LTC Properties, Inc.
Q2 2021 Earnings Call Transcript

Published: 30 Jul 2021

[Operator:]

Good morning, everyone and welcome to LTC Properties’ Second Quarter Analyst and Investor Call. All participants will be in listen-only mode. After today’s presentation, there will be opportunity to ask questions. 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 could cause actual results and events to differ materially. These risks and uncertainties are detailed in LTC's Properties filings with the Securities and Exchange Commission from time to time including the company's most recent 10-K dated December 31, 2020. LTC undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation. Please note that this event is being recorded.

[Wendy Simpson:]

Thank you, operator and welcome everybody joining us today for LTC’s 2021 second 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. Not being able to quantify an impact of the delta variant on current and near future operations, what we have recently heard from our operators gives us some optimism. We are seeing occupancy gains for the first time in a long while. Vaccination rates among patients and residents throughout the industry are high, generally in the 80% range with gradual increases expected. Our buildings are beginning to stabilize with in-person tours and family visits allowed once again, notwithstanding the recent introduction of the delta variant. The transition of our senior lifestyle portfolio is virtually complete and we are seeing a nice pickup in deal flow and activity. We are seeing a few encouraging signs throughout the industry. According to Nick's data, communities and nursing centers are doing much better clinically than they have in some time given the high rate of vaccinations among residents and patients. On average, especially with respect to SNF, occupancy is trending slowly upward. Over the last 25 weeks, SNF have seen occupancy rise in each week except one, when census remained flat. Various government stimulus programs have helped significantly in keeping skilled nursing operators a float over the course of the pandemic. Additionally, there is about $25 billion remaining for distribution to all healthcare providers in the Provider Relief Fund. While private pay has not been a beneficiary of adequate government relief to date, we are seeing some signs that more aid may become available soon. This is not to say unfortunately, that all of the challenges facing our industry are slowly trending downward. Labor continues to be a major challenge for operators and interest rates and inflation are something we're watching carefully. Even so, I believe our industry is on more solid footing today than it has been over the last 18 months and I'm hopeful that some of the remaining pressures will begin to ease in the coming months. That said, however, a serious surge of the COVID delta variant across the country, especially in states with lower vaccination rates among staff could result in the need to stop admissions again temporarily delaying a full recovery but hopefully, any such surge will be addressed locally rather than by a national e-debt.

[Pam Kessler:]

Thank you, Wendy. Total revenue increased $9.6 million compared with last year's second quarter resulting primarily from a $9.5 million increase in rental revenue, which was due to a $17.7 million write-off in last year's second quarter related to Senior Lifestyle straight-line rent and lease incentive balances. Completed development projects and higher rent payments from Anthem also contributed to the increase. The increase in revenue was partially offset by reduced rent from senior lifestyle net of rent received from releasing 11 properties in the portfolio defaulted Senior Care lease obligations, abated and deferred rent and a decrease in property tax revenue. Interest income increased $113000 from the prior year due to the funding of expansion and renovation projects offset by scheduled principal pay downs. Interest expense decreased by $686000 due to scheduled principal paydowns on our senior unsecured notes lower interest rates and a lower outstanding balance under our line of credit partially offset by lower capitalized interest in 2021. Property tax expense decreased $311000 compared with last year's second quarter as a result of the timing of certain operators property tax escrow receipts and the payment of related taxes partially offset by completed development projects. G&A was $757,000 greater than last year due to the timing of accrual for incentive compensation salary increases and restricted stock vesting. Income from unconsolidated joint ventures increased $376000 due to mezzanine loan fundings. During last year's second quarter, we recognized a loss on liquidation of unconsolidated joint ventures of $620000 related to the sale of the four properties comprising our unconsolidated real estate joint venture with an affiliate of senior lifestyle. During the second quarter of 2021, we recognized a net gain on sale of real estate of $5.5 million related to the sale of three properties in Wisconsin and a closed property in Nebraska all previously leased to Senior Lifestyle. We also transitioned a memory care property in Colorado, previously operated by Senior Lifestyle to an operator new to LTC. The lease has a five-year term and provides a purchase option for $5.5 million, which is exercisable after the first year of the lease.

[Clint Malin:]

Thank you, Pam. As Wendy discussed, our Senior Lifestyle portfolio is now nearly fully transitioned and I'm excited to provide our final update on the transition. I'll speak in some detail about the newest transactions, but I will start with a brief recap of the transactions completed earlier this year. In total the Senior Lifestyle portfolio included 23 properties, 12 of which were transitioned through April of this year. Six of those communities were transferred to Randall Residence, a current LTC operator, five to Encore Senior Living an operator new to us and one to Graceful Senior Living also new to us. Of the remaining 11 properties, four were sold in the second quarter, three assisted living communities located in Wisconsin were sold for $35 million, which roughly approximates their combined gross book value. We used the net proceeds of approximately $33.9 million to pay down our unsecured revolving line of credit. In total these properties included 263 units. The fourth was a previously closed property sold for $900,000 for an alternative use. The gross book value when we acquired it in 1997 was $2.5 million and the net book value was $1.1 million. Of the remaining seven buildings in the portfolio, three have been transferred and four are awaiting licensure. Two properties are being operated by Juniper in Pennsylvania. One property in New Jersey also to be operated by Juniper should be receiving licensure any day. Combined these communities include 168 units. Juniper has been a close partner of LTCs since 2012. The new lease has a two year term with zero cash rent for the first three months. After that time, cash will be reset based on mutually agreed upon fair market rent. Cash rent will be reset every three months for the first year and twice a year for the second year as cash flow in the buildings improves until we set permanent rates for the longer term. three properties in Nebraska with a combined 119 units will be operated by Oxford Senior Living, an existing LTC partner since 2012 as soon as licensure is received which we also expect in short order.

[Wendy Simpson:]

Thank you, Pam and Clint. We have come a long way since the start of the pandemic. It has not been an easy road, but I believe we are now coming up on an easier road. Let's face it. This business has never been a newly paced smooth super highway with an express lane. But with great pride, I can say our industry has learned many lessons through many cycles of significant challenge and we continue to provide what I believe is the world's most caring service to the nation's most vulnerable people. Each day I become more and more confident in our ability to continue to proactively participate in this vital industry. We are positioned to play offense and are seeking out opportunities to strengthen LTC now and for the future. We will accomplish this by identifying accretive ways to enhance our portfolio, diversify our investments, serve as a growth capital partner of choice and return to a well-covered dividend for our shareholders. Now, we'll open up the call for your questions.

[Operator:]

Our first question today will come from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

[Jordan Sadler:]

Thank you and good morning. Wanted to just circle back Wendy. I think in your prepared remarks you discussed an occupancy statistic of 25 consecutive weeks of occupancy gains next one week in the skilled nursing business. And can you talk about that in the context of what you're seeing or what your operators are seeing in your portfolio? I think that was a reference to the industry. I'm just not 100% sure. And as Clint just gave the occupancy statistics, I don't feel like you guys are necessarily seeing the same thing?

[Wendy Simpson:]

We've had a conference call with several of our skilled operators. And they are seeing a small uptick in occupancy. The market that's lagging a little is the Michigan market. And we have a lot of properties in Michigan. But Clint had drinks with the operator in Michigan the other evening. And he's not startled about the situation at all. So we are seeing that, our operators are pretty much tracking, Nick's accept for Michigan.

[Jordan Sadler:]

Okay. And then, I just -- I followed you guys on the SLC update very thorough. But I was wondering, because it's pretty granular. And I guess, you can do the work here, but could you guys summarize sort of the original rent versus maybe the pro forma rent? I am thinking the 23 properties last year were scheduled to pay $18.4 million. I think you sold four for $36 million and you've transitioned or about to transition the rest. What's the pro forma total rent from the remaining 19 properties or 18 properties for let's say the second half of 2021 or for 2022? How much do you expect to get now in total?

[Clint Malin:]

One of the challenges on that Jordan is the buildings that we're transitioning to Juniper and as well as to Oxford which as I articulated, we're ramping up rents as occupancy increases. The two properties that we have with Juniper and Pittsburgh, those two buildings were really substantial contributor under the Senior Lifestyle portfolio previously. So to be able to get back to where we're at and those buildings will play a big part in increasing the rents. And then, once we redeploy the capital on the asset sales. So I think as we get into next quarter or starting into the first of 2022, we'll be able to give that better comparison of where we're at but it's still in drops right now.

[Jordan Sadler:]

Okay. But the -- if you exclude Juniper, I mean, is there a number if you exclude Juniper and Oxford sort of $8 million?

[Clint Malin:]

Well, previously Jordan we didn't allocate buildings by property. So to be able to take that allocation it's hard to make that comparison.

[Jordan Sadler:]

No. I think I get that. I'm just kind of curious, where you stand. I know there was actually a yield associated with the $35 million. I can follow-up with you guys after but I'm just trying to understand where you guys are ending up on sort of this overall portfolio?

[Wendy Simpson:]

We're giving guidance for one quarter not fourth, anything beyond one quarter.

[Jordan Sadler:]

Yeah. No, I follow. I follow. But I'm trying to understand. I'm trying to model more than just a one quarter and I'm not looking for specific guidance. I'm just trying to see where this specific portfolio round up. And then, in terms of the acquisition market investment opportunity is there anything sort of -- how would you characterize it Clint? I mean, are you guys getting closer on some of these smaller deals? What is sort of the flow starting to look like at this point?

[Clint Malin:]

Yeah. There's a lot of activity. We're seeing a lot of deal flow. Buying assets right now, as I mentioned in the comments is the valuation on what's the ask compared to what the performance is a little challenging to buy into investments today for the long haul, but we're seeing a diverse set of opportunities on structured finance newer from Assisted Living to Independent, Living skilled nursing. So we've been happy with the volumes that we're seeing in the number of transactions. So I mentioned $130 million in my comments. And I'll just not guarantee, but those are under lettered intent. And we're actively involved in due diligence working on those. So we're encouraged by what we see.

[Jordan Sadler:]

Okay. I’ll hop back in the queue. Thanks.

[Clint Malin:]

Thank you.

[Operator:]

And our next question will come from Connor Siversky with Berenberg. Please go ahead.

[Connor Siversky:]

Good morning everybody. Thanks for letting me in the call. Really just one question for me, as I'm looking at the deferred abated delinquent rent. For the deferrals in particular, I think there's the term for repayments between six and 36 months, correct me if I have that wrong. But I'm wondering, if there's any sense of what the weighting of repayments is within that term as we kind of roll those receipts back in -- back into the cash metrics?

[Pam Kessler:]

Hi Connor, it's Pam. I would weigh toward the back end. I think the recovery is going to be a little elongated. And so obviously they need to get back to a cash flowing stabilization to repay all of that. So I would wait toward the back end if you're asking from modeling.

[Wendy Simpson:]

And we would hope any new provider relief funds that come out, we'll clear some of that up.

[Pam Kessler:]

Yeah.

[Wendy Simpson:]

If they're stable now,…

[Pam Kessler:]

Right…

[Wendy Simpson:]

… that should come to us.

[Pam Kessler:]

Yeah.

[Wendy Simpson:]

…Maybe we can get to the government to have it so it's directed to us.

[Pam Kessler:]

Yeah.

[Connor Siversky:]

Okay. That helps. And then, just a more general question on occupancy. I mean, within your existing markets, are you seeing any discrepancies between certain markets where occupancy is coming back faster than others and whether or not that's related to say the spike of the delta infection rate or anything like that?

[Clint Malin:]

Our buildings, it differs by market. We have seen some buildings as I mentioned in my comments on some of the Senior Lifestyle transitions, where there's been a noticeable uptick in occupancy. So, it depends by market and some markets are still a little bit flatter. We're not seeing any big deceleration in occupancy, which were really -- that's the encouraging part. We're seeing, either slowly tick up, staying flat or in some markets, a substantial increase. So, the fact that they're not seeing declines is a positive.

[Wendy Simpson:]

And lead generation has been strong. Yes, especially recently.

[Connor Siversky:]

Okay. That’s all from me. Thanks very much.

[Operator:]

Our next question will come from Michael Carroll with RBC Capital Markets. Please go ahead.

[Michael Carroll:]

Yes, thanks. Could you guys walk us through the range of outcomes with the Senior Care Centers lease? I mean, will you guys get a decision from the bankruptcy court in the next hearing? I mean, I guess, I'm just trying to figure out, how long do we have to wait for this resolution to occur? And can you give some guidance on that would be great.

[Wendy Simpson:]

Well, considering the fact that we're in this legal situation, it's hard for us to predict or say anything. We do have the August 11 hearing and we'll do a press release if we get anything material regarding going forward with this lease in these properties. So, I'm sorry Michael, it's just so complicated and we just can't say anything.

[Michael Carroll:]

Okay. No, I understand. I mean, just one more on that and then I understand, if you can't talk about it yet is, can you talk a little bit about the -- how those properties are performing right now? I mean, has there been disruption since Senior Care Centers filed for bankruptcy? Is there any guidance or commentary you can provide on that?

[Wendy Simpson:]

Let me -- have we gotten recent financials from them?

[Clint Malin:]

Yes. We have got recent financials.

[Wendy Simpson:]

Recent financials would indicate that they're cash flow positive, but we haven't done any independent due diligence on those financials. I mean, they're giving us financials and I don't through March?

[Clint Malin:]

No, we have to through May.

[Wendy Simpson:]

Through May. And they would indicate that those properties are cash flow positive. So…

[Michael Carroll:]

Okay. And then, can you talk about how the two leases for, I think was it Juniper and Oxford with Senior Lifestyles. How does that new rank gets set? Is it going to be based on a formula, so it's a percent of EBITDAR that you're going to receive in the second quarter, or how does those kind of flow back into earnings?

[Clint Malin:]

It's a great question, Mike. So we structured it by design. We've had long-standing relationships both with Juniper, as well as Oxford, both taking back to 2012. So, performance had declined substantially in those buildings, so it's going to be an effort that we cooperate to work together towards those. So, be fortunate we have a strong relationship with both operating companies. And they obviously need to be making some profit if we want to get participation as performance increases. So it's something that we'll work through cooperatively, except we're doing it on a quarterly basis during the first year and then semi-annually in the second year.

[Wendy Simpson:]

Isn't our comp to file cash?

[Clint Malin:]

Basic it's still. So it would not be for us to materially meaningfully participate as those performance improves and that was the purpose of why we designed it as such.

[Michael Carroll:]

Okay. And do they have renewal options at the end of the lease? The two-year lease?

[Clint Malin:]

Right now, we don't have renewal options. So -- but what we are working on is trying to get to a rent to put for Juniper to put them into the lease -- their existing lease long-term. I mean, these buildings are in their markets. For the Oxford buildings, these are three buildings that, we don't have any other big presence in Nebraska, so that would be properties that we probably look at selling after the building is going to be stabilized and Oxford would participate in that with us would be the optionality we have for the Nebraska buildings.

[Michael Carroll:]

Okay. And then, can you break out how many operators LTC is deferred or beta at rent to? And I know, there's been a couple of months here, but maybe you could just focus on July and August and September. It looks like the only rent that was deferred is all to the unidentified operator. Is that correct? And then, how many operators are you abating rent for right now?

[Pam Kessler:]

It's the same small group that we've been abating for the past couple of quarters. So there's not anything new in there. One, in the deferred group that you noted and one -- primarily one in the beta group. There's two in the beta group, but one is the majority.

[Wendy Simpson:]

They both had.

[Pam Kessler:]

It was their transition portfolios. Yes. These were transition portfolios. Yes, we've got caught in the pandemic, not stabilized.

[Michael Carroll:]

Okay. Great. Thank you.

[Pam Kessler:]

You are welcome.

[Operator:]

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Wendy Simson for any closing remarks.

[Wendy Simpson:]

Thank you all for taking time to listen to our conference call and we look forward to reporting to you again at the end of the third quarter. Have a great weekend. Bye-bye.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.