LTC Leaders: Bank Caution on SNFs Drives Opportunity, Operators Poised for Margin Improvement

Leaders with LTC Properties (NYSE: LTC) see opportunity in a fluctuating bank lending environment, with maturities coming due for operators at a brisk pace and interest rate increases causing a fair amount of anxiety among operators and some lenders.

This environment favors real estate investment trusts (REITs) like LTC, which maintain a conservative investment strategy and provide customized solutions for what operators need, CEO Wendy Simpson said in the company’s third quarter earnings call on Friday.

“We are now in the planning stages of building a new pipeline for 2024 and beyond, but will remain a patient investor. We are watching to see what happens with respect to pricing as current loans come due and owners don’t have the resources to refinance,” added Clint Malin, chief investment officer and co-president for LTC. “Broadly speaking, we’re hearing that banks are being more selective about seniors housing and skilled nursing investments, potentially leading to more opportunities for LTC.”

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In terms of operations, Simpson said she expects SNF operators in particular to be in a better position to begin improving margins, with occupancy improving for skilled nursing and seniors housing alike.

“We are happy to see the positive gains the industry has made but are also cognizant that the operators will face some challenges for both seniors housing and skilled nursing, including inflation, insurance premiums. litigation and SNF minimum staffing requirements, which pending the release of the final rule will take several years to implement,” said Simpson.

Leaders at LTC also noted the large amount of comments submitted to the Centers for Medicare & Medicaid Services (CMS) so far on the staffing proposal, and the efforts by the American Health Care Association (AHCA) to rally comments before Nov. 6.

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Malin said the general focus right now is on shaping what a final version of the staffing rule will look like and ensuring it’s phased in for an appropriate amount of time.

Prestige updates

The REIT updated shareholders on a deferred $900,000 in interest payments during Q3 for SNF tenant Prestige Healthcare. LTC and Prestige agreed to a deferment of up to $1.5 million, or up to $300,000 per month for May through September.

Deferred interest payments would have been due on a mortgage loan secured by 15 skilled nursing facilities in Michigan and operated by Prestige.

Subsequent to Sept. 30, the loan was amended, with LTC drawing $2.8 million from Prestige’s $5 million letter of credit to repay all deferred interest outstanding through October 2023, LTC reported during the earnings call.

LTC will draw down approximately $334,000 in November, then the same amount in December to be applied toward interest due on the loan – with loan amendments, LTC expects to receive all contractual interest of $19.5 million due from Prestige this year.

At the beginning of 2014, the minimum mortgage interest payment due to LTC from Prestige will be set based on a current pay rate of 8.5% on the outstanding loan balance; the contractual interest rate on the loan of 10.8% as of Jan. 1 2024 is unchanged, the REIT reported.

LTC expects Prestige’s letter of credit to be replenished next year from retroactive Medicaid funds due to the operator.

All other Q3 transactions were for the REIT’s seniors housing, assisted living and memory care assets.

A productive Q3

Simpson said the third quarter was productive for the REIT, with the company having worked through some “previously identified challenges.” LTC Properties is going into the end of the year on a positive note, she said, with most signs pointing to continued recovery.

LTC reported diluted funds from operations at 65 cents per common share, an increase compared to 65 cents per common share in 3Q of 2022. Net income came in at $22 million for the quarter compared to $13.15 million in 3Q of 2022.

Results beat analyst expectations of 64 cents per share for adjusted funds from operations, according to a note from BMO Capital Markets, with the REIT benefitting from a deferral payment with no new tenant problems, despite a dip in collections.

Higher interest income from financing receivables impacted 3Q financial results, with three SNFs being acquired during the 2022 3Q and 11 assisted living and memory care communities during the first quarter of 2023.

Additional higher interest income from mortgage loan originations in Q1 of 2023, other income from the origination of a mezzanine loan also in Q1 2023, and a higher interest expense linked to increased interest rates and outstanding balance on LTC’s revolving line of credit also played a role in Q3 results, according to a statement from the REIT.

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