Following months of strong investment activity, LTC Properties will turn its focus to reducing leverage and supporting operators as they continue to recover from pandemic-era challenges, executives said Friday in a second-quarter earnings call.
The Westlake Village, CA-based real estate investment trust has completed the majority of a $100 million pipeline it detailed last quarter, bringing total investments for the first half of 2023 to $258 million, and making this LTC’s strongest investment year so far since 2015, Chairman and CEO Wendy Simpson said.
Second-quarter investments included a $16.5 million purchase of a 150-bed skilled nursing facility in Illinois, operated by current LTC partner Ignite Medical Resorts, and a $45 million investment in a $54.1 million joint venture acquisition of a 242-unit senior housing campus in Ohio operated by Encore Senior Living, another existing partner.
The activity follows investments of $170 million in 2022. Now the REIT will pivot to paying down its credit line through sales of non-revenue producing assets, Simpson said. It is also optimizing its portfolio, which currently includes 213 properties in 29 states with 29 operating partners, divided equally between skilled nursing properties and seniors housing.
The primary mission for the remainder of 2023 is to focus on “completing our identified asset sales, working with operators who still need some guidance around their focus and establishing permanent rents for properties that are not currently revenue-producing to LTC,” Simpson said in the earnings call. She said activities are aimed at putting the REIT “in a position to refocus on additional growth in 2024.”
SNF loan deferral
Funds from operations held steady for the second quarter 2023, at $27.2 million or $0.66 cents per share, while rental income was down slightly from second quarter 2022.
Net income was down to $6 million, or $0.15 per share, compared to $54 million, or $1.36 per share in second quarter 2022. The decrease in net income is related to the sale of four properties in the same quarter 2002 that led to a net gain of $38.1 million.
Simpson highlighted progress made on ongoing issues with two operators that she said have likely been a drag on its stock price.
The REIT has deferred $1.5 million connected to payments due on a mortgage loan secured by Prestige Healthcare, which operates 15 skilled nursing facilities in Michigan. The state’s two-year, COVID-related delay in Medicaid system rebasing has left operators with cash-flow shortfalls. LTC Properties reported in May that the deferment was to last until September 2023, capped at $300,000 monthly, or about 18% of what Prestige is obligated to pay.
LTC and Prestige recently hammered out an agreement in which LTC will collect 100% of interest due from Prestige in 2023, Simpson said.
Also in the works for the third quarter are previously announced plans to sell or re-lease 35 Brookdale Senior Living communities. The operator in February elected not to exercise its lease renewal option.
Since January 1, LTC Properties has generated $37.8 million in asset sales proceeds overall, resulting in a $15.7 million net gain, Simpson noted. Expected sales proceeds in the range of $50 million to $55 million throughout the remainder of 2023 include a portion of its Brookdale portfolio. Anticipated sales proceeds of $35 million to $40 million will reduce an outstanding line of credit used to fund the investments made so far this year, she said.
“We are confident that between sales of certain properties and new leases on certain properties, we will not experience a decrease in 2024 FFO from the non-renewal of the Brookdale lease,” she added.
The REIT recently reduced the portion of Brookdale communities it plans to sell to 40%, down from 50%, according to Clint Malin, co-president and CIO.
Skilled occupancy recovery a ‘long, slow grind’
The REIT is witnessing improved coverage on its private pay side as a result of growth in occupancy and rates. On the skilled side, ongoing occupancy hurdles may be partly offset by a proposed 3.7% Medicare rate increase announced by the Centers for Medicare & Medicaid Services in April, Simpson said. A reduction in the use of agency staffing could also help bring down operator costs, she added.
But any recovery has been tempered by a recent industry-wide dip in occupancy, especially on the skilled side, influenced by a shift to home- and community-based services, said the REIT’s Pam Kessler, co-president, CFO and secretary. Average occupancy among the company’s skilled nursing operators, representing approximately 93% of same-store beds, has hovered near 70% so far this year (72% in June) compared to an average of 80% occupancy in 2019.
Kessler said the REIT is working with its operators to determine what the long-term trajectory will be in returning to a pre-COVID census — or a new norm. She expects recovery to be a “long, slow grind” — chiefly on the skilled side, and said it is “anyone’s guess” how long it will take.
In the meantime, staffing continues to be a bright spot, with a decrease in the use of staffing agencies among both skilled and private pay operators and increases in pay, according to Malin. It is “never easy in this industry, but obviously better than it was in the first half of this year and in 2022,” he said.
