Earnings Call Transcript - LTC Q3 2025

Operator, Operator

Greetings, and welcome to the LTC Properties, Inc. Third Quarter 2025 Earnings Conference Call. Before management begins its presentation, please be aware that today's comments, including the question-and-answer session, may contain forward-looking statements that are subject to risks and uncertainties which could cause actual results and events to differ significantly. These risks and uncertainties are outlined in LTC's Properties' filings with the Securities and Exchange Commission, including the company’s most recent 10-K dated December 31, 2024. LTC is not obligated to revise or update these forward-looking statements to reflect any events or circumstances occurring after this presentation. Additionally, please note that this event is being recorded. I will now turn the conference over to LTC management. Thank you, you may begin.

Clint B. Malin, CEO

Hello, and welcome to LTC's 2025 Third Quarter Earnings Call. After some brief introductory remarks from me, you'll hear from Cece Chikhale, our Chief Financial Officer; followed by Gibson Satterwhite, LTC's Executive Vice President of Asset Management; then Dave Boitano, our Chief Investment Officer. Pam Kessler, LTC's Co-CEO, will close out our formal remarks. It's been a busy and productive 10 months for LTC. We've been executing on every front, initial cooperative conversions from triple net lease to SHOP, external growth through investments, capital recycling and transformation through SHOP. Following the announcement of our SHOP initiative in late 2024, we moved quickly to build our investment pipeline, outperforming our own expectations and growing the pipeline fourfold since the beginning of this year. As Gibson will detail later, today, we are raising our 2025 SHOP NOI guidance. We have closed about 85% of our projected $460 million investment pipeline, more than $290 million of which was in our SHOP segment. We expanded operator relationships and reduced the average age of our portfolio. Today, we have 6 SHOP operator relationships, 4 new to LTC. By the end of the year, we expect SHOP to approach 25% of our investment portfolio with an average age of less than 9 years. Our primary thesis for launching SHOP was the realization that LTC was effectively excluding itself from a vast opportunity set of new investments. With the robust volume of new investments we've made in 2025 and the backdrop of favorable demand fundamentals and supply constraints, our external growth trajectory remains strong. The transformation we've accomplished since the second quarter of this year is delivering meaningful results and positioning LTC to continue creating long-term value for our shareholders. Pam, Wendy and I want to extend a sincere thank you and express our gratitude to the LTC team. They have stretched themselves by tackling new tasks and responsibilities and are working together tirelessly and professionally to successfully execute on LTC's strategy. Now I'll turn the call over to Cece.

Caroline Chikhale, CFO

Thank you, Clint. The numbers I'll be discussing today are for the third quarter of 2025 compared with the same quarter in 2024, unless otherwise noted. You can find a more detailed description of our financial results in yesterday's earnings release, our supplemental and our Form 10-Q. Core FFO improved to $0.69 from $0.68, principally due to an increase in SHOP NOI from Anthem and New Perspective compared with rents we received before those leases were converted from triple net, new SHOP acquisitions and a decrease in interest expense. These were partially offset by an increase in recurring G&A. Core FAD improved by $0.04 to $0.72 versus $0.68 last year. The increase primarily related to the same factors impacting core FFO as well as the turnaround impact of rent assistance provided to ALG in the third quarter of 2024, cash rent increases from escalations and CapEx funding in our triple net portfolio. These were partially offset by an increase in recurring G&A. During the quarter, we took a noncash write-off of Prestige's straight-line effective interest receivable balance of $41.5 million, resulting from the loan amendment that we discussed on last quarter's call. The amendment gives Prestige a penalty-free prepayment option on their $180 million loan within a 12-month window beginning in July 2026. Additionally, during the third quarter, we wrote off $1.3 million of straight-line rent receivable related to the Genesis Chapter 11 bankruptcy filing. During the third quarter and subsequent, we sold a total of 1.5 million shares under our ATM for net proceeds of approximately $56 million. Our pro forma debt to annualized adjusted EBITDA for real estate was 4.7x, and our annualized adjusted fixed charge ratio was 4.6x. Our pro forma liquidity stands at nearly $500 million. We have increased the low end of our full year 2025 core FFO guidance by $0.01, which now stands at $2.69 to $2.71. For the fourth quarter, we expect core FFO in the range of $0.67 to $0.69. Guidance excludes asset sales and includes only those transactions closed to date or expected to close over the next 60 days. Additional assumptions underpinning this guidance can be found in our earnings release, which is posted on our website. Now I'll turn the call over to Gibson.

J. Satterwhite, Executive Vice President of Asset Management

Thank you, Cece. We're repositioning our portfolio with purpose, recycling capital from non-core assets, adding new operators and expanding SHOP to drive long-term value. At the close of the third quarter, SHOP included 21 properties with 5 operators, 3 of them new to LTC, including LifeSpark, Charter Senior Living and Discovery Senior Living. The portfolio's gross book value is $447 million or approximately 20% of our overall portfolio with average occupancy of 87%. We expect to convert 2 seniors housing communities in Oregon from our triple net portfolio into our SHOP segment on or before December 1. Upon conversion, we will terminate the triple net master lease with the operator and enter into a management agreement with Compass Senior Living, a partner new to LTC. The contractual rent under the lease agreement is approximately $2.5 million and the SHOP NOI run rate is approximately $1.2 million, which is expected to grow to exceed the contractual rent over the next couple of years. For the 13 properties originally converted to SHOP, we are increasing guidance to $10.9 million to $11.3 million, up from $9.4 million to $10.3 million. At the midpoint of guidance, pro forma NOI growth for these properties for the full year 2025 over '24 would approach 18%. For the remainder of the SHOP portfolio acquired through today's call and expected to convert, we expect fourth quarter NOI of $4.8 million to $5.2 million. While we are not providing formal guidance for 2026 today, we do expect continued strong SHOP NOI growth given the competitive position of our SHOP assets. Our expectation for rent from the 14-property portfolio, subject to market-based rent resets, remains steady at $5.7 million, which represents a 64% year-over-year increase. We will continue working to optimize value in this portfolio over the next 12 to 15 months. We have completed the sale of a previously discussed portfolio of 7 skilled nursing assets, generating net proceeds of approximately $120 million and a resulting gain of $78 million. Now I'll hand the call over to Dave for a discussion of our investment activity.

David Boitano, CIO

Thanks, Gibson. The fall NIC conference echoed a powerful theme, confidence in the future of senior housing. LTC is poised to capitalize on this robust industry updraft and build upon our solid cornerstone of 2025 investment success, a foundation of strong senior housing operator relationships and accelerating deal flow. We're gaining strong traction, not only in the volume of potential investments, but in the quality and depth of opportunities we're seeing. Our conversations with potential and existing SHOP operating partners continue to generate a strong pipeline, including off-market deals sourced from LTC's deep industry relationships. Our current opportunity set stands at roughly $1 billion, and we already have nearly $110 million under LOI with a target close in January 2026. The majority of our 2025 pipeline is closed with more than $290 million in SHOP transactions completed since May. We expect to ramp up that pace in 2026 as we focus on executing on the substantial opportunities we are seeing with both existing and potential new SHOP relationships. I want to take a moment to thank Gibson for the over $100 million in sales proceeds that we're quickly redeploying into quality senior housing communities. Through the end of the third quarter, we closed 3 SHOP investments totaling nearly $270 million. After quarter end and as just recently announced, we acquired a stabilized senior housing community in Georgia for $23 million that is being managed by a new LTC operator, Arbor Company. These stabilized assets were underwritten to generate threshold year 1 yields of about 7% and unlevered IRRs in the low teens, tangible proof of our ability to source, structure and execute high-performing investments. And as with all our SHOP relationships, LTC's management agreements provide incentives for our operating partners to surpass base underwriting assumptions. During the third quarter, we also originated a $58 million 5-year mortgage at 8.25%, providing strong current returns and portfolio diversification. SHOP has proven to be a true external growth engine for LTC, built on disciplined underwriting, strong partnerships and consistent execution. As the market continues to evolve, we're focused on maintaining balance between opportunity pursuit and execution discipline, ensuring LTC's growth remains both sustainable and strategic. I'll now pass the call to Pam.

Pamela Shelley-Kessler, Co-CEO

Thanks, Dave. LTC's strategy today is clear and forward-focused. We're building a company defined by growth, quality and consistent performance. Over the past year, we've established a strong foundation, and now we're focusing on scaling it by expanding our SHOP platform, deepening operator partnerships and driving long-term accretive returns. We're intentionally building a SHOP portfolio of newer assets with staying power, one that will compete well as the industry continues to evolve. The bifurcation between high-quality modern assets and older, less competitive properties is becoming more pronounced across all real estate asset classes, and seniors housing is no exception. By concentrating on newer, well-located communities operated by experienced partners, LTC is positioning itself to outperform over time. Underpinning all of this is a strong balance sheet. We maintain solid liquidity, a conservative approach to leverage and a disciplined payout ratio that gives us the flexibility to pursue growth while preserving financial stability. That foundation allows us to move decisively when opportunities arise. Our momentum is strong, our strategy is working and our opportunities ahead are significant. We're executing with discipline and confidence, and I couldn't be more optimistic about what's next for LTC. Operator, we're ready for questions from the audience.

Operator, Operator

The first question comes from John Kilichowski with Wells Fargo.

Unknown Analyst, Analyst

This is Jesus on for John. Just looking at the guidance here to get started, looking at the moving parts, just talk about the underlying assumptions here for the low end and the high end of the range.

Caroline Chikhale, CFO

Yes, Jesus, it's Cece. The low range, we included all investments that have closed to date and then the high is all that we expect to close within the next 60 days.

Unknown Analyst, Analyst

Perfect. And let's talk about the pipeline as well and the makeup here. Are you purely focusing on SHOP deals at the moment? Or are you looking at other triple net and loans as well?

David Boitano, CIO

So this is Dave. Predominantly SHOP. Certainly, we will consider other opportunities across our desk, but our primary focus is SHOP.

Operator, Operator

And the next question comes from the line of Juan Sanabria with BMO Capital Markets.

Juan Sanabria, Analyst

Maybe just to start to piggyback on the prior question. Could you provide any color on expected yields and growth for $110 million in the pipeline to close in January and $70 million over the next 60 days?

Clint B. Malin, CEO

So Juan, this is Clint. We've guided to 7% yields on our SHOP acquisitions, and you should think of the same for the $110 million deal we disclosed on our earnings release.

Pamela Shelley-Kessler, Co-CEO

Initial yield.

Clint B. Malin, CEO

Initial yields.

Juan Sanabria, Analyst

Okay. How should we consider funding the additional capital you've mentioned? And what is your perspective on your marginal cost of capital for both debt and equity?

Pamela Shelley-Kessler, Co-CEO

Yes. Thanks, Juan. This is Pam. We expect to receive proceeds in the first quarter from loan payoffs and purchase option exercises that we mentioned in the supplemental. This amounts to approximately $90 million, with the remainder funded through equity from the ATM. We have been very disciplined this year in issuing equity to align with our investments, and you can expect this approach to continue moving forward.

Juan Sanabria, Analyst

Great. And just last one, if you don't mind. Any other options of prepayments that we should expect in 2026 or '27 that you think realistically would be executed?

Clint B. Malin, CEO

The only thing you should think about is Prestige, which we talked about previously. And we gave them a prepayment window starting in July of '26, and they have improved performance, and we have been in communication with them, and they are going to be making loan applications in early '26. So at this point, we would think that they should be on track for hopefully 7%, Juan. It may take a little bit longer, but that's $180 million.

Pamela Shelley-Kessler, Co-CEO

Juan, you should consider this as part of our strategy to move from older skilled nursing properties to higher-performing SHOP assets through loan payoffs and purchase options. Additionally, we have an accordion feature on our line of credit that we can utilize in 2026 to increase our availability.

Operator, Operator

And the next question comes from the line of Rich Anderson with Cantor Fitzgerald.

Richard Anderson, Analyst

So this is all very exciting. The pipeline growing $1 billion is not a number we've heard associated with LTC in the past. So congrats on that. But the thing that I think I find more valuable is the growth profile of the company in year 2 and onward after the investment. So can you can you talk about what happens to the overall growth of the organic growth of LTC? Let's say, you get to 30%, 40% SHOP in the next year or so, let's say, legacy LTC was growing 2% or 2.5% on escalators on triple net. Like what's the incremental growth picture for the company after the investment, not from the investment?

Pamela Shelley-Kessler, Co-CEO

You're talking about the growth through SHOP because if you're not looking at...

J. Satterwhite, Executive Vice President of Asset Management

Yes, that's correct, Rich. This is Gibson Satterwhite. We entered with cash yields of 7%, and previously, we indicated that we anticipate at least a 3% growth rate, primarily to keep pace with inflation. When considering our cost of capital as we transition away from skilled nursing assets and looking at the overall blended cost, that 3% is the baseline growth rate we apply for pricing deals on new assets as we expand our SHOP portfolio. However, we are certainly forecasting growth that exceeds this baseline. We are aiming for low double-digit internal rates of return, and due to the current supply-demand imbalance that has been widely discussed in the industry, we expect growth to surpass 3%. Preliminary discussions with operators suggest that by 2026, revenue per occupied room will outstrip expense growth. Although we are currently finalizing budgets and cannot provide a specific figure, we believe this will lead to a more robust growth profile to achieve those low double-digit internal rates of return.

Clint B. Malin, CEO

And Rich, in addition to that, the average vintage right now of the deals we're acquiring in SHOP in '25 is 2019. So we are buying and bringing newer assets that we think we're going to have pricing power continuing on into future years. And we've purchased assets that are stabilized from an occupancy standpoint but have further room to grow from their positioning in the markets for revenue growth and dropping to the bottom line for NOI growth.

Richard Anderson, Analyst

Okay. Yes. I noticed the 87% occupancy. Some of your peers are achieving mid-teens or more in same-store NOI growth, much of which is due to an increase in occupancy. On a RevPOR basis, do you believe you could reach mid-single digits? I understand you mentioned 3%, but what is the potential for growth beyond that, especially considering the goal of creating a compelling growth narrative for shareholders?

Clint B. Malin, CEO

Well, people are certainly targeting. I'm sorry, Rich.

Richard Anderson, Analyst

Yes, please go ahead.

Clint B. Malin, CEO

Yes, people are definitely aiming for over 3% revenue per occupied room growth, which would at least match expense growth. We anticipate that expense growth will be lower, around 5%. There are discussions about base rates increasing between 6% to 8%, depending on various levels of care. This could lead to revenue per available room growth of around 5%. We're not receiving significant feedback from operators for next year indicating severe wage pressure, which is a major component of costs. If we're starting from around 4% or 5%, we'll have clearer insights after our budget season. We do expect revenue growth to exceed expense growth, so I believe mid-single digits is a reasonable expectation.

Richard Anderson, Analyst

Awesome. Just to clarify, you previously mentioned the conversion of two properties, one with $2.5 million in rent and another with $1.2 million in SHOP, expecting to exceed the $2.5 million. Is this a standard approach when doing a conversion, where you forgo short-term rent? Or do you sometimes start with a higher figure in a SHOP execution compared to the earlier net lease structure? I'm interested in how typical this calculation is for other conversions.

Clint B. Malin, CEO

This one is a little bit of an anomaly, Rich, and it's a fair question. So as you know, as I disclosed in my prepared comments that the current NOI run rate was lower than the contractual rent. So this was a specific operator issue that we dealt with that we had to address. We're really excited to start the relationship with Compass. These 2 particular properties have covered that contractual rent before, and we've just seen performance deteriorate. So we looked at this as a good opportunity, and we're really glad to have SHOP, the RIDEA platform and the toolkit to address a situation like this. So we really are confident that Compass is going to be able to drive NOI to more than exceed that contractual rent such that the value creation is going to more than offset the temporary reduction in our income. So if you think about the other conversions, Anthem that was cooperative, New Prospective cooperative, strategic. Those were really strategic important pieces for us to start our platform. And as you're seeing as we increase guidance on those, that it's really paying off for our shareholders.

Operator, Operator

And the next question comes from the line of Michael Carroll with RBC.

Michael Carroll, Analyst

Yes. Maybe aligns with those last questions. I guess, Gibson, how many of the assets that you have in the portfolio were recently transitioned or how many of the acquisitions that you guys have are recent acquisitions where you're transitioning out the old operator and bringing in a new operator? And with regard to those, should we expect some type of disruption, so higher expenses or lower revenues as there's always some type of disruptions with those?

David Boitano, CIO

This is Dave. So, so far, on our existing external acquisitions, the operator has remained in place, and it's actually been, as far as I'm concerned, sort of a twofer because we get to buy a great piece of real estate and we get to establish a great relationship with an operator. There will be some situations where we do have transitions. And obviously, we're very careful to plan well in advance with the operator to avoid disruptions. But predominantly, so far, we've been able to keep the operator in place on deals that we've executed.

Clint B. Malin, CEO

And right now, Mike, on our pipeline, we only have one deal in our pipeline where there would be an operator transition, but that was a smaller operator that was a real estate owner that's exiting that. So it's cooperative transition.

Michael Carroll, Analyst

Okay. So there's nothing really in the existing shop right now where you just did a transition and we should expect some type of disruption. So like you've kind of already realized that in the numbers in the third quarter?

Clint B. Malin, CEO

Yes, correct.

Michael Carroll, Analyst

Okay. Great. And then I guess, related to Prestige, I know you provided and I appreciate the color, Clint, earlier in the call. What do they need to get done to exercise that purchase option? I mean, is it just obtaining the loans? Or do they need to drive better results so they can get, I guess, better underwriting with any potential, I guess, HUD-type debt? I mean, do they need to drive performance in order to exercise that? Or is it just getting the loans done?

Clint B. Malin, CEO

We're seeing some performance improvements, which is why we allowed them a year to prepay. They've made significant progress, and from our analysis of their financial performance, things look promising. This should help them remain operational, and the decrease in interest rates could also be beneficial for them. We are confident in our decision to permit this prepayment so we can reinvest that capital into higher quality assets. We're monitoring the situation closely, and everything appears positive for mid-next year.

Michael Carroll, Analyst

Okay. And how many trailing or how long of a trailing P&L do they need to get HUD debt and should we think about them utilizing HUD to take this out? Or could they find a bridge loan and get HUD at a later date when their financial results are more stabilized?

David Boitano, CIO

So this is Dave again. So generally speaking, HUD's looking at a trailing 12, which you're right, there are bridge lenders out there that would probably happy step into the situation. So there'll be optionality for them as they approach that point.

Michael Carroll, Analyst

Okay. All right, great.

Clint B. Malin, CEO

Mike, they are just seasoning through the rest of the year. As Clint mentioned, their current performance appears to be at a level that will enable them to proceed with HUD. They are planning to season through the remainder of the year to submit the application in the first quarter. And then also... Sorry, just one other positive aspect is that the trailing 12 months included more difficult periods, which means that as time progresses, the underwriting is set to improve. Additionally, Prestige was waiting for their rate letters, which they received confirming their expected Medicaid rates. This enhances consistency. Furthermore, within our portfolio with them, they remain the largest vent provider in Michigan, and we anticipate significant Medicaid rate increases for vents. Therefore, when we consider our portfolio with Prestige, we are optimistic about the reimbursement for the ongoing portfolio, as there are vent units in some of the remaining buildings we will have with them.

Operator, Operator

And the next question comes from the line of Omotayo Okusanya with Deutsche Bank.

Omotayo Okusanya, Analyst

Yes. So much talk on SHOP. Let's talk a little bit about skilled nursing. Curious, again, when you take a look at your skilled nursing portfolio at this point, if there are opportunities to also try to improve your earnings growth from your current portfolio? Again, one of your peers did something really interesting with one of their operators. Again, not wondering again, are you guys looking at structures like that, that could also kind of help you generate better earnings growth from the skilled nursing portfolio?

Clint B. Malin, CEO

We have not looked at that, Tayo, as an option. We've mentioned previously on our calls, we've been selective looking at skilled nursing, and we have focused on more transitional newer transitional care, newer assets. And we continue to be in discussions with companies about that. So that would be what I'd see us selectively growing on skilled nursing.

Omotayo Okusanya, Analyst

Got you. That's helpful. And then anything from a regulatory perspective as well on the skilled nursing side, you guys are watching at this point?

Clint B. Malin, CEO

Nothing new at this point. I think everything that has been discussed regarding the staffing mandate is now behind us. There are no major issues that we are aware of in skilled nursing, although a few states have mentioned potential Medicaid rate reductions. This is a situation that has emerged in select states, and we are uncertain whether it will continue to expand or not, but it has appeared in a few instances.

Omotayo Okusanya, Analyst

Do you have exposure to those states like North Carolina and some of the other guys you've talked about it?

Clint B. Malin, CEO

Correct.

Operator, Operator

And the next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt, Analyst

Pam, I appreciate your earlier comments about the available liquidity. Regarding your previous remarks on funding plans, you've mentioned over-equitizing investments or at least maintaining a leverage-neutral position. I'm curious how patient you are willing to be with capital markets, considering the significant investment opportunities currently available.

Pamela Shelley-Kessler, Co-CEO

Yes. Thank you, Austin. Yes, I mean, we will look to match fund. So you're asking about how much we'll issue on the ATM. I mean we will look to match fund. We do have the proceeds coming back in the first quarter, as I talked about, and then possibly Prestige in third quarter if they meet their open window period. So with that backdrop, there's not a ton of pressure on us. But we have been disciplined this year in executing on the ATM when the backdrop was favorable for us to sell shares. And so we would continue that discipline into 2026 as well.

Austin Wurschmidt, Analyst

Appreciate that. And then just how are you guys balancing the regional densification or sort of a clustering strategy and the benefits of scale within SHOP versus geographic diversification and just kind of thinking about those future SHOP investments.

Clint B. Malin, CEO

Yes. I think that we're going to continue to evolve into that, Austin, but we've been out meeting with operators for upwards of a year now pre-marketing this. And I think where you see where the pipeline and our investments to date, this has been a result of that very intentional effort of going out and meeting with operating companies. So as we continue to work with these companies, I mean, we will look at density being a factor of concentrating in certain markets with certain operators.

Pamela Shelley-Kessler, Co-CEO

And we've done that. The operators that we're partnering with in our acquisitions, they are the market leaders in their area. And so that is a strategy of ours.

Austin Wurschmidt, Analyst

Helpful. Has the competition changed at all to a point where you felt you've had to increase your growth underwriting in sort of the 3 years out? I think you were in sort of the low to mid-single-digit growth you referenced last quarter with the expectation they would exceed that, of course.

Clint B. Malin, CEO

Yes, it's very competitive in the market regarding deals, and we've focused on smaller transactions. We've been fortunate to secure a couple of portfolios, but it is definitely competitive. However, we feel very good about our momentum and positioning in the marketplace to succeed with investments. Our investments to date, along with the new investment we announced for '26, demonstrate our ability to compete in the marketplace.

Austin Wurschmidt, Analyst

And last one for me. The transitions this quarter, I mean, it didn't sound like there was any other immediate kind of transitions that were available, but I think you'd referenced maybe evaluating some assets in the market-based rent reset, those 14 properties. Anything in the near term there that you're evaluating on maybe transitioning some additional assets from triple net or to the SHOP structure?

J. Satterwhite, Executive Vice President of Asset Management

Sure, Austin, this is Gibson. Yes, we're definitely considering that as we look into 2026. We have several options regarding those properties. We're continuing to collaborate with current operators and establish permanent rents. As a reminder, there were 14 properties that were set up with short-term leases, averaging about 2 years in duration with regular market rent resets. There may be instances where we retain those properties with the operators once we are confident we've reached an occupancy level and margin that makes sense for that relationship. However, we will certainly look at transitioning some of those assets to the SHOP model. You might see some movement on that early next year, and we could also make decisions on a few regarding whether to dispose of them. These are our options to maximize value within that group of assets, and we believe there's upside in that portfolio moving forward.

Operator, Operator

There are no further questions at this time. And I would like to turn the floor back over to Clint for any closing remarks.

Clint B. Malin, CEO

Thank you, everyone, for joining us today. 2025 has been a pivotal year for LTC so far, and our focus on driving growth is working and will continue. We look forward to sharing our progress with you next quarter. Thank you.

Operator, Operator

And thank you, ladies and gentlemen. That does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.