Good day, and welcome to the LTC Properties First Quarter 2017 Analyst and Investor Conference Call and Webcast. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would like to turn the conference over to Wendy Simpson, CEO and President. Please go ahead, madam.

Thank you, Francesca, and good morning, everyone. I’m glad you could join us for LTC’s 2017 first quarter investor call. With me today are Pam Kessler, our CFO; and Clint Malin, our Chief Investment Officer. I’ll begin with a few brief remarks, and we’ll then turn the call over to Pam for commentary on our financial results, and then to Clint for a discussion of our pipeline and operator partner performance. I’m pleased to report that LTC increased FFO by nearly 9% this quarter, our 26th consecutive quarter of normalized FFO growth. As we expected, there was no meaningful investment activity during the first quarter, as we paused to deploy capital in an environment that was not particularly aligned with our measured and conservative investment strategy, a strategy that has served LTC well across many senior housing cycles and one that has allowed us to maintain some of the best coverage ratios in the industry. With that said, I’m going to reaffirm our 2017 FFO guidance at $3.08 to $3.10. But unlike our view of the year as of our last call, this range now has varied positives tailwinds. Clint will tell you in more specific shortly. Our balance sheet remains strong with considerable flexibility that will allow LTC to act quickly when we identify new transactions that we believe add value to our portfolio and for our shareholders, and help our operating partners achieve their business schools. It bears repeating that even if we do not close any deals in 2017, LTC would still be well-positioned for sustained future growth. I’ll now turn the call over to Pam.

Thank you, Wendy. As Wendy noted, NAREIT FFO increased almost 9% from a year ago. On a diluted per share basis, FFO improved 2.6% to $0.78 on nearly 5% more weighted average diluted shares outstanding compared with last year. FFO expansion was driven primarily by top line growth of more than 10%, resulting from prior-year investments, completed development in capital improvement projects, as well as lease amendments in the latter part of 2016. Revenue growth was partially offset by higher interest expense, as a result of terming out our line of credit in 2016 and 2017, as well as the effective equity issuance under our ATM program and performance-based equity award. That increased nearly 13% due to growth drivers previously mentioned, as well as lower capitalized interest on development projects this quarter as compared to last year. During the quarter, we invested almost $9 million in various development and capital improvement projects, received a $11 million in principal payments and mortgage loan payoffs, and paid a $0.19 per share monthly common dividend. As I described on our last call, LTC took advantage of opportunities in the capital markets earlier this year, raising nearly $15 million gross proceeds under our ATM program and $100 million through the sale of senior unsecured notes to a group of institutional investors in a private placement. We used the proceeds from these transactions to pay down our line of credit and fund capital improvement and development projects. We continue to have well laddered long-term debt maturity matched to our projected free cash flow, and with no amounts currently outstanding under our line of credit, we don’t have any significant debt maturities over the next five years. Our considerable liquidity, which includes availability of more than $820 million puts LTC in an advantageous position to execute its growth strategy and quickly and decisively seize opportunities as they arise. Our availability currently includes $600 million under our line of credit, almost $37 million under our shelf agreement with Prudential and $185 million under our ATM program. We continue to strategically allocate capital where it makes the most sense for our portfolio, our partners, and our shareholders. Our capital deployment strategy will remain conservative in an effort to ensure a profitable portfolio growth. We are not interested in growth just for growth sake. LTC has long believed that closely aligning the maturities on our long-term debt with projected free cash flow is the best way to mitigate future refinancing risk. This strategy combined with a conservative releveraged balance sheet helps us maintain an investment grade credit profile. At the end of the first quarter, our credit metrics compared favorably to the healthcare REIT industry average, with a debt to annualized normalized EBITDA of 3.9 times, a normalized annualized fixed charge coverage ratio of 5 times, and a debt to enterprise value of 24.1%. Now, I’ll turn the call over to Clint for a discussion of our pipeline and portfolio metrics.

Thank you, Pam. Good morning, everyone. As Wendy noted, LTC’s current pipeline is rather active and has grown to $125 million from $50 million at the time of our prior quarters call. Approximately, 70% of our pipeline is represented by private pay assets. Additionally, 70% of the pipeline is represented by assets constructed in the last four years. Growth in our pipeline is exclusively from off-market transactions, we spend most of our time sourcing investment opportunities. Pipeline consists of five transactions with three existing operating partners and the two other transactions with new operator relationships. These two transactions with new relationships began as discussions to provide mezzanine financing and have evolved industry or leaseback opportunities. Both of the transactions proposed with new operating partners will be structured, as joint ventures for real estate ownership, LTC owning 90% and an affiliate of the lessee owning a 10% non-controlling subordinate minority interest. The real estate will be leased under a long-term triple net master leases to affiliates of LTC’s limited partner invested in the real estate. LTC will have the opportunity to acquire 100% of the real estate over time subject to the properties meeting pre-determined financial metrics. If you recall, in the last quarter, Wendy talked about our ability and willingness to explore different types of lease and investment structures, and these two transactions are representative of this approach. In building operator and partner relationships, we are looking at a variety of options to best meet the needs of our partners. The other three transactions in our pipeline, each consisting with a single property, or the existing operating partners to acquire newly constructed private pay assisted living and memory care communities to be added to the respective master leases. Outside of the unique market trend, off-market transactions, such as, the deals…

Thank you, Clint and Pam. Senior housing supply is kind of a hot topic of conversation of late, with new supply continuing to enter the market and occupancy dipping, increased competition for the tenant wallet share is ongoing. Recent Nick Data showed that in the first quarter of this year, senior housing occupancy dropped to the lowest levels since 2013, with assisted living occupancy moving to its lowest levels in seven years. That’s not the whole story, however, while certain markets are struggling with supply and demand imbalances, other markets remain steady and attractive. At the recent Nick Conference, audiences were reminded that no two markets are the same. And that while natural trends provide important data getting down to what’s happening in regional and local markets is equally important, if not more important. I should note that that diversity we’ve built into our portfolio help to soften the potential impact of any one community. I also believe that we have built a defensible position through the utilization of tripe net leases, master leases, and strong coverage. With favorable long-term healthcare trends and the expected growing need for memory care communities, I feel good about our position. Including the possible investments Clint mentioned, our committed capital for the remaining nine months of 2017 totals approximately $155 million. In addition to acquisitions, we are investing in development, both SNF and private pay, as well as major existing property additions and improvements. If we choose to finance these investments entirely on our bank line, at year-end, we project that our debt to market capitalization will be around our self-imposed feeling of 30% debt to 70% market cap. As we make investments and watch the markets during the year, we will be making decisions on managing our debt load and the maturities. So…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

Hi, this is Katie on for Jordan. Good morning. And I just have a quick question about – could you provide some color on a deterioration of occupancy at the Jacksonville, Florida asset that is currently in lease up?

Sure. This is Clint, thank you for the question. On the Jacksonville property, we’re seeing in that specific market, there has been some newer entrants into that market, and that has impacted occupancy on that property. Specifically, we’re working with the operator on that. They are bringing in some new executive director into that community. And we’re hopeful that will show positive trends, it’s just taking a little longer time than we had anticipated to stabilize that property. So we’re not concerned at this point. It is taking a longer time than we’ve typically seen on our memory care property. So some of that we’re aware off and we’re focused on with our operating partner.

Great. Thank you so much.

Thank you.

The next question comes from Chad Vanacore of Stifel.

Hi. Good morning, all.

Good morning.

All right. So you’ve been pretty selective on the investment front. So I’m trying to think about what things would you need to see changed in the markets to meet your underwriting criteria, as it stands today?

Cap rates.

All about price?

A lot of the market in transactions, especially in the private pay site right now, I’ve heard – I have listened to some of the calls of our peer group as well, and saying some of the consistent things that cap rates just have not adjusted on that. And that’s why we’re spending most of our time focused on off-market transactions and looking for unique opportunities that where cap rates are not the sole determinant in what they’re looking for maximizing value.

All right. So I mean, would you classify that as that there is still plenty of capital chasing these assets and you just haven’t seen much expansion in cap rate?

Correct. There are still a lot of capital chasing out investment opportunities.

All right. Then my other question would be on the EBITDAR coverage improved in this net portfolio. I thought, it might be, because you book range of care in there. But that seems to have actually been – have the opposite reaction?

[Multiple Speakers] ironically up to our determent.

Right. So what drove the improvement in SNF coverage and occupancy actually, given that we’ve seen headwinds in the industry. So what’s driving, I guess, the main thing is what’s driving that occupancy gain?

So it’s been driven by a number of different operators that we had seen in the past a couple of challenges in certain states with our operators. And there was refocusing by the operators in our portfolio putting in different leadership at different properties and just different efforts just focused by the operators. So it’s what we had a couple – a little bit of a dip probably six to nine months ago and that’s been stabilized. So it’s something we’ve expected and we’ve been monitoring those the last few months. And we do think that 1.5 times range in our SNF portfolio is a very sustainable number at this point in time.

All right. Thanks for taking the question.

Thank you.

Thank you, Tim.

The next question comes from Michael Carroll of RBC. Please go ahead.

Yes, thanks. Clint, can I off of Chad’s first question, what actually changed, I guess, in the investment market today that’s allowed you to increase your investment pipeline pretty significantly compared to the last period?

Off-market transactions, as I mentioned in my prepared comments, we’re working with these two companies looking and doing some type of preferred equity or mezzanine financing. And just the needs for these organizations as we got into a more communication, more discussion with them about what they want to accomplish sale leaseback since that being an evolution through that discussion. And this is what we wanted to target by bringing Doug Korey on and joining our organization is introductions to companies that we otherwise would probably not have an introduction to that typically not utilize sale leaseback financing. But entering that discussion with them through a product that they’re familiar with allows us to open the dialogue to find out what their true financing needs are and how we could partner with them. So that’s how we’re sourcing off-market transactions.

What’s happening in these two particular instances, I believe is that, the operator is not looking to get the equity out. And so then there’s a lot of equity money in the market right now. But if the operator wants to do a deal to get some debt and a little bit of equity, there’s often a gap there in terms of how much they can get secured debt these days, it’s not 80%, it’s going down on the secured debt. And as an operator looks at possibly doing a deal for the next five years or however long they can get a debt, they can often understand the benefit of doing a sale leaseback and still keep all of their equity in the operating company. So we’re seeing opportunities, it’s just because that’s the way an operator is looking at his business at this point. And as we – as Clint pointed out, we’ve been able to work with a couple of operators and say, if you want to continue a small amount of equity interest in the property, we can structure some sort of joint venture that allows that. And so, they’re really only paying rent on 90% of the value of the property. So it’s a lot of different things that have happened. Yes, there’s a lot of capital out there, but it’s not necessarily debt to capital.

Okay. And then, I guess, you guys said earlier that’s – the big thing that’s keeping on the silence right now is price. Can you remind us where your targeted cap rates are and where the market is? And how much higher does the market need to kind of go to hit your range and will you be more active?

Sure. Yes, on the assisted living side private pay, we’re looking at anywhere from 7% to 8% depending if buildings are stabilized, or if it is a property that we’re buying that’s newly constructed at certificate of occupancy that sort of the range. Now skilled nursing in the 9% range on skilled. And we can look at skilled transactions, I think, there’s opportunities that could fit in the 9%. The question for us on skilled is truly finding the right operating partner to work with, and we’re looking for a newer assets any markets where the operators have some type of presence and scale that gives them the ability to negotiate with managed care companies, health systems, as we have the evolution of value-based reimbursement. But on the private pay side, where market NOI cap rates are, times are equal to or less than our lease rate cap rates and that provides effectively no coverage for our operators in a triple net lease.

Okay. And then, I guess, one final question maybe for Pam on the modeling side. There is the memory care asset that was stabilized in Colorado that didn’t achieve the occupancy targets. I guess, can you remind us where occupancy is right now? And how does that hit your model, because if I remember correctly rents kind of ramps up, as the occupancy picks up. So is that full rental rates currently being impacted at that facility, or is it still kind of based on where occupancy is?

No, it’s full rental rate at once it reaches at two years, 24 months is our defined stabilization regardless of occupancy. So it’s full rent, but it’s currently at 66% occupancy.

And I guess, is that in a master lease, how is that operator currently paying that?

Yes it’s in a master lease, and that’s a property, where we’ve been in close conversation with our operating partner on this property specifically, and there has been a couple of new buildings that have been built in that market. But it’s a situation, where the management team felt that the executive director of this community became complacent and wasn’t really out marketing and pushing new admissions into the community, because for a while they had – there were the only – they were the new building on the block. And so they’ve recently replaced the executive director, and this is a building with Anthem Memory Care and they have three other communities in the Denver markets. So they’ve got a strong presence in the marketing. It’s really just changing the leadership at the local community to be able to continue to grow occupancy on that. So something we’re aware off, but right now, I think with the change in the executive director and the market presence that Anthem has in the Denver metro area, that would take a little bit longer for this building to stabilize. But at this point, we’re not concerned about the long-term stability of this asset.

Great. Thank you.

Thank you.

Thank you.

Next question comes from Karin Ford of MUFG Securities.

Hi, good morning. Clint, I wanted to ask you about -- in your pipeline, I didn’t hear you mention of behavioral health, mezzanine loans, new development, things that asset classes and types that you’ve – and structures that you’ve looked at in the past. Can you just comment on your appetite for those today?

Sure. On behavioral health, we just haven’t seen as many opportunities to look at. And it’s – they were still trying to evaluate and understand, especially with potential changes that could take effect in Obamacare. We’re evaluating and exceeding where that’s at. So just haven’t seen the opportunities to move forward further in behavioral health. As it relates to development, we’re not seeing as much development from our existing operating partners. And I think it’s a function of cost of land, labor materials have gone up, and our operators are not seeing the opportunities that they have before on development. And when it comes to development, we’re really focused on relation or development with our existing partners. We’re not, at this point, outsourcing new relationships to do development other than that if it happened to be an opportunity for a sale leaseback transaction to bring in some stabilized assets and then look at adding development onto that. So since we’re sourcing that development through our existing relationships and pricing has gone up, that’s – that has abated right now on the development.

Are you still looking to do on mezzanine loans as well?

Absolutely.

Okay.

Absolutely looking at doing mezzanine loans. But, as an example, Doug was spending his time on a number of opportunities the two I talked about specifically, which initially was about mezzanine financing that has evolved into a sale leaseback transaction. So we’re being methodical strategic about how we deploy capital for mezzanine. But where we can find opportunities to redirect mezzanine discussions in sale leaseback opportunities, we’ll go with that and March forward and try to convert those opportunities.

Thanks for that. My next question is on the portfolio of lease to Sunrise. If my memory serves correctly, even expiration there coming up in 2018, can you just remind us what percentage of your revenues that lease comprises? And what the coverage is and what your current thoughts are on that expiration?

Well, I’ll let Pam talk about – with the percentage.

About 30% now.

Okay, about 30%. We’re actively engaged and we have 12 months remaining on that lease, and we’re actively engaged in evaluating that. We’ve met with in conversations with Sunrise relating to this.

We have an independent consultant go out and look at our financials from Sunrise somebody who knows the industry well. And it has given us some analysis, which we are looking at to determine where we might price these assets coming forward. So we’re on top of it.

Does it still have coverage below 1.0 times?

After 5% management fee, yes.

Okay, thanks. And then my last question is just on – there has been some M&A in the healthcare space, can you just give us your thoughts on consolidation, your current size and what your thoughts are on what’s been going on, particularly in SNF sector?

I enjoy our strategy, our balance sheet, our confidence in what we can add to our shareholder value as time goes on. So the size of our company is not as important to me in terms of what earning potential we have. And I think we have a great earning potential this year and in the future. We have not seriously discussed any mergers or consolidation of our company. I think the one that was announced the other day has many reasons why it makes sense for those two companies to merge, they wouldn’t have made sense for LTC. Every time there’s a merger, I think, it’s just like every time we do a transaction. It’s the unique set of circumstances that makes that thing happen. And so I think it’s a unique set of circumstances that is at work for that current merger.

Thanks for your thoughts.

You’re welcome. The next question comes from Rich Anderson of Mizuho Securities.

You guys are just too darn unique. So the – I just want to understand a little bit about the potential need for equity to right size your leverage ratios. You said $155 million of committed capital, did you say that plus the – first of all, Clint, your three – your five opportunities, does that equate to $125 million?

Yes.

Okay. So it’s 125 plus the 155 is some – 155 is the total?

Yes.

Okay.

And the 155 is for the nine months remaining in 2017.

Yes.

Okay. So the total number is 155, should you get up to that point and use only debt that’s when you start to think about it?

Correct.

Okay. So I guess, the question is, how do we time that? Here you guys have the fortune of trading at a premium to NAV, you have a topsy-turvy political landscape. I mean, if you feel – at what point when you – do you feel like you have to start to think about even if that hasn’t happened yet? Is it – are you in front of it by six months, or can you – you can – or you can be more precisely timed, or can it be more precisely timed as it relates to kind of addressing your leverage levels?

So that’s the beauty, Rich. This is Pam, setting such goal, leverage target is that, it allows you to be opportunistic and so we’ll precisely time it. We won’t feel any pressure once we reach that hurdle to do something. You know, stay tuned, yes.

All right. So you kind of get there and then think of it, or is that the way you look at it, or as you’re approaching you start thinking about it?

I think it’s all of that. I think if you look over the past three years at how we’ve timed the market, it’s been opportunistic and we don’t get up to a target and feel pressure to do something. We set low target. So that if we go over it a bit, because the market is just not there, we still are one of the lowest levered companies in the healthcare industry. So if we reach that target, there’s – we’re not going to have beads of sweat on her forehead.

Okay. I appreciate, that makes sense. And then, Wendy, you gave your guidance, I’m just curious if that already assumes all the activity that that Clint mentioned, or would there be upside to your range assuming these deals do close?

There’s definitely upside that includes nothing, no transactions to share at all, it’s just our…

Current companies...

Yes, current companies and our current commitments.

Okay.

Yes, it’s not – it’s none of Clint’s 125 pipeline.

Okay.

It’s not that we don’t have confidence in him, but…

I mean, maybe you could just speak in terms of history when you’ve done a $100 million of deals in the past. How accretive that has been for LTC not to necessarily comment on these, but just to get a sense of how accretive your external growth pipeline has been in the past?

Clint, without specifying, would you say of the amount that you’re talking about of the deals, how much do you think could close in the second quarter, third quarter, and I’d say, if you use an average of a 7% yield.

Yes, yes.

On this whole group of assets.

Okay.

I’d say, 50-50, 58% in the second quarter, 50% in the third quarter.

Okay.

Okay. And you said 7% yield?

Yes, on average, it’s about 7% yield.

Okay.

Pam, that’s what putting it on our line at a 2% cost, or how much is our line?

Yes, 2% cost.

At a 2% cost.

Okay, great color. Thanks very much.

Thank you, Rich.

The next question comes from John Kim of BMO Capital Markets.

Thanks. Good morning. Just a couple of follow-ups. On your existing acquisition pipeline, is there any carryover from last quarter the $50 million that you had?

There’s carryover, yes.

How much of that 50 would carryover?

I would say, of the carryover, we have about $40 million. Those projects are newly constructed that are currently under construction or one just recently completed construction in January and the others are currently under construction that sort of time that we would be a take out at certificate of occupancy on that 40 – approximately $40 million.

Got it. Okay. You talked about acquisition cap rates if you’re underwriting at 7% to 8% for assisted living, 9% for SNF. But can you also tell us about coverage levels, I’m sorry, please go ahead.

1.5 – well, 1.5 times coverage on skilled after a 5% management fee and one point from stabilized and 1.2 times stabilized for private pay assets.

Okay, pretty much where you have today.

Correct.

On the Sabra Health Care capital merger yesterday, I think, increased scale, improved cost of capital and diversification of assets were cited at the few reasons for the – moving forward. It doesn’t sound like you’re really concerned that much about scale or cost of capital, but what about diversification, the first tenant diversification or ad type?

Well, as Clint said, I think of our activity two or with current operators [Multiple Speakers] current operators and two with new operator. So those new operators will further dilute our top three or five. And they’re the ones that we’re doing with current operators are not significant in our top three. So it is diluting our exposure to our top operators and we’re bringing new operators in, and diversifying types of assets, where we’re still going to be very nicely diversified between private pay and skilled nursing. We continue to look at behavioral, but it’s not as important to us right at the moment. I think we’re very happy with our asset allocation and our operator allocation.

Do you have any internal goal and time line as far as getting any particular tenant below 10% or your top line below 15%. Any internal goals that you can share with us?

No. No not – we don’t have set goals and we’ve said broadly that we would like to see no one operator be over 10% of our revenue. But we’re not going to do a transaction just to get there, we believe that will involve naturally over time and with us sourcing new operator relationships, I think, we’ll get there. But conversely, if one of our top operator say preferred, came to us and said a prestige, came to us and said, we have another $150 million transaction we’d like to do with you. Our strategy – our conservative strategy would – it would be difficult for us even though we love the operator. And we think that they’re probably the one of the best operators in the industry to do that transaction. So conversely, you’re probably not going to see us following a lot of money into one of our top three to five operators.

Okay. And then, Wendy, the last quarter, you discussed some of your operators having discussions with you requesting a more flexible leisure term. And I’m wondering what your updated views are on this particularly since the last call?

Well, as Clint said that, we’re offering these two transactions that the operating company can maintain an ownership interest in the assets. We are still not offering sale options at leases that we’ve talked to some people about including the possibility of a purchase option. We have talked about doing leases with CPI, we haven’t done that yet, but we’re still open to transactions that are different than transactions that we’ve done in the past as long as it protects our PC’s long-term and current interests.

Anything on the CapEx front?

CapEx front, no, nothing new on CapEx. It’s pretty well detailed in our – oh, you mean, are we going to add any CapEx? We haven’t talked to anybody recently that needs CapEx that would be revenue enhancing. So, if – as Karin asked about the Sunrise assets, as we get through releasing them, there may be some CapEx that needs to be deployed, but we haven’t evaluated that right at the moment.

Okay, great. Thank you.

Thank you.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Wendy Simpson for any closing remarks.

Thank you, Francesca. Thank you, again, for joining us, and we’ll talk to you next quarter. Thanks very much. Have a great day.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.