, six years and --

And their occupancy is --

And their occupancy is 83.4%. That's in the second quarter. Trailing 12, it was 87.5%. So it's -- we watch that operator, but it does not give us -- we're not concerned about it. Not -- not as concerned as we were when the corporate entity of Sunrise was experiencing its difficulties.

Great. Thank you.

And next is a question from Karin Ford of KeyBanc Capital Markets.

Hi. Good morning. I think on last quarter's call, you said you thought that this year you would be at about $100 million for acquisitions and that next year you thought you would probably be greater than that. Based on your new outlook on acquisitions, would you say now that you now expect 2012 to come in probably lower than the $100 million or is it too early to tell?

It's really too early to tell. I'm optimistic based on the stuff that we're currently working on, but big headline issues relative to any changes in reimbursement could create another pause.

Right. Okay. And how much skilled nursing exposure would you be comfortable with having the company at on a go-forward basis?

I really would be comfortable having it 60%, 70%.

Okay.

If you underwrite a business properly and you factor in your risks -- I would love to find a no-risk business but this is a risk and if you underwrite properly, you're going to be -- I think you're going to be okay. So this is an industry that's here to say. I think we're very familiar with the industry and we're going to continue making acquisitions for accretive purposes so we may -- I expect we will go higher.

And on the most recent skilled nursing acquisitions, what was the rent coverage on those leases?

The rent coverage. This is Clint. We were --

We're underwriting, too.

We were north of 1.5 times.

North of 1.5. And has that changed since the CMS ruling?

No. What we are doing, though, is we're taking their Medicare revenues and reducing them by 13.1%.

Okay.

So.

Got it.

And then we're underwriting to 1.5.

Got it. Okay.

And that's including an entire 5% management fee, and so it would be like that entity was operating all on itself and -- or was -- yes. Operating all on itself and was paying somebody an additional 5% profit.

Right. Okay. And then last question, there's been a lot of discussion by your peers about the ability of larger national scale operators versus their smaller brethren to be able to weather any reimbursement storms. You span, I guess, the breadth of some smaller guys and some larger guys. What's your view on the smaller versus larger argument on the operator side?

I think the individual -- single individual operator is probably going to -- or not probably, is likely to have an issue for the cost reductions. I wouldn't like to be an individual operator in the state of California and all of a sudden have 10% of my reimbursement banked for me. But in the other states, we don't have that many individual operators that I would be concerned about, and I think all of our operators have some -- have made really good profits in the past and have some cushions, so I'm not concerned about our portfolio. There may be some opportunities then to buy an individual operator and roll it into some operator that can put it into its portfolio, but I think the really small operator might have some problems, Karin, but I don't see any of them in our portfolio significantly.

Okay. And what is your skilled exposure in California? Including the new deal as well.

Right. Yes. The new deal is kind of a unique deal, though, because it's mostly contracted care rather than the regular nursing home Medicare.

Oh, okay. Do you know the percentage of your SNF portfolios in California?

Very small. That's total. That's total.

Which includes --

Two properties, one in Sacramento and one in -- (multiple speakers)

So we had 17. We just did 17.

It's probably less than 1%.

Okay. Great. Thanks very much.

Thank you, Karin.

The next question is from Frank Morgan of RBC Capital Markets.

Good morning. Understanding your definition of backlog, I'm just curious. Can you talk a little bit about -- we'll call it stuff that you're working on as opposed to your backlog where you have pre-underwritten it. Can you give us any comments about how big that backlog would be and over what period of time that would take to convert into actual deals?

Yes. Clint will answer.

This is Clint. It ranges from -- there's some larger deals, some smaller deals. It's between a $100 million to $200 million level. It can consist of existing operational SNFs. It includes assisted living facilities and development opportunities, so there is a lot of different -- a lot of different types of transactions, but we may be at a point about we're looking at disconnect on value but people are trying to make it work. So there's a host of different --

But more specifically, Clint, without getting off competitors, we're looking at a group of assisted living --

In the southeast.

In the southeast.

Yes.

We're looking at a small group of Alzheimer's in --

We're looking at -- in the Midwest.

In the Midwest.

We're looking at some Alzheimer's projects. We're looking at some development projects in Texas on the assisted living side. So we're looking at -- up in Pennsylvania we're looking at (inaudible) nursing home there. So it's a combination. Different parts --

Right.

A little bigger, a little smaller. There's some assisted living facilities in the northwest that we're looking at. So it ranges across the country. Different sizes as well as different asset types.

Okay. And when you look at this larger backlog and you think about the logjam right now, do you think it's more valuation disconnect? Do you think it's -- do you want to wait and see how the next quarter or two works out? How well operators do under RUGS 4? What has got to happen before you see this potential backlog turning into deal flow? Thanks.

I think it's a valuation disconnect. We're factoring in, from underwriting standpoint, cuts as Wendy indicated on the Medicare side and trying to get people to rationalize that, so I think it's really, from my perspective, on the valuation side.

Okay. And in terms of -- we've heard some operators talk about -- I guess no surprise, Sun has talked about shifting some of its growth CapEx requirements over to -- and offering that up to REITs in the marketplace, and I'm curious. Do you have an interest in that strategy and using that as a vehicle for growth in the interim?

We've done a project with Sun in the last -- we just finished up a month or two ago, and we're talking to various tenants in our portfolio. Right now -- I mentioned last quarter, we probably have about, including -- well, including the replacement project, we've got about $40 million in various projects that we're talking to our existing operators about regarding major renovations, additions, expansions things like that. So I think we have a lot of opportunity within the existing portfolio to grow that in the interim.

Okay. Thanks.

Mr. Stender?

Hi. Thanks. Sorry about that. Can you just discuss the construction, the SNF in Texas, on the land parcel you just acquired. Just the process you go through. I know the operator is going to be moving out the folks from one facility to the brand new one. Is there a transfer of licenses? Can you just talk through the process?

The process is pretty simple. The -- we -- this is a unique opportunity we found. The operator we're working with, they have recently developed another facility in Texas. We toured that property, so there is a lot less time and cost involved from a design standpoint because they're using pretty much the existing model. And the land that we acquired is pretty flat and doesn't require a lot of work. So it should be able to start it fairly quickly. On the transfer of the license, it's really about the Medicaid bed rights and we control those currently, so that's a pretty simple process of submitting it to the state.

And the operator is adding some.

And the operator is adding some. They have -- they're offering some additional licensed beds, which getting additional licensed beds in Texas is not a problem, so we will be upsizing about 30 beds from the current property that we have.

The property that we have had is in a small town in east Texas -- or west Texas called Canyon and it's the only nursing home in the town, but the town is probably 10, 15 miles away from Amarillo. So our operator was able to identify a nice piece of land on that side of Amarillo and all of the employees and all of the residents in the nursing home, it would be natural for them to transition into this new property when it's opened up, so it was just a really terrific opportunity for us because Amarillo is a growing area. We're able to put up a new property. We are able to roll in the existing rent and capture our return on the additional $8 million that we're putting in. The operator is adding some additional beds to the property. The Canyon property was doing good business, it was the only thing in town, but it was so very old and there was not enough capital that you could have put into it to make it worthwhile. It's going to be closed down. Of course, it won't have any licensed beds. The operator is responsible for taking care of that property in terms of either getting it sold for an alternative use, or if it's not sold after a period of time, for making sure it's knocked down to just the land so that we don't have the problem of what I refer to as a dead building on our hands. So it was a really, really good opportunity for us with this operator and an older property.

And another good thing about the location of the property is they're going to be able to draw probably more from Amarillo now as well as Canyon. So there will be a bigger cash scenario given the new location now that the property will actually be located in Amarillo itself on the southwestern side of the city.

That's really helpful. Thank you. And under new acquisitions, now that we're looking at the environment post-CMS's decision, do you find that lease durations are coming in a little bit, or are you still underwriting at 15 year leases? Or do you find that you and/or the operator are only comfortable, say, underwriting for ten years?

We have pretty much done have 10 to 12 year leases and we're still in that range.

Okay. Thanks. And my last question has to do with -- you touched on it before with Sunrise's corporate guarantee. I'm just wondering if we, as the investment community, are looking too close at facility level rent coverage and if a lot of your leases, or only a fraction, contain these corporate guarantees where it takes a little bit of the pressure off of a coverage getting closer to one. Can you just talk about that?

Well, I think we could use the credit at both extended care and Assisted Living Concepts portfolio. Other than that, I think it's -- I'm more comfortable looking at it at a facility level than at a corporate level because I'm not really sure what's going on with the other parts of that corporation. So.

Yes. We always look first at the facility level when we're looking through our portfolio review, but then any mitigating corporate guarantees like with Sunrise gives us less reason for concern.

And on top of Sunrise, we obviously have been monitoring these assets and we had a group from our company out looking at the buildings earlier in the year, and they have made more progress, and I think they had a backlog of capital deployment into the facilities and they have now started to spend more money. So hopefully along with spending that money will come increase in occupancy as we continue to try to improve those coverages.

And that company does tend to push rates more than some of our middle-level markets, so I think the second quarter, we saw a pushing of rates,I think, across the board, and a lot of the public operators experienced softening in the second quarter. I conjecture that was due to rate increases because we had gotten back up to about the 90% level and some of the larger operators experienced rate -- I mean, occupancy decreases and I think that's what we saw in our Sunrise portfolio. Not in our Assisted Living Concepts portfolio. They increased 100 basis points from the first quarter to the second quarter.

Okay. Thank you very much.

Thanks, Todd.

And the next question is from Jerry Doctrow of Stifel Nicolaus.

Good morning. It's actually Dan Bernstein filling in for Jerry.

Hi Dan.

Most of the good questions have been asked already. On the Prudential shelf, can you talk about what the current pricing on that might be and whether you would rather go, say, more ten -year money or five-year money given the credit curve?

Yes. Pricing right now due to a dislocation in the credit markets pertaining to [grief], it seems to change daily, but I think specific to healthcare REITs and if you look at where healthcare REIT paper is trading, there's still an overhang from CMS. I think until we get more clarity on what happens with the supercommittee and how rates are going forward, they won't trade as well as they were when we sold the 4.8% notes. So right about now, I think that rates for the same paper would be about 5.5 so I wouldn't be recommending that we term out debt right now under those circumstances. I would rather keep it on the line and wait.

Maybe hope for the equity to be above 30, right?

Yes. Make it so.

Make it so.

Yes. But we do, Dan we do look at our maturities and we like to go longer on the yield curve if it's attractively priced, because we are trying to match fund. We're buying these long-term assets and we believe it needs to be matched with long-term debt.

Related question on the other side of the coin there. For the operators, it seems like they might have less access to capital. Do you see room for LTC to be more of a capital provider on the mortgage side? I don't know if you would do mezz debt or anything like that as well, or mezz equity, but do you see yourselves having some more opportunities to provide some mortgage financing?

We haven't seen it yet. We have one unique situation that I regret to say I'm not sure where we stand on it. Pam's been handling it. One of our operators in Florida wants to put some significant money in a couple of our buildings, which we're very much in support of, and he was going to use his own money. And we said use our money even as a loan rather than roll it into your lease payment. So we're negotiating with him to do a small loan.

Yes, and I think eventually we will go forward with that. He just wanted to put it on hold after the CMS cuts were announced. He wants to see how things shake out. We, too, would like to see how coverage looks on his building after -- post cuts.

Right

So I think that will eventually happen. It's just right now on the back burner.

It's just a unique -- to put a couple of million dollars into our buildings and pay us back that couple million of dollars and it's still in our building and pay us costs -- pay us an interest rate at that time, but we haven't seen any additional requests for any mortgages.

And --

And just to clarify, to be sure, I don't want anybody to leave this call thinking that once we get to 30 we're going to be issuing equity. That's not -- that's not what I meant.

That's not what I wanted to imply either.

There you go.

And then just one last question. I assume you're not interested in anything for taxable REIT subsidiary at this point, say, senior housing, or would you actually consider a particular property or portfolio for TRS?

I don't think we would create a TRS for a new opportunity. It's just a very complicated structure for our company at the size we are and we don't like the risk portfolio --or the risk profile of it. We don't understand how it's underwritten without a level of additional return for the equity risk but -- so we haven't been able to make a pencil out. We look at it. We're not saying that we're totally closed to it if it's the right thing to do. We just haven't seen one that's the right thing to do yet.

Very unique opportunity, then, for you.

Yes.

All right. That's all I have. Thank you.

Thank you, Dan.

Next we have a follow-up question from Mark Lutenski of BMO Capital Markets.

Actually, it's Rich here with Mark. I guess a lot of your peers are having -- are talking about some difficulty underwriting nursing home deals because of the lingering uncertainty and the lack of clarity on the future of Medicare, and I'm wondering if you're having -- and you may have alluded to this, but how much is that getting in the way of executing acquisitions, just the uncertain future?

The uncertain future of Medicare as a program totally?

Yes. Well --

Or the uncertainty -- ?

Unlikely to be the last of the cuts for Medicare reimbursement to nursing homes. And so the question is isn't that creating some -- throwing a wrench in the system for you to underwrite deals or is it not so much a problem for you?

This is Clint. I would say not so much a wrench for us in underwriting them, but it's more right now I think sellers are holding back a little bit; uncertain about where things are at, and if we do underwrite something, we've got to come in with substantial coverage to be able to withstand any additional cuts because it is possible there could be additional cuts so --

We're underwriting already with 13.2% -- 13 -- ?

And at least -- (multiple speakers)

13.1%, yes.

We know it's a 1.5% coverage, so I think on the skilled side right now, I see that some owners are holding back --

Yes.

-- trying to get an understanding, as well as new -- operators that would want to position themselves to be the acquirer. They're getting their house in order right now, too, to make sure that they understand where they can cut costs to be able to go into a growth phase. \So I think as we go into 2012, you might see more opportunities open up in 2012.

Okay. And then last follow-up. It seems to me you guys -- or everybody in Texas dodged a bullet with Medicaid. And I'm wondering if you think that that could be just kicking the can down the road, or do you think the shop's in better order from a Medicaid perspective in Texas?

Well, Texas is one of the lowest -- has one of the lowest Medicaid rates in the country, so it's already pretty much at a low rate. The rates have been locked in now for two years. Going forward, it's possible that in the future something could happen, but knowing that it's, in general, is one of the lowest rates in the country, we feel that we didn't -- we didn't --

Wasn't there some talk about a significant cut and the outcome was flat last go-round?

Well, they had talked about it being up in the 30% range when you included all of the numbers, but it ended up being only a 3% cut --

Right.

-- to the actual Medicaid rate.

And so you feel because of the level of Medicaid now, that your largest exposure is fairly safe from a Medicaid perspective?

I do.

I do, and considering the economics of the state -- the state's growing.

If they were at a much higher rate than they are right now, then yes, maybe so, but they're at a fairly low overall whole dollar rate that can always cut a little bit, but you can't cut that much more out of it.

Fair. Okay. Thanks very much for the color.

Thank you, Rich.

This concludes our question-and-answer session. I would like to turn the conference back over to Wendy Simpson for any closing remarks.

Thank you, Laura, and thank you all for joining us today. We look forward to talking to you with our year-end results. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.