Leaders with LTC Properties (NYSE: LTC) on Friday expanded more on the company’s joint venture with Georgia-based nursing home operator PruittHealth, while putting recent acquisitions in context of Medicaid rate increases – potential and finalized – across multiple states.
The $62 million JV with PruittHealth to purchase three nursing homes in Florida is the real estate investment trust’s (REIT) latest effort to restructure its portfolio in favor of newer properties, while divesting of older facilities, mostly on the seniors housing side, that no longer fit in with its strategic vision.
LTC’s $52 million purchase of four newly built Texas facilities in 2Q, to be operated by Ignite Medical Resorts, marks another move by LTC to shift its portfolio.
“The Pruitt[Health] investments not only add newer skilled nursing centers to our portfolio, helping lower the portfolio’s average age, but also adds a formidable operator with more than five decades of experience and a substantial footprint in the southeastern United States,” LTC CEO Wendy Simpson said during the earnings call.
Coupled with its purchases in Florida and Texas, LTC Chief Investment Officer Clint Malin, said LTC has been advocating at the state level for Medicaid rate increases as well, particularly in Texas where facilities haven’t seen a rate bump in nearly a decade.
“Any base rate increase in Texas is huge. We had a meeting with the head of the Texas Health Care Association a few months ago,” said Malin. “It’s a substantial amount of time without an increase in the base rate. When you look at that historically, plus all the inflationary pressures that are being experienced from a staffing standpoint, that puts more pressure on the state to look at that at a rate increase.”
The Texas legislature is set to convene in January 2023 to decide on any sort of permanent rate increase; operators in the state are currently running on a 12% temporary bump in Medicaid funding through the end of the year.
“The state is looking at the [federal medical assistance percentage, FMAP] money that’s coming from the emergency health order. They’re looking at potentially continuing that as well,” added Malin. “Those can be additional dollars for the state of Texas.”
Florida, by contrast, has already included a Medicaid rate increase of $293 million in the state budget to go toward nursing center care – that’s about $419,000 per care center. Similar to New York and New Jersey, Florida tied rate increases to employee pay.
“With our recent investment with PruittHealth, the state of Florida’s pretty healthy Medicaid rate that came through is definitely helpful,” said Malin.
Modest occupancy gains, performance
Skilled nursing occupancy has slowly ticked up this year, from 72% in March to 74% in September, Malin said. Average skilled nursing occupancy was 80% pre-pandemic, he added.
LTC reported net income of $13.1 million for 3Q, an increase compared to $10.9 million in 3Q 2021. Diluted earnings per common share was 32 cents, an increase compared to 28 cents in 3Q 2021.
Adjusted funds from operations (FFO) per share for the quarter was 63 cents, missing analysts’ estimate on FFO per share of 64 cents.
While results “modestly missed,” BMO Capital Markets analysts wrote in an investor note, there were no new tenant issues or deferrals reported. No surprises during 3Q was considered a “positive amidst a choppy recovery,” analysts said.
LTC provided $240,000 in rent abatements in October for two assisted living assets and agreed to up to $215,000 in abatements for November and December for the same assets.
“I’m very pleased with our accomplishments under less than stellar national economic conditions,” noted Simpson. “We have put capital to work in our portfolio and maintain a strong and flexible balance sheet. LTC has the ability to meet strong regional operators where they are with financing solutions that best suit their needs.”
It remains to be seen whether occupancy gains and margin recovery will be disrupted by a resurgence of Covid cases and the flu, Malin said.
Currently, increases in such cases have been “one-offs,” Malin told listeners – it’s not something LTC has seen more broadly across the country. Still, the combination of Covid, the flu and respiratory syncytial virus infection, or RSV, could tank occupancy and margins again, Simpson added.
She hopes rising cases won’t result in admission bans again, which proved “very harmful” for both assisted living and SNFs: “If occupancy does not continue to increase or it decreases because of a surge in the fall, that could delay the margin recovery.”
Other LTC leaders believe increased infection prevention protocols as a result of the pandemic will put facilities in a better position.
“I do think the Covid protocols that have taken place the last couple of years definitely have an impact and influence on the overall flu season,” added Malin. “Plus, vaccination rates among residents and patients have been high and vaccination rates among employees have been increasing as well.”
While 86.9% of residents and 86.7% of staff across the nursing home industry have completed their primary vaccination doses, only 39.5% and 25.2% of residents and staff respectively have gotten their booster doses, according to data released by the Centers for Medicare & Medicaid Services (CMS).
LTC continues de-aging its portfolio
The Florida properties in the PruittHealth JV were all built between 2018 and 2021 and offer a combined 299 licensed beds, primarily private rooms, to communities in the northern part of the state, according to Malin.
Selling properties that are no longer core to its portfolio or are underperforming allows LTC to redeploy capital into more strategic assets like those in Florida and Texas while reducing the average age of its overall portfolio, added Malin.
In 3Q, LTC sold a Texas SNF for $485,000 and terminated a master lease covering 12 assisted living communities, transitioning the properties to an existing LTC operator.
A “creative financial package” worked well for PruittHealth, Simpson said, while also making good strategic sense for LTC and its stakeholders.
PruittHealth will have the opportunity to purchase the properties between year three and five of its 10-year master lease with LTC, according to Malin. LTC expects to see $700,000 in net revenue during the fourth quarter of this year, and about $4.6 million from the properties next year.
“Pruitt[Health] is just the kind of operator with whom we like to grow, and we look forward to our ongoing relationship with them,” added Simpson.
Malin said leadership is not prepared to provide granular details on potential divestitures yet, but he expects to see $35 million to $40 million of “capital recycling,” similar to the REIT’s 10-year average.