LTC Properties, Inc. (LTC) Earnings Call Transcript

Thank you. earnings call. [Operator Instructions] Joining us on today's call are Pam Kessler, Co-President and Co-Chief Executive Officer, Clint Malin, Co-President and Co-Chief Executive Officer, [ C.C. Chical ], Executive Vice President, Chief Financial Officer and Treasurer, [ Gibson Satterwhite ], Executive Vice President of Asset Management, Dave Boitano, Executive Vice President and Chief Investment Officer. Before management begins its presentation, please know that today's comments, including the question and answer session, include forward-looking statements subject to risk and uncertainties, that may cause actual results and events to differ materially. These risks and uncertainties are detailed in LTC Properties filing with the Security and Exchange Commission from time to time, including the company's most recent 10-K dated December 31, 2025. LTC undertakes no obligation to revise or update looking statements to reflect events or circumstances after the date of this presentation. Please note this event is being recorded. I would like to now turn the conference over to LTC management. Please proceed.

Good morning, and thank you for joining us. The excitement and momentum of our SHOP strategy here at LTC continues, and our transformation is well ahead of schedule. We are increasing our 2026 SHOP acquisition guidance by 50% to $900 million at the midpoint and we'll have closed $700 million in acquisitions by the end of [indiscernible]. Additionally, we expect a meaningful step up in dispositions and loan payoffs this year, well above what we've previously discussed with the majority in skilled nursing. By the end of September, SHOP will represent 40% of LTC's pro forma annualized NOI, a full quarter ahead of previous estimates. We expect to drive that to 50% by year-end through pipeline execution, redeploying proceeds from the Prestige loan payoff, and proactively recycling capital on lower growth investments at exceptional pricing. At our current pace, we see a pathway to generating 75% of our annualized NOI from SHOP by the end of 2028. We are encouraged by our core SHOP performance and the momentum we are seeing across the portfolio. Additionally, we have strengthened our balance sheet with a $1.1 billion credit facility, supporting our growth trajectory with additional liquidity. At 40% SHOP NOI, our pro forma internal growth rate triples. Combined with external growth opportunities, LTC's projected annual growth rate at 75% of NOI in 2 years increases meaningfully. Our SHOP strategy has resulted in a substantial shift in our portfolio, dramatically enhancing LTC's long-term ability to organically grow Core FFO and FAD per share above historical rates. LTC's transformation from a triple-net lease and lending platform into a higher growth, SHOP-focused REIT reflects deliberate planning and efficient execution. What you see this quarter is our transformative SHOP strategy converting into results. Investments we have made in operator relationships, human capital, and real estate are creating value and long-term growth for our shareholders. I'll now turn it over to [ Gibson ] to walk through the operating portfolio.

Thank you, Pam. We are intentionally and rapidly transforming our business to meaningfully increase LTC's long-term intrinsic growth profile. The degree to which we accomplish our objective will be driven by our investment in SHOP and the long-term growth potential of that segment. With respect to increasing our SHOP mix, we now expect proceeds of $730 million from dispositions and loan payoffs in 2026, $465 million above prior guidance. We expect to realize a 5.5% cap rate on rent from the incremental $465 million and a blended rate of 7.3% on total 2026 proceeds. About two-thirds of the incremental sales will be skilled nursing properties, bringing total expected 2026 proceeds from skilled nursing to $570 million at a blended cap rate of 7.5%. The remaining $160 million of triple-net seniors housing properties is expected to be sold at a 6.5% cap rate on current rent. The total proceeds this year include $180 million from the Prestige loan payoff, which we are now modeling to occur on October 1. Our revision to the anticipated payoff date relates to the HUD process timeline. And given the progress that has already been made, we do expect that closing to occur this year. The timing of the additional sales and associated rent reductions are outlined in our supplemental package. With respect to SHOP growth, we remain encouraged by the portfolio's strong characteristics and expect to realize pro forma growth of 14% at the midpoint of guidance in our core SHOP portfolio when compared with 2025. Our second quarter core SHOP NOI was $13.3 million, up from $12.9 million pro forma NOI in Q1. We're encouraged by the RevPOR growth relative to our expectations earlier in the year and saw occupancy increases accelerate at the end of the quarter. Given those factors, we believe we are well positioned to achieve guidance with continued improvement throughout the year. Looking forward into 2027, we will continue to evaluate our portfolio for opportunities to accelerate our strategy by recycling capital at attractive risk-adjusted rates. We're excited about the long-term growth potential of the SHOP portfolio that we are assembling. Now I'll turn the call over to Dave to discuss our investment activity.

Thanks, [ Gibson ]. We are winning and growing in a dynamic acquisition market that is fueling LTC's near-term momentum and long-term growth trajectory. By the end of the third quarter, we will surpass the previous midpoint of our investment guidance by $100 million and now expect to reach $900 million in SHOP acquisitions in 2026. Importantly, we expect this pace of growth to continue into 2027 and beyond. From the start of the year to the end of July, we closed approximately $400 million in SHOP acquisitions. We expect another $300 million by the end of Q3 and roughly $200 million more by year-end, reflecting the depth of our deal flow. A key value underlying LTC's success is our strong commitment to relationships. Our speed, strength, and collaborative execution resonate with operating partners, sellers, and intermediaries. And as a result, we're seeing a robust pipeline of opportunities to support our growth. Our SHOP acquisitions are targeted, focusing on key characteristics that support the quality of the platform and will drive higher intrinsic growth and better risk-adjusted returns. The average age of the $700 million of acquisitions that Pam referenced earlier is 9 years, with 76% located in primary markets as designated by NIC. The average unit size of these communities is around 110, with nearly 60% offering a continuum of care spanning IL, AL, and memory care. These acquisitions represent growth with existing and new operators, as well as repeat and first-time seller relationships. As our SHOP portfolio grows, we remain focused on identifying opportunities that align with the LTC strategy and pair well with our strong operating partners. Our investment team's focus on asset quality and size, unit mix, and market dynamics directs our growth to communities that will retain their competitive position and deliver durable long-term performance. We know sellers and operators have options, and we strive to be their trusted partner. We are deeply grateful to everyone's contributions to LTC's SHOP transformation and believe our people, our platform, our financial strength, and our deep relationships position us for continued growth and success. Now I'll pass the call to [ Cece ] for a review of our financial results.

Thank you, Dave. We recently expanded our credit facility by $300 million, increasing our unsecured revolving line of credit to $900 million. Additionally, we anticipate entering into a new ATM agreement in the third quarter. During the second quarter, we sold 4.1 million shares of common stock for $155 million in net proceeds under our ATM program to pre-fund our SHOP acquisitions. Our pro forma liquidity stands at $648 million. This strength in capital position enhances our financial flexibility and enables us to accelerate external growth initiatives and capture additional NOI expansion opportunities. At the end of the second quarter, our debt to annualized adjusted EBITDA for real estate was 4.2x and our annualized adjusted fixed charge coverage ratio was 4.9x. We continue to operate comfortably within our leverage target of 4x to 5x debt to EBITDA and will fluctuate within that target depending on the timing of our acquisitions and expected proceeds from sales and payoffs. Core FFO per share was $0.68 for both 2026 and 2025 second quarters, and Core FAD per share was $0.70 this quarter compared with $0.71 in the 2025 second quarter. The decrease was due to an increase in our weighted average diluted shares outstanding, driven by additional shares issued under our ATM program, a decrease in income from SNF sales and loan payoffs, and an increase in interest expense. The decrease was offset by an increase in SHOP NOI and interest income from loan originations and additional loan funding. As we head closer to year-end, we are narrowing our guidance range for 2026. We expect Core FFO per share in the range of $2.76 to $2.78 and Core FAD per share between $2.83 and $2.85. This guidance includes an increase in SHOP acquisitions to $900 million at the midpoint, increasing total SHOP NOI between $71 million and $80 million, and decreasing FAD CAPEX to approximately $4 million due to the timing of acquisitions. It also includes $730 million of proceeds from asset sales and loan payoffs. Assumptions underpinning our guidance are detailed in yesterday's earnings press release and our supplemental package, which are posted on the LTC website. I'll turn the call over to Clint.

Thank you, [ Cece ]. When we launched our SHOP platform just 15 months ago via cooperative triple-net conversions, it was seeded with 13 communities with a gross book value of $175 million. At the end of the third quarter, SHOP gross investments will total over $1.3 billion with an average age of 9 years. 80% of this growth has been external, driven in part by our ability to successfully cultivate strong SHOP operator relationships. We are deliberately building a SHOP portfolio to compete effectively today and in the future when new supply eventually comes online, although new construction starts remain near historical lows nationally. We are mindful that this will not always be the case, so we seek to acquire communities with an already strong market presence and with unit and common area configurations designed to fulfill contemporary consumer preferences. I would like to close by thanking our SHOP operators for choosing LTC and trusting in our relationship and ability to help support them as they care for our nation's seniors. Also, I would like to thank the LTC team for their tremendous efforts in carefully planning and executing our SHOP strategy in the pursuit of shareholder growth. Our transformation is happening faster than we predicted with everyone here at LTC working together as a team to build a platform for higher, sustainable, long-term FFO and FAD growth.

With that, we are ready to take your questions. [Operator Instructions] One moment while we pull for the first question. The first question comes from Juan Sanabria with BMO Capital. Please proceed.

This is [ Robin ] sitting in for Juan. I was just curious on the $321 million left to close, if you could discuss cap rates, IRRs, expected timing. And then if you could maybe also discuss if you could do additional deals in addition to the incremental $321 million before year-end.

Sure. This is Dave. So that remaining to be closed looks much like what we have, similar cap rates and from an addition and mix and quality, really we're finding a lot of transactions that look like what we've acquired. And so we feel very good about that. As far as additional opportunities throughout the year, we're always looking. And if we find transactions that fit our box, we will certainly pursue them.

Then on the SHOP expectations, could you just help us understand the drivers of the RevPOR increase and the occupancy moderation?

Sure. Hi, this is [ Gibson ]. So before I get into those metrics, I just want to back up for a second and just talk about that core portfolio for a minute just to give some context. So it's 27 properties. When we rolled that guidance out, it was like 97.5% of the NOI that we owned at the time. In that mix, I think everybody knows that we converted standalone memory care, so it's more heavily tilted towards standalone memory care, about 30%, 32% of the units in that portfolio. So we're going to see some movement over time from quarter to quarter and performance and our expectations. And it's not exactly analogous to some of the other same-store portfolios of our peers. With respect to the underlying metrics of guidance, the RevPOR is, we're taking that up 50 basis points, and that's really based on the pricing strength that we've seen so far year-to-date. And we've got more price increases coming in the second half of the year. Underlying metrics are good. There's no material difference between the operator's asking rates and the rates at which people are moving in. We feel like the marketing funnel is working and flowing. And so we feel pretty good about that. On the occupancy front, that's really a function of the math. So year-to-date, we're at about 89.7% occupancy. Last year was 89.7%. So if you think about that, to be able to get our initial guide of 150 basis points, you'd have to average 300 basis points over the second half of the year. We felt like because some of the cohort of buildings that we see, that we would need to really make that kind of movement, a lot of that's a standalone memory care. We don't feel like that's an expectation that we're going to anchor. We're not going to anchor our expectations on that kind of movement. Now I will say last year, we saw not only in that segment of the portfolio, but the overall portfolio, we saw a really good move in occupancy in Q3. So, it's not out of the realm of possibility, but if we get that same kind of move, we're really talking about the high end of the guidance as opposed to hitting the midpoint. The RevPOR expectations are really just a function of the moderation in our expectations. And then if you just step back and think about it, overall, if our operators are able to deliver 14% growth at the midpoint, and I think Pam mentioned this on a prior call, we will have outperformed our underwriting on those new deals. It's about $460 million worth of new deals in that cohort. We will have outperformed our underwriting, and we will have significantly transformed the intrinsic growth profile of our portfolio. So we're really excited about that. It's a low end, which we don't expect to hit and hope not to hit. That's still double-digit growth in that portfolio for the deals that we bought. At the high end, you're at high teens growth. So we're really encouraged. And the way we're thinking about it now, I think our expectations are probably normally distributed around that 14% midpoint. We're not trying to sandbag. We feel like that's a good, reasonable expectation of our operators. But we feel at that growth rate, we will go a long way to proving out the thesis behind turning over $730 million of our portfolio investing in SHOP, making the investments in the platform. And we're really excited about that here at LTC.

The next question comes from Tayler Okusanya with Deutsche Bank. Please proceed.

A couple of quick ones from me. The core SHOP portfolio and the 14% NOI growth profile, I'm just curious, as we kind of think of everything else you've bought or just kind of in the line-up, and we kind of think about where you kind of have all that kind of in the portfolio by the end of this year, and we start thinking about 2027 and trying to do like a year-over-year comparison type of thing like we're doing with the core SHOP portfolio. How much confidence do you have at that point that you could still put up kind of similar NOI growth by the end of the year with kind of a redefined corporate portfolio heading into 2027, if I may use those words?

I mean, the growth, are you specifically referencing the growth that we're projecting in what we're buying, the recent acquisitions?

Yes, that's a great way to kind of think about it. Like how do we think through the growth of that stuff?

So, Tayler, this is Dave. Sort of like I commented earlier, right, so what we're looking to acquire, and try to in terms of acquisitions that are coming in and what we're pursuing. We expect similar dynamics in terms of low to mid-teens IRRs, and that's kind of growth. So we really see it as sort of adding quality to quality as we continue to grow. So that is our expectations as these roll into our portfolio and be in march step with the rest of the assets.

We haven't bought any value-add, Tayler, if that's what you're asking, where you would expect outsized growth, yes. That's how my comments are made. We're expecting to have the $700 million completed by the end of Q3. That'll put us at $1.3 billion, the average age of 9 years. We've targeted larger campuses, newer assets that are occupancy stabilized, that then have the ability to push revenue growth. And it's something that we have conversations with our operating partners about this and looking to the budgeting process and where to focus on it. And we do think there's going to be room to push rate, especially with just supply constraints that exist today. And that's why we have targeted the asset profile that we have to acquire to build the SHOP platform. We think that's going to be very advantageous to us going forward.

Okay, that's helpful. So then with the mid-teens IRR and you're buying, let's kind of call it high 6% to about a 7% cap, so you're kind of thinking it gives you like 7%, 8% type growth. Yes. Okay, that's great. And then just a quick second question, kind of with further growth in SHOP, this idea of being 75% by 2028, as we're kind of thinking about additional acquisitions, how should we think through funding that? I think, again, this year is a little bit different because, again, some of the funding is some of the high yield paper that's kind of from the loan payoffs and things like that. But so just kind of think about your actual cost of capital relative to where you're buying assets. You should be kind of thinking about that stuff as being kind of accretive from day one or more neutral from day one, and then we kind of get to growth in outer years.

Yes, more neutral from day one and the growth in the following year. We do have some more potential capital recycling we can do in our portfolio. The bulk of it done this year, I mean, over $700 million, that's pretty incredible, as [ Gibson ] alluded to, turning over a third of our portfolio in less than 18 months. You know, we've taken a lot of work here, but the SNF asset sales have unlocked a lot of trapped value that's created a currency for us for growth-oriented investments. And we'll continue to look within our portfolios to see if we can get a lot of value. But next year, I would anticipate it more the normal course, 70% equity, 30% debt. So you'll see more growth in the bottom line asset, gross asset value of LTC this year. It was more recycling and replacing low growth investments with high growth investments. Next year you'll see more bottom line growth.

That is very helpful. You guys are grinding hard.

Thank you. We're working hard over here. Our team, we've got a great team and everybody's, we're all in the same boat rowing together in the same direction and feel like we're firing on all cylinders. As [ Gibson ] said, we're really excited about what's happening here at LTC and, you know, a lot of our investors are serving.

I'm certainly thrilled by it as well and looking forward to next year. That's a lot to track the operating partners that we have into the SHOP portfolio. Going from May of last year to now having 12 operating partners and adding one more, I think that energy has resonated and has really helped us catapult this growth.

The next question comes from John Kilichowski with Wells Fargo. Please proceed.

This is [ Jesus ] on for John. So to start here, you guys raised the investment midpoint here by $300 million to $900 million and increased SHOP NOI guidance, but kept the midpoint per share guidance unchanged. I guess, what is offsetting the incremental earnings contribution from those acquisitions?

Well, a lot of it is [ Cece ] here. A lot of it is the timing of acquisitions and when they're coming on board. That's the primary cause of keeping it where it was, you know, initially coming out the model. We typically modeled ratably throughout the year, but it's been pushed back.

Perfect. And just as you've scaled the SHOP portfolio and just added several new operator relationships, I guess what have you guys learned so far about what distinguishes operators best positioned to grow with you guys?

So, this is Dave. The operators who are best positioned to grow, or that we've had the most interaction with, have been regional operators that know their states well, know their markets well, and really got that level of knowledge about the locality and the market dynamics and probably have other communities in that sort of general region to draw upon. So I think that gives you a lot of strength in terms of having an operator who certainly is operating your community, but they have a broader tapestry of regional resources and other things that can draw upon their resources that we will benefit from by engaging them.

The next question comes from Michael Carroll with RBC. Please proceed.

I wanted to dig into the updated disposition guidance a little bit more. What really drove the increase on those expected sales and loan payoffs this past quarter? Is there just one larger portfolio deal included in that, or is it comprised of several smaller transactions?

It's small. There's a number of transactions, Mike, that's involved in this. And this just goes to what we've mentioned on our previous calls, that we're going to look at our portfolio and given, you know, attractive pricing for skilled nursing, looking at being able to take advantage of that. So, this is something we've been managing, monitoring, operating, and buyers listen to our earnings call. They know that we have guided that our strategic focus is moving into SHOP. So we do receive a lot of inbound phone calls from that as well. So it's responding to people, but then also just being proactive in managing our portfolio and seeing where best risk-adjusted returns are and where we can raise capital.

Okay, and then some of the cap rates achieved on those sales, looks like you're getting some pretty attractive value. Is that just like the higher coverage ratios on those deals that allows you to kind of get it to that sub-6.5% type range?