LTC Properties Inc (LTC) 2017 Q1 法說會逐字稿

Good day, and welcome to the LTC Properties First Quarter 2017 Analyst and Investor Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded.

I would like to turn the conference over to Wendy Simpson, CEO and President. Please go ahead, Madam.

Thank you, Francesca, and good morning, everyone. I'm glad you could join us for LTC's 2017 first quarter investor call. With me today are Pam Kessler, our CFO; and Clint Malin, our Chief Investment Officer.

I'll begin with a few brief remarks and will then turn the call over to Pam for commentary on our financial results, and then to Clint for a discussion of our pipeline and operator partner performance.

I'm pleased to report that LTC increased FFO by nearly 9% this quarter, our 26th consecutive quarter of normalized FFO growth. As we expected, there was no meaningful investment activity during the first quarter, as we paused to deploy capital in an environment that was not particularly aligned with our measured and conservative investment strategy, a strategy that has served LTC well across many senior housing cycles, and one that has allowed us to maintain some of the best coverage ratios in the industry.

With that said, I'm going to reaffirm our 2017 FFO guidance at $3.08 to $3.10. But unlike our view of the year as of our last call, this range now has very positive tailwinds. Clint will fill you in more specifics shortly. Our balance sheet remains strong with considerable flexibility that will allow LTC to act quickly, when we identify new transactions that we believe add value to our portfolio and for our shareholders, and help our operating partners achieve their business goals. It bears repeating that even if we do not close any deals in 2017, LTC would still be well positioned for sustained future growth.

I'll now turn the call over to Pam.

Thank you, Wendy. As Wendy noted, NAREIT FFO increased almost 9% from a year ago. On a diluted per share basis, FFO improved 2.6% to $0.78, on nearly 5% more weighted average diluted shares outstanding compared with last year. FFO expansion was driven primarily by top line growth of more than 10% resulting from prior year investments, completed development and capital improvement projects as well as lease amendments in the latter part of 2016.

Revenue growth was partially offset by higher interest expense, as a result of terming out our line of credit in 2016 and 2017 as well as the effect of equity issuance under our ATM program and performance-based equity awards. FAD increased nearly 13% due to growth drivers previously mentioned as well as lower capitalized interest on development projects this quarter, as compared to last year.

During the quarter, we invested almost $9 million in various development and capital improvement projects. We received $11 million in principal payments and mortgage loan pay-offs, and paid a $0.19 per share monthly common dividend.

As I described on our last call, LTC took advantage of opportunities in the capital markets earlier this year, raising nearly $15 million in gross proceeds under our ATM program and $100 million through the sale of senior unsecured notes to group of institutional investors in a private placement. We used the proceeds from these transactions to pay down our line of credit and fund capital improvement and development projects. We continue to have well laddered long-term debt maturities matched to our projected free cash flow, and with no amounts currently outstanding under our line of credit, we don't have any significant debt maturities over the next 5 years. Our considerable liquidity, which includes availability of more than $820 million puts LTC in an advantageous position to execute its growth strategies and quickly and decisively seize opportunities as they arrive. Our availability currently includes $600 million under our line of credit, almost $37 million under our shelf agreement with Prudential and $185 million under our ATM program.

We continue to strategically allocate capital where it makes the most sense for our portfolio, our partners and our shareholders. Our capital deployment strategy will remain conservative in an effort to ensure profitable portfolio growth. We are not interested in growth just for growth sake. LTC has long believed that closely aligning the maturities on our long-term debt with projected free cash flow is the best way to mitigate future refinancing risk. This strategy combined with a conservatively leveraged balance sheet, helps us maintain an investment-grade credit profile. At the end of the first quarter, our credit metrics compared favorably to the healthcare REIT industry average, with a debt-to-annualized normalized EBITDAR of 3.9x, a normalized annualized fixed charge coverage ratio of 5x, and a debt to enterprise value of 24.1%.

Now I'll turn the call over to Clint, for a discussion of our pipeline and portfolio metrics.

Thank you, Pam. Good morning, everyone. As Wendy noted, LTC's current pipeline is rather active and has grown to $125 million from $50 million at the time of our prior quarter's call. Approximately 70% of our pipeline is represented by private pay assets. Additionally, 70% of the pipeline is represented by assets constructed within the last 4 years. Growth in our pipeline is exclusively from off-market transactions, we spend most of our time sourcing investment opportunities. Pipeline consists of 5 transactions with 3 existing operating partners and the 2 other transactions with new operator relationships. These 2 transactions with new relationships began as discussions to provide mezzanine financing and have evolved into sale-leaseback opportunities. Both of the transactions proposed with new operating partners will be structured as joint ventures for real estate ownership, LTC owning 90% and an affiliate of the lessee owning a 10% noncontrolling subordinated minority interest. The real estate will be leased under a long-term triple net master leases to affiliates of LTC's limited partner invested in the real estate. LTC will have the opportunity to acquire 100% of the real estate over time, subject to the properties meeting predetermined financial metrics.

If you recall that last quarter, Wendy talked about our ability and willingness to explore different types of lease and investment structures, and these 2 transactions are representative of this approach. In building operator and partner relationships, we are looking at a variety of options to best meet the needs of our partners. The other 3 transactions in our pipeline, each consisting with a single property or with existing operating partners to acquire newly constructed private pay assisted living and memory care communities to be added to the respective master leases. Outside of the unique market trend, off-market transactions such as the deals in our current pipeline, the landscape has not changed substantially for us since our last call. And, although, we are continuing to look at a number of deals, most have not met our investment hurdles. We are seeing continued moderation in sale-leaseback flow and the asking price for private pay assets remains high. Given these dynamics, we remained focused on the sourcing off-market deals, and are comfortable taking the role of patient investor and maintaining clear and rigorous underwriting standards. As I mentioned last quarter, given the amount of capital currently chasing acquisitions and new development projects, we are more than okay taking a backseat until market conditions are better suited to a more aggressive investment strategy.

During 2017, we will continue to strategically evaluate our portfolio to identify opportunities to recycle capital on assets that are nonstrategic and no longer core to our portfolio. We are currently evaluating a few properties for sale, but are not prepared to provide any additional details today. However, it is possible a few sales could occur within the next few months.

Moving now to LTC's portfolio statistics. Q4 trailing 12-month EBITDARM and EBITDAR coverages on a same-store basis was 2.04x and 1.51x respectively for our skilled nursing portfolio. And 1.46x and 1.24x respectively for our assisted living portfolio. These metrics are stable compared with the prior quarter. I remind you that LTC's EBITDAR rent coverage is calculated using a management fee equal to 5% of revenues. We continue to believe that EBITDARM is a better metric of comparison to our peer group, as different management fee percentages may be used to calculate EBITDAR by different companies.

Historically, we had a range of care property-type classifications, which included properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services. Since we only have 7 properties that would have been included in this category. And these properties derive materially all the revenues from skilled nursing services, we elected to reclassify them into the skilled nursing category beginning this quarter. Had these 7 properties remained in the range of care classification, skilled nursing coverage for Q4 trailing 12-month EBITDARM and EBITDAR on a same-store basis would have been 2.07x and 1.53x.

Now I'll turn the call back to Wendy.

Thank you, Clint and Pam. Senior housing supply has been a hot topic of conversation of late. With new supply continuing to enter the market and occupancy dipping, increased competition for the tenant wallet share is ongoing. Recent NIC data showed that in the first quarter of this year, senior housing occupancy dropped to the lowest levels since 2013, with assisted living occupancy moving to its lowest levels in 7 years. That's not the whole story, however, while certain markets are struggling with supply and demand imbalances, other markets remain steady and attractive. At the recent NIC conference, audiences were reminded that no 2 markets are the same, and that while natural trends -- national trends provide important data, getting down to what's happening in regional and local markets is equally important, if not more important.

I should note that the diversity we've built into our portfolio helps soften the potential impact of any one community. I also believe that we have built a defensible position through the utilization of triple net leases, master leases and strong coverage. With favorable long-term healthcare trends and the expected growing need for memory care community, I feel good about our position. Including the possible investments Clint mentioned, our committed capital for the remaining 9 months of 2017 totals approximately $155 million. In addition to acquisitions, we are investing in developments, both SNF and private pay as well as major existing property additions and improvements. If we choose to finance these investments entirely on our bank line, at year-end we project that our debt-to-market capitalization would be around our self-imposed ceiling of 30% debt to 70% market cap. As we make investments and watch the markets during the year, we will be making decisions on managing our debt load and the maturity.

So in summary, while we are taking a bit of a cautious, but slightly more rosy approach this year on investing, we remain opened to and interested in deals that further solidify our investment and growth strategy. That is reducing the average age of our portfolio, broadening our operator partner base, investing in developed assets and maintaining a strong coverage ratio relative to our peers.

As I mentioned earlier, even with taking a bit of a wait-and-see approach, our current commitments will begin providing FFO later this year and into next year, regardless of 2017 activity levels. And as Pam said, our strong balance sheet and ability to flexibly structure deals for our partners positions LTC well to take advantage of accretive opportunities as they arrive.

LTC has more than a quarter century of experience in the senior housing market, and has operated successfully across many market cycles. We are confident in our strategy and our ability to patiently invest in the right properties and community, at the right time, while maintaining highly focused on developing mutually beneficial relationships with asset operators based on trust, transparency and shared success. I look forward to keeping you updated on our progress.

Thank you for joining us today. We will now open the call to questions. Francesca?

(Operator Instructions) The first question comes from Jordan Sadler of KeyBanc Capital Markets.

This is [Katie] on for Jordan. And I just have a quick question about -- could you provide some color on the deterioration of occupancy at the Jacksonville, Florida asset that is currently in lease up?

Sure. This is Clint. Thanks for the question. On the Jacksonville property, we have been in that specific market. There has been some newer entrants into that market and that has impacted occupancy on that property, specifically we're working with the operator on that. They are bringing in some new Executive Director into that community. And we're hopeful that will show positive trends. It's taking a longer time than we had anticipated to stabilize that property. So we're not concerned at this point. It is taking a longer time than we've typically seen on our memory care process. So something that we're aware of and we are focused on with our operating partner.

The next question comes from Chad Vanacore of Stifel.

All right. So you've been pretty selective on the investment front. So I'm trying to think about what things would you need to see changed in the market to meet your underwriting criteria as it stands today?

Cap rates.

All about price?

A lot of the marketed transactions, especially on the private pay side right now. I've listened to some of the calls of our peer group as well, and saying some of the consistent things that cap rates just have not adjusted on that, and that's why we're spending most of our time focusing on off-market transactions and looking for unique opportunities that cap rates are not the sole determinant, and what they're looking for, maximizing value.

All right. So I mean, would you classify that there is still plenty of capital chasing these assets and you just haven't seen much expansion in the cap rate?

Correct. There is still a lot of capital chasing investment opportunities.

All right. Then my other question would be on the EBITDAR coverage, improvement in the SNF portfolio. I thought it might be because your book range of care in there, but that seems to have -- have actually been -- have the opposite reaction.

I'd say ironically up to our detriment.

Right. So what drove the improvements in SNF coverage and occupancy, actually given that we've seen headwinds in the industry. So what's driving, I guess the main thing, what's driving that occupancy gain?

So it's been driven by a number of different operators. We had seen in the past, a couple of challenges in certain states with our operators. And it was refocusing by the operators in our portfolio putting in different leadership at different properties. And just different efforts to focus by the operators. So it's what we -- we had a couple -- a little bit of a dip probably 6 to 9 months ago, and that's been stabilized. So it's something we've expected and we've been monitoring those, the last few months. And we do think that 1.5x range in our SNF portfolio is a very sustainable number at this point in time.

Next question comes from Michael Carroll of RBC.

Clint, kind of off of Chad's first question, what actually changed, I guess, in the investment market today that's allowed you to increase your investment pipeline pretty significantly compared to the last period?

Off-market transactions. As I mentioned in my prepared comments, we are working with these 2 companies looking at doing some type of preferred equity or mezzanine financing. And just the needs for these organizations, as we got into more communication, more discussion with them about what they wanted to accomplish, sale-leasebacks ended up being an evolution through that discussion. And this is what we wanted to target by bringing Doug Korey on and joining our organization is introductions to companies that we otherwise probably not have an introduction to that -- have typically not utilized sale-leaseback financing. But entering a discussion with them through a product that they're familiar with allows us to open the dialogue to find out what their true financing needs are and how we could partner with them. So that's how we're sourcing off-market transactions.

What's happening in these 2 particular instances, I believe, is that the operator is not looking to get the equity out. And so there is a lot of equity money in the market right now. But if the operator wants to do a deal to get some debt and a little bit of equity, there is often a gap there in terms of how much they can get secured debt these days, it's not 80%, it's going down on the secured debt. And as an operator looks at possibly doing a deal for the next 5 years or however long they can get a debt. They can often understand the benefit of doing a sale-leaseback and still keep all of their equity in the operating company. So we're seeing opportunities -- it's just because that's the way an operator is looking at his business at this point. And as we -- as Clint pointed out, we've been able to work with a couple of operators and say, if you want to continue a small amount of equity interest in the property, we can structure some sort of joint venture that allows that. And so they're really only paying rent on 90% of the value of the property. So it's a lot of different things that have happened. Yes, there is a lot of capital out there, but it's not necessarily debt capital.

Okay. And then, I guess, you guys said earlier, that it's the big thing that's keeping on the sidelines right now is this price. Can you remind us where your targeted cap rates are? And where the market is? And how much higher does the market need to kind of go to hit your range? And where you'd be more active?

Sure. On the assisted living side, private pay. We're looking at anywhere from 7% to 8%, depending if the buildings are stabilized, or if it is a property that we're buying, that's nearly constructed at certificate of occupancy, that sort of the range that. Skilled nursing we're in the 9% range on skilled. We can look at skilled transactions, I think there is opportunities that could fit in the 9%. The question for us on skilled is really finding the right operating partner to work with. And we're looking for newer assets and markets where the operators have some type of presence and scale that give them the ability to negotiate with managed care companies, health systems as we have this whole evolution of value-based reimbursement. On the private pay side, market NOI cap rates are, at times are equal to or less than our lease rate cap rates and that provides effectively no coverage for our operators in a triple net lease.

Okay. And then I guess one final question maybe for Pam, on the modeling side. There is the memory care asset that was stabilized in Colorado that didn't achieve the occupancy targets. I guess, can you remember -- remind us where occupancy is right now. And how does that hit your model because if I remember correctly rent kind of ramps up as this occupancy picks up. So is that full rental rates currently being impacted at that facility? Or is it still kind of based on where occupancy is?

No, it's full rental rate at -- and once it reaches that 2 years, 24 months since our defined stabilization regardless of occupancy. So it's full rent, but it's currently at 66% occupancy.

And I guess, is that in a master lease, guess how is that operator currently paying that?

It's in the master lease. And that's the property, where we have been in close conversation with our operating partner on this property specifically. And there has been couple of new buildings that have been built in that market. But it's a situation where the management team felt that the Executive Director of this community became complacent and wasn't really out marketing and pushing new admissions into the community because for a while they had -- they were the only -- they were the new building on the block. And so they've recently replaced the Executive Director, and this is a building with Anthem memory care and they have 3 other communities within the Denver market. So they've got a strong presence, and the market I think it's really just changing the leadership at the local community to be able to continue to grow occupancy on that. So it's something we're aware of. But right now, I think with the change in the Executive Director and the market presence that Anthem has in the Denver metro area, that takes a little bit longer for this building to stabilize. So I think at this point, we're not concerned about the long-term stability of this asset.

The next question comes from Karin Ford of MUFG Securities.

Clint, I wanted to ask you about -- in your pipeline, I didn't hear any mention of behavioral health, mezzanine loans, new development, things that asset classes and types that you've -- and structures that you've looked at in the past. Could you just comment on your appetite for those today?

Sure. On behavioral health, we just haven't seen as many opportunities to look at. And it's something we're still trying to evaluate and understand, especially with the potential changes that could take effect in Obamacare, and we're evaluating and seeing where that's at. So just haven't seen the opportunities to move forward further in behavioral health. As it relates to development, we're not seeing as much development from our existing operating partners. And I think it's a function of cost, of land, labor materials have gone up, and our operators are not seeing the opportunities that they have before on development. And when it comes to development, we're really focused on relation or development with our existing partners. We're not, at this point, outsourcing new relationships to do development, other than if it happened to be an opportunity for a sale-leaseback transaction to bring in some stabilized assets and then look at adding development on to that. So since we're sourcing that development through our existing relationships and pricing has gone up, that has abated right now on development.

Are you guys still looking to do on mezzanine loans, mezzanine loans as well?

Absolutely, looking at doing mezzanine loans. But as an example, Doug was spending his time on a number of opportunities. The 2 I talked about, specifically, which initially was about mezzanine financing that has evolved into sale-leaseback transactions. So we're being methodical, strategic about how we deploy capital for mezzanine. But where we can find opportunities to redirect mezzanine discussions in the sale-leaseback opportunities, we'll go in with that and march forward to try to convert those opportunities.

My next question is on the portfolio of lease to Sunrise, if my memory serves correctly, you have an expiration there coming up in 2018. Could you just remind us what percentage of your revenues that lease comprises? And what the coverage is? And what your current thoughts are on that expiration?

I'll let Pam talk about what the percentage.

About 3% now.

Okay, about 3%. We're actively engaged in -- we have 12 months remaining on that lease and we're actively engaged in evaluating that. We have met with and had conversations with Sunrise relating to this.

We have an independent consultant go out and look at our financials from Sunrise, somebody who knows the industry well. And has given us some analysis, which we are looking at to determine, where we might price these assets coming forward. So we're on top of it.

Does it still have coverage below 1.0x?

After a 5% management fee, yes.

Okay. Thanks. And then my last question is just on -- there's been some M&A in the healthcare space. Can you just give us your thoughts on consolidation, your current size? And what your thoughts are on what's been going on, particularly in the SNF sector?

I enjoy our strategy, our balance sheet, our confidence in what we can add to our shareholder value, as time goes on. So the size of our company is not as important to me in terms of what earning potential we have. And I think we have a great earning potential this year and in the future. We have not seriously discussed any mergers or consolidation of our company. I think the one that was announced the other day has many reasons why it makes sense for those 2 companies to merge. They wouldn't have made sense for LTC. Every time there is a merger, I think it's just like every time we do a transaction, it's the unique set of circumstances that makes that thing happen. And so I think it's a unique set of circumstances that is at work for that current merger.

The next question comes from Rich Anderson of Mizuho Securities.

You guys are just too darn unique. So the -- I just wanted to understand a little bit about the potential need for equity to rightsize your leverage ratios. You said $155 million of committed capital. Did you say that plus the one -- or first of all, Clint, your 5 opportunities, does that equate to $125 million?

Yes.

Okay. So it's $125 million plus the $155 million is some -- $155 million is the total?

Yes.

And the $155 million was for the 9 months remaining in 2017.

Okay, so the total number is $155 million. Should you get up to that point and use only debt that's when you start to think about it?

Correct.

Okay. So I guess, the question is, how do we time that. You guys have the fortune of trading at a premium 10 NAV. You have a topsy-turvy political landscape, I mean, if you feel -- at what point do you feel like you have to start to think about even if it hasn't happened yet? Is it -- are you in front of it by 6 months? Or can you -- you can -- or can you be more precisely times or can it be more precisely timed as it relates to kind of addressing your leverage levels?

So that's the beauty, Rich, this is Pam. Setting such low leverage targets is that it allows you to be opportunistic. And so we'll precisely time it. We won't feel any pressure once we reach that hurdle to do something. So no stay tuned, yes.

All right. So you kind of get there and then think of it. Or is that the way to look at it? Or as you're approaching, you start thinking about it?

I think it's all of that. I think if you look over the past 3 years at how we've timed the market. It's been opportunistic, and we don't get up to a target and feel pressure to do something. We set low target so that if we go over it a bit because the market's just not there. We still are one of the lowest levered companies in the healthcare industry. So if we reach that target, there isn't -- we're not going to have beads of sweat on our forehead.

Okay. I appreciate that makes sense. And then, Wendy, you gave your guidance. I'm just curious, if that already assumes all the activity that Clint mentioned? Or would there be upside to your range assuming these deals do close?

There's definitely upside, that includes nothing -- no transactions this year at all. It's just our current companies and our current commitments.

Yes, it's none of Clint's $125 million pipeline.

It's not that we don't have confidence in him, but...

I mean, maybe you could just speak in terms of history, when you have done $100 million of deals in the past. How accretive that has been for LTC not necessarily to comment on these. But just to get a sense of how accretive your external growth pipeline has been in the past?

Clint, without specifying, would you say of the amount that you're talking about of the deal. How much do you think could close in the second quarter, third quarter. And I'd say, if you use an average of 7% yield...

Yes, yes.

On this whole group of assets.

I'd say, we've talked 50-50: 50% second quarter, 50% in the third quarter.

Okay.

Okay. And you said 7% yield?

Yes, on average of a 7% yield. And that's what putting it on our line at a 2% cost, or how much is our line?

Yes. 2% percent.

At a 2% cost.

The next question comes from John Kim of BMO Capital Markets.

Just couple of follow-ups. On your existing acquisition pipeline. Is there any carryover from last year, the $50 million that you had...

Yes. There is carryover, yes.

How much of the $50 million would carry over?

I would say of the carryover, you have about $40 million. Those projects are newly constructed that are currently under construction. 1 just recently completed construction in January and the others are currently under construction. So it's sort of time that we would be a take out at certificate of occupancy on that 40 -- approximately $40 million.

Got it. Okay. You talked about acquisition cap rates that you're underwriting at 7% to 8% for assisted living and 9% for SNF. But can you also tell us about coverage levels as far as EBITDAR?

Well 1.5x coverage on skilled after a 5% management fee. And 1 point -- that's unstabilized. And 1.2x stabilized for private pay assets.

Okay. Pretty much where you're at today.

Correct.

On the Sabra, Care Capital merger yesterday, I think increased scale, improved cost of capital and diversification of assets were cited as a few reasons for them moving forward. It doesn't sound like you're really concerned that much about scale or cost of capital. But what about diversification, and as far as tenant diversification or asset type?

Well, as Clint said, I think of our activity 2 are with current operators.

3 with current operators.

3 with current operators and 2 with new operators. So those new operators will further dilute our top 3 or 5. And the ones that we're doing with current operators are not significant in our top 3. So it is diluting our exposure to our top operators. And we're bringing new operators in and diversifying types of assets, we're still going to be very nicely diversified between private pay and skilled nursing. We continue to look at behavioral, but it's not as important to us right at the moment. I think we're very happy with our asset allocation and our operator allocation.

Do you have any internal goals and timeline as far as getting any particular tenant below 10%, or your top line below $50 million, any internal goals that you could share with us?

No. No, not -- we don't have set goals. I mean, we've said broadly that we would like to see no 1 operator be over 10% of our revenue. But we're not going to do a transaction just to get there. We believe that will evolve naturally over time and with us sourcing new operator relationships I think we'll get there.

But conversely, if one of our top operators say Preferred came to us and said -- a Prestige came to us and said, we have another $150 million transaction we'd like to do with you, our strategy -- our conservative strategy would -- it would be difficult for us even though we love the operator, and we think that they're probably the -- one of the best operators in the industry to do that transaction. So conversely, you're probably not going to see us piling a lot of money into 1 of our top 3 to 5 operators.

Okay. And then, Wendy, last quarter, you discussed some of your operators having discussions with you requesting more flexible lease terms. And I'm wondering, what your updated views are on this particularly since the last call?

Well, as Clint said that, we're offering these 2 transactions that the operating company can maintain an ownership interest in the assets. We are still not offering sale options at leases, though, we've talked to some people about including the possibility of a purchase option. We have talked about doing leases with CPI. We haven't done that yet, but we're still opened to transactions that are different than transactions that we've done in the past as long as it protects LTC's long-term and current interests.

Anything on the CapEx front?

CapEx front? No, nothing new on CapEx. Pretty well detailed in our -- oh! you mean, are we going to add any CapEx? We haven't talked to anybody recently that needs CapEx, that wouldn't be revenue enhancing. So, no, if -- as Karin asked about the Sunrise assets. As we get to re-leasing them, there may be some CapEx that needs to be deployed, but we haven't evaluated that right at the moment.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Wendy Simpson, for any closing remarks.

Thank you, Francesca. Thank you again for joining us, and we'll talk to you next quarter. Thanks very much. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.