Sell-Off Gives LTC Fresh Cash

Although its industry has plenty of virus-related risks, LTC Properties in Westlake Village has seen its stock steadily increase since mid-March when the pandemic ramped up in the U.S. The senior housing REIT beat analyst expectations for its first quarter earnings report by $1.08 per share. It reported net income of $63.4 million, compared to $20.3 million for the same quarter a year ago. The big number didn’t come from the performance of its nursing homes, but from the sale of facilities. LTC sold off a 21-property portfolio for $78 million in net proceeds. The properties were managed by Preferred Care, a Florida-based operator that filed for Chapter 11 reorganization status in 2017, the result of multi-million dollar personal injury lawsuits in Kentucky and New Mexico, according to a Reuters report. The divestiture of the 21 properties – a series of transactions involving homes with 2,500 beds in Arizona, Texas, Iowa, Kansas and Colorado – plus another $17 million from the liquidation of an unconsolidated joint venture – gives LTC money for shareholders and acquisitions at a time when most of the industry is in defense mode. “The Preferred Care portfolio sale is a solid example of our capital recycling initiative — selling older, less strategic properties and investing in newer assets,” the company told the Business Journal in an email. “We are firm believers in capital recycling and will continue to do so strategically, strengthening the portfolio and investing in newer assets.” The company’s stock plummeted along with the rest of the market in March, but quickly recovered. In one day – between March 17 and 18 – it fell from $30.99 to $24.74, and then climbed back to $42.79 on June 8, its highest point since the pandemic took hold of the country. Shares closed on July 15 at $37.34. In general, REIT shares for companies with sizable senior housing portfolios have taken a nosedive because of contagion concerns and declines in occupancy rates, according to a report from Biznow. Chief Executive Wendy Simpson attributes the company’s success to being well positioned as a mid-size REIT. “Against this challenging backdrop, LTC remains highly liquid and conservatively capitalized, which will allow us to respond to future new business opportunities when the pricing of assets and our investment classes can be reasonably calculated,” Simpson said during the company’s first quarter conference call. “One of our primary goals right now is to further increase liquidity while focusing on maintaining a strong and flexible balance sheet,” added Chief Financial Officer Pamela Shelley-Kessler on the call. “We believe this increased financial flexibility and liquidity will allow LTC to better compete for and complete accretive transactions when the time is right.” Mid-market position “The mid-size REITs are really well positioned in that they haven’t been in the public eye so their share prices haven’t been as impacted, and then they can look at smaller deals – it gives them a leg up,” said Lisa Widmier, vice president of capital markets for senior housing and investment banking at real estate brokerage CBRE Group. “Private equity is best positioned here, but mid-sized REITs that can pay cash for turnaround deals do have an advantage because there is a lack of breach financing currently in the market.” The large REITs such as Welltower will wait for the larger deals, Widmier said, because of their investment parameters. The fact that there aren’t many large deals brokered right now put them in a holding pattern. Mid-size trusts, on the other hand, have already started buying up properties — Widmier pointed to Tennessee’s National Health Investors recent $100 millon line of credit to perhaps do just that. LTC said it is looking to explore other ways to best deploy capital, such as providing structured finance for existing partners, while operators are focused on protecting staff and residents from COVID-19. “These vehicles could include preferred equity investments, mezzanine loans, bridge loans, construction loans and unit tranche loans, which we believe provide a better risk-adjusted return and a shorter investment horizon in today’s environment,” said Clint Malin, chief information officer for LTC, during the conference call. “These solutions can assist operators by providing them with liquidity through releasing trapped equity in their properties, bridging maturing loans while waiting for the market to return to normal, funding construction for shovel-ready projects, funding existing projects where other investors have backed away from their commitments and providing an exit plan for equity investors who may have their own liquidity needs.” Malin added that LTC will look to more traditional acquisitions and development investments long term. “We have capital, we are opportunistic and creative. But we do not seek growth for growth sake and are not going to acquire communities simply because we have funds from a disposition,” the company added in its email, referring to its Preferred Care portfolio divestiture. Industry discount The senior housing industry has been docked 500 basis points overall by capital markets, CBRE’s Widmier said, due to the pandemic. “Not because of a decrease in demand, but because the owners of the communities, the operators, have made a decision not to accept, for some period of time, new residents,” she added. “I can tell you, from our latest data, skilled nursing occupancy eroded further in April from the March time period, because in March we were just starting to feel the impacts,” said Bill Kauffman, senior principal at the National Investment Center for Seniors Housing and Care, a nonprofit focused on investor research on the industry. “We ended the month at 78.9 percent, which was down 441 basis points from March. That’s a really significant decline.” Because of government health orders, there was a several months gap where elective surgeries weren’t taking place. That also contributed to the industry’s financial problem because a lack of elective surgeries means a slowdown on patient admissions to nursing homes, Kauffman told the Business Journal. “Hospitals are a major referral source to nursing homes,” he noted. For REITs, that means depressed activity in mergers and acquisitions, and, just like other industries during the pandemic, exploring other options and getting creative with finances, Kauffman said. LTC has said as much with Malin’s suggestion of mezzanine loans and other financing solutions, offering operators liquidity while waiting on the market to return to normalcy. Simpson called it an “REIT done differently.” “People aren’t entering into transactions because of all the uncertainty,” added Kauffman. “Maybe directly or indirectly, some of the REITs can work with the operators. … The question is, what can they do to help each other?” For LTC, operator support has so far involved helping facilities source personal protective equipment, deferring rent for certain operators and advocating for government assistance.