LTC Properties Trims Operators’ Rent Escalation by Half in 2021

LTC Properties (NYSE: LTC) is offering a reduction on 2021 rent escalators for its operators, the company announced Thursday.

The Westlake Village, California-based health care real estate investment trust (REIT) plans to reduce operators’ 2021 rent escalators by 50% in the form of a one-time rent credit. 

LTC expects the escalation reduction will have an approximately $560,000 impact on its 2021 first-quarter GAAP revenue, and an approximately $1.4 million impact on first-quarter funds available for distribution. The REIT plans to replace the funds with accretive transactions next year.

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While LTC’s rent escalators take effect at different times throughout the year, the REIT is allowing its operating partners to apply the full amount of the reduction to January’s rent in order to aid their cash needs.

The move is aimed at providing financial support to operators amid the pressures and challenges caused by the Covid-19 pandemic, according to LTC CEO Wendy Simpson.

“We have often stated that stronger operators make LTC stronger, and this pandemic has been devastating to all of our operators,” Simpson told SHN. “In formulating a way to provide some level of support to our operators, we arrived at this monetary support while being mindful of shareholder returns.”

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Some LTC tenants have run into challenges related to Covid-19, and thus have fallen short of rent obligations. For instance, Chicago-based Senior Lifestyle paid LTC $3.3 million in rent in the third quarter of 2020 compared with an obligation of about $4.6 million.

Overall, LTC collected 94% of the rent it was owed for the third quarter of 2020, reflecting $690,000 of abated rent, $326,000 of deferred rent, and $1.3 million of delinquent rent owed by Senior Lifestyle, according to a 3Q investor note from BMO Capital Markets analyst John Kim.

LTC’s shares were trading up a slight 0.1% on Thursday at market close.

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With operators across the country facing significant headwinds, LTC’s move could portend similar escalator reductions from other REITs. But Simpson does not believe rent escalators will go away anytime soon.

“This is a monetary support we can provide as we patiently await getting back to a normal operating environment,” Simpson said. “Despite some belief to the contrary, a REIT’s operating expenses rise over time, so rent escalations will likely remain intact to some degree, especially because of the long-term nature of our leases.”

Rent escalation has been a hot topic in senior living in recent years. Some REIT CEOs believe that senior living providers are already saddled with new supply, labor expenses and other challenges that compress their margins.

While that has prompted a move to RIDEA agreements among some REITs, others — like Eric Mendelsohn, CEO of National Health Investors (NYSE: NHI) — have favored taking a different approach to triple-net leases that lessens overall risk to operators. 

“NHI has been doing things like new leases that have escalators that are much lower than 3%, and often CPI-based,” Mendelsohn told Senior Housing News earlier this year in January. “Conceivably, you have a year or two, if CPI is negative, that your escalators are little to none.”

Triple-net leases that result in coverage of around 1.1x or 1.2x are unsustainable for operators when they encounter headwinds, Sabra Health Care REIT (Nasdaq: SBRA) CEO Rick Matros said during the company’s Q3 2020 earnings call last month. He hopes that lease structures will be different in the future.

“Hopefully, everybody’s learned their lesson,” he said.

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