Covid-19 Could Put Other REITs in Similar Triple-Net Predicaments as LTC

The issues faced by LTC Properties (NYSE: LTC) on a lease with an affiliate of Senior Lifestyle Corp. in the second quarter of 2020 may be a sign of things to come among other real estate investment trusts in the senior living industry, especially if occupancy deteriorates further in the months ahead.

Westlake Village, California-based LTC collected 92% of rent from its operating partners in the second quarter of 2020. Not counting Senior Lifestyle, the company would have collected 99% of its rent due in the second quarter. In the second quarter, LTC wrote off $17.7 million of non-cash, straight-line rent receivable and lease incentive balances related to its lease with Senior Lifestyle.

The non-recurring write-off was related to a shortfall in May and June rent payments, the company noted. LTC placed Senior Lifestyle on a cash basis as of July 1.

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As of last year, Senior Lifestyle was the eighth-largest U.S. operator, with nearly 200 properties. The company did not immediately respond to requests for comment from Senior Housing News.

Joining LTC executives on Friday’s second-quarter earnings call with investors and analysts was Juniper Communities Founder and CEO Lynne Katzmann, who shared the Bloomfield, New Jersey-based company’s perspective on mitigating the pandemic’s challenges, and some of what it has learned so far.

Triple-net trend?

Senior Lifestyle operated 23 of the 180 total senior housing properties in LTC’s portfolio as of June 30. The operator’s total quarterly rental obligation to LTC is approximately $4.6 million. As of the end of the second quarter, LTC received a total of approximately $1.8 million in rent from Senior Lifestyle, leaving $2.8 million outstanding.

“In cooperation with Senior Lifestyle, we are evaluating our options for the portfolio, which may include seeking new operators for the 23 properties, and/or pursuing sales of some of the 23,” LTC Chairman and CEO Wendy Simpson said during the call.

LTC also consolidated four leases covering 35 properties with Brentwood, Tennessee- based Brookdale Senior Living (NYSE: BKD) and assembled them in one master lease while extending the term by one year, to Dec. 31, 2021. The economic terms of rent under the new lease are the same as the consolidated terms under the previous four separate lease agreements.

Brookdale recently restructured its leases with Chicago-based Ventas (NYSE: VTR).

As of July 17, LTC’s total private-pay senior housing occupancy was 77% — but that is only counting 72% of the REIT’s total private-pay units, as not all operators gave the REIT this data on a voluntary and expedited basis. That’s down from the 83% occupancy LTC’s private-pay senior housing portfolio logged on March 31, 2020.

LTC may not be alone in its need to alter leases or grant rent relief to operating partners. Other REITs may encounter similar troubles as Covid-19 continues to wreak havoc across the country. Part of the problem is that many senior housing triple-net leases were set at fairly tight coverage ratios in the pre-pandemic era, according to RBC Capital Markets Director Michael Carroll.

“[Triple-net leases] have been under pressure for the past few years because of elevated supply in the space, and that has been slowly eroding some of those coverage ratios,” Carroll told Senior Housing News. “And then you introduce a pandemic that will, at least within the near-term, drive significant weakness in results.”

Even if the U.S. largely gets the pandemic under control by the fall, providers are still likely to face a flu season that could cause further occupancy deterioration — and that would spell bad news for companies that are already struggling.

“Some of these troubled tenants, they’re not going to recover as quickly as we would like, just because the pandemic is still here,” Carroll said.

These are trends that were underway before the pandemic started, when publicly traded and private REITs were reconsidering the long-term stability of triple-net leases and pursuing other ways of aligning owner-operator interests. For instance, REITs were bucking triple-net leases and entering into RIDEA structures with senior housing operators at a level not seen for years.

There are still some leaders of REITs that believe in the value of triple-net leases, however. Triple-net leases can be “wonderful products” but must be treated as “living, breathing” arrangements, LTC Properties’ Co-President and CFO Pam Kessler told SHN in January. Another believer in triple-net leases is National Health Investors (NYSE: NHI). Specifically, the company’s leadership believes that having triple net leases in place helped its operating partners access federal funds through the paycheck protection program (PPP) earlier this year.

“The operators own their business. They’re able to apply for the loans because they’re in the ownership seat versus the REIT owning the operations,” NHI Chief Investment Officer Kevin Pascoe said during the company’s first-quarter earnings call earlier this year.

Juniper update

One bright spot in LTC’s senior housing portfolio is Juniper Communities. The company has 21 senior housing communities across the U.S., two of which are leased through LTC in Colorado and three of which are leased in New Jersey.

Juniper was an early proponent of mass testing in senior living, and through an aggressive infection control strategy, has reduced its cases of Covid-19 to zero across its resident and staff populations. The company’s plan centers on five infection control pillars, which are prevention, people, program, place and packaging.

Juniper also has seen success with “bubbling up” its communities, like what it did at Juniper Village at Brookline, a Juniper senior living and memory care community in State College, Pennsylvania. Juniper worked out a deal with an RV dealership near Brookline to rent vehicles, establishing an outpost in the parking lot dubbed “Camp Wellspring,” according to Katzmann.

“We are doing viral testing weekly,” Katzmann said during the earnings call Friday. “But the key to the strategy working is rapid, accurate, affordable and regular testing.”

On the sales and marketing side, Juniper focuses on the “golden triangle approach,” which tasks a community’s executive director, director of wellness and the director of sales and marketing to reach out to prospective residents and their families and work together to close sales.

Juniper has resituated its sales offices, began doing virtual tours and moved its model suites to areas that are more accessible without having to access the rest of the building. The company has also revamped its messaging, and added additional sales support for communities that saw significant reductions in census.

“Our July 2020 digital leads are up 33% over April of 2020, and our July 2020 digital leads are up 48% over July, 2019,” Katzmann said. “So, we are seeing a substantial growth in leads.”

On the staffing side, Juniper moved to train all of its available associates to become universal workers so that they could fill in for one another as needed. The company also gave its staffers benefits for “bubbling up,” and doled out hero pay.

As far as what the senior living industry needs now to be successful, Katzman identified three things: funding for rapid testing, prioritization for a Covid-19 vaccine when it’s available and liability protection to shield providers from lawsuits in the post-Covid era. Simpson agreed.

“We need more support from the government relative to the cost of that testing,” Simpson said. “We can survive this, we can get back to profitability, [but] plaintiffs’ lawyers can take us down for instances that nobody could have expected and nobody could have protected against.”