LTC Properties, Inc. (NYSE:LTC) Q4 2023 Earnings Call Transcript
LTC Properties, Inc. (NYSE:LTC) Q4 2023 Earnings Call Transcript February 16, 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: Greetings. Welcome to the LTC Properties, Inc. Fourth Quarter 2023 Earnings Call. [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, 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 conference over to Wendy Simpson.
Wendy Simpson: Thank you, operator, and welcome everybody to LTC's 2023 fourth 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. 2023 was a year of solid execution. So I want to begin by recognizing our very talented LTC team. During the year, we completed $262 million in investments and generated $77 million in sales proceeds, the sales resulted in net gains totaling $37 million. Additionally, we received $11.8 million in mezzanine loan payoffs, generating $1.6 million of exit IRR income at a weighted average rate of 12%. From an operational perspective, we successfully transitioned the Brookdale portfolio resulting in anticipated revenue of $0.5 million more than we generated from the original lease.
We received full contractual 2023 interest from Prestige with expectations for full contractual payments through at least 2025. Clint will further discuss this shortly, and importantly, we significantly reduced our leverage ahead of street expectations. From an industry perspective, demand for seniors housing is strong. Occupancy has increased for 10 consecutive quarters. And according to NIC, seniors housing occupancy rates are now on track to recover to pre-pandemic levels in the second half of this year, especially as new construction remains muted. While we are not in the prediction game, we are encouraged by what we're seeing. Market fundamentals currently favor REITs with billions of dollars of financing maturities coming due interest rates influx and banks being more selective about their investments, particularly in real estate and for properties that are not currently generating positive cash flow.
We have been preparing for this environment by developing creative financing structures, including those with shorter maturities. We believe LTC's creativity and flexibility makes it easier for us to act quickly by providing customized financing solutions based on an operator's needs. Finishing up now with some LTC-specific metrics, the FAD payout ratio for the fourth quarter was 79%. We also maintained our monthly dividend payout of $0.19 per share. For the 2024 first quarter, we anticipate that FFO will be in the range of $0.69 to $0.70 per share. FFO excluding non-recurring items, will be in the range of $0.63 to $0.64 per share. The decrease between FFO and FFO, excluding non-recurring items, is due to the repayment of rent related to a property sale in January.
Pam will provide details shortly. We're entering 2024 with a stronger, more diversified portfolio and a stronger balance sheet, better positioning LTC for future growth. Now I'd like to turn things over to Pam.
Pam Kessler: Thank you, Wendy. All numbers I'm going to discuss today are for the fourth quarter of 2023 compared with the fourth quarter of 2022, unless otherwise stated. Total rental revenue decreased by $2.2 million, principally related to portfolio transition, Anthem Street payment in 2022 of a temporary rent reduction and property sales. This was partially offset by revenue from an acquisition completed in the second quarter of 2023, annual rent escalations and lease renewals and extensions. Interest income from sale leaseback financing increased $2.4 million, mainly due to the acquisition of 11 assisted living and memory care communities during the 2023 first quarter accounted for as a financing receivable in accordance with GAAP.
Interest income from mortgage loans increased $1.8 million, primarily due to mortgage loan originations in the first quarter of 2023. Interest expense increased by $3.6 million, primarily due to a higher outstanding balance on our revolving line of credit and higher interest rates. Draws on our line of credit were used primarily to pre-fund 2023 investments. Interest expense was partially offset by scheduled principal paydowns on our senior unsecured notes. We recognized a $16.8 million gain on the sale related to the divestiture of 9 assisted living communities, which I'll discuss shortly. Our provision for credit losses increased by $4.2 million, primarily due to a $3.6 million write-off of a working capital note pursuant to a 12-property assisted living master lease with ALG.
Additionally, we recorded an impairment loss of $3.3 million related to 7 of the Texas properties covered under this lease. Clint will provide additional detail later in the call. Transaction fees increased approximately $0.5 million related to lease transitions and amendments. Net income available to common shareholders increased by $10.2 million primarily due to the increase in gain on sale and higher interest income from new investments, partially offset by higher interest expense, the previously discussed impairment loss and increase in our provision for credit losses as well as the decrease in rental income. Fully diluted FFO per share was $0.57 compared with $0.72. Excluding non-recurring items, which represents the write-off of the working capital note, FFO per share was $0.66 compared with $0.72.
The decrease in FFO, excluding non-recurring items, was due to higher interest expense, lower rental income and additional shares outstanding from sales under our ATM program, partially offset by higher interest income from new investments. Now I'll recap our recent divestitures. In total, we sold 9 properties with a combined 408 units for $29.6 million. We received proceeds of $24.6 million net of transaction costs and seller financing and recorded gains of approximately $17 million, 8 of the properties were part of our previously disclosed Brookdale transactions. Subsequent to the end of the fourth quarter, we sold our JV interest in a 110-unit assisted living community located in Wisconsin for $23.1 million, which yielded 8.12% to LTC in 2023.
The purchase price includes the repayment of $2.4 million of rent credits given to the operator during new construction lease up and the payoff of a $550,000 working capital note. We received net proceeds of $19.6 million net of transaction costs, and we anticipate reporting a gain on sale of $4 million in the 2024 first quarter. With the repayment of the risk credits, we effectively received full 2024 rental income during the first quarter. However, in order to provide first quarter FFO guidance, we normalized this $2.4 million of rent as a non-recurring item. Also during the fourth quarter, we sold approximately 1.6 million shares of common stock for net proceeds of $52 million under our ATM program. Subsequent to the end of the quarter, we sold approximately 91,000 shares of common stock for net proceeds of $2.9 million under the program.
During the fourth quarter, we repaid $5 million in scheduled principal paydowns on our senior unsecured notes and paid $24 million in common dividends. Importantly, we repaid $60 million under our unsecured revolving line of credit, reducing our debt to annualized adjusted EBITDA for real estate from 6x for the 2023 third quarter to 5.5x for the 2023 fourth quarter. Subsequent to the end of the quarter, we repaid $30.5 million under our unsecured revolving line of credit, reducing our 2023 fourth quarter debt to adjusted EBITDA per real estate ratio from 5.5x to 5.4x on a pro forma basis. As Wendy mentioned earlier, by substantially reducing our leverage, LTC is better positioned for growth in 2024 and in the future. Additionally, subsequent to the end of the quarter, we amended our unsecured revolving line of credit to accelerate the 1-year extension option notice date and exercised our option to extend the maturity date to November 19, 2026.
All other provisions of the agreement remain unchanged. Currently, we have $15 million of cash on hand, approximately $128 million available on our line of credit with roughly $272 million outstanding and about $73 million available under our ATM. This gives us total liquidity of almost $217 million. Now I'll hand the mic over to Clint.
Clint Malin: Thank you, Pam. I'll begin with a discussion of some of our operating partners, starting with Brookdale. Aside from the 8 properties sold from the original portfolio, Brookdale retained 17 of the properties under a new master lease. 5 properties were transitioned to an existing LTC operator, Oxford Senior Living, and fiber transition to an operator new to LTC, Navion Senior Solutions. Compares repeating that through these successful transactions, we have more than replaced the income that was generated from the original Brookdale portfolio through a combination of new leases and pre-investing sales proceeds. Next, I'll discuss a 12-property nonrevenue-generating portfolio which has temporarily transitioned to ALG in July 2022 following the COVID pandemic.
ALG provided assistance by stepping out of their geographic footprint to quickly support us by operating these properties while we evaluated whether to sell them or transition them or some combination of both. This 12-property ALG master lease included 8 properties in Texas and 1 each in Florida, Georgia, Mississippi and South Carolina. The majority of these properties are primarily located in small towns and were built in the 1990s. We sold the Florida and Mississippi communities during 2023. For the remaining 10 properties, we entered into an agreement to sell 5 of the Texas properties, closed a building in Texas during 2023 and plan to close a second Texas property in the near future. We then expect to sell the 2 closed properties for alternative uses.
After the end of the fourth quarter, we transitioned 2 properties that were built in the last 5 to 7 years in Georgia and South Carolina to an operator new to LTC, the Legacy Senior Living. The lease term is for 2 years and with two 1-year extension options. Initial rent for the first 6 months is zero, after which it will be based on mutually agreed-upon fair market rent. The master lease includes a purchase option that can be exercised in 2027 if the two 1-year lease extensions are exercised. Additionally, we agreed to fund up to $900,000 for capital expenditures for the first year of the lease and up to $240,000 for a working capital note at 8.25% maturing on December 31, 2025. We are currently working to transition the remaining property.
To reiterate, the portfolio was non-revenue generating. A few words about Prestige Healthcare. As we previously disclosed, we amended Prestige's mortgage loan, which is secured by 15 skilled nursing centers in Michigan. Effective January 1, 2024, the minimum mortgage interest payment due to LTC is based on an annual current pay rate of 8.5% on the outstanding loan balance of $183 million. Contractual interest rate on the loan, 10.8% remains unchanged. Additionally, the amendment gives LTC the right to draw on Prestige's security, pay the difference between the contractual rate on the loan and the current pay rate. We received all 2023 contractual interest up $19.5 million due from Prestige including drawing $3.4 million of security held by us.
Subsequent to the end of the 2023 fourth quarter, Prestige increased our security using retroactive Medicaid payments received from the State of Michigan. We currently hold security of $4 million and expect that additional retroactive Medicaid payments to be received by Prestige later in 2024 will be remitted to LTCS security. Full contract interest has been paid on the loan through February 2024, and we expect to receive full contractual interest through at least 2025, including draws as needed from the security provided by the retroactive Medicaid payments. Improvement in the performance of the properties will reduce the need to apply security held by us. Occupancy in this portfolio grew from 73% in September to 75% in January. Regarding our fourth quarter investment activity, we mentioned during the last quarter's call that we closed on a transaction to fund a $19.5 million mortgage loan at a yield of 8.25% for the construction of an 85-unit assisted living and memory care community in Michigan.
The borrower's equity has been fully drawn, so we began funding in the first quarter of this year. Moving on to our assisted living portfolios with quarterly market-based rent resets which now include the 2 assisted living communities for whom we have been providing abated rent, we received 861,000 during 2023 and expect to receive $3.3 million in 2024. For our SNF portfolio transition to HMG, we received $8 million in rent during 2023. Subsequent to December 31, 2023, we amended the master lease to extend its term from February 1, 2024, to August 31, 2024. Rent was set at $4.7 million for the period, which annualizes to $8 million. We also extended the term of HMG's revolving line of credit to coincide with the new lease expiration. Next, I'll provide insight into our portfolio numbers, which excludes properties transitioned on or after July 1, 2022.
Q3 trailing 12-month EBITDARM and EBITDAR coverage as reported using a 5% management fee was 1.23x and 0.99x, respectively for our assisted living portfolio. Excluding stimulus funds received by our operators, coverage was 1.14x and 0.9x, respectively. For our skilled nursing portfolio, as reported EBITDARM and EBITDAR coverage was 1.96x and 1.47x, respectively, excluding stimulus funds received by our operators, coverage was 1.68x and 1.19x, respectively. Pro forma for the 4% Medicare market basket rate increase skilled nursing EBITDAR coverage, excluding stimulus funds, would have been 1.24x. Now for some recent general occupancy trends, which are as of January 31 and are for our same-store portfolio. These numbers include approximately 65% of our total same-store private pay units and approximately 78% of our same-store skilled nursing beds.
Private pay occupancy was 87% at January 31, 2024, 87% at September 30, 2023, and 85% at June 30. For our skilled nursing portfolio, average monthly occupancy was 76% in January, 75% in both September and June. As for the pipeline, we are working to rebuild it with accretive and strategic investments. The majority of our investments during 2024 are expected to be back-end loaded. In terms of how we're thinking about the current market and potential opportunities, bank maturities will likely be in the billions of dollars this year and in many cases, banks are highly selective and only will work with existing customers that are willing and able to put up higher reserves. The bottom line for LTC is that we believe we are in a good position to grow and further diversify our portfolio.
We believe our structured finance platform offers interesting solutions to complement triple net acquisitions and joint ventures. And that as a result of the current lending environment, we can grow relationships with the regional operators with whom we don't already have a relationship. Now I'll turn the call back to Wendy for her closing remarks.
Wendy Simpson: Thank you, Pam and Clint. After some major accomplishments in 2023 and strengthening our portfolio and balance sheet, we believe LTC is well positioned to capture current opportunities. Thank you, everyone. We appreciate your continued support, and we'll talk to you again next quarter. Operator, we are now ready to take questions.
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