LTC Properties Inc (LTC) 2018 Q1 法說會逐字稿

Good morning, and welcome to the LTC Properties First Quarter 2018 Results Conference Call. (Operator Instructions)

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, 2017. LTC undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation.

Please note, this event is being recorded.

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

Thank you, operator, and hello, everybody. Welcome to LTC's 2018 First Quarter Investor Call. Joining me today are Pam Kessler, our CFO; and Clint Malin, our Chief Investment Officer.

I'll begin with some brief introductory comments, including the sale of our Sunrise portfolio and update on Anthem and a slight upward revision of our 2018 guidance. Pam will follow me with a discussion of our financial results, and Clint will provide commentary on our portfolio pipeline and operator partner performance. I'll come back with a quick wrap-up before we begin questions and answers.

Earlier this month, we announced the successful closing for the sale of our Sunrise portfolio. As you know, the master lease related to the portfolio expired on April 30, and we had been seeking to re-lease or sell the collection of 6 senior living centers in Ohio and Pennsylvania. The properties generated good cash flow and are located in strong markets. As a result of a rigorous process to identify a new lessee or buyer, we determined it more prudent to sell the portfolio for $67.5 million and reinvest that capital into newer, more modernized assets. Pam will provide additional details shortly.

Although we did not make any significant investments during this quarter, we funded a new loan with Prestige Healthcare and identified some new potential opportunities. Clint will provide additional color later in the call.

Next, I'll provide a brief update on Anthem. As a reminder, we anticipate 2018 rent from them to be $5.2 million. 2 Anthem properties in the Chicago area, that we have previously discussed as having occupancy challenges, have improved. Tinley Park occupancy was 56% at April 30, up from 47% at the end of January. In Burr Ridge, the occupancy has grown to 71% from 67% on January 31. On last quarter's call, I indicated the 2 Kansas communities operated by Anthem would remain in their portfolio. Anthem has solidified key leadership roles in these communities, which should help position them to gain momentum. Anthem's Glenview, Illinois memory care community, which opened in December of last year was 50% occupied at April 30, up from 24% at January 31. The newly constructed community in Oaklawn, Illinois expects to admit its first resident later this month. As a reminder, that completes our development with Anthem. And now, Anthem's entire focus is on profitably operating our portfolio while providing care to their residents. We are encouraged that Anthem is paying higher rent in line with our expectations and that they have made some progress on occupancy, but we are continuing to work closely with them to make sure they achieve the goals they committed to for 2018.

Before I turn the call over to Pam, I want to provide an update on our guidance for 2018. Assuming no additional investment activity, financing or equity issuances, FFO is now expected to be between $2.96 and $2.98 per share for the full year, which at the midpoint is $0.01 higher than our previous forecast.

Now I'll turn things over to Pam. Pam?

Thank you, Wendy.

NAREIT FFO was $0.75, which is $0.03 lower than in last year's first quarter. The decrease was the result of a reduction in rental income related to properties we sold last year, Anthem's previously disclosed default and higher interest expense resulting from an increase in net borrowings. This is partially offset by higher income from acquisitions, completed development [in] capital improvement projects and mezzanine loans accounted for as unconsolidated joint ventures. Revenue was down about $800,000 from last year's first quarter primarily due to reduced rental and interest income. Higher income from unconsolidated joint ventures, which represents income from mezzanine loans was a partial offset. G&A expense is generally in line with last year and as typical, seasonally slightly higher in the first quarter due to the timing of certain expenditures. G&A is expected to be approximately $4.6 million to $4.7 million per quarter for the remainder of 2018.

As Wendy mentioned, we funded a loan with Prestige Healthcare for $7.4 million and committed an additional $1.7 million for the renovation of a 112-bed skilled nursing center in Michigan. During the quarter, we also funded $11.3 million under existing commitments for development and capital improvement projects. At March 31, we owned 3 properties under development and 2 under renovation with remaining commitments totaling $40.5 million. We also have $17.2 million in remaining commitments under mortgage loans for expansions and renovations on 7 properties located in Michigan.

Related to Sunrise, as Wendy discussed, subsequent to the end of the quarter, we sold the portfolio for $67.5 million and received net proceeds of approximately $65 million. We expect to record a gain on sale of roughly $48 million in the second quarter. The immediate use of proceeds was to pay down our line of credit. However, given the nearly $58 million of capital commitments remaining, the proceeds are ultimately being recycled into new assets with a better strategic fit for our portfolio.

During the quarter, we borrowed $24 million under our line of credit to fund a loan origination and capital improvement projects already disclosed. We also repaid $4 million in senior unsecured notes and funded our $0.19 per share monthly common dividend.

We continue to maintain a strong balance sheet with substantial flexibility and liquidity to fund our growth initiatives. Our long-term debt maturity profile remains well matched to our projected free cash flow, which helps to moderate future refinancing risk. Additionally, we have no major long-term debt maturities over the next 5 years. Currently, after the Sunrise sale, approximately $545 million remains available under our line of credit, $68 million under our shelf agreement with Prudential and $185 million under our ATM program, giving us a total of $798 million of availability. We will continue to apply our strategic and conservative capital allocation philosophy, which has worked well for us through several real estate and business cycles.

At the end of the first quarter, our credit metrics compared well to the healthcare REIT industry average with debt-to-annualized normalized EBITDA of 4.6x, a normalized annualized fixed charge coverage ratio of 4.7x and a debt-to-enterprise value of 31%. Pro forma for the sale of the Sunrise properties, our debt-to-annualized normalized EBITDA is 4.3x, our normalized annualized fixed charge ratio is 4.8x and our debt-to-enterprise value is 29%.

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

Thanks, Pam.

Our active pipeline is valued at approximately $50 million. We're currently engaged with 2 potential off-market transactions comprised of 4 properties with 2 private pay [operators], both of whom would be new to our portfolio. The transaction I've discussed before in Oregon comprises the acquisition of an independent living community and the development of an assisted living and memory care community on an adjacent land parcel to create an innovative campus. The second potential transaction is for the purchase of 2 private pay memory care communities in Texas, which were built in 2014 and 2015, respectively. The communities include a total of 84 units comprised of both private and companion suite accommodations. We are selectively looking at stand-alone memory care in certain markets where we can work with a well-capitalized operating partner and where there is a solid potential for relationship growth. Additionally, we are continuing to cultivate several off-market opportunities both with existing [operating] partners and with companies that can expand operator diversification within our portfolio. As I mentioned last quarter, off-market opportunities take a bit longer to complete so they are not included in our active pipeline. We are exercising patience, [while] we continue to identify new opportunities. We feel good about LTC's position and ability to attract new investment opportunities, which help us grow well into the future.

On the heels of the sale of the Sunrise portfolio, we recently began the process of either selling or re-leasing 2 properties in California. These properties are assisted living communities operated under a master lease that is expiring at the end of November. The operator has notified us they will not renew the lease, but the communities do generate positive net operating income. While both re-leasing and selling the properties are viable alternatives and the properties are in good condition, they are approximately 20 years old, so we believe considering a strategic recycling of capital on these assets is a prudent consideration. We have engaged an intermediary to assist us with the process and anticipate completing a sale or having a new lessee in place by the lease expiration. We will continue evaluating our portfolio to find additional strategic opportunities, and as I've mentioned before, future asset sales are likely to be single assets or small portfolios as we don't foresee the opportunity for any additional large portfolio sales in the near future.

I'll end my comments with a discussion about our current portfolio. Last quarter, I mentioned quarter-over-quarter census declines at 2 properties in the Thrive master lease. I am pleased to report the Corpus Christi, Texas community has improved 67% occupancy at April 30 from 57% at January 31. Also, occupancy at the Louisville, Kentucky community increased to 75% from 73% over the same period of time. Since December 31, 2017, all properties in the Thrive master lease have experienced occupancy gains with the exception of their memory care community in Jacksonville, Florida. At April 30, occupancy was at 54% compared with 63% at December 31, 2017. As a reminder, both the Jacksonville and Louisville communities were transitioned to Thrive's master lease in the fall of 2017. We continue to actively monitor our portfolio with Thrive and are engaged with them as they progress through the lease-up of the 6 communities in their master lease, which have opened at various times during the past 3 years.

This quarter, we are reporting pro forma portfolio statistics, which exclude the Sunrise portfolio due to the sale. As a reminder, these metrics are reported 1 quarter in arrears and represent approximately 85% of our [fourth] quarter trailing 12-month cash rent. Q4 trailing 12-month EBITDARM and EBITDAR coverage using a 5% management fee was 1.46x and 1.24x, respectively for our assisted living portfolio and 1.83x and 1.33x, respectively for our skilled nursing portfolio. While coverage in our assisted living portfolio was stable, our skilled nursing portfolio coverage declined by 5 basis points from the previous quarter. A decline in revenue for 3 of our operating partners is the primary driver for the coverage degradation in our skilled nursing portfolio. The revenue reduction was a combination of declines in both skilled and Medicaid census. In some cases, these operating partners were not able to manage down cost in tandem with the census declines. As an offset to the downward pressures going forward, one of our operating partners is anticipating Medicaid rate increases later in the year. Additionally, the proposed 2.4% Medicare rate increase beginning October 1, 2018, should be a positive impact to our operators. We are continuing to engage with our operating partners on a regular basis to monitor their performance through this current environment.

Now I'd like to turn the call back to Wendy.

Thank you, Pam and Clint.

As you've all likely heard by now, there has been an industry wide drop in senior housing occupancy with average rates falling to a 6-year low according to NIC, including a 90 basis point decline from last year's levels. In fact, the most recent NIC report did not provide much good news for our sector. However, we all know that the long-term demographic trends remain strong. I believe LTC has managed well through this challenging seniors housing environment. We have remained highly disciplined, innovative and well-funded, being careful not to make investments that are not real value add to LTC. We could grow for growth's sake, but that's not LTC's style. We are measured, strategic and conservative in everything we do and that framework has served us well. We plan to continue along the same path of meeting the needs of our operating partners through financing flexibility and creativity, while maintaining a steadfast focus on sound investing. If it takes us a bit longer to complete deals in this environment, we're okay with that, knowing that when we enter into a transaction, it will be one that benefits not only our partners but the shareholders of LTC. As I say on every quarterly call, because I feel it is important to reiterate, we have built a portfolio to generate FFO through 2018 and beyond. We are well capitalized, and we successfully have demonstrated our ability to provide creative ways to add value for our partners and our shareholders. And we will continue to focus on the needs of our partners, while continuing to drive long-term value through a culture of trust, transparency and shared success.

Thank you for joining us today. We will now take your questions.

(Operator Instructions) And our first question will come from Jordan Sadler of KeyBanc Capital Markets.

I wanted to just touch base on the gain on the Sunrise assets. I think Pam, in your commentary, you said initially you paid down the line and then you'll use ultimately the proceeds to fund some of the remaining capital commitments. But just from a tax perspective, can you maybe elucidate the point how that capital gain will fit within your overall distributions requirements for the year? Will there be any 1031 activity? Or is this going to be absorbed through a dividend increase or a special or what?

We are not anticipating any special dividend. We have room in our dividend to support more sales without necessitating a special dividend. So no, we're not contemplating that in any of our sales transactions this year.

Okay. And no 1031s, obviously?

No.

Okay. Okay. And I guess, I don't know if it's too technical, but I thought this gain is well over $1 a share, and your current dividend is certainly $2.25 or thereabout. Would this put upward pressure on you guys to increase that normalized dividend this year? Or there's enough room because you're -- relative to your operating cash flow?

Yes, there is room. It does not -- this sale doesn't alter our dividend policy for the year. As you know, we target 80% FAD payout ratio. So we're comfortably within that for this year.

Okay. And then separately, Clint, you spoke to the $50 million active pipeline. The cap rates, that you'd be targeting on the memory care facilities in Texas and then in Oregon?

We're looking in the 7% to 7.5% range.

Okay. And the last one, Clint, for you, is just on the expiration in November. What is the rent and the coverage on those facilities today?

The rent on these facilities is -- wait a second. You want cash rent or do you want GAAP rent on that -- on those 2 buildings?

I guess.

I have the -- so right now, on the cash rent for these 2 buildings, it is, on the trailing 12-month, $3.2 million.

I assume the GAAP is lower?

Correct. And the coverage on this is right around 1x.

Is that cash coverage?

Correct.

Our next question will come from Chad Vanacore of Stifel.

So really quickly, I missed the FFO guidance. Is it right up $0.01? So that's $2.96 to $2.98?

Correct.

Okay. And then, Clint, you gave some helpful numbers on the Thrive occupancy gain. Can you give us some color on how all the margin and expense management on those properties are performing post-transfer?

We -- at the margin side, you will have some compression on the margins as far as -- we mentioned before on last quarter's call that on the Louisville community that there were some higher [acuity] residents that Thrive had to manage down on that. And there has been some utilization of agency labor usage in a couple of the properties. So we've been engaged with Thrive and working with them and they're working to make sure they are managing that down. So the transition [of] buildings does take a little bit of time to go ahead and accomplish. We've seen that in other circumstances. And I think we've been working and they're managing through, they're aware of it. I think they're making progress on this.

And next, we have a question from Michael Carroll of RBC Capital Markets.

Clint, can you provide a little bit more detail on the 3 tenants that you mentioned that weighed down coverage results. Where are their coverage ratios at right now? And are they implementing other types of policies to help them improve their operating performance or they're just waiting hoping for Medicaid and Medicare rates to increase?

Sure. Good question. We haven't given coverage by specific operators. But in the case of 1 operator, in particular, which we've talked about on previous calls, is they did see a decline in Medicare and skilled census, which they have taken note of and indicated they probably can do a little better in managing through in increasing that census. Quarter-over-quarter for that 1 operator, we have seen an increase in skilled mix. Not back to where it was probably 12 months ago, but sequentially, quarter-over-quarter, they have made progress on that. We do have 1 operator in the portfolio that has definitely made a push for gravitating away from rehab and more towards complex care, pulmonary, cardiac event programs. They've invested a lot of time and capital and resource into that putting policies, procedures, hiring up, buying equipment. So they have made that investment and now they are very, very pleased with the proposed rule of the PDM -- PDPM model that would shift reimbursement more towards complex care. So they're excited about that. Obviously, those reimbursement rates will not take effect until 2019. So that's off into the future, but I think they're making positive steps to gravitate towards that. That's one example what we're seeing with one of the operators.

And how big are these tenants right now? And as all the weakness shown through the coverage ratio, should we expect coverage ratio to decline again next quarter?

Given the -- the tick-down, obviously, the larger operators that contribute to tick-down on [sale]. These are operating companies that are larger organizations that have scale. And we might see a tick-down possibly in coverage because we've got strong quarters back in 2017 falling off in a couple cases with maybe a weaker third quarter. But sequentially, we've seen growth. So growing coverage, again, may take a little bit more phase in just as you have strong quarters that are in the legacy part of that trailing 12, if they fall off and you have more challenging quarters that still remain, it takes a while for coverage to regain.

Okay. And then, I guess, Clint or Pam, maybe you can talk about how many coverage ratios or how many leases do you have right now where the coverage ratios are considered fairly tight and the average EBITDAR ratio just above 1.3, means most of your coverage ratios above 1.2? I guess what's the distribution?

I would say the distribution is -- we don't have any large outliers of material rent within our portfolio. So it would fall within that band.

The next question comes from Daniel Bernstein of Capital One.

I'd like to continue down the line of questioning on the SNF coverages and those properties you talked about that were struggling. Are there corporate guarantees there given that they are large entities? And could you talk a little about the security on those leases?

In one case, we do have a corporate guarantee. Another case, we have the parent company as the lessee. So it's a combination of that and different operators. We have a strong security deposit. One -- we've got a corporate entity as a lessee on one, and then we have a strong letter of credit as well as a corporate guarantee on another.

Okay. And those tenants are current on rent?

Right.

Okay, and then going back to Sunrise, I just want to understand the -- obviously, your peers saw value in the assets and re-leased them. And so I just want to understand the thought process on what went through on that sale versus lease for the Sunrise assets? Just a little bit more.

Sure. We ran a very rigorous process engaging bankers to assist us in the process. We had options looking at both leasing and sales. And I think for us given that the pricing is attractive for us to look at for the buyer, they had a strong relationship with the company that was growing in that marketplace, and I think it worked well for them to layer this into an existing operator relationship.

Is it also part of a strategy to reduce the age of the portfolio? I know you talked about some additional assets that could be sold later this year that are all 20 years old. So what's the strategy to, I guess, improve the age of the portfolio going forward?

It is absolutely a consideration. I mean, Dan, we've talked about on a number of our last calls about continuing to want to invest and reduce the average age and invest in new and modernized assets. And you can see that by -- in our lease-up page on our supplemental. We have -- that's been a strategy of ours and so we have a situation of looking at re-leasing or selling assets and it comes down to if we can get an attractive price where we think we can reinvest that capital to bring in new or modernized assets, we think that strategy makes sense for us. And that's the same thing we're going to look at on the 2 buildings that the lease expires at the end of this year, and we look at pricing and look at lease options, and we'll see what is the best option for us. But definitely a consideration as assets age, we want to look at how do we continue to reduce the average age in the portfolio. We think that's a long -- good long-term strategy for us.

How significant was the age of the portfolio in your lease coverages in seniors housing improving versus I think many other REITs have had some deterioration given the oversupply in the industry? And just want to understand the performance of your seniors housing versus maybe the industry.

As far as the average age, I don't maybe have the average age. Right now, we executed on the sale of some of the ALC assets a couple of years ago. We did a follow-up sale on 4 assets and we sold the Sunrise asset. So that alone is 25 properties that were probably all in the late '90 to early 2000 vintage. So the selling of those assets and then investing in new development on a lot of these private pay assets definitely has changed our average age in our private pay portfolio. We can get the number to you on the average age so we can go on a follow-up...

Yes, I think it's around 12 years, as I'm recalling. It's in one of our prior presentations, but it really is -- I don't think that average age is that indicative because we've got a lot of newer assets that are less than 5 years old and then we have portfolios that are more legacy and that are 20 years old. So the mean there is not that meaningful, I don't think.

We do have a, I mean, offsignal, where we have a portfolio with Brookdale assets, which have very strong coverage and those were late '90s, early 2000 vintage properties. But again, those are properties that have very strong coverage.

(Operator Instructions) Our next question will come from Karin Ford of MUFG Securities.

Wanted to see if I could get your latest thoughts on where the Anthem lease should ultimately shake out as they continue to make progress on the leasing? Do you think the end of the year is sort of the right time to cease the forbearance? And any thoughts on where the permanent rent will ultimately be set?

I won't predict the permanent rent. I would -- I think we gave quarter-by-quarter rent last time, and I don't have it in front of me, but I would assume that it would be no less than the fourth quarter run rate for 2019. We've got to see how well Glenview is doing, which seems to be doing extremely well. And we'll see about Oaklawn. They're on a month-by-month, quarter-by-quarter review. So right now, they're showing some increases in occupancy. The industry has had some problems with the last flu season and some not admit periods because of illnesses within properties. We'll have to see how that has impacted Anthem and monitor it constantly going forward. And so, like we have in the past when we had to explain ALC, we will keep explaining Anthem and Thrive as they lease up, and we certainly will give you as much color into them as we possibly can. But to predict where they're going to be by the end of the year, I don't want to go over any more than what we have given for the fourth quarter cash rent right at this moment.

Okay. Fair enough. Question for Clint on the investment pipeline. Sounds like it's heavily weighted towards senior housing as opposed to skilled. Are you guys -- do you guys, I guess, looking at skilled, within the larger portfolio or is a goal really to focus on senior housing and on the new buys and in new development?

We've always been supportive of the skilled nursing side. It just so happens that opportunities that we looked at haven't been a good fit for us on the skilled side. I mean, we would continue to look at for the right opportunity and the right operating partner and obviously, we look to expand with existing operators in our portfolio. So it just happened that opportunities haven't come across in the skilled side yet that has fallen into our active pipeline.

And then just last one for me, sorry if I missed this, but did you guys give an update as to where your property stand within the Preferred Care bankruptcy?

We did not give an update on that, Karin. But right now, we are progressing in the bankruptcy. Right now, they have -- June 11 is the date to assume or reject leases. We understand that Preferred Care has filed an extension -- 90-day extension for that. We [are still of the mind set] that Preferred Care should indicate they would want to assume our leases. I think part of that -- the extension of the assumption rejection date relates to the transition of the buildings in New Mexico and Kentucky. I believe I read on Omega's transcript, they're working on transitioning 16 buildings that was referenced on their earnings call that they are transitioning to operators within their portfolio, which should occur in the fourth quarter, I believe, what was mentioned on Omega's call. So I think that's the gating item, to being able to conclude their bankruptcies, exiting the New Mexico and the Kentucky property leases they have.

And they're still fully current on rent, correct?

That is correct.

And this concludes our question-and-answer session. I would like to turn the conference back over to Wendy Simpson for any closing remarks.

Again, thank you all for spending your time and listening to our presentation. We look forward to talking to you again early fall. Thank you. Have a great day.

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