Real estate investment trust LTC Properties (NYSE: LTC) is trying to think and act “outside the REIT box” as Covid-19 continues to pressure its operators, with efforts such as a Smart Design initiative to modernize communities.
Meanwhile, the Westlake Village, California-based company continues to work through challenges with some tenants, notably Senior Lifestyle. In the third quarter of 2020, LTC received rent payments from Senior Lifestyle of about $3.3 million against an obligation of about $4.6 million, LTC CEO Wendy Simpson said Friday on the company’s Q3 earnings call.
Despite the write-offs that LTC has taken related to unpaid rent since the pandemic started, Simpson is heartened by recent trends.
“We continue to see signs of progress within our portfolio and throughout the industry as a whole,” she said.
Among these positive developments is the federal financial support for private-pay assisted living providers, which began to flow in the third quarter. Further funding is likely, according to American Health Care Association/National Center for Assisted Living President and CEO Mark Parkinson, who spoke as a guest on the LTC earnings call.
Parkinson laid out different potential scenarios depending on who wins the Presidential election, and he acknowledged that by taking federal relief dollars, the assisted living sector may have opened the door to more regulation. But he thinks limited, targeted regulation is more likely than a comprehensive and burdensome framework.
Senior Lifestyle transitions
In the third quarter, LTC collected 94% of rent owed. That reflects $690,000 of abated rent, $326,000 of deferred rent, and $1.3 million of delinquent rent owed by Senior Lifestyle, BMO Capital Markets analyst John Kim explained in a note to investors.
Excluding Senior Lifestyle, third-quarter rent collections were down 200 basis points sequentially, showing “broader tenant pressure,” Kim noted. Still, the REIT’s balance sheet remains strong, with net debt to adjusted EBITDA increasing to 4.6x in Q3 from 4.4x in Q2.
Chicago-based Senior Lifestyle is one of the largest senior living providers in the United States, operating about 175 properties. The LTC portfolio consists of 23 communities, representing 6.7% of the REIT’s annual income.
Last quarter, LTC wrote off $17.7 million in Senior LIfestyle rent. Since that time, the situation has been improving, Simpson noted. In October, Senior Lifestyle paid $1.3 million of its $1.6 million contractual rent obligation. Still, the provider now owes a total of $3.8 million in unpaid second quarter and third quarter rent.
LTC is considering various options for the portfolio, including bringing in some new operators, selling some properties, and retaining Senior Lifestyle as the operator for some of the communities. Negotiations are currently underway, and LTC’s leadership expects the majority of the portfolio to be addressed in the first quarter of 2021.
“As we discussed previously, transitioning this portfolio provides LTC with the opportunity to build relationships amongst several different regional operators, some of whom will be new to LTC and others with whom we have an existing relationship,” Simpson said.
The end result will be in line with the company’s objective of reducing portfolio concentration.
Senior Lifestyle is not the only LTC operating partner under stress. In another example, an operator that is not among LTC’s 10 largest — but has been a “go-to” for challenging situations — began short-paying rent in Q3 and requested deferrals, Simpson said.
In addition to putting this operator on a cash basis and writing off its straight-line balance, LTC agreed to close a Florida assisted living community that had been damaged in recent storms and was attracting the attention of plaintiffs’ attorneys. LTC has not relieved the operator of its future rent obligations.
Excluding one-time write-offs, LTC adjusted funds from operations (FFO) of $0.71 per share just beat analysts’ consensus estimate of $0.70.
Smart Design
Given current challenges in pursuing typical senior living and skilled nursing investments, LTC is looking to various other types of transactions, including mezzanine, bridge and unitranche loans, Malin said.
The REIT also executed two preferred equity deals in the third quarter, investing in a 95-unit assisted living and memory care community in Arlington, Washington, to be operated by Fields Senior Living; and a 267-unit independent living and assisted living community in Vancouver, Washington, to be operated by Koelsch.
And, the company is developing new ways to support its operating partners and increase the quality and value of its portfolio. One example is the Smart Design program being spearheaded by Executive VP and Managing Director of Business Development Doug Korey and VP of Marketing and Investor Relations Mandi Hogan.
The pandemic has highlighted the need for senior living and care buildings to be redesigned in certain regards for increased infection control. Unlike large operators, regional providers may not have the financial and logistical resources to undertake these types of renovations.
“With that in mind, we are partnering with Avenue Development to assist our operators with turnkey and customized retrofitting options,” Simpson said.
These options include touchless equipment, custom dividers, and air filtration systems and technology such as bipolar ionization and ultraviolet sanitation. Indianapolis-based Avenue will handle the retrofitting, while LTC will work financing of the program into current leases or provide flexible lines of credit at attractive rates.
“While Covid was the catalyst for the program, we believe the benefits will serve us well over the long term by helping ensure our portfolio contains safer, more updated assets,” Simpson said.
Outlook from D.C.
Private-pay senior living providers spent months clamoring for financial relief from the federal government, while watching funds disbursed to other types of health care providers. The reason for this delay was mainly because lawmakers are less familiar with assisted living than other parts of the health care continuum, which are regulated and reimbursed by the government, Parkinson said on Friday’s call.
Even after the industry associations were able to convince policymakers to disburse funds to assisted living, significant obstacles remained.
“We ran into a very unique problem,” Parkinson said. “They told us, hey, we don’t even know who the assisted living providers are — we don’t have a list of companies to send funds to.”
Trade associations began working with the Department of Health and Human Services (HHS) to create a database of all the senior living companies in the country, but that effort took time, as well. Assisted living providers finally began receiving money in early September. The good news is that the infrastructure is now in place to tap future funding, which Parkinson is confident will be on the way.
He subscribes to the conventional wisdom in Washington, D.C., which is that Congress will inevitably pass another large stimulus package. If President Donald Trump wins another term, that bill likely will be in the $1.8 trillion to $2.2 trillion range; if the Democrats sweep the election, the bill will be closer to the $3 billion version that the House of Representatives passed in August, Parkson predicted.
Liability protection is a thornier issue, with the Republicans supportive of such measures and the Democrats more reluctant. But some Washington insiders believe that Democrats do see the necessity of protecting businesses from lawsuits related to Covid-19, and that if the party prevails in the elections, lawmakers might press for a more modest stimulus bill with some liability protections during the lame duck session of Congress, before pushing through a larger stimulus after the new administration takes office.
On the question of whether assisted living providers should expect more federal regulation as a result of taking Covid-19 relief money, Parkinson said the trade associations did weigh this possibility. They decided that the need for the money outweighed the risks of subsequent regulation.
“We’ve opened up the door to a discussion about it by accepting the funds,” he said.
If federal regulation takes shape, he expects that it might involve some level of minimum regulation across every state, with infection control being an area of particular focus. For example, regulation might mandate that every assisted living community have an infection control program or a stockpile of personal protective equipment.
“I don’t think that there will be the kind of regulatory scheme that nursing homes have suffered under for so long,” he said.
Access to Covid-19 tests has also greatly improved since the early days of the pandemic, and Parkinson is also encouraged by the plans put forward by the government to distribute Covid-19 vaccines in senior living when they are available. He pointed to the effort involving Walgreens and CVS to administer vaccines in senior housing and care communities, and he is hopeful a vaccine will be approved by the end of the year.
“I think there is a possibility that all of our residents and all of our staff will be vaccinated in January and in February, and it will create this wonderful time … where we will be able to say to people, the safest place in the country for an older person right now is in one of the long term care facilities that are out there,” he said.
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