Greetings. Welcome to the LTC Properties, Inc. Third Quarter 2023 Earnings 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, 2022. 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.

Thank you, operator and welcome everyone to LTC’s 2023 third quarter conference call. I am joined today by Pam Kessler, Co-President and Chief Financial Officer and Clint Malin, Co-President and Chief Investment Officer. On our last call, I spoke about LTC’s primary mission of focus for the remainder of 2023. And as a result of that strategy, we have made progress towards those identified goals, including very positive results regarding the Brookdale and Prestige porfolios. We also closed the remaining transactions in the pipeline with funding of that transaction expected early next year. Pam and Clint will talk more about this later. To recap, since the beginning of the year, we have originated nearly $270 million in transactions and generated over $51 million in sales proceeds resulting in net gains totaling approximately $21 million. Of the $51 million in sales proceeds to-date, $14 million was received in the third quarter. We expect to receive additional sales proceeds in the $27 million to $28 million range throughout the remainder of 2023, primarily related to the expected sales of the portion of the Brookdale portfolio. Additionally, so far in 2023, we have received almost $12 million in mezzanine loan payoffs generating $1.6 million of exit IRR income at a weighted average rate of 12%. LTC’s long-term mandate remains focused. First, focus on the portfolio, where we have been working to further reduce its average age while creating additional operator diversity and maintaining a balanced portfolio of private pay and skilled nursing. Second, focus on reducing leverage to more historical levels by using sales proceeds to pay-down a portion of our debt. And third, focus on positioning LTC for future growth. I’d now like to spend a few minutes on some industry-wide trends that I am sure are top of mind, starting with…

Thank you, Wendy. For the third quarter of 2023, total revenue increased by $5.8 million compared with the third quarter of 2022. The improvement related primarily to $3.5 million more of interest income from acquisitions accounted for as financing receivables and $1.9 million more of interest income from 2023 mortgage loan originations. Additionally, interest and other income increased by $453,000 primarily due to a recent mezzanine loan origination. Rental revenue and income from unconsolidated joint ventures were comparable to the prior year period. Interest expense increased by $4.7 million from last year’s third quarter primarily related to higher interest rates and a higher outstanding balance on our revolving line of credit, partially offset by scheduled principal paydowns on our senior unsecured notes. During the 2023 third quarter, we recognized a $4.9 million gain on sale related to 2 assisted living communities in Pennsylvania. I’ll provide additional details on property sales shortly. Our provision for credit losses decreased by approximately $600,000, primarily due to the 2022 acquisition of 3 skilled nursing centers accounted for as a financing receivable partially offset by the origination of the mezzanine loan I mentioned earlier. As a reminder, upon origination, we record a loan loss reserve estimate equal to 1% of the loan balance. This reserve is amortized as the loan principle is paid down. Net income available to common shareholders increased by $8.9 million primarily due to higher interest income from new investments, the increase in gain on sale of real estate and an impairment charge of $1.3 million reported in the prior year third quarter, partially offset by higher interest expense. Fully diluted FFO per share improved to $0.65 for the third quarter of 2023, up from $0.60 in the third quarter of 2022. Excluding non-recurring items, FFO per share was $0.65 for the…

Thank you, Pam. I’ll start with an update on our 35 property Brookdale portfolio, whose lease expires on December 31. As previously announced, we released 10 of the properties, six in Colorado and four in Kansas back to Brookdale, under a new 6-year master lease commencing on January 1, 2024. Recently, we amended the new master lease to add seven additional assisted living communities from the 35-property portfolio, including one in Ohio and six in Texas. The initial rent on the new 17 property master lease will be $9.3 million escalating by approximately 2% annually, and our capital expenditure commitment will be $7.2 million for the first 2 years of the lease at an initial rate of 8%, escalating by approximately 2% annually thereafter. Brookdale will have purchase options on these 17 properties in 2029. Brookdale has been a great partner through the years, and we are happy to have reached an outcome that benefits all parties. Additionally, we are on track to transition the remaining 18 properties by year-end. More specifically, we plan to sell seven while leasing 11 to two different operators. The sales price for the seven properties being sold, four of which are in Florida and three of which are in South Carolina, will be approximately $27.1 million. We anticipate receiving $20 million to $21 million in proceeds, net of transaction cost and seller financing as a result of these sales. We are leasing the remaining 11 properties to two operators. Six in Oklahoma with a total of 219 assisted living units will be operated under a new master lease by a current LTC operator which we anticipate will commence on November 1, subject to the issuance of licensure to the new operator. The lease term is for 3 years with one 4-year extension period. Rent…

Thank you, Pam and Clint. The third quarter was very productive as we worked through some previously identified challenges and made progress on some of the expectations we set for ourselves and for our shareholders. We’re going into the end of the year on a positive note with most signs pointing to continued industry recovery. As Clint said, bank lending is in flux, maturities are coming due for operators at a brisk pace, and interest rate increases are causing anxiety. We think this environment favors REITs, especially those like LTC who maintain a conservative investment strategy and provide customized solutions geared towards the needs of operators. I believe we are well positioned for growth for next year and into the future. Thank you, everyone, for your continued support. We will talk to you again next quarter. Operator, we’re now ready to take questions.

[Operator Instructions] Your first question for today is coming from Juan Sanabria with BMO.

Good morning. I just wanted to ask a question on Prestige with regards to modeling FAD or cash. How should we think about what they are expected to pay in ‘24? Should we be modeling kind of the floor on the weight that you set on how that loan was redone, or should we think about the effective rate. I know there is a difference between FFO and FAD from a GAAP perspective. Curious from a tax perspective, how we should be thinking about that for ‘24?

Yes. Sure. Juan, this is Pam. You should model FFO and FAD the same at the effective rate, because we are going to be getting the cash. It’s just the timing issue for replenishing the letter of credit. So, we will be drawing down on the letter of credit each month to fund the difference and then they will – when they get their retroactive Medicaid funds, they will replenish the letter of credit. So, from a cash and GAAP standpoint, it’s the same as it has been previously. So, same as you probably already have in your model.

So, that the drawing down, just to confirm the drawing down on the letter of credit will continue in ‘24 to make up any difference between the cash and effective rate?

Yes.

Okay. Great. And then on Brookdale, so the proceeds from the dispositions of those assets that are teed up or completed. Should we think of those as just repaying the line and any sort of kind of offset to the dilution from asset sales being just the repayment of the line, given you have invested most of your anticipated capital into the ‘23 pipeline? Is that the right way, or should we be reinvesting those proceeds at a higher yield?

Well, as we talked about on the last call, we consider we pre-invested the proceeds, right. We are getting $27 million and we invested this year earlier at 8.5%. So, in theory, we have already reinvested those. But logistically, because of timing, we drew down on the line, and that’s why debt got higher, and we talked about on the last call that we were comfortable with debt creeping a little higher because there was a difference in the timing of us pre-investing the proceeds and then actually getting the proceeds. So, logistically, you are going to take down the line. But when you are looking at the transaction holistically and saying, are we getting replacement income to be replaced, the $15.4 million from Brookdale, yes, we did. And we can walk through that math if you want. But logistically, you are going to just take it – don’t assume any more investments this year is what I am telling you.

Okay. And then one – just one last quick one for me. I think you called out a $30 million loan maturity in the first quarter ‘24. Is there anything else that we should be modeling for the balance of the year for ‘24 going forward?

Not right now, not with any certainty. I mean the debt markets are challenging, but for cash flowing properties. Operators are able to find financing for that. So, right now, I am comfortable with the debt maturities or mortgage loan maturities that are coming back to us, not our own mortgage maturities because we don’t really have any – we don’t have mortgages. So, we have no maturities. But our debt payments obviously are – we feel comfortable with those.

Great. Thanks. I appreciate it.

Your next question is your coming from Connor Siversky with Wells Fargo.

Good morning. Thanks for the time. Maybe just to zoom in on the minimum staffing requirement, following the entire ruling we had. I am curious, feedback has been from your operators in the SNF portfolio. And then, do you believe there is any potential that we could see a cutback or on-time or in the hours required to the registered nurse part of the…?

Hi Connor. Good morning. It’s Clint. The feedback we are getting from operators speaking to about this. It’s in the comment period right now. There has been a lot of comments that have been submitted and Arca [ph] is doing a good job of organizing that. Generally speaking, I think the consensus is that the impact is not in, obviously, ‘23 or ‘24 or ‘25 and really working with CMS, how to phase that in. So, that’s really where the focus is right now. So, as you look into 2024, generally speaking, people aren’t concerned about that, but it’s just trying to shape what it looks like and how it’s phased in beyond that timeframe.

Okay. Understood. And then transaction activity expectations for next year, I mean we have seen the 10-year more than double and yet in ALS and sale of assets, it seems yields have only gone up maybe 100 basis points to 150 basis points in certain cases. Do you have any idea what’s driving that kind of stickiness on pricing, whether that’s just the transaction activity and that is paying attention to those assets?

I think it’s just a lower transaction volume. And then we see going forward, with that rise in rates, and you haven’t seen the adjustments yet in the cap rates with mortgages coming due, as I talked about in the prepared remarks, I mean we see an evolving market with opportunity in front of us and we think that REITs would be well positioned to take advantage and capitalizing on deploying additional capital.

Got it. Thank you.

Thank you.

Your next question for today is coming from Michael Carroll with RBC Capital Markets.

Thanks. And I am not sure if everybody else is here in that, but I am getting some feedback on the line two? Anyway, I guess my first – my first question is on Prestige. Clint, can you just kind of give us some ideas of what’s going on with the Michigan Medicaid true-up payments. I mean how much additional capital is receipts going to get in the fourth quarter of ‘23. And why wasn’t that capital used to pay back the deferral?

So, on last call, we – you and I had a conversation in Q&A regarding this. So last quarter, like I had mentioned that the estimates of the time was the procedure received $7 million in – or estimated to be $7 million in ‘23 million and then the $8 million to $10 million range in ‘24. At this point, right now that the rate letters have been issued that estimate is approximately $8 million for 2023, and we are at the higher end of the range of $10 million in 2024. Given the deferral in these rates over the last 3 years, there will be – there is AP, there is bed taxes that need to be paid for Prestige. So, this basically this initial payment allows them to bring the AP back into current terms, pay the deferred bed tax. And on the call last time, I had mentioned you shouldn’t assume those dollars in 2023 would come to LTC.

Okay. And then as you are thinking about into the operations of Prestige going into 2024, are there operating trends improving? And I believe you might have answered this with Juan’s question, but do you expect that they are not going to pay the full contractual rent in 2024?

No, we fully expect – as Pam just detailed, we fully expect and as Pam mentioned, to Juan’s comment to model FAD cash rent from – or cash interest from Prestige, the same as FFO. So, we fully expect to receive the contractual interest payment, not only in ‘23, but in ‘24 in our prepared remarks, we said 2025 as well.

Okay. And then why did you change it to allow them to pay less, I guess what was the reasoning behind that?

The real story for Prestige is building back census and improving operations. So, what we have done is we have afforded them the ability to have a lower current pay while they are doing that. And in addition to our participation in the retroactive Medicaid payments in exchange for implementing the current rate that LTC will be participating in 50% of the excess cash flow beginning January 1, 2025. And that amount that – if it materializes, will just be added into our letter of credit to provide more security, if there is accrued interest, that will be money available to pay down accrued interest. So, that was the – it was giving them a runway of effectively 2.5 years as we are guiding to getting full contractual interest through that timeframe. We are giving them a 2.5-year runway to make improvement in operations and improve margins.

Okay. Great. Thank you.

Thank you.

We had reached the end of the question-and-answer session, and I will now turn the call over to Wendy for closing remarks.

Thank you everyone. We really appreciate the time you take to listen to our comments and we appreciate your questions to help us clarify those comments. I look forward to talking to you after the end of the year. Have a great rest of your 2023 and a great weekend. Talk to you soon. Bye-bye.

This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.