LTC’s Simpson: Private Equity Driving Unreasonable Valuations, Thrive in Default

A persistent pricing disconnect in the senior housing M&A market is limiting acquisitions for LTC Properties (NYSE: LTC), CEO Wendy Simpson said Thursday in announcing Q1 2019 earnings. The Westlake Village, California-based real estate investment trust (REIT) is taking advantage of current market dynamics to sell some properties and also has been trying to resolve challenges with several of its operating partners.

Notably, LTC on April 5 issued a notice of default and demand for payment to Atlanta-based Thrive Senior Living, which has been operating six struggling properties and was granted a rent deferral last year.

Thrive has paid back $1.4 million in deferred rent, caught up on 2018 rent owed, and has paid its 2019 property tax escrows, but has not paid 2019 rent totaling $2.6 million, Simpson said on Friday’s earnings call with investors and analysts.


LTC has entered into letters of intent with two regional operators to take over five of the buildings, and engaged a broker to market the sixth community, in Jacksonville, Florida.

Despite the Thrive default and some ongoing challenges elsewhere in the portfolio, LTC’s Q1 funds from operations of $0.75 per share beat analysts’ consensus expectations, and LTC’s shares were trading up 0.51% at market close on Friday.

Acquisitions still elusive

After a period in which they drove senior housing dealmaking, REITs began to pull back from acquisitions around the end of 2015. Since that time, private equity has stepped up as a buyer, and a number of REIT executives — such as Rick Matros, CEO of Sabra (Nasdaq: SBRA) — have described being essentially priced out of the market.


This situation still has not changed, Simpson said on Friday.

“As long as private equity continues to pour money into the marketplace at what we believe are unreasonable valuations and risks, this discount is likely to continue,” she said. “However, as we did in 2018, we are strategically assessing this market to monetize some of our properties.”

And LTC has executed on a few deals, including a $16.9 million joint venture with English Meadows Senior Living that closed during the first quarter. That transaction involves a 74-unit assisted living and memory care community in Abingdon, Virginia.

LTC has development projects in the works as well. These include a 110-unit independent living/assisted living/memory care project operated by Tealwood Senior Living that opened a few weeks ago and is 10% occupied. A 78-unit assisted living/memory care community in Oregon is slated to open later this year, to be operated as part of a larger campus by Fields Senior Living.

A 143-bed skilled nursing facility development in Kentucky opened in early February and is 45% occupied, ahead of pro forma projections, LTC Executive Vice President and Chief Investment Officer Clint Malin said.

Portfolio in transition

The situation with Thrive has been brewing for several quarters.

LTC issued a $1.4 million rent deferral in Q2 2018. Last August, Malin expressed confidence that Thrive would be able to pay back the deferred rent, considering that the operator has a sizable portfolio outside its LTC relationship that includes equity stakes in some communities. As of that time, Thrive operated 22 communities in total and had six under development.

Now, Thrive has indeed paid back the deferred rent, but operating these buildings in the future does not appear to be in the cards.

The portfolio is fairly dispersed geographically, and LTC believes that operators with a more regional focus will be better suited to manage through the challenges facing these properties, Malin said during Friday’s call.

LTC is also transitioning to new operators in other parts of its portfolio. Skilled nursing provider Senior Care Centers is currently in the Chapter 11 bankruptcy process, and LTC is prepared to bring new management into the 11 Senior Care Centers buildings it owns, when and if the legal proceedings allow for it, Simpson said.

Another skilled nursing operator in LTC’s portfolio, Preferred Care, filed for Chapter 11 in 2017. LTC is currently pursuing sales of the majority of these buildings, and those remaining under the REIT’s ownership could be transitioned to other operators, among other potential outcomes.

In 2017, LTC issued a default to Lake Oswego, Oregon-based Anthem Memory Care, which operated 11 communities under a master lease. Now, Anthem is on more stable footing, and LTC projects a 45% increase in rent compared with 2018.

“Any revision in contractual rent cannot realistically be calculated until all of the properties have been stabilized for a period of time, so it will likely be late in 2020, before we have greater visibility on stabilized rents going forward for Anthem,” Simpson said.

Simpson remains optimistic that LTC will be well-positioned with new operator relationships and will be able to execute on opportunities as the M&A market conditions improve.

“We’ve had a lot of work to do and progress is being made,” she said.

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