How do you spell relief in the pandemic? Reducing the rent escalators that REITs charge their tenants. That is precisely what LTC Properties has decided to do in 2021, and we wonder if a few other REITs may follow suit.
Several REITs already agreed to rent deferrals in 2020 as their tenants were struggling with census and operating costs. But those deferrals have to be paid back at some time, since they were simply “deferred.” But under LTC Properties’ plan, the 2021 rent escalator will be cut by 50% and presumably not have to be paid back.
While it may be painful for LTC and its shareholders in the short-term, it was the right thing to do because many tenants really dislike the escalators, even though they knew about them when they sold their real estate, pocketed the cash and entered into the leases. LTC’s first quarter fully diluted funds available for distribution will be down $0.03 per share. Even though that sounds significant, LTC’s share price barely budged on the news.
Will other REITs follow suit? That is impossible to predict, but the first quarter is not going to be a picnic for operators and their landlords even as their staff and residents get the vaccine. Shareholders will understand, and it is the long-term financial health of the operators that will matter most. A little short-term pain for long-term gain?