Q4 2023 LTC Properties Inc Earnings Call
Participants
Wendy Simpson; Chairman & CEO; LTC Properties, Inc.
Pam Kessler; Co-President, CFO & Secretary; LTC Properties, Inc.
Clint Malin; Co-President & Chief Investment Officer; LTC Properties, Inc.
Austin Wurschmidt; Analyst; KeyBanc Capital Markets, Inc.
Rich Anderson; Analyst; Wedbush Securities Inc.
Michael Carroll; Analyst; RBC Capital Markets Corp.
Connor Siversky; Analyst; Wells Fargo Securities, LLC
Presentation
Operator
Welcome to the LTC Properties Inc fourth quarter 2023 earnings call. At this time, all participants are in a listen only mode. 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. Before management begins his 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 31st, 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 Nick 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 rates 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 nonrecurring 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
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 revenues decreased by $2.2 million, principally related to portfolio transition Anthem's repayment in 2020 to have 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 prefund 2023 investments. Interest expense was partially offset by scheduled principal paydowns on our senior unsecured notes. We recognized a $16.8 million gain on a sale related to the divestiture of nine 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 seven 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, an increase in our provision for credit losses, as well as a 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 nonrecurring items was due to higher interest expense, lower rental income and additional shares outstanding from sales and our ATM program, partially offset by higher interest income from new investments.
Now I'll recap our recent divestitures. In total, we sold nine 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. Eight 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 path 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 prepayment of the net credits we effectively received for 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 nonrecurring 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 6 times for the 2023 third quarter to 5.5 times 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 for real estate ratio from 5.5 times to 5.4 times 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 one-year extension option notice date and exercised our option to extend the maturity date to November 19th, 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 mike 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 eight properties sold from the original portfolio, Brookdale retained 17 of the properties under a new master lease, five properties were transitioned to an existing LTC operator, Oxford senior living in fiber transition to an operator new to LTC Navion Senior Solutions and bears repeating that through these successful transactions, we have more than replace the income that was generated from the original Brookdale portfolio through a combination of new leases in pre-investing sales proceeds.
Next, I'll discuss a 12 property non revenue 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 mass release included eight properties in Texas and one each in Florida, Georgia, Mississippi and South Carolina. Majority of these properties are primarily located in small towns and were built in the 1990s, we sold to Florida and Mississippi communities during 2023. For the remaining 10 properties, we entered into an agreement to sell five 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 two closed properties for alternative uses. After the end of the fourth quarter, we transitioned properties that were built in the last five to seven years in Georgia and South Carolina to an operator new to LTC legacy senior living. The lease term is for two years with two one-year extension options. Initial rent for the first six months of zero after which will be based on mutually agreed upon fair market rent master lease includes a purchase option that can be exercised in 2027 if the two one-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 procedures 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 the 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 security pay the difference between the contractual rate on the loan and the current pay rate. We received all 2023 contractual interest of $19.5 million due from proceeds, 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 Christie's later in 2024 will be remitted to LTCS. Securities. Full contractual 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 eight and three-quarter percent 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 base rent resets, which now include the two 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 still 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 H & G'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 first, 2022 Q3 trailing 12 month EBITDA arm and EBITDA coverage as reported using a 5% management fee was 1.23 times and 0.99 times, respectively, for our assisted living portfolio. Excluding stimulus funds received by our operators, coverage was 1.14 times and 0.9 times, respectively.
For our skilled nursing portfolio, as reported, EBITDARM and EBITDAR coverage was 1.96 times and 1.47 times, respectively. Excluding stimulus funds received by our operators, coverage was 1.68 times and 1.19 times respectively. Pro forma for the 4% Medicare market basket rate increase, skilled nursing EBITDAR coverage, excluding stimulus funds, would have been 1.24 times.
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% 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 we'll 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 structure finance platform offers interesting solutions to complement triple net acquisitions in joint ventures and that as a result of the current lending environment, we can grow relationships with regional operators with whom we don't already have a relationship.
Now I will 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.
Question and Answer Session
Operator
(Operator Instructions) Austin Wurschmidt, KeyBanc Capital Markets.
Austin Wurschmidt
And good morning, everybody. I'm just wanted to first hit on the quarterly first quarter guidance and just curious what the biggest factors are driving the delta between what you achieved in the fourth quarter and the guidance that you put out for the first quarter, $0.63, $0.64.
Pam Kessler
It's Pam. It's primarily coming from a decrease in revenue from property sold and then the dilution from the ATM issuance.
Austin Wurschmidt
Is there anything from an excess rent payment that's also having an impact there from -- you received over 100% believe in the fourth quarter I'm just curious how much of an impact there is or any other considerations in the first quarter as we think about then the run rate through the balance of the year.
Pam Kessler
Right. So we did normalize in the first quarter and the guidance we did normalize the on the year of rent that we received for the property that was sold. And then in the fourth quarter, I think you're referring to the Prestige deferred interest. We've received, the $1.5 million, that was recorded on the effective interest method, which is a strip essentially straight line for interest income. So there was no effect from that. And in FFO and FAD, yes, there's a pickup of $1.5 million, but in FFO, there is nothing that would change that run rate.
Austin Wurschmidt
Got it. That's helpful. And then just switching over to the HMG. portfolio, you guys have talked a lot about this pushing out the lease on a on a sort of temporary basis, but what are sort of the thoughts on how you plan to keep the assets on the current master lease? Or are you still considering selling some of those assets? And then as it stands today, I mean, can you can you kind of put a little bit of a ring fence around or bookend where you think potential upside is currently within that lease? And that is there even further upside if the reimbursement environment is more favorable than today?
Clint Malin
Sure. This is clients. One of the items for doing the ARM seven month extension is HMG. has asked us to look at re-tenanting or selling two of the properties. So we're going through that evaluation right now, and that was the primary reason for extending just for seven months.
Tom, we do believe there is upside in this portfolio on we're not sure exactly of the timing and how much. But we do believe there's definitely room that we should be participating in the cash flow on the cell to set a more permanent rent but we have a constant rent growth.
Austin Wurschmidt
Even if you sell those two assets in the --?
Clint Malin
Right now, the -- while these two assets are waiting, whether we sell or re-tenant that recurrently collectively positive cash flow on cell. It's not that they are a negative drain to H&G. is maybe more geographic based so on. I think that gives us optionality that it.
Austin Wurschmidt
But do you think you can sustain the $8 million run rate then if those two assets get sold or -- (multiple speakers)
Clint Malin
I think we get zoning -- Yeah, I think on a net basis we sell at the other three assets. And when we could redeploy those dollars that I think on a net basis, yes, we would be at $8 million at a minimum.
Austin Wurschmidt
That's helpful. And then just last one for me. I'm just curious, you guys were active on the ATM this quarter brought down leverage. I mean, should should we expect that you want to continue to drive down leverage? Or would you think about further deleveraging from here more so from over equitizing on future investments?
Pam Kessler
Yes, probably the latter. We know we have some loans. If you look at the maturity of the loan receivable maturity schedule in the supplemental, we have about $80 million coming due to us this year. So that naturally deleverages us down to five times by the end of the year, which is around our long-term target. But yes, we would look to over equitize investments as well.
Operator
Rich Anderson, Wedbush.
Rich Anderson
Thanks. Good morning. I'm and I get my thoughts together here on the ALG portfolio that was paying you zero? Correct, Clint, prior to all this?
Clint Malin
Correct. Prior to the transition to ALG, it was paying us zero.
Rich Anderson
Okay. And so now you go through all these these steps. Do I have this right? You'll be left probably two operating assets.
Clint Malin
So we'll be left with three. So two, we've already transitioned to a new operator at the end of the year. And then we have one remaining property to transition and those three buildings or then those three buildings are the newer buildings of the 12 property master lease.
Rich Anderson
Two to legacy and one to go and zero rent for the first six months on those two?
Clint Malin
Correct.
Rich Anderson
Okay. So there's no downside in 2024 from this then, right. As you get anything from those three, it's positive from --?
Clint Malin
As I say, non-revenue-generating. Correct.
Rich Anderson
Okay. And then on prestige collected the $19.5 million, including -- I think you said a $3.4 million draw last year. They've added to that to replenish that through the retroactive Medicaid. Did you say how much that how much more your security deposit is now and above? That's question number one.
Clint Malin
So we were at $5 million previously. We're now at $4 million after we drew on the letter of credit and then they replenished a letter of credit. So net change down $1 million. We're current on contractual interest through February of 2024.
Rich Anderson
Okay. So that contractual interest is some combination of real payment -- interest payment and draws -- on future draws and security? Correct?
Clint Malin
Correct. The current pay is 8.5% and then we can draw on the security to reach the contractual interest payment on.
Rich Anderson
Okay. And when do you think that you're going to get away from security deposit draws --?
Clint Malin
So as the -- we've given them effectively a 2.5 year runway to improve operations, occupancy, improve margins. So they're doing -- they are paying us 8.5% current pay from cash flow generated from the portfolio. And as they get retroactive funds, they provide those to us to increase the security on starting in 2025, incremental to the retroactive Medicaid funds, we get 50% of some of the excess cash flow. So as the buildings perform better, we contribute or we also participate in the cash flows in that mechanism. So as operations improve, we have less draws on our security.
Rich Anderson
Okay. Okay, great. And then on the run rate, the $0.63 to $0.64, excluding the nonrecurring rent, how -- would you call that a kind of a floor to the year? Is there any reason why that might trickle down from here for whatever reason may be through ATM draws or whatever, temporarily speaking or do you see this is sort of like a jumping off point and you're likely to see more of a quarterly sequential ramp from that level?
Pam Kessler
Yes, I think it's probably more of a floor than on than a run rate for the year, but that remains to be seen I mean, we're very bullish on the investment outlook for the year. So that would add to it. We give a base case scenario given no additional investments on. So anything above what we have right now would be accretive even even over equitizing.
Rich Anderson
If you assume zero future acquisitions, it's still it still trickles up right through escalations and so on.
Pam Kessler
It does. That is correct. And those hit more in the back half of the year.
Rich Anderson
Yes, but there's nothing sort of sinisterly behind the scenes that's look waiting to lower that number for one reason or another, nothing kind of onetime-ish that you see coming, it's basically pretty go pretty visible path from this point going forward?
Pam Kessler
Yes, correct. Our crystal ball right now does not have anything looming out there on the phone.
Operator
Michael Carroll, RBC.
Michael Carroll
Yes, thanks. I wanted to circle back to HMG. just to confirm the rest of the portfolio minus those two assets that they are happy with, and how it fits within their geographic footprint and how they want to keep those properties going forward once you kind of figure out what to do with those other two properties?
Clint Malin
Correct. Yes, I mean -- they've identified these two buildings where they are cash flow positive on. So we're in discussion with them on on how we approach those two. But they have approached us about a possibility of transitioning to. But again, the two collectively are cash flow positive.
Michael Carroll
And then once those two get transitioned away, would you be in a position to create a longer-term lease with HMG. or are you still waiting for that portfolio to recover before you set a longer-term lease with more of a permanent rental rate we have to see more tracked.
Clint Malin
We think there's more upside in occupancy and performance. So we definitely feel there's more room for growth. So we want to participate in that.
Michael Carroll
And then how how are those assets performing? I know that they took over those, was it early 2023 when they took those over on I guess, how have they recovered since they've been operating them.
Clint Malin
It was 21 after they took over. Occupancy has been fairly flat, but they've improved. Our labor agency utilization has gone down. So cash flow has improved, but occupancy has been a little bit flat. So that's really where we see the potential for growth. Is that occupancy gains.
Michael Carroll
Okay. And I know that the I mean, I guess on C's contractual rent was significantly higher. I mean, should when you kind of set a new rate, is it going to be closer to that $14 million, $15 million run rate or is it going to be closer to $8 million run rate?
Clint Malin
Somewhere in between. I don't think you're going to get all the way back to the [$14 million and $8 million].
Michael Carroll
Okay. And then just last one for me on on investments. I know you kind of touched on this a little bit. So what on the investment side are you looking at more intently right now, and it sounded like you are more interested on the loans. Is that correct? Or is it are you seeing a lot of different opportunities on the real estate too.
Clint Malin
I think a lot of different opportunities. I think that people are speaking to are looking to work with stable capital providers come in. So it for us, it's going to be looking at loans, mez preferred equity on joint ventures, acquisitions and triple nets a little bit of everything. So I think we're going to be considering and looking at a lot of opportunities.
Operator
Connor Siversky, Wells Fargo.
Connor Siversky
Hey, good morning, guys. On for Canada this morning. Thanks for taking the question. I just can you it most of my questions have kind of been asked at this point. Can you quickly go over what you're seeing in the watch list, it seems like ALG. was a unique situation given COVID and proceeds from some. You've seems to be that you guys are pretty comfortable with the level of visibility you have with them the way you structured that contract and the anticipated Medicaid rate increases you restructured that for what else are you seeing out there just in the upfront.
Clint Malin
We bought resolution to a lot of items. So the Brookdale lease transition, Prestige, we're working through the energy transition, and we spoke about H. and G. So those are our main focuses and we're talking about growth. So I think that is a positive aspect of where we are at on our focuses and also in the transition portfolio, we're seeing upward movement in recovering on rental income. So those are all positives.
Connor Siversky
Great. Appreciate the color. And just a quick modeling one to make sure I'm kind of buttoned up here with the post quarter acquisitions and dispositions. So some there was a bunch of moving parts here post post quarter here. Can you go over any anticipated acquisitions and disposition activity that have closed so far in 1Q are expected to close in the near term for the LG., it looks like you've got $1.6 million in proceeds. You're anticipating from five properties and another one that's expected to be sold as well. Anything else kind of to think about that's expected to close near term as we're kind of buttoning up the models here?
Pam Kessler
No, nothing every everything that we have on deck right now we've talked about. So nothing nothing beyond that right now.
Operator
Your next question is coming from [Marcus Neve], a private investor.
Marcus, your line is live. Marcus, if you have a question, please, and I would say your line is live. (Operator Instructions) It seems like the speaker line dropped just one moment while we reconnect.
Wendy Simpson
No, we're here.
Operator
We have reached the end of the question and answer session. I'll turn the call over to Wendy for closing remarks.
Wendy Simpson
Thank you, operator. And we look forward to talking to you at the end of this first quarter. And we appreciate the time you've taken to listen to us today. Have a great weekend. Bye-bye.
Operator
Thank you. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.
