It is usually the larger REITs that are the first out of the block with their quarterly earnings reports, so it was nice to see LTC Properties be the first one this time. And a week before the others. With a stock market capitalization of just $1.4 billion, LTC prides itself on being nimble and customer-centric. In today’s “new normal,” that is crucial.
Pretty much every REIT has had its tenant problems this year, with some issues already present before the COVID-19 crisis hit the industry. The pandemic has just amplified existing problems. LTC’s second quarter performance was partially impacted by its “old news” story with Preferred Care, a situation that was mostly dealt with in the first quarter. But what really impacted the results, from an accounting perspective, was a $17.7 million write-off of straight-line rent receivables and lease incentive balances from Senior Lifestyle Corporation (SLC), plus a $600,000 loss on the liquidation of an unconsolidated joint venture with an affiliate of SLC.
It turns out SLC did not pay its full rent in May and June, paid $1.8 million out of $4.6 million owed in the second quarter and has paid just $1.1 million of what was due in July. We are not sure how much is COVID-19 related or some operational issues, but most likely both. Part of this has been offset by forfeiture of security deposits and other guarantees. The leases have gone from straight-line to a cash basis for accounting purposes, and it is likely LTC will recoup the balance owed at some point. But this is certainly not a good sign for the seniors housing industry for privately-owned SLC to be having problems making lease payments on the 23 properties owned by LTC. The two companies are in discussions to see whether it makes sense to find new tenants for some of the buildings, sell some of them off, or keep a portion with SLC. It must be a fluid situation.
LTC management has been on top of the problem, and they don’t see it as impacting the viability of their current monthly dividend. On other news, subsequent to the close of the quarter, LTC consolidated four leases with Brookdale Senior Living into one master lease that covers 35 properties in eight states, extending the term to the end of 2021. Brookdale now has three renewal options, including a four-year renewal option, a five-year option and a 10-year option. Brookdale has certainly been getting its leases in order.
In other news on the earnings call, they reported that LTC’s private pay portfolio occupancy had declined from 83% on March 31 to 77% on July 17, but that the June 30 occupancy was also 77%, so it has stabilized. Skilled nursing occupancy declined from 80% on March 31 to an average of 72% effective June 30, with just a small slippage in July. These are significant declines and more in line with what we have been hearing anecdotally as well as some of the monthly reports from other REITs. The good news is that lease coverage is still comfortably positive for the entire portfolio.
LTC also did something new which a few of the other smaller REITs plan to do on their upcoming earnings calls as well. They had Lynne Katzmann, founder and CEO of Juniper Properties, as a guest speaker to give the provider’s take on what is going on in seniors housing with COVID-19. Most investors and analysts don’t get top talk with private company CEOs, so we are sure it was helpful to hear what she has been doing. She was asked what two or three things would be the most important to happen to the industry. She said funding for rapid testing and access to it, being prioritized for a vaccine, and getting liability protection. That would certainly be a great trifecta.
Next week we hear from Healthpeak Properties, Welltower, Omega Healthcare Investors, Sabra Health Care REIT and Ventas. It will be a very busy week.
