LTC Properties (NYSE: LTC) gave partial rent deferrals to six of its tenants in April as the Covid-19 pandemic dragged down occupancy and drove up expenses across the board.
The deferrals amounted to $772,000, or about 7% of the total rent the company expected to collect in April. The picture has improved somewhat in the weeks since then, and LTC’s affected tenants have already repaid $137,000 of that total. And LTC only has one rent deferral lasting into the month of May, the company’s executives said during a first-quarter earnings call Monday.
Rent deferrals were likely amid the pandemic’s challenges, according to LTC President and CEO Wendy Simpson.
“Given the current situation, it comes as no surprise that a handful of our partners have requested rent deferrals,” Simpson said on the REIT’s first quarter 2020 earnings call Monday. “We are actively assessing and exploring each request, and are collaborating with our operating partners to make sure we are helping as needed.”
But Simpson also cautioned that LTC believes the second quarter of this year will be even more challenging for its operators than the first. The Covid-19 pandemic did not strike the United States until Q1 was winding down, and providers are incurring significant costs related to procuring personal protective equipment (PPE), cleaning and sanitizing and employee payroll. At the same time, admissions and move-ins are down for many of those operators, reducing revenues.
“As this crisis persists, [PPE] supplies are becoming less scarce, but shortages remain, and the costs have increased beyond anyone’s estimation,” Simpson said. “Employee costs have also increased to an almost unbelievable level.”
Given the uncertainty surrounding the effects of Covid-19 and how long it might last, LTC suspended its full-year 2020 guidance. Overall, the Westlake Village, California-based real estate investment trust (REIT) logged funds from operations (FFO) of $.74 per share for the first quarter of 2020, missing analysts’ expectations by one cent.
LTC’s share prices rose 1.4% to land at $33.96 by the time the markets closed Monday.
Although LTC is shared some heartening information on Monday, where the future lies with regard to the pandemic is very hard to predict. In particular, it’s hard to tell right now how far occupancy might fall — not just for LTC, but for the senior housing industry as a whole.
“While operators and REITs are doing everything they can to stop the bleeding, this is a difficult trend with a big element of vulnerability and defenselessness,” SMBC Nikko Securities America Analyst Richard Anderson wrote in an investor note Monday. “Where it ends is impossible to know, although one could argue that skilled nursing is better protected given the enhancements of the PDPM reimbursement model and the support of CMS, and more broadly, the federal government.”
Good signs to start earnings season
The REIT was the first senior housing owner to report earnings in the Covid-19 era. The fact that more of LTC’s tenants didn’t request rent deferrals is likely a good sign, analysts such as Capital One’s Daniel Bernstein and KeyBanc Capital Markets’ Jordan Sadler noted.
However, the picture could be somewhat rosier for LTC’s skilled nursing portfolio, which makes up nearly 57% of its total revenues.
“We view LTC’s results as generally positive for skilled nursing owners, as tenants are paying rent,” he wrote in a note to investors Monday. “Skilled occupancy will pick up quicker than seniors housing as elective surgeries return.”
A similar line of thinking was also shared by Jordan Sadler, equity research analyst KeyBanc Capital Markets.
“We think the percent of April rent collected could temper fear surrounding SNFs … and we suspect the stock could outperform its health care peers in today’s trading,” Sadler wrote in a note to investors Monday.
Another good sign: LTC is seeing more normal levels of rent payments from operators in the month of May, as its tenants who have paid about 55% of their expected rent and interest as of Friday. The REIT typically receives rent payments through the middle of the month.
LTC is also still waiting to see whether Brookdale Senior Living (NYSE: BKD) will choose to renew its master lease with the REIT, which covers 35 properties in eight states. The company expects that any renewal notice with Brookdale would come in June.
Expect rent deferral and occupancy updates to be major topics as other publicly traded companies report their financials this week. If LTC’s share price bump on Monday is any indication, investors were reassured by the REIT’s performance and the executive team’s insights.
However, LTC did enter the Covid-19 crisis with higher rent coverage than some other REITs in the space.
“LTC is an outlier with EBITDAR rent coverages, averaging 1.22x for assisted living and 1.34x for skilled nursing, so the company is perceived to have a better security blanket in place with regard to potential need for future rent cuts (as opposed to the temporary condition of rent deferrals),” Anderson wrote. “Not every REIT can say the same thing, and it will be interesting how decisive management teams will be to address this issue. In our view, if there was ever a time to ‘kitchen sink’ the situation, that time is now.”
Furthermore, other REITs in the space have significant RIDEA exposure, meaning they will feel more immediate pain from hits to NOI at the property level.
Major challenges remain
While analysts were heartened by some of the rent collection trends, there’s no question that major Covid-19 challenges remain, with occupancy dipping, infections rising, more testing needed and expenses on the rise.
The Covid-19 pandemic and the precautions operators have enacted to mitigate it led to a decline in occupancy of 600 basis points among LTC’s private-pay senior housing operators. Specifically, occupancy dropped from 86% on Dec. 31 to 80% as of April 23.
By the REIT’s latest count, 35 of its properties had reported at least one case of Covid-19. About 7% of LTC’s operators were not able to report the state of infections within their communities, Simpson added. The “cadence” of infections has increased recently, but that may be due to the fact that LTC pushed operators for more data in advance of the earnings call. In the interest of reducing burdens on operating teams, the REIT asked only for reports of larger outbreaks earlier in April.
Though procural of PPE presented the biggest challenge at the outset of the pandemic, LTC’s operators are now more focused on testing for Covid-19.
“If you talk to an operator about their biggest challenge, it’s getting tests and getting the results of the tests,” Simpson said.
And testing will remain a challenge going forward, given the high rate of asymptomatic carriers of the disease. Some of the provider’s operator tenants are testing all of their employees and residents, while others are only testing those that show symptoms, Simpson said.
“It is difficult to compile stats that are comparable when some test 100% [of residents] and some do not,” Simpson said.
While LTC’s operating partners have struggled with unexpected expenses related to PPE and labor, some have found temporary relief in the payroll protection program (PPP), particularly those on the skilled nursing side. The $350 billion program quickly ran out of funds days after its April launch, but was refreshed not long after with another $310 billion.
“It’s too early to tell how much this Paycheck Protection Program has helped defer some of that [cost] increase over time,” Simpson said.
One operator that was approved for a PPP loan is Fields Senior Living, which with LTC developed a 78-unit assisted living and memory care community in Medford, Oregon, as part of a joint venture. That community is nearly ready to start taking residents, but Fields made the strategic decision to delay the community’s opening in order to deal with the pandemic.
Although some banks and private equity lenders are pulling back from senior housing and senior care investments, LTC believes it can help fill the void as long-term investors. But, the company does not foresee closing any new major transactions in the short-term, “given an underwriting and diligence process that is currently broken and restrained,” Simpson said.
In the meantime, LTC is exploring structured finance products such as equity investments, mezzanine loans, bridge loans, construction loans, and unitranche loans.
In the midst of reporting on dollars-and-cents results and future financial considerations, Simpson also emphasized that the most immediate concern is the health and wellbeing of residents and workers in senior living and skilled nursing communities.
“This experience will not be forgotten by any of us,” she said. “The world is currently operating in a unique environment, especially for those of us in the senior housing and care sector. LTC has built a strong operator network and we couldn’t be more proud of the work they are doing, the sacrifices they are making, the care they’re giving and the lives they’re saving.”