LTC Properties Investment Pipeline Valued at $110M While Underperforming Operators Impede Recovery

LTC Properties (NYSE: LTC) leadership doesn’t expect to see a big change to rent deferrals and abatements in the first quarter of 2022 as the real estate investment trust (REIT) awaits more permanent occupancy gains and continues transitioning underperforming facilities.

Despite rent challenges, the Westlake Village, Calif.-based REIT is pleased at the rate it is building and strengthening its investment pipeline, according to CIO Clint Malin – opportunities total more than $110 million in value, encompassing SNFs and private pay across a “geographically diverse” landscape.

CEO Wendy Simpson said “more permanent rent” will be set in the next 12 to 24 months as occupancy returns to pre-pandemic levels. In the meantime, LTC has continued to enhance relationships with existing operators and build new relationships via loan origination.

“We’ve talked to all of our operators and talked to the highest concentration of skilled operators and so far, they’ve been pretty confident for 2022,” said Simpson, referring to rent expectations. “I would be really surprised if we had a material revenue hit.”

Skilled nursing portfolio occupancy increased from 70% in June to 72% in January, Malin said. The REIT has 73 SNF assets in its portfolio and 119 assisted living properties.

LTC missed analyst expectations on funds from operations for the fourth quarter by one cent, while beating revenue expectations by $4.38 million, according to SeekingAlpha.

NAREIT funds from operations (FFO) decreased from $30,439 in Q4 of 2020 to $22,105 during the same financial quarter in 2021. Total revenues for Q4 2021 was $39,441, a decrease from $46,273 in Q4 of 2020.

“The REIT is in the middle of dealing with some troubled operators through rent deferrals and abatements, and this is causing a hit to earnings,” Stifel analysts said in a note issued late Thursday. Issues are expected to continue for the next six to 12 months as earnings are expected to grow less than 1% in 2022 and 4.1% in 2023, according to Stifel.

The REIT maintained a 19 cent per share monthly dividend during Q4 2021, although Simpson anticipates funds available for distribution (FAD) payout ratio to continue declining in 2022 and 2023 – FAD payout decreased from $30,744 in Q3 to $24,023 in Q4.

Lower rental income

LTC attributed lower rental income in its fourth financial quarter earnings call to the transition of 11 properties from Senior Care Centers and parent company Abri Health Services to HMG Healthcare.

CFO Pam Kessler said the REIT doesn’t expect to receive any rent from the properties in the first quarter, approximately $1 million in the second quarter and $2 million in the third and fourth quarter of 2022.

Occupancy for the 11 properties remained at 57% between December 2020 and January 2022.

Abri and LTC entered into a settlement agreement approved by the U.S. Bankruptcy Court for the Northern District of Texas in August, following Abri filing for Chapter 11 bankruptcy protection in April. The group had emerged from another bankruptcy involving Senior Care Centers one month earlier.

Malin said LTC re-leased, or transitioned 18 of 19 former Senior Lifestyle Corp. (SLC) properties in Q3 and expects the last property expected to transition “shortly,” also leading to lower rental income alongside abated and deferred rent across all portfolios.

LTC granted $1.3 million in rent deferrals and $720,000 in abatements to the “same small subset” of operators in the fourth quarter.

The REIT provided a total of $867,000 in deferred rent and $480,000 in rent abatements in January and February. LTC has agreed to continue deferral and abatement through March at $452,000 and $240,000, respectively.

An existing unsecured credit agreement was extended to Nov. 19, 2025 with a reduced aggregate commitment from $600 million to $500 million.

Both transitions mentioned are expected to generate additional rental income in 2022, LTC said in its earnings announcement.

Lower income is partially offset by annual rent escalations and capital improvement funds.

Loan origination and what’s in the pipeline

LTC during the fourth financial quarter originated three mortgage loans totaling $96.2 million, including one secured by a 189-bed skilled nursing facility in Louisiana.

The $27 million SNF loan marks a new partnership with an unnamed regional operator, the REIT said in its Friday earnings call.

“We continue to strongly believe that these types of investments, which are shorter in duration, represent cash flow strategic deals with what we believe to be reduced risk profiles,” Simpson said. “The shorter durations of these investments can act as an inflation rate hedge which is important in today’s market.”

SNF deals are seen in two different markets, according to Malin – older assets coming onto the market from the broker community, and newer assets developed with an 8% yield range.

“People are buying [SNFs] on their belief in what they can do from a pro forma perspective,” Malin said, referring to an operator’s anticipated financial performance.

A diverse set of financial vehicles available for M&A activity makes a difference in current opportunities too, Malin said, naming acquisitions, development joint ventures, mezzanine loans and mortgage loans among them.

“Our current investment strategy focuses on structured finance products, which began as a way to fill the void during the pandemic but has become a creative and successful strategy,” Malin noted.

LTC in the last two years has built up its internal business development team, Malin continued, to provide financing which meets operators where they are at this point in the pandemic.

“Ample liquidity” has allowed LTC to act on opportunities, Simpson added.

The SNF loan is for a three-year term with one 12-month extension option at 7.5% interest.

The other two loans were for 13 assisted living communities in North and South Carolina and a 68-unit assisted living and memory care community in Florida.