LTC Properties, Inc. (LTC) Q1 2015 Earnings Report, Transcript and Summary

Good day. And welcome to the LTC Properties Inc. 1Q 2015 Analyst and Investor Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Before management begins it 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 Ms. 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 by comments from Clint Malin, our Chief Investment Officer, who will talk about the transaction that is 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. First quarter interest expense was $2.8 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 increase staffing, restrictive stock expenses related to awards granted to 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 and entered into development commitments to complete the construction of a 56 unit memory care community in Texas and an 89 unit combination of assisted living and memory care community in South Carolina. We also exercised our purchase options 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 an 11% mortgage loans, $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 securing 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 prepayment 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, our existing loans, the loan we originated this quarter and the 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 billion in properties under development in capital improvement projects at a weighted average yield of 8.7% funded $1.9 million under our 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 of applicable treasury rates with maturities of up to 15 years from the data 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 charge 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 assisted living - independent living, assisted living, and memory care services and 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 yield to 15% net 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 the 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 is being granted a fair market value purchase option exercisable during a 17-month period beginning in April 2018. Four properties are operated by Senior Lifestyle Corporation, who is also an equity investor. This investment furthers our growth oriented leadership 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 commitment and as announced in our previous earnings call, added a new operator relationship to our portfolio, Thrive Senior Living. In closing, on the preferred equity investment represents execution on 25% of $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 towards private pay seniors housing. Two of the development projects in the pipeline subject to a letter of intent are currently under construction and the deal is structured such that LTC will acquire the properties upon completion of construction and license providing a current return on our deployment of capital. Our shuttle 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 drive organic growth for LTC. We’re off to a great start in 2015 on the investment front and with the strong pipeline, we are optimistic about our investment opportunities for the remainder of the year. Turning to the portfolio, our leased coverage for the trailing 12-month period ended in the fourth quarter 2014 remains consistent and strong. I will caveat for the following coverage metrics are derived from unaudited financial statements provided to us by 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 12 months - 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 of 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 initiatives 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’ve realized 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.

[Operator Instructions] And 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 9 to 10 increases, is that purely a function of the preferred investments 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 share 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 shadow pipeline that have similar sort of characteristics?

Good question. We’ve looked at some preferred equity investment opportunities over the past year, year and half and I would say the 15% rate is I think sort of market overseeing further opportunities, so I don’t think it's out of line for other opportunities that we’ve seen. And again the opportunity was a turn around that Senior Life Style had 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 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 and is this strategy you think you can kind of continue to pursue?

Sure, I think 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 investments. So I still see being a smaller portion of our investment strategy but to the extent there is opportunities we definitely would look at it.

And then I guess as one of the follow-up may be again for you Clint, as on the shadow pipeline it sounds like you said there is a couple of unique opportunities. I’m just curious in terms of the composition, I know there is a further not committed but composition of the shadow pipeline, is it looking a lot like the active pipeline or there is some differences in any changes in thinking as we sort of make our way through the reimbursement outlook?

I would say the shadow pipeline is probably more acquisitions not as much or active pipeline is on development in it, the shadow pipeline has more acquisitions and that would include both private seniors housing as well as skilled nursing. So it’s a combination. Again the shadow pipeline is -deals that we’re currently bidding and trying to put a structure together to them. So to the extent we’re able to execute, we’re not positive on that, we try 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’re focusing efforts. But it’s both skilled nursing and assisted living in that shadow pipeline.

Okay. Thank you.

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

Clint can you break out between the SNFs in senior housing acquisitions in the shadow pipeline and why are you seeing more senior housing acquisitions. I thought previously that valuations are bidding able to deep for you, are you dropping your targets little bit or are you seeing better deals of opportunities?

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

Can you give us a break up 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 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 80s, 90s early 90s, and I think it struggled from the large properties, the one in the Phoenix Metro is a large property and there had been a number of changes in management over the course of the past 45 years with Senior Life Style coming in within the last year or so. I think it just struggled from identity crisis and it needed a manager that who has experience with these large properties and sits on 29-acres, three-different buildings, it's a large property to manage and I think Senior Life Style has got demonstrate 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 population sort of commingled in certain buildings and it’s really working and deploying capital into couple of buildings to be able to specialize in care for certain types whether memory care, assisted care or IL.

Okay great. Thank you.

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

Thank you. Good morning. I was wondering if I can have your comments on - I guess quickly changing public landscape, Omega is a larger company, Care Capital Properties might be spun out, how does this changed 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 into our opportunities in the market.

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

It does not.

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

Pam says I would.

But what did you say?

I begin to get it little confirmed in the mid-20s, so what it depends on of course, I mean it’s just basic economics is when you’re in the 20s, 24, 25 and 30 is kind of your cap and if you good 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 percent 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 that came in, I think about 14% higher than your projections early this year, was this all acquisition related or this is some of this due to, to release in 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 the existing operators.

That's right, yeah.

Was there anything unusual in the -

Sorry, John -

Was 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, 15 years which is the standard lease we typically do between 10 and 15 years with 2.5% escalation. Yes, 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.

Okay, 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 the cell, everybody can hear me, okay.

So you left Baltimore, why?

So I want to ask about your thoughts on the assisted-living fundamentals, some of the NIC data has been a little bit soft in the last couple of quarters. That might be the book to integration or little bit but and maybe seasonality 1Q, so have you seen any material change in the performance, your book deal assets and then how you’re feeling about assisted-living, memory care giving some of that NIC MAP Data in the last couple quarters.

Dan on the book deal property, they’ve been strong performers for a number of years and we haven’t seen that occupancy or coverage change in that portfolio. So that's been very strong and consistent for a number of years now. We’re getting feedback from our operators that took over the ALC buildings in January and we’ve had - Texas had a very positive report on increased occupancy at those communities already. So, I think that NIC MAP Data it really goes down to specific markets and what you’re saying, I mean that tends to track larger metro markets and there is a lot of the U.S. that you have lot of other markets that are not captured in the data. So I think it really goes back into local markets to be able to provide any specificity reporting, what you’re seeing on trends on occupancies and performance.

And you haven’t say become favorable to independent living and development or acquisitions side versus assisted, you're still more focused on that memory care.

That's correct. We are doing one project, in [indiscernible] we did a project in assisted-living memory care developments 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 that campus. And do the extent we, on our existing developments could add IL into it we would be very supportive of that, I think it's more of just a standalone IL that we haven’t been pursuing.

Okay. And the interest broad line cap rate which has been a lot of - had about cap rates comprising again in first quarter first half of 2015 obviously the 10 years moved up last couple days, but do you see cap rates compressing when you differ assets and maybe what do you see or think the difference is between the one-offs small portfolios versus large portfolio cap rate should be?

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

Okay.

It’s probably 100 basis point.

Okay. One quick question here on the occupancy on the development in leasehold? 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, there could be upside in your leased coverage.

Not in lease coverage and those are actually - currency go to the supplemental on page -

It’s Page 7 and they are as of March 31, so they are no in arrears.

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

No.

No.

Okay.

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

I noted that it was moving up nicely in the last quarter, that's all questions I have, I’ll hop off thanks.

Thanks Dan.

I’m showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. We have one jump in the question queue. It's 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 and has the feel of special situation opportunistic in 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 the unique opportunity with an existing customer to support them, I think they will 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 in the 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. Please go ahead.

Hi guys, sorry, just on the guidance, it sounded like Wendy - maybe Pam that, guidance could move up further later in the year and I think that - 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 sort of in your sites right now might be impactful to earnings in the back half of the year?

Clinton in your actual pipeline, the majority of those are construction projects or development projects. Quite a few of them are ones that we invest in at CMO.

There is a couple of the development projects. They are structures I mentioned in my prepared remarks, they’re already in construction, we’re coming in as a takeout capital at CMO. So those would - even though they’re in development today and they would be brand new, we are not taking on construction risk, we would only be taking on lease, so those would be acquisitions this year.

And our timing on those are more half, the latter half of the year. 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 sign 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 sound like you wouldn’t take construction risk but you might take lease up risk but that’s obviously not on our day out basis, right that is you just as it relates to the operator taking the day lease up risk?

Those would just be sale leaseback effectively - entrepreneur lease.

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

On a lease up property, correct.

Okay. And it would have a step up or you would start at current basis?

Current basis.

Okay. Thank you, guys.

Thank you.

I’m showing no further questions. I’d 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.