LTC Properties Inc (LTC) 2012 Q1 法說會逐字稿

Good day and welcome to the LTC Properties Inc. first quarter 2012 analyst and investor conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

I would like to remind everyone that today's comments, including the question and answer session, will include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in LTC Properties, Inc., filings with the Securities and Exchange Commission including the Company's 10-K dated December 31, 2011. Please note, this event is being recorded. I would now like to turn the conference over to Wendy Simpson. Please go ahead.

Hello and thank you for joining us today. We will begin our call with comments on the quarter from Pam Kessler, our Executive Vice President and Chief Financial Officer.

Thank you, Wendy. I will be discussing first quarter 2012 compared to fourth quarter 2011. I will refer you to our 10-Q that was filed yesterday for a year-over-year analysis. During the first quarter 2012, revenues increased approximately $342,000, due to acquisition. Interest expense increased $40,000 due to increase borrowing under our line of credit to fund the acquisition in the first quarter. Acquisition cost decreased $127,000 due to one acquisition in the first quarter as compared to three acquisitions in the fourth quarter.

Operating and other expenses increased $92,000 due to higher payroll taxes in the first quarter related to, bonuses paid during the quarter and increase in restricted stock vesting expense. During the quarter we sold a 140-bed skilled nursing property in Texas for $1.2 million and recognized a gain on sale of $16,000. The property was in a master lease with Preferred Care and there was no change in rent from this master lease as a result of this sale. So, there was no change in revenue due to the sale of the property.

Expense from discontinued operations relates to an independent living property in Texas. We receive multiple offers on this property, all with financing contingencies. We ordered in appraisal to determine the fair market value and should the appraisal indicate a market value below the current net book value of $5 million, we will record an impairment charge equal to the difference between the appraised value and the net book value.

Net income available to common stockholders increased $353,000 due to acquisitions, normalized fully diluted FFO per share was $0.56 this quarter, compared to normalize fully diluted FFO per share of $0.55 last quarter. Normalized fully diluted FAD per share was $0.56 this quarter and $0.54 last quarter.

Turning to the balance sheet. During the quarter we purchased a 144-bed nursing skilled property in Texas for $18.6 million. The property was added to a master lease at a GAAP yield of 10.8%. We sold a 140-bed skilled nursing property as previously discussed. We received $718,000 in scheduled principal payments on mortgage loans receivable, we funded $1 million under construction and term loan at 8.5%, and received $190,000 from the pay off of a note receivable. Subsequent to March 31, Skilled Healthcare Group issued a redemption notice for $6.5 million of bonds that we own. The notice provided for redemption date of May 12, 2012, and the bonds will be redeemed at PAR plus accrued interest.

At March 31 we had $73 million drawn on our unsecured line of credit. We currently have $137 million available under our line of credit. Additionally, we have $100 million available under our shelf agreement with Prudential. During the quarter, two of our limited partners redeemed a total of 89,294 shares in our limited partnership. At our option, we elected to pay the redemption of $2.8 million in cash rather than issue common shares. During the first quarter we paid $14 million in preferred and common dividend.

In discussing the operator statistics, I will give the general caveat that these numbers come from our operators. They are unaudited and have not been independently verified by us. Additionally, occupancy on lease coverage information is by the trailing 12-months fourth quarter 2011 compared to the trailing 12-months third quarter 2011. Occupancy in our same property ALF portfolio increased 79%. Excluding properties leased to Assisted Living Concepts and Extended Care, occupancy in our ALF portfolio was 88.5%. EBITDA released coverage after a 5% fee was 1.4 times. Before Management fee or EBITDARM, coverage was 1.6 times.

Occupancy in our same-property SNF portfolio was 78%, EBITDAR of these coverage after a 5% by Management fee was 2.1 times. Before Management fee or EBITDARM coverage for our SNF portfolio was 2.8 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 87%. EBITDAR lease coverage after a 5% Management fee was 1.4 times. Before Management fee or EBITDARM coverage was 1.9 times.

Quality mix for the nine months ended December 31, 2011. For our same-property portfolio which includes -- skilled nursing, assisted living, independent living and properties with a combination thereof, was 63% private pay, 13% Medicare and 24% Medicaid. Within our same-property SNF portfolio, the quality mix was 23% private pay, 26% Medicare and 51% Medicaid and that quality mix was for the 12 months ended December 31. That's it.

Okay. Thank you, Pam. Clint, our Senior Vice President and Chief Investment Officer, will comment on our deal flow and our pipeline.

Thank you, Wendy. Last quarter I mentioned we had entered into two letters of intent. One of these transaction was converted into a closed deal during the first quarter, as Pam mentioned in her comments. The second letter of intent is for the acquisition of land to construct a freestanding private pay memory care property. We anticipate finalizing all transaction documents this week and closing on the land acquisition in the next two weeks.

We're very excited about beginning our first memory care development project since announcing our development initiative late last year. LTC's funding commitment for this investment inclusive of land and hard and soft costs for construction of a 60-unit facility will be approximately $9.8 million. This investment has increased approximately $800,000 from when I initially mentioned this potential transaction on our previous earnings call. We will formally announce the transaction and related details once we close on the land acquisition.

Our deal pipeline remains strong in the $150 million range consisting of development opportunities and acquisitions of existing operational properties, mainly skilled nursing facilities. We have two new letters of intent signed by both parties and we're in the process of conducting due diligence on the transaction. We continue to be in active discussions with multiple companies regarding development opportunities for freestanding, private pay memory care properties as we focus on building out our developed program for this property type.

Now that we will be closing on land for our first memory care development project, we've been able to refine our financial modeling and our due diligence process, address accounting and tax questions, and create standardized documents in order to replicate the structure with other operators on other development projects. We believe that by having this structure in place it will give us a firm advantage in going forward and selling our development program to operating companies seeking construction financing in the memory care space.

To that extent, I anticipate having two fully executed LOI's by the end of this month on two additional development projects. One will be a freestanding memory care property and another will have a combination of assisted living and memory care. Consistent with last quarter's earnings call, we are anticipating the acquisition of skilled nursing properties will be back loaded into the first quarter of this year.

Turning to existing portfolio, last quarter I mentioned we have an approximate $40 million-plus pipeline for renovation and expansion projects within the portfolio. Following the quarter close we entered into a lease amendment with one of our lessees to fund $1.7 million for renovations to two skilled nursing properties located in New Mexico which are part of -- or are in the master lease together. Separately, we anticipate executing a lease amendment in the next two weeks on a skilled nursing property in California to fund a $1.7 million renovation to that property.

Also, we have entered into a letter of intent with a lessee to fund approximately $15 million to expand and renovate two assisted living properties which will include a memory care component at both locations. We are actively in discussions with lessees in our portfolio to convert these identified opportunities within our renovation expansion pipeline into new investments for the Company. Now, I will turn the call back to Wendy.

Thank you, Clint. We've had a very active 2012. Pam mentioned the $18.6 million deal that we closed in the first quarter and Clint's outlined some of the opportunities we are currently pursuing. We're very positive about our deal flow and the success of our marketing efforts. To add some details to what Clint has outlined, let me give you an idea of what we are working on that is in that $150 million bucket of opportunity. I believe that we have a very high possibility of Clint converting these into closed deals.

We've completed due diligence and gotten a signed -- once we completed due diligence and gotten signed purchase agreements, we will announce lease rates, and states, and licensed beds, and other details. Now this is what I am comfortable in disclosing relative to some of the deals we're working on. We have assigned LOI to purchase a skilled nursing facility for $6.5 million. This facility will be tucked into an existing master lease with an existing operator. This property is a year or so old and is being sold by its developer operator. We have a good possibility of closing this in the second quarter.

We have assigned LOI to purchase $54 million worth of skilled nursing properties from an operator in a sale lease back transaction. I'm so excited about these properties because they are among the nicest properties I have ever seen. The operator is a very innovative and experienced. These properties were opened in 2009 and 2010. The operator has done transactions with a REIT before and is comfortable with a triple net lease structure. We very much want to become the owners of these properties and add the operator to our portfolio. And, the owner operator would very much like to work with us.

The primary snag here is there is a third-party financing that needs to be addressed and is being addressed as aggressively as possible. We are also doing a market study for these properties because of the size of the deal, but having seen the properties, met the management, and knowing the state, we have some confidence that the study will be positive. If we complete this transaction, they will definitely become the front page picture on our presentation.

Last week Andy introduced me to an operator in a COM state that has some unique opportunities. The operator has options or other agreements to purchase very old properties that have three or four bed wards. These properties are grandfathered in right now, but the operator does not follow the philosophy that this grandfathered waiver will last forever. What the operator proposes is to purchase the property for reasonable amounts and build new replacement properties. These are skilled nursing properties.

I saw all of the old properties and they are extremely clean and bright back but small and cramped. The buildings are of the one-story flat roof variety and are really beyond renovation opportunities, but they are either full or close to full and almost the only long-term care facility option in their market. The operator is already operating most of the facilities either through a lease or through a management agreement. One of the properties has land that a new facility can be built on and in another instance the operator has identified an available parcel of land in an area to build a new property. This is a very new opportunity for us, but I think it would be a terrific project and I hope to be able to give more details in the future.

During our last call I mentioned that we would probably term out some of our debt line some time this year. I would say that we are more likely than not to do something to change our debt structure in the near future. If interest rates and maturities can be agreed to, we would take the opportunity to more permanently finance our recent acquisitions and secure some amount of long-term debt for transactions that we see likely this year.

I really don't want you to think this means that LTC will be raising cash from a debt offering just to have it on the balance sheet to use for possible deals. I understand and respect of you that you when you are quote -- underleveraged and cash is cheap, get all the cash you can and buy whatever you can't even if it's not immediately accretive. Whatever we do, however, our interest costs will go up. We will be careful to schedule maturities to provide us with maturing debt of reasonable amounts yearly.

We're stepping out a bit from our conservative at all costs business plans, by pursuing de novo projects in memory care and doing some financing of replacement skilled nursing properties. But each of these projects is relatively small and manageable within our core conservative philosophy. Pam mentioned that skilled nursing -- or skilled healthcare was able to refinance their debt and called their bonds. We had $6.5 million worth of their bonds and we need to replace that $715,000 worth of income. We congratulate skilled for a good refinancing and really regret to lose these bonds. We'll take this as an opportunity to use those proceeds and fund real estate assets that will provide for a longer-term return.

On our last call, I gave guidance of FFO and FAD between $2.23 into $2.25. Right now I am not changing that. Despite the $18.6 million transaction we recently closed, we are losing the interest from the skilled bonds and the difference is about $0.01 to the positive, but that does not take into consideration any additional interest costs from any debt deal that we may do. This is where I would turn the call over for your questions but let me anticipate the first question.

Assisted Living Concepts has not defaulted, as I speak, on any of their lease terms with us. Since January of this year we have physically visited all but one of the properties they lease from us. The last property is being visited this week. We have checked that all licenses are current in all properties. We have checked that the real estate taxes have been paid and are current -- and they are. We have a couple of follow-ups to do with regulatory agencies to confirm that the current licenses are in place and if we cannot get confirmation, will be contacting our lessees, Assisted Living Concepts and Extended Care about this requirement to have the current licenses.

We are compiling a comprehensive list of maintenance items we want addressed as a result of our property visits. I've not been told that any of these items are other than in the normal course of repairs and maintenance we would be noticing at any property we inspect. Additionally, I was told that at one of the properties they were replacing a roof.

We have not talked to management of Assisted Living Concepts and have no information about any process or corporate alternatives or initiatives other than what we've seen in print, including the recent release regarding [Ventas] litigation with Assisted Living Concepts. This litigation, as it stands now, does not cause default under our leases. With that, I thank you all for your time and I will now open it up for questions.

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Daniel Bernstein of Stifel Nicolaus. Please go ahead.

Good afternoon.

Hi, Dan.

A little hard not to come back to Assisted Living Concepts, although you're right to anticipate it. Do you have similar properties with other operators? I just want to understand if you have something to compare against their performance at all?

They're not just similar to properties we have with Brookdale.

And would you say those properties are performing better or are you just --?

Well, the Brookdale properties in the same type of market areas are performing better and Brookdale does not, not take Medicaid or allow their residents to convert to Medicaid, so it gets back in the areas where they are not performing very well. They are in states that rely a lot on the Medicaid residents. But, in states where -- other states like common states that we have with Brookdale, Texas would be one, they're very similar performances.

Okay. And the other question I was wondering is on the acquisition front, what are the timing of some of those LOIs that you have? Obviously, they are still in the due diligence process, but are you thinking those are second or third quarter close or is it going to be later than that? You may have said it, I might have missed it.

Yes. That's all right, the 6.5 is probably --n definitely a second quarter close. The $54 million we would both like to do but because there is a third party involved, it might slip a little bit.

Is that HUD debt or is it something else?

It something else.

Okay. And what are you seeing in terms of the pipeline in seniors housing space? I mean you clearly have some focus here on skilled nursing, but are you seeing any opportunities in seniors housing as well that might present an LOI at some point?

Well, Dan, this is Clint. On the senior housing side for the assisted living properties that we would like to look at that are better markets, newer product. The cap rates, the pricing premium that is being demanded in those makes it challenging for us to go ahead and look at so, there are opportunities we see but given the pricing current in today's market it's a little hard for us to work on our cost of capital. So, we're still actively looking at them but the pricing on skilled nursing tends to work better for us.

Okay. And then I have a question. The assets that you are buying tend to be fairly new. Do you have an average age for your portfolio and maybe a goal as to where you want that to go?

No, we don't have an average age because we've done a lot of renovations, but I would say that in the last year, most of what we bought has been built in the 2000s.

By design.

By design, or in the instance I was talking about the opportunity we buy something at a low amount and be able to replace it hopefully.

Okay. And no hesitancy on the part of sellers to sell in an uncertain market, uncertain reimbursement? The sellers, there's no hesitancy upon -- amongst the sellers to go ahead and do these transactions at this point across the pipeline?

We haven't found an operator who believes that they've ever been in a market that's not always changing. So, --.

Okay. That's all I have.

Thank you, Dan.

The next question comes from John Roberts of Hilliard Lyons. Please go ahead.

Morning, Wendy.

Hi, John.

You didn't mention cap rates. I don't know if that was purposeful or nothing's really decided upon, but I'm interested in the discussion on that $54 million portfolio since it's larger than you typically do --?

We are not ready to announce that yet.

Okay. What are you seeing? I mean, what -- are they within your typical expectation for --?

Yes, they are definitely within our typical expectation.

Okay, great. Thanks.

Our next question comes from James Milam of Sandler O'Neill. Please go ahead.

Hi, guys. My first question is just on the skilled nursing coverage. Can you guys give us a number what it would've been for annualized fourth quarter? I'm just curious if there's a way to quantify if that may continue to decline to the rest of the year, given that it's a trailing 12-month number?

I don't have it annualized. Sorry, James.

Okay, what generally -- what are your thoughts or perspective on how that may shift over the course of the year. Are operators starting to do -- should they see some EBITDARM increases over the rest of the year or is that -- obviously that's a trailing 12 number. Does that continue to dip through the third quarter?

It will dip as we expected it to dip because of RUGS4. So, a little bit of it was experienced in this last annualized quarter, so as RUGS4 comes fully into the quarter we even talked about it last quarter, we expect it will be at about 1.9 normalized.

Yes. I think we're still comfortable with that estimate one 1.9

Okay, perfect. And then my second question is I hear you on not changing your guidance given the skilled bonds, but you've also made -- closed a couple of CapEx investments that should start generating some revenue in addition to the skilled nursing asset. So my question is, why aren't you a little more comfortable assuming that the revenue does go up through the rest of the year, number one. Then number two, without being specific thinking about the potential deal pipeline what are your thoughts and also with where CMS is at this point, what are your thoughts on the dividend payout and potentially increasing the dividend over the next few quarters?

Our revenues are going up but, as I said, we're probably going to do a financing that's more long-term, so we'll be going from about a 2% interest rate to more. For a short period of time we might have additional cash that's not invested at our regular rate of returns in the 8% to 10% rate, so that will cause some additional expenses, and at -- just putting these assets online even the $54 million transaction or the $6.5 million transaction coming in at the later end of the year, we just haven't had time to push through all possibilities. I got this standalone do-nothing projection but CC, who is our controller, hasn't been able to get everything filed and give me all the assumption transaction so I am sorry, I don't have it available. The deals that we are doing are accretive but timing of when those deals come in we just haven't been able to do the pro formas on those changes, I'm sorry.

So, I guess, as a follow-up you're leaning towards potentially doing an unsecured financing to repay the line of credit balance regardless of whether these acquisitions close or not? It's not dependent on some additional acquisitions closing?

I believe so. We've got -- as Pam said, we've got $73 million drawn and as I said before when we have a significant amount drawn on our line and I always was looking at about $100 million to make it worthwhile to do a longer-term financing and right now it seems like the deal -- the debt markets are pretty open whether we do it through the pull down of our Prudential agreement, or do something else, it looks like we'll do something in the second quarter if markets hold.

Okay.

Also, in terms of us giving guidance, historically we've only given guidance on investments we've made that we've closed on and I think not updating guidance kind of adheres to that philosophy. We're very hopeful that we are going to be able to consummate these transactions, but I think to increase guidance at this point based on that would be a little premature. And in terms of the development deals that we do have commitments on, those tend to be -- those go somewhat ratably usually over a 12 to 18-month period, so you will see the revenue from those not really showing up until the end of the year or the first part of the year.

Okay. I get it. Thank you very much.

Thanks, James.

The next question comes from Josh Paddington of BMO Capital Markets. Please go ahead.

Hi, it's Rich Anderson here with Josh.

Hi, Rich.

How are you doing?

Great.

Do you have any sense of what the level of interest, a replacement tenant would be for Assisted Living Concepts should that ever happen or have to happen?

Yes. We've talked to some of our other operators on a what if type. We're fairly confident we could either place them with one operator or find people who are interested in grouping some of the assets. So, I'm not really too concerned about finding a new operator for those properties.

And at a similar rent level?

Well, that would be the question because, well, probably at a similar -- I just got to believe something is going to happen at Assisted Living Concepts, that hopefully they will either change their strategy or their strategy will be born out in the future. If we had to do it today and we didn't have the credit of the assisted living -- I mean if for some reason we to them back today and we had to lease them at a lower lease rate because they are under-occupied, we would still have Assisted Living Concepts and extended care who would have to make up that lease differential during the time that the new operator got them more fully occupied. If it lingers on until the end of the lease period which is 2014, but we'll know in 2013 that they are renewing or not renewing, so we have a whole year to analyze that. Right now if I had to take them back and I had nobody else to go through to make up the rent differential, I just believe yes we would probably take less of a rent while somebody got them up to speed, but I don't see that happening.

Okay, that's fair.

The initial rent yield would be lower but it would ramp up nonetheless

And ramp up probably higher than what the existing assisted living --

That's assuming an idea structure, something along those lines, we decided not -- we would look at that too, but we would have to think hard about employing that structure as opposed to triple net lease structure.

Okay, good color. And then the second question is on the skilled nursing coverage numbers. Have you gotten any sense of the level of mitigation efforts that your operators have accomplished to offset the reduction in Medicare reimbursement?

Rich, I don't have any specific numbers to give you, but we are in active discussions, staying in close contact with our operators to get a better sense of what they are doing and where they are at. And they started implementing this in the fourth quarter so I imagine as this year continues we will see that get to a stabilized number where they have those cost mitigation efforts fully baked into their financials, so that's something that's in process, it's underway. I don't have any specific details other than they are pursuing multiple cost reductions.

Perfect. That's all I have. Thank you very much.

Thank you, Rich.

The next question comes from Daniel Bernstein of Stifel Nicolaus. Please go ahead.

I just have a follow-up on the construction. The construction you are doing, is that memory care? And are you looking at any other asset type to do some construction funding?

Right now the property I talked about, Dan, is a freestanding private pay memory care facility. So, that's what we're targeting primarily, but we would also look at assisted living and memory care as a combined property would depend on the market, the operator, but that is something we would look at. And then we're also looking, as Wendy mentioned, on skilled nursing properties and doing some replacement projects. We have the project in Amarillo, Texas that's underway as a replacement skilled project. And we're looking at a few other opportunities hopefully in our portfolio to replace some projects, so it would depend on the circumstance, but the primary focus on development is for freestanding private pay memory care.

Okay. And just so I understand what the ALC leases, what month do they expire in 2014 and when do they have to give you notice?

They need to give us notice by December 31, 2013, to expire December 31, 2014.

And they have another set of leases, when do those expire? I think it was 2016 or so?

No. They are the same.

They're all the same?

Yes, they're all the same.

All right. Thank you. Appreciate it.

Your welcome.

(Operator Instructions) Our next question comes from Karin Ford of KeyBanc Capital Markets. Please go ahead.

Hi, good morning. What percentage of the $150 million pipeline is development versus acquisitions today?

I would say you are probably looking at about 40% development.

40%, okay. And I know you said the total cost for the initial deal sounds like it went up a little bit. What are you expecting on yields for the memory care product these days?

Right around the 9% range.

9% yield, okay. Great. And then last question is on the SNF that Kindred gave up leases with Ventas on. I know Ventas is focused on -- they said they are focused on releasing those today. Have you guys seen them for sale in the market? If you did, would you be interested in taking a look?

We made contact with Ventas initially when the announcement came out.

We're one of the 100.

Yes. One of the 100, exactly. And they are running a process. If the opportunity came up and there were a few buildings that another operator wanted to buy or we could look at, we would probably look at a couple if the right opportunity came up.

Or if an operator came to us. We've been talking about this and Clint and I and Andy are around a lot and I just don't remember being in a market where somebody said oh, we have a Kindred facility that's competing. So, I think they are in a lot of markets that we just are not in. I have a gotten a list of those properties, but they don't seem to be competitors in our stronger markets.

Got it. Thanks for the color.

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, Sue, and, again, thank you all for joining us today. Hopefully, we'll have some press releases out about deals or debt transactions within this quarter before we talk to you again. But, if not, we will talk to you in approximately three months. Again, thanks a lot for spending the time.

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