The dealmaking environment in senior housing and care continues to limit investment activity for LTC Properties (NYSE: LTC), with even moderately large acquisitions tough to come by. And there are no signs that this situation will change in the near term, according to Wendy Simpson, CEO of the Westlake Village, California-based real estate investment trust (REIT).
“We see some small deals that provide a decent return to us, but relative to spending even $50 million, I don’t see the spreads are getting to our level or the prices coming down,” Simpson said Tuesday during the company’s Q3 2018 earnings call.
After a period of driving senior housing M&A — including through a series of large portfolio deals — REITs have gone to being net sellers in recent quarters, giving way to private equity and other buyers. High prices, a scarcity of sought-after Class A portfolios, and the need to divest nonstrategic and underperforming assets have all contributed to the trend.
LTC underwrote a total of $414 million in investments in 2015. So far this year, that total is $73 million. In the third quarter, the REIT sold two skilled nursing facilities (SNFs) and acquired an 89-unit independent living community. The IL property is located in Oregon; it was purchased in a sale-leaseback executed under a joint venture agreement. LTC contributed $11.5 million of cash and the non-controlling partner contributed $2.9 million in equity.
Even as M&A activity has slowed, LTC is identifying assets for sale to create a less risky overall portfolio and recycle capital, and is actively managing existing assets as well as seeking off-market deals. Ultimately, the cycle will turn, and LTC is well-capitalized to take advantage of opportunities to acquire when that happens, Simpson emphasized.
“Do not mistake our patience for inactivity,” she said.
Anthem’s upswing continues, Thrive not yet thriving
While largely sidelined from acquisition activity, senior housing REITs have had their hands full helping operators through industry headwinds, which have come in the form of oversupply in certain markets as well as tight labor markets.
In terms of its operators, “focal points” right now are Anthem Memory Care and Thrive Senior Living, LTC’s Executive Vice President and Chief Investment Officer Clint Malin said on Tuesday’s call.
LTC issued a monitory default to Lake Oswego, Oregon-based Anthem in August 2017, after the provider failed to pay its rent in full. With 11 properties in LTC’s portfolio, Anthem accounts for about 3% of the REIT’s annual income.
Since last August, Anthem’s performance has steadily improved, and progress continued last quarter. Currently, LTC is in discussions to increase rent expectations for 2019.
Improvements have been harder to come by for Thrive Senior Living. The Atlanta-based provider has an overall portfolio of about 20 communities, of which six are owned by LTC.
Last August, LTC announced that it was granting $1.4 million in deferred rent to Thrive, which was having trouble leasing up some of its properties. That rent deferral was granted through June 30, 2019, but occupancy has not improved much and Thrive has already exhausted that whole deferred amount, Simpson said.
“We had anticipated the deferred rent would provide a longer runway, and that has not materialized,” she said. “We’re working with Thrive to understand the extent to which they can meet 2019 rent obligations.”
Occupancy for the Thrive buildings was at 67% last January, and that had only ticked up to 72% as of October, Malin said. These are “relatively new buildings,” and they could be feeling the effects of oversupply in their markets, he noted, but LTC is trying to assess if there are operational improvements that need to be made.
The issues at these properties are not indicative of more widespread challenges at Thrive, President Les Strech told Senior Housing News. He zeroed in on two memory care properties, in particular.
“In late 2017, we inherited two relatively distressed memory care communities from another LTC tenant into our master lease,” he said. “The turnaround of those communities is still in progress and occupancy is increasing, just not as quickly as we hoped. A few of these are located in increasingly competitive and difficult markets but we have found LTC has been great to work with through the process.”
In September, Thrive experienced the highest single-month, portfolio-wide increase in census in the company’s history, Strech added.
On the skilled nursing side, LTC has exposure to 11 Senior Care Centers properties. The operator is in default with another of its landlords, Sabra Health Care REIT (Nasdaq: SBRA). So far, Senior Care Centers is maintaining acceptable lease coverage with LTC. The REITs leaders met with the operator’s management team last week and is closely monitoring the situation, Simpson said.
In fact, LTC has reached out to other operators to gauge their interest in taking over the Senior Care Centers properties and is poised to take quick action should the need arise.
“I don’t think cooperating with them for a long-term solution may be the right answer if they have these significant problems with the Sabra assets,” Simpson said.
In terms of Q3 financials, LTC posted funds from operations of $29.9 million, which was down slightly from $30.1 million in Q3 2017. This was in line with analyst expectations. Its revenue of $41.8 million beat expectations by $7.56 million. Shares in LTC were up 3.58% in midday trading, at $44.54.
Written by Tim Mullaney