Earnings Call Transcript - LTC Q2 2024

Operator, Operator

Good day and welcome to the LTC Properties, Inc. Second Quarter 2024 Earnings Call. 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 that this event is being recorded. I would now like to turn the conference over to Wendy Simpson. Please go ahead.

Wendy Simpson, CEO

Thank you, operator, and welcome everyone to LTC’s 2024 second quarter conference call. On the call with me today are Clint Malin, Co-President and Chief Investment Officer, and Pam Kessler, Co-President and Chief Financial Officer. The second quarter went generally according to plan. We encountered a challenge with respect to occupancy issues at select assisted living communities operated by ALG Senior, but we very quickly provided solutions that are in the best interest of LTC, our partner, and our shareholders. With the full cooperation of ALG, we were able to neutralize the impact to LTC while enhancing our portfolio and providing us with additional security. Clint will explain as part of his portfolio review. As with other REITs, over the years, we have responded to challenges presented by industry and operator-specific headwinds. Our track record demonstrates that we’ve done so with expediency and transparency, and the ALG situation is no different. Our philosophy and mission have not changed, and we remain committed to our 2024 guidance and future growth.

Clint Malin, CIO

Thank you, Wendy. I’ll first discuss the steps we took to address the occupancy issues underlying some of our ALG investments. At a high level, we provided rent assistance for two of our investments at the end of the second quarter, and in exchange, reconfigured mortgage loans due from affiliates of ALG into two joint venture investments. First, we agreed to defer a total of $1.5 million in rent from ALG for May and June related to an 11 property assisted living portfolio in North Carolina that we own through a joint venture accounted for as a financing receivable. This receivable had a balance of $121.4 million at June 30, 2024. Additionally, we agreed to defer up to $250,000 in rent per month as needed, as they build back census to the remainder of 2024. The maximum deferred rent from July through December would be $1.5 million. Second, we agreed to no rent on a single property lease in South Carolina for May through September 2024, with quarterly market-based rent resets thereafter. At June 30, 2024, this property had a gross book value of $11.7 million and a net book value of $8.2 million. In conjunction with the rent assistance, LTC wrote off $321,000 of straight-line rent receivable in the second quarter. Previous annualized rent on this lease was approximately $900,000. Third, we funded $8.3 million under two mortgage loans. In consideration for the rent assistance I discussed, these mortgage loans were converted to two joint ventures, giving us a majority ownership stake in 17 assets, 13 in one joint venture and 4 in another. After the $8.3 million of additional loan funding, the joint venture investments related to these 17 properties are configured as follows: We exchanged our $64.5 million mortgage loan for a 53% interest in a joint venture that now owns 13 assisted living communities, 1 in South Carolina and the rest in North Carolina. We exchanged our $38 million mortgage loan for a 93% interest in a joint venture that now owns 4 assisted living communities in North Carolina. Each of these joint ventures then leased the properties to an affiliate of ALG under 10-year master leases, maturing at the end of June 2034, with purchase options available through June 2028. In accordance with GAAP, these investments are being accounted for as a financing receivable. Combined contractual annual rent under the two new master leases is $7.4 million compared with $6.9 million of annualized cash interest due under the previous mortgage loans as a result of the additional $8.3 million in cash we invested. For the month of July, we received total contractual rent and interest related to our ALG investments, less a $250,000 deferral. All of our investments with ALG are now cross-defaulted and cross-collateralized, providing us with added security. Our pathways for repayment of the deferred rent are through ALG’s exercise of their purchase options, occupancy improvements within our investments, or through proceeds from potential sales of properties to a third party. We have successfully managed all these maturities in 2024, including our HMG extension, through which they repaid $1.5 million on their $13.5 million working capital note in the second quarter and an additional $10.4 million in July. Lease maturities in 2025 represent 3% of rental income. We collected contractual rent from former operators related to properties previously transitioned, as Pam will discuss. As detailed in our supplemental on Page 16, coverage continues to increase across our portfolio. With respect to our pipeline, subsequent to the end of the second quarter, we committed to fund a $26.1 million mortgage loan for the construction of a senior housing community in Illinois. We expect to begin funding this commitment in early 2025 after the borrower has contributed $12.3 million of equity to initially fund the construction. The long term is approximately 6 years, at a current rate of 9% and an IRR of 9.5%. We look forward to updating you on the progress of our pipeline next quarter. Now I’ll turn things over to Pam for a review of our financial results.

Pam Kessler, CFO

Thank you, Clint. Because we have provided significant detail on our press release, supplemental, and Form 10-Q, I will keep my remarks at a high level today. Please note that all numbers discussed are for the second quarter of 2024 compared to the same period in 2023, unless otherwise noted. I’ll start with liquidity. At June 30, we had total liquidity of nearly $190 million, including just over $6 million of cash on hand, about $118 million available on our line of credit and roughly $65 million available under our ATM. Moving to our second quarter financial results. Net income available to common shareholders increased principally due to an impairment loss last year, higher interest income from loan originations and receipt of insurance proceeds, and lower interest expense, partially offset by higher G&A expense and provision for credit loss. Fully diluted FFO per share was $0.65 compared with $0.66. Excluding non-recurring items, FFO per share was $0.67 compared with $0.66. As discussed last quarter as subsequent events, we originated a $12.7 million mortgage loan to Ignite Medical Resorts and recorded $295,000 of revenue from this investment during the second quarter. We expect to record approximately $884,000 of revenue for the full year. We funded $3.9 million of a previously disclosed $19.5 million mortgage loan commitment, with $12.6 million remaining. Subsequent to the end of the second quarter, we sold an assisted living community for $8 million and anticipate recording a gain on sale of approximately $3.6 million in the third quarter. As part of the transaction, we received contractual rent through the remainder of the lease term, which would have expired in January 2025 in the amount of $441,000. As Clint mentioned, subsequent to the end of the quarter, we recorded $2.6 million of income from former operators related to portfolio transitions in prior years, and we received a $10.4 million pay down on HMG’s working capital note. We also expect 2 maturing loan receivables totaling $80.5 million to pay off before the end of the year. During the second quarter, we sold 204,700 shares of LTC’s common stock for net proceeds of $6.5 million under our ATM program. We paid $4 million in scheduled principal paydowns on our senior unsecured notes during the quarter and repaid an additional $18.2 million subsequent to June 30. During the second quarter, we also paid $24.8 million in monthly dividends of $0.19 per share and borrowed $4.7 million under our unsecured revolving line of credit. Our debt to annualized adjusted EBITDA for real estate is down to 5.3x from 5.5x for the prior quarter and our annualized adjusted fixed charge coverage ratio is up to 3.7x from 3.5x for the prior quarter. Our third quarter guidance for FFO, excluding non-recurring items, is between $0.66 and $0.67 per share. Non-recurring items for the third quarter related to the $3.1 million in income from former operators and the rent collected in connection with the property sale as discussed earlier. Our full year guidance for FFO, excluding non-recurring items, remains $2.63 to $2.65 per share. Non-recurring items for the full year include the $3.1 million expected for the third quarter as well as the non-recurring items recognized to date as detailed in our earnings release. This guidance assumes no additional investment activity, asset sales, financing, or equity issuances but does assume that the loans receivable I mentioned pay off that maturity. Now I’ll turn the call back to Wendy for closing remarks.

Wendy Simpson, CEO

Thank you, Pam and Clint. This quarter, we worked cooperatively with one of our largest operating partners to help them address a challenge while improving our security and gaining a majority ownership position in our investments. I’m very proud of LTC’s track record with respect to successfully mitigating challenges as they arise, and that we’ve done so quickly and transparently. With continued improvement across our industry, I remain optimistic that we are on the right path for growth. Before closing, I would like to welcome our new Board member, Bradley Preber. Brad is the Chairman of our Audit Committee and comes to LTC after retiring as CEO of Grant Thornton. We look forward to his contributions. Thank you to everyone who joined us today. We look forward to talking to you again after the third quarter. Operator, we are ready to take questions.

Juan Sanabria, Analyst

Hi, good morning. And thanks for the time. Just on ALG, could you be a little bit more specific about the issues that happened that caused the deferrals and all these changes to take place? And as part of that, maybe you could comment a little bit on why provide them a purchase option? And what you got in return as part of the negotiations?

Clint Malin, CIO

Sure, Juan. So really, it’s a function of two issues that surfaced on ALG, which these challenges came to life in May. One was the occupancy challenge that Wendy referred to in her prepared remarks on 12 of the communities. On those 12 communities, in some smaller markets, there were some staffing challenges, and some of those staffing challenges were really evident in a decline in occupancy. An additional impact to the buildings is these investments have a component of an affordable senior living product that has a Medicaid waiver component. And in North Carolina, they’ve had a long-standing Medicaid waiver program. And as you probably recall, the cyber attack that happened on Change Healthcare did have impacts on reimbursement aspects for Medicaid and Medicare through intermediaries. And that did impact ALG on their Medicaid revenues, which was a short-term temporary impact that they felt. Furthermore, ALG did not have a line of credit in place for Medicaid receivables, which you typically find on skilled nursing, which is the reason why we didn’t see this in our skilled nursing portfolio. So really, it was these staffing challenges at certain communities that led to occupancy declines in certain assets. In giving the purchase options, what we also did is we created another pathway for recovery of this deferred rent that we provided on the 11 property portfolio. We think that was an important element to get from a credit standpoint.

Juan Sanabria, Analyst

Okay. Thank you for that. And then just so I understand this, the deferrals are not reducing guidance because you’re sticking with straight-line accounting. You’re not cash accounting for ALG. Is that correct?

Pam Kessler, CFO

That’s correct, Juan. Yes, the effective interest method is similar to mortgage loans. So there was no difference in FFO between mortgage loans and the owned properties accounted for as financing receivables.

Juan Sanabria, Analyst

And how should we think about the difference between FAD and FFO? Presumably, you won’t capture the deferrals through normalized FAD, correct?

Pam Kessler, CFO

Yes, that is correct. But as I said in my prepared remarks, we have about $3.1 million that we’re collecting in the third quarter, so those offset for the year.

Austin Wurschmidt, Analyst

Hey, good morning everybody. Just sticking with ALG here. I guess following the sale and releasing of some of the older rural ALG assets earlier this year, did you consider any alternative routes for these portfolios as well? And were there signs of distress leading up to some of the items you highlighted that impacted them?

Clint Malin, CIO

Well, there is an alternative. ALG was looking at alternatives for financing and paying off these investments. Because of the deferral and the timing, we didn’t want to wait and allow them to pay it off. I’m not sure when the other financing would close. Ultimately, for ALG, taking out this portfolio through agency financing, I think, will benefit them long-term. And I think that remains our objective on this. The impact for us really became more obvious in May when they needed assistance. I think that was sort of the impact of the Change Healthcare issue catching up with them. But we still think that their execution to acquire these buildings is still in their interest.

Austin Wurschmidt, Analyst

Got it. And then sorry if I missed this, but are you starting to see occupancy of these assets begin to recover? And have they addressed some of the staffing challenges that you highlighted?

Clint Malin, CIO

Currently, on the portfolio that has the 13 buildings, ALG has been pursuing agency financing and has been in the process of getting appraisals. The challenge was primarily in the 11 building portfolio. The other two portfolios have been stable or increasing in occupancy, so we are working with ALG to understand those staffing challenges.

Austin Wurschmidt, Analyst

Got it. And then just last one for me. Just on the deferral balances that you’ve had a couple of these one-time collections you’ve highlighted. How big of a balance is that? And what agreements do you have in place to recover those rents over time?

Clint Malin, CIO

Well, our primary balance outstanding is probably a little bit over $3 million.

Pam Kessler, CFO

$3.5 million from one operator specifically. We have various security instruments in place from assets, personal guarantees. We have a pathway to recovery. We did not include it in our earnings. Not certain when we’d be able to collect, but our loans receivable is entirely separate from this operator.

Rich Anderson, Analyst

Thank you. Good morning. Just I apologize, I just need a little bit more clarity. There is $3.1 million of deferral collections in the third quarter, and that offsets the $3 million of deferrals that you potentially offered ALG, is that right?

Pam Kessler, CFO

That is correct.

Clint Malin, CIO

No, the deferrals are intended to be a take out to agency financing, so I would think that they will continue to pursue this.

Rich Anderson, Analyst

Any expectation of when this could trigger?

Pam Kessler, CFO

It will probably be over the course of 2025, pro rata through that year.

Michael Carroll, Analyst

Yes. Thanks. Just real quick on ALG, how broad based of an issue is it? I know you offered the deferrals on one group of assets, but then you did give them incremental dollars related to a new mortgage loan on another group of assets. So, is it the issue just the problem with the assets that you gave the deferrals to?

Clint Malin, CIO

The assets we provided the deferral on were more challenging. The additional capital for the new mortgage loan was to participate in that JV where there was positive value. These funds were used for security, and we hold various security to ensure we retain what we need.

Michael Carroll, Analyst

Could we expect these purchase options to happen sooner rather than later if they are already in the process of getting some secured financing?

Clint Malin, CIO

You might see some towards the end of this year, but mostly it’s going to be in 2025.

Wendy Simpson, CEO

Thank you again everyone for joining us and having these clarifying questions. I know it was a complicated transaction, and we tried to explain it both in our Q and our supplemental and in our prepared remarks. But indeed, if you still have questions to run your model, call Pam, and we look forward to talking to you next quarter. Have a great day.

Operator, Operator

Thank you everyone. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.