Q1 2024 LTC Properties Inc Earnings Call

Participants

Wendy Simpson; Chairman of the Board, Chief Executive Officer; LTC Properties Inc

Pamela Shelley-Kessler; Co-President, Chief Financial Officer, Corporate Secretary; LTC Properties Inc

Clint Malin; Co-President, Chief Investment Officer; LTC Properties Inc

Austin Wurschmidt; Analyst; KeyBanc Capital Markets, Inc.

Juan Sanabria; Analyst; BMO Capital Markets Corp.

Rich Anderson; Analyst; Wedbush Securities Inc.

Michael Carroll; Analyst; RBC Capital Markets Corp.

Presentation

Operator

Good day and welcome to the LTC Properties Incorporated first quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded 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, and these risks and uncertainties are updated sorry, are detailed in LTC's property filings with the Securities and Exchange Commission from time to time, including the Company's most recent 10-K dated December 31, 2023. Ltc undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation. Please note this event is being recorded.
I would now like to turn to call over to Wendy Simpson. Ma'am, the floor is yours?

Wendy Simpson

Thank you, operator, and welcome, everyone, to LTC's 2024 first quarter conference call. I am joined today by Pam Kessler, Co-President and Chief Financial Officer, and Clint Malin, Co-President and Chief Investment Officer. In 2023, we completed more than $260 million in investments, all while our team devoted significant amount of time to optimizing our portfolio.
Now after successfully selling $77 million of assets last year and re-tenanting others, we are concentrating our efforts on producing strategic, long-term and sustainable growth, which is our key focus for 2024. With that in mind, we are evaluating multiple investment opportunities and are confident we have both the bandwidth and resources necessary to strategically allocate capital to enhance our portfolio and achieve the best risk adjusted returns for our shareholders.
Seniors housing and care industry is on a promising upturn after setbacks related to COVID, thanks to favorable demographic trends, improving margins and rising occupancy rates all signs point to a more robust market. We also are encouraged by the reimbursement landscape, particularly with the anticipated 4.1% increase under the snus payment rule for fiscal 2025. Reimbursement in several states also is expected to rise in Florida where we own seven centers, our operators will benefit from an unprecedented 8% Medicaid rate increase, which will result in increased coverage for LTC last week as expected CMS issued its final Smith minimum staffing rules. Our industry pushed back on the proposed rule during the comment period with more than 46,000 letters, mainly related to the concerns that the mandate is unfunded and that the level of staff required simply does not exist. According to the American Healthcare Association, 81% of skilled nursing centers do not currently meet the rural staffing requirements. We will continue to monitor the situation and support industry organizations and initiatives to oppose this rule.
Looking ahead to the second quarter, we expect FFO and FFO, excluding nonrecurring items, to range between $0.65 and $0.66 per share. We also are introducing full year 2024 guidance, which assumes no additional investment activity asset sales financing or equity issuances, but does assume our loan receivables payoff at maturity and includes the rent increase associated with an HMG. lease amendment.
FFO, excluding non-recurring items, is expected to be between $2.63 and $2.65 per share for the full year. Nonrecurring items include the payment of rent related to a property sale in January and $900,000 of credit reserves that get reversed as loans pay off.
In summary, as we redirect our efforts towards strategic growth, the entire LTC team is geared up for a highly productive 2024.
For now, I'd like to turn the call over to Pam.

Pamela Shelley-Kessler

Thank you, Wendy. Can all numbers I'll discuss today are for the first quarter of 2024 compared with the first quarter of 2023, unless otherwise stated, total rental revenue increased by $1.8 million due to several factors. First, the receipt of $2.4 million of rent in connection with the sale of a property in Wisconsin in the 2024 first quarter. Second, a property acquisition in Ohio in the 2023 second quarter. Third, more rent paid by HMG. and last annual escalations and other lease adjustments. The increases were partially offset by lower rent related to property sales and operator transitions. Interest income from sale leaseback financing was comparable year-over-year, but interest income from mortgage loans increased by $1.2 million, principally related to mortgage loan originations in 2023 and the funding of a construction loan in 2024. Interest and other income decreased by $1.2 million, primarily due to the payoff of two mezzanine loans and the related exit IRR and prepayment fee received in 2023, partially offset by income from mezzanine loan origination in the third quarter of 2023. Interest expense increased by $436,000, mainly due to higher interest rates and a higher outstanding balance on our revolving line of credit, partially offset by scheduled principal paydowns on our senior unsecured notes.
Our provision for credit losses decreased by $1.7 million, mostly due to a higher dollar volume of loan originations in the prior year first quarter upon origination, we recorded loan loss reserve estimate equal to 1%, which amortizes as loan principal is repaid. Net income available to common shareholders decreased by $8.9 million, primarily due to lower gains on sale of real estate compared with last year's first quarter, as well as the receipt of exit IRR. and prepayment fees in connection with mezzanine loan payoffs in last year's period. This was partially offset by an increase in rental income, higher interest income from loan originations and a lower provision for credit loss. Fully diluted FFO per share was $0.69 compared with $0.66 excluding nonrecurring items, FFO per share was $0.64 compared with $0.67. The decrease in FFO, excluding nonrecurring items, was principally due to dilution from sales under our ATM program, the proceeds of which were used to fund investments and reduce our leverage. During the quarter, we sold a total of six properties in Florida and Texas with 268 combined units and sold our interest in a joint venture in Wisconsin. The combined sales price was $26.3 million. We received proceeds of $25.4 million net of transaction costs and recorded gains of approximately $3.3 million. You can find more details about these sales in the press release we issued yesterday afternoon. Subsequent to the end of the first quarter of 2024. We sold two assisted living communities in Texas with a combined 70 units that were built in 1995 and previously have been closed. The combined sales price was 500,000, and we received approximately 400,000 of proceeds net of transaction costs. During the first quarter, we funded $2.9 million of a previously disclosed $19.5 million mortgage loan commitments for the construction of an assisted living and memory care community in Michigan. Ltc's investment represents 62% of estimated cost project costs during the first quarter, we sold approximately 139,000 shares of LTC common stock for net proceeds of $4.5 million under our ATM program. Subsequent to the end of the quarter, we sold approximately 205,000 additional shares of common stock for $6.5 million in net proceeds. Proceeds from the ATM sales were used for investments and to reduce our leverage. Additionally, we repaid $25.2 million under unsecured revolving line of credit and repaid $6 million in scheduled principal paydowns on our senior unsecured notes. We also paid $24.6 million in common dividends, marking our 216th consecutive monthly dividend payment, which continued throughout the pandemic. When other health care reach decreased FARES. Our debt to annualized adjusted EBITDA for real estate stands at 5.5 times, and our annualized adjusted fixed charge coverage ratio was 3.5 times. Although our debt to annualized adjusted EBITDA for real estate metric remains higher than our long-term target, we anticipate we will achieve this metric by year end as a result of recent investments, anticipated paydowns on our line of credit, using proceeds from loan payoffs and scheduled principal paydowns on our senior unsecured notes. You can find more detail about our loan receivable maturities on page 12 of our supplemental. Currently, we have total liquidity of nearly $197 million, including $9 million of cash on hand $123 million available on our line of credit with $277 million outstanding and roughly $65 million available under our ATM.
Now I'll turn the call over to Clint.

Clint Malin

Thank you, Pam. I'll start my remarks today with recent transactions as well as a few brief updates on some of our operating partners. We have resolved the remaining 10 non-revenue-generating properties discussed on last quarter's call. Three of these properties we re-leased and the remainder were sold and you can find specific details in yesterday's press release subsequent to the end of the quarter, we announced the origination of a $12.7 million senior loan to Ignite Medical Resorts that current LTC offer loan, which was primarily funded using our ATM is secured by a skilled nursing and assisted living campus, which was built in 2017 and is located in a Houston suburb. Five-year loan is interest-only at a rate of 9.15% in accordance with GAAP. We are accounting for the loan as an unconsolidated joint venture, and we expect to generate approximately 884,000 of revenue in 2024. To date, we have managed approximately 80% of our lease maturities through 2025. First, we executed a term sheet with H. and G., whereby we have reached an agreement in principle to amend the master lease covering 11 skilled nursing centers in Texas to extend its term through December 2028 annual rent in 2024 at $9 million, a $1 million increase over 2023. Rent will increase to $9.5 million for 2025 and $10 million for 2026 escalating 3.3% annually. Thereafter, the amended master lease will provide HMG. with two 5-year renewal options with rent in the initial year of the first renewal term, adjusting to fair market rent subject to a collar between 2.5% and 12.5% as a condition of the amendment, HMG. will repay $11.9 million on its $13.5 million working capital note in the 2024 second quarter on repayment, the remaining balance for now will be interest free and will be repaid in installments through 2028. The proceeds from this 4% working capital note will be used to pay down higher interest debt or to fund accretive investment. In addition, an operator of five properties not in our top 10 has exercised its renewal option of the master lease for another five years at its contractual rate from March 2025 through February of 2030. Quickly, occupancy for the Prestige health care loan secured by 15 properties in Michigan was 77% in March 2024, an increase from 73% in the year ago period and up from 75% in January of this year.
Regarding our assisted living portfolios with quarterly market base rent resets we received 525,000 during the first quarter of 2024 and continue to expect to receive $3.3 million in total for 2024.
Now I'll provide insight into our portfolio numbers, which exclude properties transitioned on or after October first, 2022 Q4, trailing 12 month EBITDA and EBITDAR coverage for our assisted living portfolio as reported, using a 5% management fee was 1.31 times and 1.07 times respectively. Excluding stimulus funds received by our operators, coverage was 1.28 times and 1.03 times, respectively, for our skilled nursing portfolio. As reported, EBITDA and EBITDA coverage was 1.84 times and 1.34 times, respectively. Excluding stimulus funds received by our operators, coverage was 1.71 times and 1.21 times, respectively, as a result of occupancy increases and margin improvement. Same-store Q4 trailing 12 month EBITDA coverage has improved from the prior quarter, same-store coverage by 11 basis points for our assisted living portfolio and three basis points for our skilled nursing portfolio. Recent general occupancy trends include private-pay occupancy of 88% at March 31, up from 87% at both January 31st and September 30, 2023. For our skilled nursing portfolio, average monthly occupancy grew to 75% in March from 74% in January and 72% in September. The data include approximately 66% of our total same-store private pay units and approximately 87% of our same-store skilled nursing beds. Our business development team is continuously refining our offerings to meet dynamic customer demands from traditional triple-net leases to structured finance products, including mezzanine loans, preferred equity investments, creative joint ventures and construction and unitranche loans. We pride ourselves on crafting these customized solutions that cater uniquely to operators' needs while ensuring any transactions we complete are aimed at further driving shareholder value.
Looking forward, inflation remains somewhat of a wildcard and banks continue to consider their options prior to any decision making about maturing loans on their books. Regardless, we are building our pipeline with interesting opportunities that are very by financing vehicle property type operator and size. Now I'll turn things back to Wendy for her closing remarks.

Wendy Simpson

Thank you, Pam and Clint. I'll conclude today with this LTC as a compelling investment one, we have consistency of leadership with successful track record two, our monthly dividend is well covered. Three. We have laddered debt maturities matched to cash flow, which reduces refinancing risk four. We have built a diversified portfolio balanced between skilled nursing and private pay seniors housing, employing various financing structures to provide LTC with a steady stream of income and liquidity and to match our operator's needs.
Last but not least, our smaller asset base makes it easier to drive growth because smaller investments can contribute meaningful accretion. We can achieve significant growth without making a large-scale transformative investment, we recognize that our current stock price multiple is below our historical average. We believe this reflects our focus on asset management initiatives during the pandemic. The majority of our internal resources are dedicated to growth. So our multiple should begin to expand as we demonstrate the conversion of our pipeline to accretive investments.
Thank you, everyone. We appreciate your ongoing support and look forward to talking to you again next quarter.
Operator, we're ready to take questions.

Question and Answer Session

Operator

Thank you. At this time, we will be conducting our question and answer session and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue question. You may press star two, if you'd like to remove your question from the commission For participants using speaker, it tends to enable the necessary to pickup your handset before pressing the star case starts. One moment, please while we poll for questions at all banQi bank.
Our first question is coming from Austin Wurschmidt with KeyBanc. With your line is live.

Austin Wurschmidt

Thanks, good morning, everybody, or how much wind in our claim, what you highlighted that the whole investment opportunity that is being evaluated today, weighted any share, some additional detail around the sale of scope with a lifeline. Appreciate your comment or issue more on a one-off deals and we will need all.
But you spoke to the competition in the transaction actually market.

Clint Malin

Sure. We'll as we and it was weak. What are we give a pipeline quote? Historically, we've given that when when deals have no near term visibility as we're building that pipeline and hopefully next quarter, we'll be able to give more visibility on on that. But at this point, we're seeing more opportunities to invest on private pay assets in some select opportunities on the skilled nursing side, such as our recent investment with Ignite for newer skilled nursing assets and currently the inbound skewed towards senior loans, construction loans, mezzanine preferred equity investments, and then but there was we see is loan maturities that are coming. We think that will be an opportunity for us to actually look at equity investments and doing sale leasebacks as well as joint ventures. I guess what's the appetite to do some of those loan type and development heightening that and what do you think the average duration on those ratios deals?
Our yields arm versus we just don't have appetite to do. We don't have appetite and it's going to be, I would say probably somewhere in the three to five years. Our range.

Austin Wurschmidt

Got it. And then just from a funding perspective, I mean, how are you saying that going to happen? But once you have seen a pickup in investment and investment, should we expect that you'll see over equitize and Cordis write-down luxury right now, we're kind of hanging around and timing around it, right?

Pamela Shelley-Kessler

Austin, we'll equitise. We'll use equity.

Austin Wurschmidt

Understood. Thank you.

Operator

Thank you. Thank you. Our next question.
Our next question is from Juan Sanabria from BMO Capital Markets.

Juan Sanabria

Hi. A high affiliate personally aware of it, just trying to get it done, get better and back cap rates you guys are on it sounds like I still skewed towards all skewed on loans, but if you can give color on color on CapEx,

Clint Malin

Sure, Juan. your line is cutting out a little bit, I think give regarding cap rate, I mean, right now we're looking at on our new investment in the 9% range, plus or minus, depending on whether it's loans or owned assets for BMS and preferred equity. There's usually a around a 9% target rate that would go on with an IRIR. exit around 12%.

Juan Sanabria

Thanks. And then hoping you can give a little color on what you're calling on the normalized FFO guidance I've gotten from the start from the second quarter. Number one, remember that provided if they had filed, it's at the upper end. If you can give any color or any color on that on reporting on that more how are outlined in our homes themselves?

Pamela Shelley-Kessler

Sure. Sure. One, it's really hard to hear you because it's cutting out. But I think you asked about our guidance and the quarterly and annual guidance. It includes everything that we've announced, but we have not included any assumption for additional investments but it does include the increases in rental rates from H. and G. and then also our transition portfolio that we gave guidance on last quarter. We're reiterating that. So there's nothing else in there, we kind of give a base rate for guidance, and then we'll allow our analysts and investors to layer on their own investment assumptions beyond and what was the second part of your question, but timing time on the other timing, I don't know your name and and.
Yes, yes, I'm sorry. The timing on the loan repayments on that is outlined in the supplemental on page 12, but it is the fourth quarter. We have two loans that are maturing in the fourth quarter and totaling about $80 million.
Again, where we're in discussions with the operators on that the borrowers and as we've talked about before, in giving loans, it is not our strategy to do all loans on weeks. We have and loans that we make available to operators can meet their needs, but as we always do, look to possibly convert those to long-term equity ownership. So if there's an opportunity to do that we will or if there's an opportunity to stay in those investments in some capacity, we would look to do that as well. We like these two investments.
And so we are in discussions with the operators on that.

Operator

Thank you. Our next question is coming from Rich Anderson with Wedbush. Your line is live.

Rich Anderson

Yes, I'm getting some mental Vertigo here. With the Echo. I hope you can hear me, but I only have one question. A lot of structured deals you talked about, Clint. I'm wondering what's your comfort level in terms of loans or I should say anything else besides fee simple ownership as a percentage of the total, how willing how far are you willing to go on that from an before risking being viewed as a mortgage rate or something that you're anywhere near that. But I'm just I'm just curious if you have a threshold in mind about how up how high you want to go on that level of investment.

Pamela Shelley-Kessler

We don't have a hydrogen TAM. We don't have a set threshold, but we are very mindful of that. And we really look at our structured product as a marketing tool and a way to get exposure with operators that might not normally look to refinancing and that want to retain some ownership in the properties and that's been a big hurdle in and marketing sale leasebacks to operators. There are operators out there that are like I'll never do a sale leaseback with every well. That's a that's a big portion of the marketplace that we feel if we can get an inroad with them and they can get exposure to LGC and our way of doing business that they might actually convert to ownership equity. We saw that happen with Pruitt. The it did never done a sale leaseback with a week before and they did one with us. And we worked a long time on that relationship. And that's what our business development team is out there doing looking for operators that are new to to refinancing and getting an inroad with them.

Clint Malin

It's and it's also it's not just it's not just yield focused teams. And this is really an opportunity to partner with operating companies with an investment structure. They're familiar with that leads us to dialogue in other opportunities they might have. So it's really more marketing, as Pam mentioned. And but from a mortgage standpoint, we're seeing an equity raise.

Rich Anderson

Okay. I'm sure that I do have one more question on the question was asked, how are you financing the stuff? And the quick answer from Wendy was really going to use equity, but you through your ATM, you raised about $10 million or $11 million this year. So yes, that does really filled the gap so much that amount, at least in terms of what I'm thinking about for you your activity going forward. So when you say, can you expand upon the funding strategy beyond just saying we're using equities and but certainly more in the way of issuance, but also Are there other priorities downstream from equity that you might use more dispositions? I'm just if we can get more color on the financing side of things that be great. Thanks.

Pamela Shelley-Kessler

Sure. Sure. It's Pam on. So equity on the ATM as our primary way of financing your one-off investments like the KD loan that we did on this this year, we've almost equitized that 100%. And going forward for the smaller one-offs or two property portfolios, the ATM is great. If we were looking at a large portfolio transaction, you know, and I know it sounds very old-fashioned, but there's still an overnight marketed deal that that could be done and that's a good way to place stock in the hands of some of new potential investors, but we don't have anything like that on the horizon right now. And as I discussed, we have the $80 million in loan proceeds that currently we're anticipating are going to pay off. And so those would also be used to fund new investments.

Rich Anderson

Okay. What about disposition?

Pamela Shelley-Kessler

We've definitely done a lot of dispositions over the past 24 months, and we don't have anything immediately on the horizon. So we're not looking right now at financing growth with any more dispositions.

Rich Anderson

Thanks. That's it for me.

Pamela Shelley-Kessler

Thanks.

Operator

Thank you. Once again, if you have any questions, please press star one on your phone at this time. Our next question is coming from Michael Carroll with RBC Capital Markets, your line is.

Michael Carroll

Yes, thanks. I'm sorry, I was missing some of these questions during getting some bad feedback. Seems like everything's fine now, but can you provide some background on the EG&G lease negotiations. I know last quarter you temporary extended that lease to August and today you announced the amendment through the end of 2028. And I guess what changed there, I guess was facilitated this lease amendment that increased your rents and extended the lease term?

Clint Malin

I'd like to point out, so we've been actively working on this. The as the buildings have increased occupancy as margins have improved is really trying to figure out how do we structure that from a rent basis you had the arm, the pending staffing rule that was out there was just finalized recently. So there is elements that were out there that we needed to collectively focus on with HMG. to be able to look at a longer-term horizon, which took some time to do that. But as you saw from the rent growth that we're getting off of this, not only in 2024, but going forward, that was a positive as well.

Michael Carroll

Okay. And then correct me if I'm wrong, client by our other two app after finance master lease?

Clint Malin

There are not we have we talked initially about, um,

Pamela Shelley-Kessler

Second matter, the other master that although there were no,

Clint Malin

Yes, there's two of them, we have to separate master leases and then also often is on the yes, we have a line of credit outstanding with EG&G as well that we knew that that was a temporary financing, not temporary, but the short-term financing where we really took the properties back from Senior Care Centers. So we wanted to be able to get that paid off to redeploy at higher yields because that was a 4% yield on that line of credit.

Pamela Shelley-Kessler

So yes, they needed to get up. Yes, the working capital line of credit, yes.
Yes. And they need a longer term lease to do that from. And just to clarify for everybody with HMG., we have two separate master leases. We have we've had one which covers two properties that was pre-existing this of new 11 property master lease I think there was some confusion around that. So there are two separate master leases. We are just talking about the 11 property master lease.

Clint Malin

Okay. And Bill of also add on that too, is we want to look at how do we get probably ramp of rent on this on what was important to us in this negotiation was getting a fair market rent reset at some point, and we were able to negotiate that into the overall terms of the amendment.

Michael Carroll

Okay. And then what's the rents on the new asset naturally that now and do you plan on selling those on selling?

Clint Malin

No, we don't have any plans on selling those. Obviously, it was structured before it's typical. So you got a 10 10-year initial term, and we agree that a gentleman was just.

Michael Carroll

Okay. Great. Sorry, the feedback or the it goes back, so it goes to Tarsa outgo question, but just real quick on the market base lease rent forecasts on that you provided that you kept it the $3.3 million for 2024 on. Does that rent include anything related to the ALG. on April transitions. I know they're not paying rent through October, but are they expected to pay rent in November and December? And is that included in that $3.3 million number?

Clint Malin

There's no rent included in that number for those buildings.

Pamela Shelley-Kessler

Just asking about it now revenue produced. That's not in the $3.3 million.

Michael Carroll

Okay. Great. And you expect that to get rent from those assets after the free rent period?

Clint Malin

Correct.

Michael Carroll

Okay, Clint. Thanks.

Clint Malin

Thank you.

Operator

Thank you. As we have reached the end of our question, and answer a question and answer session. I will now turn to commentary on Cohort two. I know from some new brand closing remarks or closing remarks.

Wendy Simpson

Thank you all for joining us for the first quarter, and we're really excited about this year, and we hope to bring you additional good news after our second quarter ends. Have a great day.

Operator

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.