LTC Properties : Transcript of LTC Properties, Inc. Q1 2021 Earnings Call

LTC Properties, Inc.

Q1 2021 Analyst and Investor Call Friday, April 30, 2021, 8:00 A.M. Pacific

CORPORATE PARTICIPANTS

Wendy Simpson - Chief Executive Officer

Pam Kessler - Co-President and Chief Financial Officer Clint Malin - Co-President and Chief Investment Officer

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PRESENTATION

Operator

Good morning and welcome to LTC Properties' First Quarter Analyst and Investor Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star (*) key, followed by zero (0). After today's presentation, there will be opportunity to ask questions. Please note that this event is being recorded.

Now, I'd like to turn the conference over to Ms. Wendy Simpson, CEO. Please go ahead.

Wendy Simpson

Thank you, operator and welcome to everyone joining us today for LTC's 2021 first quarter conference call. With me on the call are Pam Kessler, Co-President and Chief Financial Officer; and Clint Malin, Co-President and Chief Investment Officer.

For the last year, I started our calls by offering thanks and gratitude to our operators for all they have done to keep their patients, residents, and staff safe. Today is no different. Now, however, for the first time in a long while, I am cautiously optimistic that some of the more daunting challenges presented by the pandemic and the many, many lives lost are mostly behind us, and that we have entered the recovery stage.

With the high percentages of vaccinations administered to the senior population, skilled nursing centers and assisted living memory care communities should begin welcoming new patients and residents at increasing frequencies from the lower levels that we've seen over the last 12 months.

We don't know with any certainty when census numbers will return to pre-pandemic levels, but anecdotal evidence from some of our operating partners is encouraging. As in 2020, some of our operators have needed rent deferrals and abatements. First quarter rent and mortgage interest income collections were 86.5%, excluding the first quarter reduced 2021 rent escalations we provided to eligible operators in the form of rent credits. The credits were provided to give eligible operators additional working capital during the first quarter of 2021 and are expected to have an approximate $530,000 impact on our 2021 GAAP revenue and an approximate $1.3 million impact on our 2021 FAD.

Approximately $292,000 and $1.2 million respectively, was recognized during the first quarter. We expect to recognize a decrease of approximately $170,000 and $133,000 GAAP and FAD revenue respectively in the second quarter and a much smaller amount in the last six months of 2021.

Currently, we don't anticipate providing additional across-the-board relief, but we'll continue to review relief requests, if any, on a case-by-case basis, keeping in mind the operators' ongoing operations, rent coverage, and corporate financial health and liquidity. Pam will discuss the specifics of current rent deferrals and abatements a bit later.

One additional way we helped our operators through the pandemic is by providing attractive financing to our operators through our smart design program. This program creates safer physical environments for residents, family, and staff by utilizing state-of-the-art infection control protocols, including air filtration, bipolar ionization, UV sanitation devices, custom dividers, and touchless equipment. We are working in partnership with Avenue Development to assist our

LTC Properties, Inc.

Friday, April 30, 2021, 8:00 A.M. Pacific

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operators with turnkey and customizable retrofitting options. To date, Smart Design is being implemented in 13 of our communities.

Next, I'll talk briefly about Senior Lifestyle. We are making progress on transitioning this portfolio with several of the transactions expected to close in the second and third quarters. As we disclose in a recent 8-K filing, Senior Lifestyle has not paid rent in 2021. Clint will provide details on this portfolio shortly.

Regarding an update on Senior Care centers, I'll refer you to the same 8-K, which was filed with the SEC on April 19th. Although, the M&A market has not changed much since we last spoke and we do not believe that LTC will engage in any large transactions in the immediate future, deal flow has picked up meaningfully.

Over the last month in particular, we've seen a healthy uptick in inbound inquiries regarding preferred equity and mezzanine financing. We are performing due diligence on a host of these opportunities, which we believe have reduced risk profiles and strong returns, especially for development projects, whose success is not dependent on immediate lease up or current census.

With respect to more traditional acquisitions, however, we're seeing more and more potential investments where pricing does not accurately represent what we see as the current value of the underlying properties. We have the ability to act quickly on investment opportunities as they arise and if they're accretive and provide value to LTC and our shareholders.

I believe that LTC remains well-positioned in an industry that, despite the pandemic, has strong long-term fundamentals, which point to an increasing need for senior housing and care solutions. We are starting to see some stability in our operators. However, it is too early to predict the timing of a full recovery.

In light of the matters discussed above, together with the uncertainty regarding the Senior Care bankruptcy, we do not plan to provide guidance again, until occupancy and census increases gain additional traction.

It has been our Board's practice to support a dividend payout ratio of approximately 80% of FAD, as a result of the financial support, we are providing some of our operators and the significant lease defaults of Senior Lifestyle and Senior Care. Our 2021 dividend payout ratio will likely exceed the 80% target. However, we see our 2022 FAD recovering as we are able to totally transition the Senior Lifestyle portfolio to more stable operators and the issues involving LTC in the Senior Care bankruptcy are resolved.

Before turning the call over to Pam, I'd like to recognize our newest board member, Cornelia Cheng. Her addition brings to 50% the number of LTC directors who are women. Cornelia will be instrumental as we further develop our diversity and ESG initiatives.

With that, please go ahead, Pam.

Pam Kessler

Thank you, Wendy. Total Revenue declined $6.1 million compared with last year's first quarter, impacting our results with a decreased rental revenue related to non-payment of lease obligations by Senior Lifestyle, partially offset by rent received from 11 properties from this portfolio that were transitioned.

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Results were further impacted by abated and deferred rent granted in the quarter, a reduction in property tax revenue, and a one-time 50% reduction of 2021 rent and interest escalation to provide eligible operators with additional working capital in recognition of increased costs due to COVID-19.

Additionally, we wrote-offstraight-line rent receivable related to the transition of an operator's lease to cash basis accounting. The decrease was partially offset by rent from acquisitions and completed development projects and higher rent payments from Anthem.

Interest expense decreased by $738,000 due to lower interest rates under our line of credit in the 2021 first quarter, partially offset by lower capitalized interest. During the 2021 first quarter, we sold a closed assisted living community in Florida and recognized a loss of $861,000. Comparatively, during the first quarter of 2020, we sold 21 skilled nursing properties and recognized a total gain on sale of $43.9 million.

As a result of the items discussed, net income available to common shareholders for the first quarter of 2021 decreased by $49.7 million, primarily due to a gain on sale in the prior year period and the revenue declines already discussed. This is partially offset by lower interest expense.

NAREIT FFO per fully diluted share decreased $0.12 to $0.62 in the 2021 first quarter, compared with $0.74 in the 2020 first quarter, excluding the straight-line rent receivable write-off, FFO per fully diluted share was $0.64 this quarter, compared to $0.74 last year.

During the first quarter of 2021, we received $1.6 million related to the payoff of a mezzanine loan and $936,000 related to the payoff of a note receivable. Additionally, we borrowed $17 million under our unsecured revolving line of credit at 1.3%.

Moving on to our investment activity. During the 2021 first quarter, we invested the remaining $8 million of our $13 million preferred equity commitments to develop a 267-unit independent living and assisted living community in Vancouver, Washington. The preferred equity investment earns an initial cash rate of 8% and a 12% IRR and is accounted for as an unconsolidated joint venture.

We also funded $1 million in capital improvement projects on properties we own and $158,000 under existing mortgage loans. We have a remaining commitment under a mortgage loan of $1.6 million related to the expansion and renovation on one property. We also paid $7 million in regularly scheduled principal payments under our senior unsecured notes and paid $22.4 million in common dividends.

Subsequent to the end of the first quarter, we repaid $5 million under our unsecured line of credit, including this repayment, we have $8.2 million in cash, $498.1 million available under our line of credit, under which $101.9 million is outstanding and $200 million under our ATM program, providing LTC with liquidity of $706.3 million. As a reminder, we have no significant long-term debt maturities over the next five years.

At the end of the 2021 first quarter, our credit metrics remain strong with net debt to annualized adjusted EBITDA for real estate of 5.1 times, an annualized adjusted fixed charge coverage ratio of 4.6 times, and a debt to enterprise value of 28.6%.

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Next, I'll touch on rent deferrals and abatements. As Wendy mentioned, we collected 86.5% at first quarter rent and mortgage interest income, excluding the 50% reduction of the 2021 rent and interest escalations provided to eligible operators in the form of rent credits in the first quarter, which reduced cash revenue by $1.2 million and GAAP revenue by $292,000. Additionally, during the quarter we provided $1.1 million in rent deferrals net of repayments and $600,000 in rent abatements.

As Wendy mentioned, Senior Lifestyle has not paid us rent thus far in 2021, but we did receive rent from the operators to whom we transitioned former Senior Lifestyle Communities to date. In April 2021, rent deferrals net of repayments totaled $367,000 and rent abatements were $319,000. Additionally, we provided $133,000 and abated rent in April through a rent credit related to the rent escalation reduction already discussed. We also have agreed to provide rent deferrals and abatements of up to $800,000 for each of May and June 2021.

Now I'd like to turn the call over to Clint.

Clint Malin

Thanks, Pam. I'll start my discussion today with an update on our Senior Lifestyle portfolio. After transitioning 11 of the 23 properties in the first quarter, we transitioned one additional property in April. This property, a 48-unit member care community in Castle Rock, Colorado was transitioned to Graceful Senior Living, an operator new to LTC. The lease agreement is for a 5-year term with a purchase option exercisable after the first year of the lease. Cash rent starting in year two of the lease would be $150,000, $300,000 in year three, then escalating by 2% annually thereafter.

There are now 11 buildings remaining in the portfolio, of these we expect to re-tenant three by the end of the second quarter, and one by the end of the third quarter. Three additional properties in the portfolio are under contract for sale with an expected closing in Q2, at least four remaining buildings. One was closed as expected to be sold for an alternative use in the third quarter, and we are evaluating options for the remaining three, which have a total book value of approximately $3.4 million. We will provide more details on these transactions after they have been completed.

Next, I'll provide some color on our most recent development projects that are now operational. Weatherly Court, operated by Field Senior Living in Oregon, began accepting residents last September. At March 31st, occupancy was 24%, up from 23% on February 15 and 10% on October 23rd. Ignite Medical Resort in Blue Springs, located in Missouri, began welcoming patients last October. At March 31st, occupancy was 64%, the same at February 15, and 23% on October 23rd. We currently have three properties under development. They are all on schedule and on budget.

Moving now to Brookdale whose master lease was scheduled for exploration on December 31, 2021. We have recently extended their term by one year, now maturing on December 31, 2022. Brookdale's first renewal option will begin on January 1, 2022 and go through April 30, 2022. Rent terms under the amended master lease did not change. Last year we extended a $4 million capital commitment to Brookdale, which remains available through December 31, 2021 at a 7% yield. To-date, we have funded $2.1 million of this commitment. As a reminder, we only have one other lease that expires this year. The SNF operated under this lease is under contract for sale, closing expected in the second quarter.

LTC Properties, Inc.

Friday, April 30, 2021, 8:00 A.M. Pacific