With New Operators in Tow, LTC to ‘Dig Deep’ to Find Deals

With some of its more troubled senior housing tenants on better footing now than in the past, LTC Properties (NYSE: LTC) plans to spend 2020 looking for new opportunities — but current market conditions are all but certain to complicate that goal.

The challenge is that, in many markets throughout the U.S., pricing for new deals remains “fairly tight,” according to LTC Chairman, CEO and President Wendy Simpson.

“It bears repeating that the market has not changed meaningfully since our last call, and early indications show that we will have to dig deep to find the kinds of transactions that best benefit our shareholders,” Simpson said during a fourth-quarter 2019 earnings call Friday. “Older properties have unattractive cap rates, and newer properties are priced well above replacement cost.”

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To mitigate those market conditions, the Westlake, California-based real estate investment trust (REIT) will focus on building relationships with regional operators and offering flexible and creative lease structures that set them up for success, Simpson continued. Currently, the REIT is evaluating a “wide swath” of financing opportunities, including construction, broken deals, turnaround properties and stabilized properties along the care continuum.

The REIT made good headway on forging new relationships last year. Of the $81 million worth of investments that LTC completed in 2019, all but $7.5 million of that total was with operators new to the company. Those newcomers included Lawton, Michigan-based Randall Residence; Christianburg, Virginia-based English Meadows; and Ignite Medical Resorts, an Illinois-based operator of post-acute care facilities.

At the same time, the company is offloading properties that don’t fit its current strategy.

In the fourth quarter of 2019, LTC sold a hurricane-damaged property in Texas, resulting in a net gain of $1.3 million with insurance proceeds factored in.

The REIT also sold two communities that were not generating revenue: a 160-bed skilled nursing facility in Arizona, and a 140-unit independent living community in Texas. LTC sold the communities for an aggregate sale price of $7.3 million, amounting to a cumulative loss of $3.8 million.

All told, LTC sold $16 million worth of properties last year, and the REIT is on track to blow past that total this year, provided that it sells its Preferred Care portfolio as it plans to do, Simpson said.

By its most recent count, LTC had 106 senior living communities and 92 skilled nursing facilities with 30 operators in 28 states.

Occupancy for its senior living properties held steady sequentially, up from 86.9% in the second quarter of 2019 to 87% in the third quarter, according to a Dec. 31 investor document. The same was true for its skilled nursing portfolio, which ticked up 10 basis points to land at 78.7% in the third quarter of 2019.

LTC on Friday logged a funds from operations (FFO) of $0.81 per share for the fourth quarter of 2019, which beat analysts’ expectations by five cents.

Operator improvements

In past quarters, LTC reported that it was working toward a resolution with some of its previously troubled operating partners. That trend continued Friday.

By the end of 2019, LTC had collected 45% more rent than in 2018 from its portfolio managed by Lake Oswego, Oregon-based Anthem Memory Care. The operator ran into difficulties in 2017 that caused it to fall in default of its lease — but those challenges have steadily improved, Simpson said.

“We expect to collect $9.9 million of rent from Anthem in 2020, which is a 32% increase,” Simpson said.

The properties that LTC transitioned away from Thrive Senior Living last year are also improving. Those properties are now in the hands of Trilogy Management Services, Veritas Healthcare Group and Affinity Living Group.

“Former Thrive assets will yield higher cash rents in 2020 over 2019,” Simpson said. “This portfolio is just one example of how we’ve used our solid and robust network of original operating relationships to quickly transition properties and portfolios where needed.”

The trend of improvement also extended to Preferred Care and Senior Care Centers, two skilled nursing providers that caused the REIT heartburn in previous quarters.

Senior Care Centers, which is currently navigating bankruptcy proceedings, paid LTC its past-due rent and legal fees, to the tune of $2.5 million more than it paid in the fourth quarter 2018. LTC is currently monitoring the operator’s progress, and has a plan in place to transition those properties to another operator should the need arise.

“Senior Care continues to get short [court] extensions to emerge as they work to finalize their exit financing,” Simpson said. “Currently, we expect their emergence from bankruptcy to be sometime in March.”

Regarding Preferred Care — which in 2017 filed for its own Chapter 11 bankruptcy — a $2.5 million shortfall in rent in the fourth quarter of 2019 canceled out the rent increase from Senior Care Centers, executive vice president and chief financial officer Pam Kessler said.

LTC is anticipating to offload the majority of the 23-facility Preferred Care portfolio by the end of the first quarter of 2019, with net proceeds for the buildings currently under contract equaling about $59 million. LTC also sold one of the communities last year, and the company is on track to sell the last two communities in the second quarter of this year, according to LTC’s executive vice president and chief investment officer, Clint Malin.

One unknown in LTC’s portfolio is whether Brookdale Senior Living (NYSE: BKD) will choose to renew its master lease covering 35 properties with LTC. Brookdale is currently weighing whether to exercise its first 10-year renewal option, which remains open through the end of June.

But, should that not occur, the REIT is positioned to make do — and potentially even reap the benefits.

“If they elected not to renew the portfolio, that would be most likely a financial pickup for us,” Malin said.

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