Q2 2023 LTC Properties Inc Earnings Call
[music].
Good morning, and welcome to the LTC properties, Inc quarterly earnings call.
At this time all participants are in a listen only mode and we will open the floor for your questions and comments after the presentation.
If you wish to enter the queue to ask a question you can press star one at any time should you wish to remove yourself from the queue you May press star two.
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.
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 2022 held she undertakes no obligation to revise or update these forward looking statements to reflect events or.
Chances 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. Please go ahead.
Thank you operator, and welcome everyone to L. T. C 2023 second quarter conference call I am joined today by Pam Kessler, <unk>, President and Chief Financial Officer, and Clint Malin, our co President and Chief investment Officer.
The first half of 2023 was driven by substantial investment activity generating growth this year and in the future to date. This year, we have put more than a quarter billion dollars to work through new investments to produce accretive current and future income.
We used our line to fund these investments and plan to pay down the line, primarily using future expected asset sales.
A good number of these assets have been non revenue producing mostly from being in lease up when COVID-19 changed the world.
With our second quarter and subsequent investment activity that Clint will detail later, we have completed the majority of the $100 million pipeline, we spoke about last quarter, bringing total investment so far this year to $258 million.
Now the senior management team at LTC knows that our primary mission for the rest of 2023 is to focus.
And that focus is on completing our identified asset sales working with operators, who still need some guidance around their focus and establishing permanent runs for properties that are not currently rapidly producing to LTC.
I believe issues around two of our operators could be an overhang on our stock price and I want to address our progress at the beginning of this call and Pam and Clint will give you more specifics during their remarks.
As to Brookdale, we are confident that between sales of certain properties and new leases on certain properties, we will not experience a decrease in 'twenty 'twenty four S. F O from the non renewal of the Brookdale lease anticipated sales proceeds of $35 million to $40 million will reduce.
Our outstanding line of credit, which was used to pre fund accretive investments already made this year.
As to prestige, Michigan has a very complex cost based Medicaid system that due to Covid did not rebase rates for two years, which results in reimbursement true ups from prior periods.
This can cause operators to have cash flow shortfalls until the true up is paid which is expected in the fourth quarters of 2023, and 2024 could may now be able to qualify as an expert witness regarding Michigan Medicaid rules and calculations working with prestige.
We have formulated a path whereby LTC will collect 100% of our interest due from prestige in 'twenty two 'twenty three which may include a draw on a letter of credit until the true ups are funded.
Pam will discuss more pertaining to prestige later.
Since the first of the year, we have generated $37 8 million in asset sales proceeds, resulting in a $15 $7 million net gain and we expect to receive sales proceeds in the range of $50 million to $55 million throughout the remainder of 2023.
This includes the expected sales of a portion of our Brookdale portfolio.
Additionally, we received $11 $8 million in payoffs from our mezzanine loans generating $1 $6 million of exit I, our our income at a weighted average rate of 12%.
Before talking about some second quarter LTC specifics I'd like to briefly comment on what we're seeing across the private pay and skilled landscape.
On the private pay side, we're seeing improved coverage as a result of growth in occupancy and rates.
On the skilled side Medicare rates are proposed to be a three 7% increase.
The new rates will be beneficial as operators continue to deal with some occupancy challenges panic.
Anecdotally, we're also seeing reduced HFC usage, which should help bring down operator costs.
Moving back to our results our <unk> payout ratio for the second quarter was 84% with our long term historical goal remaining at 80%.
Our monthly dividend payout remained at 19 <unk> per share.
For the third quarter, we anticipate that F. F O. Excluding nonrecurring items will be in the range of 63 to 64 cents per share.
Primarily reflecting our transition of an eight property portfolio to a current LTC, operator, which Pam will discuss shortly.
As our industry continues to recover from a period of protracted uncertainty.
<unk> is focused on shoring up its position by optimizing our portfolio to generate cash now and in the future and by reducing our leverage to put us in a position to refocus on additional growth in 2024.
Before turning the call over to Pam I would like to welcome Ltc's newly elected Board member, David Gerber, former managing director and head of equity capital markets for Keybanc, where he spent more than two decades, we have known David for 20 years and look forward to utilizing his expertise.
With respect to as we continue to implement our strategy for continued sustained growth.
Now I will hand, the mic over to Pam. Thank.
Thank you Wendy for the second quarter of 2023 total revenue increased by $5 2 million compared with the second quarter of 2020 to improve.
The improvement was driven primarily by $3 8 million of higher interest income from acquisitions accounted for as financing receivables and $1 8 million of higher interest income related to mortgage loan origination in the current and prior years.
Rental revenue and income from unconsolidated joint ventures were in line with the prior year period. The increase in total revenue was partially offset by a $346000 reduction in interest and other income related to the payoff of two mezzanine loans during the first quarter of 2023.
Interest expense increased by $3 8 million from last year's second quarter, primarily related to higher interest rates and a higher outstanding balance on our revolving line of credit as well as the issuance of $75 million of senior unsecured notes during the 2020 to the second quarter.
During the second quarter of 2023, we recorded a $12 1 million impairment loss related to two assisted living communities for which we are currently negotiating a sale one of these properties as non revenue producing any other producers minimal rent.
Net income available to common shareholders decreased by $48 million, primarily due to a decrease in gain on sale of real estate. The impairment loss I, just mentioned and higher interest expense, partially offset by higher interest income from new investments.
Diluted NAREIT <unk> per share was 66 days for the 2023 second quarter up from 64 cents for the 2022 second quarter.
Excluding nonrecurring items <unk> per share was <unk> 66 for the 2023 second quarter compared with 62 for the 2022 second quarter. The increase in <unk>, excluding nonrecurring items was due to higher interest income from new investments, partially offset by higher interest expense as already mentioned.
Next I'll discuss our recent and expected divestitures Clinton will detail our investment activity.
During the second quarter of 2023, and as previously announced we sold a 70 unit assisted living community in Florida for a $4 9 million.
During the quarter. We also sold a 39 unit assisted living community in New Jersey for 2 million <unk>.
Additionally, we entered into an agreement to sell two assisted living communities in Pennsylvania with a combined 160 units for $11 5 million, we expect to complete this sale during the 2023 third quarter and anticipate recognizing a gain on sale of approximately $5 2 million all of these assets were non revenue producing.
LTC, we repaid 4 million in regular scheduled principal payments under our senior unsecured notes and also page $23 $6 million in common dividends for the 2023 second quarter, we borrowed $56 3 million under our unsecured revolving line of credit during the 2023 second quarter, which was primarily.
Used for our second quarter investments.
Sequencers to the end of the second quarter, we borrowed $34 million under our line to fund a $17 million investment and repaid $17 2 million in scheduled principal paydowns on our senior unsecured notes.
Currently we have $7 million of cash on hand, approximately $40 million available on our line of credit with roughly $360 million outstanding and about $129 million available under our ATM.
This gives us total liquidity of approximately $176 million. Additionally, as Wendy mentioned, we anticipate receiving sales proceeds later this year in the range of $50 million to $55 million from assets. We are actively marketing. These proceeds will be used to pay down our line of credit.
At the end of the 2023 second quarter, our debt to annualized adjusted EBITDA for real estate was six one times and our annualized adjusted fixed charge coverage ratio was three five times.
Regarding the operator for whom we have been providing abatements 645000 was abated in the second quarter of 2023 and an additional 215000 was debated in July we continue to anticipate receiving 300000 in rent from this operator in 2023.
Were still evaluating options for the two properties that provide independent living assisted living and memory care services. Additionally, as discussed on last quarter's call. We agreed to defer a total of $1 5 million or 300000 per month from May through September and interest payments due on a mortgage secured by 15.
Skilled nursing centers located in Michigan and operated by prestige healthcare.
Accordingly, we may deferred 600000 in interest payments in the second quarter and 300000 in July when he spoke about reimbursement structure challenges in Michigan earlier as it relates specifically to prestige, we expect prestige will get an approximate 10% Medicaid reimbursement rate increase effective October one.
As well as retroactive rate settlement payments related to prior years, which we anticipate prestige will receive in the fourth quarters of 2023 and 2024.
We are continuing to work with prestige to assess the impact of these rate increases and settlement payments on the portfolio in light of the continued occupancy challenges.
Regarding the remaining operator for whom we had been providing assistance as previously announced during the second quarter. We transition. This portfolio of eight assisted living communities with a combined total of 500 units in Ohio, Michigan, and Illinois to an existing LTC operator as part of the transition we received repayment of $1.
3 million of deferred rent, which represents 934000 of April and May 2023, deferred rent and 316000 of deferred rent from the prior year, which was previously not reported.
Cash rent under the new two year lease is based on mutually agreed upon fair market rent beginning in month four of the lease which is September of this year.
Since the transition occupancy has improved therefore, when we can establish stabilized cash rent. These assets will again be accretive to LTC now I'll turn the call over to Clint.
Thank you Pam starting with our second quarter investment activity as previously announced we invested a total of $61 5 million in two separate transactions.
The first will be $45 million in Boston and a fifth.
For $1 billion joint venture acquisition with seniors housing campus, and Ohio, including independent living assisted living and memory care services.
Which was built between 2019 and 2020 to 242 units and is operated by our existing partner Encore senior living.
Lease term is 10 years at an initial yield of 8.25% of LTC as allocation of the investment.
A seller who was our JV partner.
Purchase option with a price established at an IRR of nine and three quarter percent.
Exercisable during the third and the fourth leases initial.
Initial rent is expected to be approximately $3 9 million per year escalating annually beginning in year three.
We are also committed to fund $2 1 million in lease incentives.
The second transaction was a $16 5 million senior loan originations and the purchase of the skilled nursing center in Illinois.
<unk>, which was originally built in 2010 and renovated in 2021. This license for 150 beds as operative existing partner ignite medical resorts. The long term is five years at an interest rate of eight and three quarter percent.
After the end of the quarter, we funded a $17 million mezzanine loan for the recapitalization of an existing independent living assisted living and memory care campus in Georgia built in 2020 that is approximately 98% occupied as.
As well as the construction of 89 additional units that will be connected to you original campus by skybridge.
When construction is complete the campus, which is operated by our existing parts of the gallery.
Includes 219 units long term is five years at an initial rate of eight three quarter percent with a minimal exit IRR of 12% LTE.
Ltc's investment equals approximately 74% of the total project cost inclusive of our senior mortgage with the borrow investing approximately 26%.
Investments such as those I, just detailed with existing partners allows us to work with growth minded operators, who we know and respect.
Next a few brief comments on our transition portfolios, excluding the one we transitioned to encore the Pam already noted.
We recently set fixed contractual range for AMG equal to $8 million for 2023.
We received $1 $75 million in rent from them in each of the first and second quarters and expect to receive $1 75 million in the third quarter and $2 $75 million in the fourth quarter.
Regarding all of the transition properties other than the properties transferred to encore projected rents for 2023 is expected to be $720000.
Moving on now to Brookdale.
Expires on December 31, 2023, our process is well underway and we now have more clarity into the properties will be selling in those that we will be leasing.
Currently our plan calls for the sale of 14 35 assisted living properties in the portfolio.
We currently estimate net proceeds after transaction costs and seller financing and the $35 million to $40 million range. As previously indicated net proceeds will be used to pay down our line.
We will provide additional details on our next quarter's call.
<unk> nears completion.
Now for some insight and our balloon numbers, which exclude properties transitioned on or after October one may 21.
Q1, trailing 12 month, EBITDAR and EBITDAR coverage as reported using a 5% management fee was 118 times and <unk> 95 times, respectively for our assisted living portfolio.
Excluding stimulus funds received by Rockers coverage was 1.05 tons, an eight two times respectively.
Both of these metrics are given in arrears is private pay coverage does not include potential future upside related to recent rate and occupancy increases.
For our skilled nursing portfolio as reported EBITDAR and EBITDAR coverage was 190 times and 142 times respectively.
Excluding stimulus funds received by operators coverage was 154 times and 1.07 times respectively.
Pro forma for the proposed three 7% Medicare market basket rate increase skilled nursing EBITDAR coverage, excluding stimulus funds would have been 112 times.
I'll now provide some recent general occupancy trends, which are as of June 30, and our for our same store portfolio.
Those are offers provide this data to us on a voluntary and expedited basis. These numbers included approximately 96% of our total same store private pay units and approximately 93% of our same store skilled nursing beds.
<unk> occupancy was 83% at June 32023, 82% at March 31, and 82% January 31.
Our skilled nursing portfolio average monthly occupancy was 72% in June 73% in March and 71% in January .
For comparative purposes, our private pay occupancy in 2019 was approximately 87% and our app.
Average of skilled nursing occupancy was approximately 80%.
As we've described today our focus on investing during the second quarter resulted in completing the majority of the $100 million pipeline that we discussed during our first quarter call, bringing our total investment so far this year to $258 million.
We expect to close the remaining pipelines in the third quarter.
So while we are always looking at strategic investment opportunities and identifying ways to drive additional growth and accretion our primary focus in the second half of the year is on reducing leverage through planned asset sales as well as completing the re leasing of the remaining brookdale assets LTC remains a solid capital partner for the seniors house.
Skin care markets. So we are continuing to identify ways to drive additional growth and accretion.
Now I will turn the call back to Wendy for her closing remarks.
Thank you Pam and Clint we are proud of the work we've done so far this year to drive sustainable growth with many of our portfolios and operators gaining stability. We are now focusing on bringing down our debt to a more typical level. So that we are prepared to provide our shareholders with growth in 2024.
We believe LTC is a great partner of choice and we expect to be a major player in the seniors housing and care market for years to come.
Thank you everyone for your ongoing support operator, we are now ready to take questions.
Certainly the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we asked you about posing your question. Please pickup your handset is listening on a speaker phone to provide optimum sound quality. Please hold just a moment, while we poll for questions.
Your first question is coming from Austin, where Smith from Keybanc capital markets. Please pose your question. Your line is live.
Hey, good morning, everybody.
So was there any change to the number of Brookdale assets that you ultimately decided to sell it I think you had discussed roughly 50% of the 35 assets exiting three states I believe and so I'm just wondering if you could clarify if that changed and what drove that decision.
Sure. Thank you for the question I did change we are now projecting 40% as opposed to 50% and it's just an evolution of the process as we were going through in.
Engaging brokers to run the process for us and see how things evolve and that was our initial estimate but now we're at the 40% of asset sales and we've continued to look at the process on a state by state basis.
So is that really based on the interest level in some of the assets or has there been improvement in fundamentals or or just more interest I guess and operators that would look to to release. The the assets you had planned to sell but ultimately decided to keep.
So a combination of different things, there's eight different states are running the process and so really just an evolution and through our engagement with various interested parties.
What ultimately fell out on this so nothing specific.
Got it and then you referenced you don't expect any dilution to 2020 for F. F. O can you just expand on that comment and is that specific to the impact from brookdale or does that encompass you know the the various brookdale transaction plus you know the impact from the investment activity you've done this year.
Planned debt repayment in the back half of the year.
Yeah, Hi, Austin its Pam that's only Brookdale, that's just if youre looking at the Brookdale silo. The same same income that we received this year. We're anticipating next year through a combination of the re leasing rates and the.
We did have the proceeds already.
Got it thank you.
Your next question is coming from Juan Sanabria with BMO capital markets. Please pose your question your line of sight.
Hi, maybe a question for Pam could you just give us a little bit more detail behind the bridge on.
On the normalized <unk> from the second quarter, two what Wendy provided I think it was 63% to 60 of course, that's what the moving pieces are there.
Yeah sure.
So it can be what we're guiding to next quarter is what we had guided to this quarter and that's primarily a decrease due to the.
The transition of the eight assets that I have a market reset that will happen in September our guidance right. Now currently is.
Nothing for September for rent for that portfolio, but that could change because.
We're being the process of setting rent for that for the next quarter on that in August .
And then so there's been an uptick in the fourth one that kind of comes back is that is that correct.
Yeah, we were expecting that will gradually it's gonna. It's like you know in lease up so it's got to gradually trend upward.
Okay, and then just curious on the on the pipeline.
What's left to transact instead of pieces coming in in the third quarter interest.
It sounds like Youre stepping back temporarily to focus on dispositions.
But just curious if you're seeing pricing revert back to where we could see more traditional fee simple acquisitions versus the lungs.
<unk> been more focused on in recent months.
Sure right now we have just one transaction remaining.
Which would be a development project on a private pay community.
That's all we have remaining in our pipeline.
We've talked about during the course of the pandemic investing in more shorter duration investments and.
Going into this year.
Accumulation of what we've tried to accomplish the last few years and we do have a focus on paying down the line and getting the transition of the Brookdale assets.
As we get through the second half of this year I think we'll be looking at more acquisitions and opportunities in 2024.
But we've got we've had a very good year and deploying capital.
To the extent we have.
This early into the year is very positive compared to prior years, which typically has been more back.
Back loaded in the second half of the year and this year, we've been able to accomplish that in the first half of the year.
Thank you.
Thank you.
Your next question is coming from Connor Seversky with Wells Fargo. Please pose your question. Your line is lives.
Good morning out there quick one on abated rent. So we have this operator that was provided 645 K during.
Q2.
If I have this correctly that abatement agreement has been extended to the end of the year right. I mean at Q1. It was only supposed to go through the end of June .
Yes, that's correct.
Okay is there any kind of color as to what materialized to.
To give you the decision to extend that agreement.
I mean, we've been doing it on a quarterly basis and as we evaluate that community and what we want to do with that long term. It just made sense to take care of that now versus just going quarter by quarter.
Okay understood and then maybe moving to the operating side of things, perhaps a question for Glen.
As we are standing in front of perhaps the development of a minimum staffing as it pertains to skilled nursing assets I'm.
I'm wondering just how the labor complexion looks in coastal versus inland markets, and whether or not you see and it could also relate to senior housing discretionary senior housing, but where you see more pressure on the labor markets, where do you think a potential ruling could have a bigger impact.
Well I think the ruling really comes down more to how is it defined and when does it phased in so I think that's the that's the biggest issue in relation to the minimum minimum staffing initiatives. That's out there I would say by largest conversations with operators across the country. It does seem that lag.
<unk> is improving.
It.
Increases in pay or are normalizing.
Use of agency both on the skilled side as well as private pay has been reduced and a lot of cases buildings eliminated. So we are seeing positive trends just across the board from a staffing standpoint, I mean never easy in this industry, but obviously better than it was in the first half of this year.
And in 2022.
Okay, but do you see any bifurcation between markets.
I mean, we get the sense, we get this I can't make it easier to source labor in coastal areas.
Youre going to find definitely it and it's going to be more challenging probably in coastal markets undoubtedly it's gonna be higher wage wages and more competition for jobs. So I think that kind of by definition youre going to see more competition in those those markets.
Okay understood have a good weekend.
You do the same thank you very much.
Your next question is coming from Steve Valiquette with Barclays. Please pose your question your line is live.
Hi, This is a means of Murray on for Steve Valiquette.
Graduations on the coverage ratios reported which reflect the strong March quarter.
Hell of a lot of the provider companies that have reported in the June quarter of deceleration.
And volume growth on the acute side. So I was just wondering is there any commentary from your operating partners on how that's translating into volume growth on the post acute side for the June quarter.
Yeah, Hi, this is Pam well we have seen.
Yeah.
I noticed that the occupancy for skilled had that they it has decelerated the increase in occupancy rate has been decelerating.
And I'm not I'm not sure what a catalyst would be nationwide for it to improved dramatically over the course of this year I think skilled nursing, it's going to continue to be.
A long slow grind upward back towards pre COVID-19 occupancy rates. It's it's if that recovery is much slower than the senior housing recovery and most of the lagged recovery is on the long term care side, because as we've been talking about over the years and I think the pandemic really.
<unk> accelerated the trend was towards home and community based care. So that's made an incursion into the long term care side of the census for skilled nursing.
Okay, and just a quick follow up from that.
Appreciate that color given that the phe ended.
Few months ago. Your is there any sense on how or any sense or any color on how this is.
Impacting what's actually been happening in the business and in June and July .
No I mean, there was anticipated and the states have stepped in with with funding to kind of.
Pick up what this lack of what the government funding that federal government funding going away.
But it's something we're continuing to watch and especially with the lower occupancy rates on the skilled side right now.
Working with all of our operators opt not to determine what's what is the long range, what whats the new norm long range and how you know what's the what's the trajectory for returning to pre Covid census, how many years will that take them at right now with all the Nic data out there I think it's.
Guess is as good as mine and I'm, not even going to hazard a guess on it at this point, it's just really taking a long time.
Alright, Thank you for taking my questions and have a great weekend.
Thanks, you too.
Your next question is coming from Michael Carroll with RBC capital markets. Please pose your question your line is live.
Yeah. Thanks, I know I wanted to touch on your comments about prestige kind of highlighting theres going to be a true up payment that they could receive in the fourth quarter.
How big of a true up payment or are we expecting I mean could that equals the amount of rent that you deferred for them. So far this year.
Hi, Mike.
You know right now the we have estimates of the rate increase which Pam mentioned of 10% and then there's these retroactive rate settlements, which is unique because of the delay in re basing.
Rates in Michigan for extended periods. So.
We have estimates is yet to be finalized new I would say right now in.
So in Q4 for 2023, it's probably in the $7 million range, which would be approximately.
The 10% range of annualized Medicaid revenues, so it's a substantial number.
And that's a settlement that goes back to the cost report or the fiscal year that ended in 2022.
Youll see another settlement in.
In Q4 of 2024 that relates to.
The current fiscal year.
That could be getting these are these are estimates, but it could be in the $8 million to $10 million range.
In Q4 of 2024 very much a delayed retroactive settlement, but a meaningful dollars. However, there are a lot of nuances with Medicaid reimbursement in Michigan and one of the biggest challenges that we see prestige in this portfolio has just been.
Growth of occupancy.
Hum.
It's been challenged as we've seen in other buildings other states with skilled nursing, so being able to grow census is a key element for prestige in this portfolio.
Okay.
And then I guess should we assume that if they do get that large seven ish million dollars true up payment in the fourth quarter. They will use that to pay back all of your deferred rent so far this year.
I think it's too premature to assume that we're going through negotiations with them right. Now there are items like bad taxes that the state has deferred payment on so there are other expenses that they would have so it's a process that we're going through right now with prestige and as we get more information and clarity.
On on what any.
Resolution looks like we will update you on the but I've said and I repeat we are going to get the interest that they owe us in 'twenty to 'twenty three we have a letter of credit.
And.
That's.
That's the announcement or that's the claim we're making.
Okay. That's.
That's helpful and then related to the H M. G. I know, they're on the lease expiration schedule for 2020 for I mean is that just semantics, because youre going to be transitioning them from this fair market value type rent payment that you have today and youre going to be some earth, establishing a more permanent rent next year is that the way to.
Think about that exploration.
Yes.
And do we have an idea of what that new rent can be have you started talking to them about where that rate could go next year or is it really thinking about.
In 2025.
Yeah, we're in active discussions with them regarding that and that that might include looking at selling an asset or two so it's something that we have been actively engaged with them is a big component of that was the state.
Announcing what those Medicaid rates would be going forward and the bridge until you get to September one windows rates become effective so that's that one.
A big element of being able to wait to see what happened with those those rates.
Okay. We are definitely engaged with <unk> and working are working on them.
And then just last question can you remind us what assets that you guys are looking to sell right. Now I know you have the brookdale properties I'm, assuming the two properties that youre continuing to a b rents those are the prime asset sale targets are there other assets within the portfolio that we should think about this near term sales in and what could the.
Potential proceeds be for those at all.
No. There there are some buildings that we have in our transition portfolio.
You know that we would look at.
Oh potentially selling so we don't have an estimate to provide right now, but there is the potential that we could look we're looking at selling additional assets because if we can't derive appropriate income on those then the alternative is to look at selling them or.
Deciding to weight and how long the recovery will be so it is a it is a possibility but we.
We've not made that decision yet.
And in our guidance that first sales Betsy its Mike between Brookdale and then the total English it was only an additional 15 million more proceeds so it wasn't hugely significant this year, but.
Every year, we do look at our portfolio and you know make disposition.
Decisions.
Okay. Thank you.
Thank you.
There are no additional questions in queue at this time I would now like to turn the floor back over to Wendy Simpson for any closing remarks.
Thank you all for spending the time to listen to our call and I wish you all a good weekend.
Thank you. 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.