LTC Properties Undergoes Portfolio Refresh, While Operator Angst May Be in Rearview 

Occupancy gains and sizable SNF transactions highlighted the second financial quarter for LTC Properties (NYSE: LTC), as the real estate investment trust (REIT) seeks to refresh its portfolio with newly-built properties managed by high-performing operators.

LTC CEO Wendy Simpson said occupancy across all assets is “gradually increasing,” while temporary agency utilization drops and rent increases are implemented by private pay operators. Average monthly occupancy for LTC skilled nursing assets increased 1% from 71% in March to 72% in June.

Average skilled nursing occupancy in 2019 was 80%, according to Clint Malin, co-president and CIO for LTC.

“I think summer months typically have been slower, so I think that’s probably a contributing factor,” added Malin.

Still, skilled nursing operators have seen a reduction in temporary staffing costs — what Malin called a positive for properties in occupancy growth at this point in the pandemic. Other positives include stimulus dollars through the employee retention credit (ERC) program.

“Multiple signs are pointing in the right direction, and I believe our industry, and LTC specifically, is successfully emerging from the worst of the Covid crisis,” Malin said. “Favorable demographics and the growing fundamental needs of our senior population speaks to the long-term health of the seniors housing and care industry. I’m confident that much of the angst we’ve managed through is now in the rearview mirror.”

The other factor to think about when considering occupancy in the skilled nursing sector, Malin said, is the cost associated with reopening wings to accommodate more admissions. It’s a balancing act for operators to offset increased costs linked to higher staffing levels and ensuring reopened wings are ready to take residents.

During the second financial quarter LTC acquired four newer skilled nursing centers in Texas for $51.5 million and a combined 339 beds in a deal with Ignite Medical Resorts.

This marks the first time Ignite has entered the Texas market. Ignite CEO and Co-Founder Tim Fields previously told Skilled Nursing News that the Texas properties fit with the company’s strategic growth and vision, with the centers being in four major metro areas and close to large hospitals.

The portfolio was previously operated by Bridgemoor Transitional Care and held in a joint venture with Invesque (TSX: IVQ).

Analysts with BMO Capital Markets see such investment momentum as a positive, while modest new deferrals were announced for smaller assisted living assets. LTC provided $240,000 in abatements for July and agreed to another $240,000 for August and September on two assisted living facilities, along with $150,000 in rent deferrals for the same months, this time on eight assisted living assets.

The Westlake Village, Calif.-based REIT beat Wall Street expectations for the second quarter, with funds from operations (FFO) rising to 64 cents per common share compared to 57 cents during Q2 of 2021.

Net income available to common stockholders surged from $18,126 in Q2 2021 to $54,065 in Q2 of 2022.

Results were impacted by higher rental income, LTC said in its earnings report, and partially offset by the sale of a skilled nursing center and three assisted living communities, in addition to temporary rent deferrals.

LTC owns 53 skilled nursing assets, 99 assisted living properties and one “other” for a total of 153 faciltiies. LTC operators with skilled properties include Prestige Healthcare, Carespring, Fundamental Long Term Care, ARK Healthcare, Genesis HealthCare, HMG Healthcare and Juniper Communities, according to LTC’s portfolio deck.

Shedding old assets, with new properties in the pipeline

Simpson said LTC’s investing goal for many years has been to focus on strong, regionally-based operating providers, and that’s the type of operator they will continue to target in the future. Newly-built properties is another factor, as the REIT seeks to shed older buildings.

That continues with the REIT’s relationship with Ignite, helping the operator break into a new market.

Ignite has done a “very good job” in overall performance on assets prior to the Texas acquisition, Malin said, the operator has forged ahead, beyond LTC’s projections, on occupancy since the deal was complete.

The lease term for the Texas properties is 10 years, with two five-year renewal options and a purchase option between the sixth and seventh lease year. LTC expected to receive about $1 million in rent at each third and fourth quarters of 2022, and then $4.3 million during 2023.

Rent will increase annually on the third anniversary of the lease by 2% to 4% based on the Medicare Market Basket Rate, according to LTC.

LTC provided Ignite with a $2 million, 10-year working capital loan as well.

Also during Q2, LTC sold a 121-bed skilled nursing facility in California for $13.3 million, recognizing a gain on sale of $10.8 million.

Other sales include two assisted living communities in California for $43.7 million and a 74-unit assisted living community in Virginia for $16.9 million.

The skilled property was more than 50 years old, Pam Kessler, LTC’s CFO and co-president noted, and the assisted living communities were about 25 years old.

“We have been very successful at recycling capital into newer properties to further reduce the average age of our portfolio,” Kessler said.

For future transactions, Simpson said LTC is looking for operators that have a presence in their local marketplace, know their markets and aren’t too diluted across different parts of the country.

Head-scratching SNF cuts, manageable Covid cases

Cuts associated with the SNF final rule and the latest Covid surge were top of mind for LTC leaders as well during the earnings call.

Hours after the REIT’s earnings call, the federal government decided on a 2.7% pay bump in SNF payments for 2023.

This reflects a $1.7 billion increase resulting from a 5.1% to the payment rates for SNFs, which includes a 3.9% SNF market basket increase, plus a 1.5 percentage point market basket forecast error adjustment, and less a 0.3 percentage point productivity adjustment.

CMS will also provide a two-year phase-in of an adjustment to the SNF payment rates related to the Patient-Driven Payment Model (PDPM). That will result in a 2.3% cut or an approximate $780 million reduction to FY 2023 payment rates, and a 2.3% reduction in FY 2024, according to a news release.

The agency originally proposed a 4.6% cut related to the Patient-Driven Payment Model in April.

“I do scratch my head at the cuts. I think the timing of them is questionable,” Simpson said on Friday, hours before the final rule was released by CMS. “I don’t understand why the federal government would essentially support this industry through the pandemic and not wait until the recovery has been complete.”

Requests for further comment from LTC Properties on the final rule were not immediately returned late Friday.

LTC leaders haven’t heard that current Covid surges are affecting operators as much as prior variants either. BA.5 and BA.4 aren’t causing as many headwinds for operators as the delta variant did during the first quarter, as staff were out sick and agency use was “quite high,” said Kessler.

Instead, inflation cost pressures and staffing are more immediate concerns for operators, added Malin. He believes the public health emergency (PHE) will provide an opportunity for skilled nursing operators in the meantime, as residents skill in place and avoid rehospitalizations.

A slowdown in the economy might help with labor problems as well, Kessler noted.

“While there is still some heavy lifting needed by our operators to return to a pre-pandemic environment, including occupancy and rent increases, a more permanent solution to ongoing staffing issues and an easing of the inflationary pressures being felt by us all, we are steadfastly moving in the right direction with a strong sense of hope for the future,” said Simpson.

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