LTC Properties Inc (LTC) 2015 Q1 法說會逐字稿

Good day and welcome to the LTC Properties, Inc. Q1 2015 analyst and investor call and webcast.

(Operator Instructions)

Before management begins its presentation, please note that today's comments, including the question-and-answer session, may include forward-looking statements subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in LTC Properties filings with the Securities and Exchange Commission from time to time, including the Company's most recent 10-K dated December 31, 2014. Please also note this event is being recorded.

I would now like to turn the conference over to Miss Wendy Simpson, Chairman, CEO and President. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. Pam Kessler, our CFO, will start our presentation with comments on our financial results for the first quarter. And will be followed with comments from Clint Malin, our Chief Investment Officer, who will talk about the transaction that has closed as well as our current outlook for additional 2015 investments. At this time, I'll turn the call over to Pam.

Thank you, Wendy. Normalized FFO increased 4.5% for the first quarter of 2015 to $23.4 million or $0.65 on a fully diluted per share basis, from $22.4 million or $0.63 per fully diluted share a year ago. Revenues for the quarter increased nearly 7% or $2 million year over year. The improvement primarily reflected completed development and capital improvement projects in 2014 and the first quarter of 2015, as well as an increase in interest income from mortgage loans resulting from a loan origination and the amendment to the Michigan loan.

First quarter interest expense was $3.8 million, an increase of $579,000 over the comparable 2014 quarter due primarily to the sale of senior unsecured notes, lower capitalized interest, and greater utilization of our line of credit to fund acquisitions and development.

General and administrative expenses were $3.5 million, or $550,000 higher this quarter compared to a year ago, due to increased staffing, restricted stock vesting expense related to awards granted in February, and the timing of certain other expenditures. Given that there is some seasonality in first quarter G&A, we are currently anticipating a G&A run rate of approximately $3.4 million per quarter for 2015. During the quarter, we recognized $116,000 in income from unconsolidated joint ventures related to a preferred equity investment that Clint will discuss in greater detail.

Turning to the balance sheet, during the quarter we invested $54.5 million in a variety of transactions. As disclosed in our last quarter's earnings release as a subsequent event, we purchased two parcels of land and improvements for a total of $9.7 million. And entered into development commitments to complete the construction of a 56-unit memory care community in Texas and a 89-unit combination assisted living and memory care community in South Carolina. We also exercised our purchase option under a $10.6 million mortgage loan and acquired and equipped a 106-bed skilled nursing center for $13.9 million, an incremental $3.3 million from the mortgage loan investment.

We originated a $11 million mortgage loan, $9.5 million of which was funded at closing, secured by a 157-bed skilled nursing center in Michigan. And we amended a mortgage loan to carrying 15 skilled nursing centers in Michigan to provide $20 million in loan proceeds for the redevelopment of two of the properties and the forfeiture of the borrowers pre-payment option. During the quarter, we began recognizing non-cash effective interest on this loan.

On page 20 of the supplemental, we break out our estimates of non-cash revenue components, which now include effective interest along with straight line rent and the amortization of lease inducements. Included in the effective interest estimate are our existing loans, the loan we originated this quarter, and a revision to the estimate of the effective interest related to the Michigan loan amendment. Also during the quarter, we invested $20.1 million in a joint venture that Clint will talk about.

We invested $10 million in properties under development and capital improvement projects at a weighted average yield of 8.7%, funded $9.1 million under a construction loan, and received $2.8 million in mortgage loan receivable payoffs and principal amortization. During the quarter, we borrowed $36.5 million under our line of credit and made $4.2 million in scheduled principal payments under our senior unsecured notes. Currently we have borrowings of $36.5 million outstanding and $363.5 million available under our revolver.

In the first quarter of 2015, we granted 65,750 shares of restricted stock and paid $18.9 million in common and preferred dividends. This week we amended and restated our private shelf agreement with Prudential, providing for an immediate availability of $102 million senior unsecured notes. Notes issued under the shelf will bear interest that is spread over applicable treasury rates with maturities of up to 15 years from the date of issuance and a maximum average life of 12 years.

At the end of the quarter, LTC's investment grade credit metrics remain one of the best in the healthcare REIT universe, with debt to trailing 12 months normalized EBITDA of 2.9 times, a normalized trailing 12 months fixed charged coverage ratio of 5.9, and debt to enterprise value of 15.8%. I'll now turn the call over to Clint.

Thank you, Pam. Good morning, everyone, and thank you for joining us today.

In March, we executed on a preferred equity investment and a joint venture with two existing customers. We initially deployed $20.1 million of a $25.6 million commitment to facilitate the acquisition of a 29-acre, 436-unit three-building campus in Peoria, Arizona, that provides independent living, assisted living, and memory care services and a 149-unit property in Yuma, Arizona that provides assisted living and memory care services. The remaining $5.5 million of the commitment is available to fund capital improvements to the communities. This investment yields a 15% preferred return to LTC.

To the extent cash flow of the joint venture is insufficient to pay the preferred return in its entirety, LTC will be paid a priority preferred cash distribution of 5% in each of years one and two, with a minimum distribution percentage increasing annually thereafter by 100 basis points through year five. LTC has a call protection period affording us a 15% annual rate of return through the third year of this investment.

Additionally, LTC has been granted a fair market value purchase option exercisable during a 17-month period beginning in April of 2018. Four properties are operated by Senior Lifestyle Corporation, who's also an equity investor. This investment furthers our growth oriented relationship with one of the leading Senior Living providers in the country.

To date in 2015, we have executed on approximately $100 million of investments and development commitments and as announced in our previous earnings call, added a new operator relationship to our portfolio, Thrive Senior Living. Closing on the preferred equity investment represents execution on 25% of the $100 million active investment pipeline I discussed on last quarter's earnings call. Since then, two additional investment opportunities have been added to our active pipeline, which maintains a balance of approximately $100 million.

The active pipeline is now comprised primarily of development projects and weighted mainly toward private pay seniors housing. Two of the development projects in the pipeline, subject to a letter of intent, are currently under construction. Ad the deal is structured such that LTC will acquire the properties upon completion of construction and licensure, providing a current return on our deployment of capital.

Our shadow pipeline is strong and includes a couple of unique opportunities sourced by existing partners, which we hope will be added to our active pipeline in the near term. The strength of our relationships with our existing customers continues to drove organic growth for LTC. We are off to a great start in 2015 on the investment front and with a strong pipeline we are optimistic about our investment opportunities for the remaining of the year.

Turning to the portfolio, our lease coverage for the trailing 12-month period ended in the fourth quarter 2014 remains consistent and strong. I'll caveat that the following coverage metrics are derived from unaudited financial statements provided to us by our operators and are reported one quarter in arrears. EBITDARM coverage for skilled nursing is 2.25 times, assisted living is 1.63 times and range of care is 1.79 times. EBITDAR coverage after an allocated management fee of 5% of revenues is 1.66 times for skilled nursing, 1.4 times for assisted living and 1.3 times for range of care.

Compared with the previous quarter, occupancy has remained consistent across all property types. Occupancy for the remaining -- for the trailing 12-months period ended in the fourth quarter of 2014 is as follows, assisted living, 85.1, skilled nursing, 79.7, and range of care, 85.6. Our quality mix remains strong as well, with 56% of our underlying revenue derived from private pay sources. Now I'll turn the call to Wendy for her comments.

Thank you Clint and Pam. As Pam mentioned we have secured another $102 million shelf financing agreement with Prudential and still have a minimum of $363.5 million available under our bank line, not including using the $200 million accordion feature.

To reach a leverage ratio of 30/70, LTC could still add $400 million in long-term debt before needing to consider any additional equity. Based on the potential transactions being considered at this time, our securing of the additional Prudential availability provides us with security to consider larger transactions and eliminate the concern of possible financing contingencies.

We've been very pleased with our development partners and as Clint mentioned, we have added Thrive this quarter. Our goal when we began our development initiative and what we have actually achieved was and is to provide LTC with future new state of the art industry assets in both skilled and senior care investments. We realize cash returns on these investments takes longer, but the quality and longevity of the assets is a solid investment in the long-term view that we have at LTC.

I remain bullish on LTC's opportunities in 2015 and look forward to reporting on additional investments as the year progresses. At this time, I'm increasing FFO guidance by $0.09 to a range of $2.66 to $2.68. And again look forward to being able to increase that when we next talk. Thank you for dialing in. And I'll now open it for questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Jordan Sadler of KeyBanc. Please go ahead.

Thank you, good morning.

Wanted to follow up on the guidance that you just touched on, the $0.09 increase -- is that purely a function of the preferred investment made in the quarter?

$0.05 of it is from the preferred investment and $0.04 is from the Michigan loan amendment.

Okay. Helpful.

On the preferred investment, can we talk a little bit, or can you shed a little bit of light on that return opportunity? Obviously a pretty good premium there for a preferred return. Maybe talk about why it's so significant and if there are any additional opportunities either in the pipeline or the shadow pipeline that have similar characteristics?

Good question. I think we've looked at some preferred-equity investment opportunities over the past year, year and a half. And I would say the 15% rate is, I think, market for what we are seeing for other opportunities, so I don't think it's out of line for other opportunities that we've seen. Again, the opportunity was a turnaround that Senior Lifestyle had been involved with for a little bit that did not have an equity position previous to the closing on this deal. So the priority cash distribution provides some flexibility for them to go ahead and reposition the asset. But we think there is a lot of opportunity with this investment for us and our partner.

In terms of the pipeline, though, are there additional preferred opportunities in there? Is it a strategy you think you can kind of continue to pursue?

Sure. We would definitely look at additional preferred-equity investments. I think they would be more unique where we have partnership-related relationship-based transactions to afford us the time to evaluate and structure transactions. So I think for the right opportunity, and there are some other partners we're talking to about preferred-equity investment. So I still see it being a smaller portion of our investment strategy, but to the extent there's opportunities, we definitely would look at it.

And then, I guess, as one other follow-up, maybe again for you, Clint, is on the shadow pipeline. It sounded like you said there's a couple of unique opportunities. I'm just curious in terms of the composition. I know those are further out and not committed. But composition of the shadow pipeline -- is it looking a lot like the active pipeline? Or are there some differences and any changes in thinking as we make our way through the reimbursement outlook?

I would say the shadow pipeline is probably more acquisitions. Our active pipeline has a lot of development in it. The shadow pipeline has more acquisitions, and that would include both private-pay seniors housing, as well as skilled nursing. So it's a combination.

Again, the shadow pipeline is deals that we're currently vetting and trying to put a structure together to them. So to the extent when we're able to execute, we're not positive on that; that's why we tried to break out the total pipeline and just the active pipeline to give you guys more color on what we're seeing and where we are focusing efforts. It's both skilled nursing and assisted living in that shadow pipeline.

Thank you.

Our next question comes from Mike Carroll of RBC Capital. Please go ahead.

I guess, Clint, can you break out between the SNFs and senior housing acquisitions in the shadow pipeline? And why are you seeing more senior housing acquisitions? I thought previously that valuations were getting a little steep for you. Are you dropping your targets a little bit? Or are you seeing better deals, opportunities?

I think it's just lumpy. I think you see certain opportunities over time. As I mentioned, we're seeing some of these opportunities source from existing relationships that have unique avenues into transactions. So I think it's just lumpiness in the market and it ebbs and flows as we react to opportunities that are in front of us.

Can you give us the breakout between the SNFs and senior housing?

As far as the percentage goes in the shadow portion?

Exactly.

I would say that it's probably 60% seniors housing.

And then you said most of that is acquisitions? What percentage of that is acquisitions?

The percentage of acquisitions -- it's probably more around the 70% mark.

Great. And then can you give us some additional color on the preferred-equity investment? I know you mentioned a little bit earlier -- when were these communities built? And what exactly do they need to do to reposition the assets?

The buildings were built in the late 1980s, early 1990s. And I think it struggled from the large properties -- the one in the Phoenix metro area is a large property. And there had been a number of changes in management over the course of the past four to five years, with Senior Lifestyle coming in within the last year. So I think it struggled from an identity crisis and it needed a manager who has experience with these large properties. It sits on 29 acres, three different buildings -- it's a large property to manage. And I think Senior Lifestyle has demonstrated expertise of being able to manage large communities like this.

So it's really trying to move around the -- I think the previous operator had different resident populations co-mingled in certain buildings. And it's really working and deploying capital into a couple of buildings to be able to specialize in care for certain types, whether it be memory care, assisted living, or IL.

Thank you.

Next question comes from John Kim of BMO Capital Markets. Please go ahead.

I was wondering if I could have your comments on the quickly changing public landscape. You have Omega is a larger company; Care Capital Properties might be spun out. How does this change the way you view or you run your business?

It doesn't change it at all. We continue to see opportunities for LTC to make accretive investments. We're patient investors. We're long-term investors. As Clint has mentioned several times, a lot of our opportunity comes from existing relationships and existing partners. So I don't see any significant change to our opportunities in the market.

So you don't see them becoming, I suppose, more competitive? They have potentially better cost of capital than you? I think they're probably looking to grow quickly. This doesn't change the way you look at acquisitions or the balance sheet leverage?

It does not.

Okay. Wendy, you mentioned $400 million to get to 30% leverage. Is that something you would be willing to go to?

Pam says I would.

But what do you say? (laughter)

I begin to get a little concerned in the mid-20%s. So what it depends on, of course -- I mean it's just basic economics -- is when you're in the 20%s, 24%, 25%, and 30% is kind of your cap, and if Clint's shadow pipeline gets more out of the shadows into actuality, you've got to assess the market and determine whether this is an equity market or a debt market. And so, I'd say if we were approaching the 20%-some leverage and equity was available and well-priced, we probably would do equity.

Okay. And then a question on the straight-line adjustment this period -- it came in, I think, about 14% higher than your projections earlier this year. Was this all acquisition-related? Or is some of this due to releasing during the period?

It was releasing; the former ALC lease that expired at the end of the year was broken into two master leases with one existing operator and one new operator. And that resulted in a large increase -- most of the increase -- in the straight-line rent. And the rest came from developments that were completed in the fourth quarter of last year and the first quarter of this year.

They were both existing operators.

Oh, that's right. Sorry.

Was there anything unusual in the --

Sorry, John?

Was there anything unusual in the escalations or the term of the lease? I'm just wondering why the big increase?

When you start a new lease, the increase is huge because that's the nature of straight-line rent. So when you take -- I think the two leases were 15 years?

Yes.

Which is a standard lease we typically do, between 10 and 15 years with 2.5% escalation?

Roughly 2.5% escalation. That results in the beginning the initial year of the lease, a large difference between your cash rent and straight-line rental revenue.

Got it. Okay. Thank you.

Thank you.

(Operator Instructions)

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

Good morning. I'm on a cell -- so everybody can hear me okay?

So, you left Baltimore? Why? (laughter)

Charm city.

I want to ask about your thoughts on assisted living fundamentals. Some the NIC data has been a little soft in the last couple quarters. It might be the Brookdale integration a little bit, and maybe seasonality 1Q. Have you seen any material change in the performance at your Brookdale assets? And then, broadly, how do you feel about assisted living, mem care, given some of that NIC map data the last couple of quarters.

Dan, on the Brookdale properties -- they've been strong performers for a number of years and we haven't seen occupancy or coverage change in that portfolio. So that's been very strong and consistent for a number of years now. We are getting feedback from our operators that took over the ALC buildings in January, and Texas had a very positive report on increased occupancy at those communities already.

I think that NIC map data -- it goes down to specific markets in what you're seeing. That tends to track larger metro markets and there's a lot of the US where that have a lot of other markets that are not captured in that data. I think it goes back into local markets to be able provide any specificity regarding what you're seeing on trends on occupancies and performance.

You haven't, say, become more favorable to independent living in the development or acquisition side versus assisted? You're still more focused on that AL mem care?

That's correct. We would look at -- we're doing actually one project in Wichita; we did a project, an assisted living memory care development with Oxford Senior Living, and they brought an opportunity to us to add independent living or senior apartments to that campus. So we're pursuing that with them to round out that campus. And to the extent we, on our existing developments, could add IL into it, we would be very supportive of that. I think it's more a standalone IL that we haven't been pursuing.

Okay. Then just broadly on cap rates. There's been a lot of chat about cap rates compressing again in first quarter, first half of 2015; obviously the 10-years moved up the last couple of days. Do you see cap rates compressing when you bid for assets? And maybe what do you see or think the difference is between the one-offs, small portfolios versus large portfolio cap rates should be?

John, I wouldn't say we're seeing a lot of compression beyond what we've seen in the past, but it's very competitive and cap rates are low. I would say, depending whether you're a one-off asset or a portfolio; whether it's IL, AL, or skilled -- you probably have a 100 basis point swing or more between one-off asset and a portfolio. So that range, probably as you're looking at assisted living, for example -- for us, we're looking at between 6.5 to 7.5 on what we would be able to invest in on assisted living. Skilled probably goes from somewhere in the low 8s for a large portfolio deal to somewhere in the 9s.

Okay.

Probably 100 basis points.

Okay. One quick question here on the occupancy on the development and lease-up. Is that one quarter in arrears, or first quarter? And is that included in the lease coverage that you quote for the entire portfolio? Because it seems like that's moving in the right direction, that could be upside in your lease coverage.

Not in the lease coverage. And those are actually current. If you go to the supplemental on -- what page?

Page 7, and they are as of March 31, 2015, so they are not in arrears.

Okay. That's not in your stabilized portfolio lease coverage yet?

No.

No.

Okay.

Again, as far as all of the development, Dan, as far as lease-up goes, everything has been on track or ahead of budget on our projects for occupancies.

I noted it was moving up nicely the last quarter. That's all the questions I have. I'll hop off. Thanks.

Thanks, Dan.

Showing no further questions, this conclude our question-and-answer session. I would like to turn the conference back to Management for any closing remarks.

Pardon me, we had one jump in the question queue. Doug Christopher of Crowell Weedon. Please go ahead.

Thanks for taking my question. Thank you.

I just have a follow-up on the preferred investment. It has the feel of a special situation opportunistic investing as part of the portfolio. Are there other opportunities like that for LTC?

As far as additional preferred investments? Or just different opportunities in general?

That type of rate and opportunities.

I think this was a unique opportunity with an existing customer, to support them. I think they'll come up from time to time. But it's not -- had it not been an existing customer, I don't know if we would have pursued this specific investment and this structure. But again, try to support our partners and be opportunistic where we can.

Thank you very much.

Thank you.

And we have a follow-up from Jordan Sadler of KeyBanc.

Hello, guys -- sorry.

Just on the guidance, it sounded like -- Wendy, you mentioned that -- or maybe Pam -- that guidance could move up further later in the year. And I think -- does that refer to potential acquisitions, closing, incremental investment closing? And then along those lines, I'm kind of curious -- it sounds like the active pipeline is more development-oriented, which -- and it sounds like you guys would look to deploy upon completion of construction. So I'm trying to think how incremental investment opportunity, at least that's in your sights right now, might be impactful to earnings in the back half of the year?

Clint, in your actual pipeline -- the majority of those are construction projects, or development projects?

Correct.

Quite a few of them are ones that we invest in at COM.

There's a couple of these development projects -- they are structures I mentioned in my prepared remarks that they're already in construction. We're coming in as a takeout capital at [C of O]. So those would -- even though they're development today and they would be brand new, we're not taking on construction risk, we would only be taking on lease risk, so those would be acquisitions this year.

The timing on those are more the later half of the year.

Correct.

So it wouldn't be impacting during the second quarter. These types of acquisitions would not be impacting during the second quarter.

In the shadow pipeline, which are some sale/leaseback transactions -- if we can get to the end game with those partners, we would have accretive things in the second quarter. What we include in our projections are only signed deals and deals that we absolutely have signed up.

So in terms of looking at opportunities in our shadow pipeline and how far we are into the due diligence on these things, it gives me some confidence that we might be able to convert some of these things during this current quarter, and increase our guidance during the second quarter, based on those closings. We won't be doing any increasing our guidance until those other pipeline things are fully signed. So it's both the pipeline and the shadow pipeline that gives me some sort of confidence that we'll be able to increase our guidance.

And then just to clarify -- on the developments, it sounded like you wouldn't take construction risks but you might take lease-up risk. That's obviously not on a [radea] basis, right? That's just as it relates to the operator taking lease-up risk?

Those would just be sale/leaseback, effectively. A triple net lease.

And you would be able to effectively earn current income on a non-lease property?

Well, a lease-up property, correct.

Okay. Would it have a step-up? Or you'd start at a current basis and --

Current basis.

Okay. Thank you, guys.

Thank you.

Now I'm showing no further questions. I would like to turn the conference back over to Management for closing remarks.

Thank you. And, again, thank you all for joining our call. And again, we look forward to talking to you after the end of the second quarter. Have a great day.

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