LTC Properties, Inc. (NYSE:LTC) Q1 2024 Earnings Call Transcript

LTC Properties, Inc. (NYSE:LTC) Q1 2024 Earnings Call Transcript April 30, 2024

LTC Properties, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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. [Operator Instructions] 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. 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 the 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 retenanting 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 adjustment returns for our shareholders.

The 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 SNF 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 SNF minimum staffing rule. 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 rule 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 non-recurring items to range between $0.65 per share 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 per share and $2.65 per share for the full year.

Non-recurring items include the payment of rent related to a property sale in January and $900,000 of credit reserves that get reversed as loans payoff. In summary, as we redirect our efforts towards strategic growth the entire LTC team is geared up for a highly productive 2024. Now I’d like to turn the call over to Pam.

Pam Kessler: Thank you, Wendy. 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 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 a 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 pay downs 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 record a loan loss reserve estimate equal to 1% which amortizes as the 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 the lower provision for credit loss. Fully diluted FFO per share was $0.69, compared with $0.66. Excluding non-recurring items FFO per share was $0.64, compared with $0.67. The decrease in FFO excluding non-recurring 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 had 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 commitment for the construction of an assisted living and memory care community in Michigan. LTC’s investment represents 62% of the estimated project cost. During the first quarter we sold approximately 139,000 shares of LTC’s 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 our unsecured revolving line of credit and repaid $6 million in scheduled principal pay downs 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 REITs decreased theirs. 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 pay downs on our line of credit using proceeds from loan payoffs and scheduled principal pay downs 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 released and the remainder were sold. 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, a current LTC operator. The 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. The 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 HMG 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 is $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 five-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. Upon repayment, the remaining balance of the note will be interest-free and will be paid in installments through 2028. Proceeds from this 4% working capital note will be used to pay down higher interest debt or to fund accretive investments. 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 Healthcare loan secured by 15 properties in Michigan was 77% in March of 2024, an increase from 73% in the year ago period and up from 75% in January this year.

Regarding our assisted living portfolios with quarterly market-based 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 will provide insight into our portfolio numbers, which exclude properties transitioned on or after October 1, 2022. Q4 trailing 12-month EBITDARM 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 is 1.28 times and 1.03 times respectively. For our skilled nursing portfolio, as reported EBITDARM and EBITDAR 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 EBITDAR coverage has improved from the prior quarter same-store coverage by 11 basis points for our assisted living portfolio and 3 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 31 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 unit launch 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 wild card 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 varied 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 is a compelling investment. One, we have consistency of leadership with a 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 operators’ 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.

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