LTC Focused on Troubled Tenants, Positioning for Acquisitions

After a year marked by troubled operators and a senior housing acquisition drought, LTC Properties (NYSE: LTC) enters 2019 not quite out of the woods.

“It was one step forward, two steps back on the tenant front for LTC in 4Q18,” analysts with financial services company Mitsubishi UFG Financial Group (MUFG) wrote, commenting on the quarterly earnings results released Thursday.

Going forward, the Westlake Village, California-based health care real estate investment trust (REIT) is looking to transition struggling properties to new operators, as well as strategically modify its health care portfolio, executives said on a conference call Friday morning.

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For the quarter, the company reported total revenue of $43.6 million, up from $41.7 million in Q4 2017. Rental income, however, fell from $34.1 million a year ago to $32.8 million in Q4.

Funds from operations (FFO) was $29 million, a $1.4 million decrease from the previous year due to nonpayment of December rent from troubled skilled nursing tenant Senior Care Centers.

LTC Properties issued 2019 guidance for FFO to fall between $3 and $3.02 per share.

Operator struggles dominated the quarter

The big news from the call is the company is preparing for life without Senior Care Centers. The Dallas-based senior living and skilled nursing operator filed for Chapter 11 bankruptcy protection last December.

LTC does not expect Senior Care to exit bankruptcy as a viable, ongoing concern and is in the process of transitioning the 11 Texas skilled nursing facilities Senior Care operates to another Texas-based operator, LTC Properties CEO Wendy Simpson said.

“It is still very early in the process,” she said. “Any lease transaction with a new operator is subject to bankruptcy court approval.”

LTC Properties is also grappling with the rent struggles of another operator, Thrive Senior Living. The Atlanta-based operator exhausted $1.4 million in deferred rent provided by LTC Properties in Q2 2018, well before Thrive was able to stabilize the six assisted living and memory care communities it operates.

Compounding matters, Thrive short paid its contractually obligated rent last November and did not pay any rent to LTC last December — a total of $619,000 which Simpson believes is collectible. Thrive also failed to pay rent in January and February.

As a result, LTC Properties issued a reservation of rights letter to Thrive, is pursuing options related to the non-payment and is no longer accruing contractual rent. But there are some guarantees in place.

LTC Properties anticipates cash rent to be $1 million this year, should the properties remain with Thrive, Simpson said. Annual GAAP rent under the Thrive master lease is estimated at $7.2 million, and the net book value of the properties was $81.7 million at the end of Q4.

LTC Properties is weighing its options with Thrive, Simpson said. These could include ongoing negotiations with the operator, transitioning some or all of the portfolio to other operators, or a combination. Simpson compared the Thrive situation to what the company went through with Lake Oswego, Oregon-based Anthem Memory Care last year.

Anthem stabilized the 11 LTC communities it operates and agreed to a contractual rent for 2019 of $7.5 million, 45% higher than last year. LTC continues to monitor ongoing improvements and will revisit appropriate rent levelt for its Anthem portfolio in Q4 2019.

“I believe we will find a successful resolution [with Thrive] that is in the best resolution of all parties, including our shareholders,” Simpson said. Generally, LTC believes that Thrive is a capable operator, Simpson said, adding that she could not comment on whether the issues at the LTC properties extend to other properties operated by Thrive, which has an overall portfolio of more than 20 communities.

The issues with the LTC-owned communities are isolated, Thrive President Les Stretch told SHN last November.

In its analysis of the earnings, MUFG observed the Thrive nonpayment may raise questions on the future of these assets, as two prior opportunities to transition to new operators have failed.

Another positive from the earnings report was LTC Properties’ sale-leaseback deal with Virginia-based operator English Meadows Senior Living last month for a 74-unit assisted living community in Abingdon, Virginia.

The company was quiet on the acquisition front in Q4, as it believed pricing was elevated due to seller expectations and investor demand for portfolio sales. But buyer-seller disconnect is growing, and as smaller sellers adjust their expectations, it will open up acquisition opportunities for LTC Properties, Simpson said.

The company plans to be strategic in its acquisitions and dispositions moving forward, Simpson said. In the meantime, the firm is content to strengthen its balance sheet, leases and relationships with its operators.

“Being a patient capital provider does not mean being stagnant,” Simpson said.

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