LTC Properties came out with its third quarter earnings on October 26, and the REIT’s loan origination program, which grew at a time when making acquisitions did not make as much financial sense, is continuing to pay off. Q3 net income was boosted by higher interest income from a variety of sources. There was financing receivables due to the acquisition of 11 assisted living/memory care communities in the first quarter of 2023 and three skilled nursing facilities in the third quarter of 2022. Higher interest income also came from mortgage loan originations in Q1:23 and a $17.0 million mezzanine loan origination in Q3:23. An affiliate of Galerie Living received that loan to recapitalize and expand an existing 130-unit seniors housing community in Georgia. The loan came with a five-year term at an initial yield of 8.75% and an IRR of 12.0%.
In addition, LTC Properties committed to fund a $19.5 million mortgage loan for the construction of an 85-unit assisted living/memory care community in Michigan. The borrower contributed $12.1 million of equity which will initially fund the construction. Then, once all of the borrower’s equity has been drawn, LTC will begin funding the commitment which is expected to be in early 2024. In a riskier development environment, that structure makes more sense for the REIT. The loan term is approximately three years at a rate of 8.75%, and includes two one-year extensions, each of which is contingent on certain coverage thresholds.
On the other hand, because of higher rates, LTC reported higher interest expense from a higher outstanding balance on its revolving line of credit, which was partially offset by scheduled principal paydowns on the company’s senior unsecured notes.
Turning to the M&A front, the REIT sold five assisted living communities in Pennsylvania and Nebraska with a total of 247 units for $14.1 million, or $57,000 per unit. LTC Properties also entered into agreements to sell seven assisted living communities in its existing Brookdale Senior Living leased portfolio. Four of the properties are in Florida with 176 units and will be sold for $18.8 million, or $106,800 per unit, while the three properties in South Carolina will be sold for $8.4 million. LTC Properties anticipates receiving between $20 million and $21 million in proceeds, net of transaction costs and seller financing, as a result of the sales.
As previously announced, the company re-leased 10 of the 35 properties in the existing Brookdale portfolio under a new master lease with Brookdale. This new master lease includes six properties in Colorado and four in Kansas. The six-year master lease will commence on January 1, 2024. Rent in the first year is set at $8.0 million, escalating by approximately 2% annually. The lease also includes a purchase option that can be exercised in 2029. LTC agreed to fund $4.5 million for capital expenditures for the first two years of the lease, at an initial rate of 8%, escalating by approximately 2% annually thereafter.
Then, subsequent to the quarter end, LTC amended the new Brookdale master lease to add seven additional properties that are currently included in the original Brookdale/LTC portfolio. Six properties are in Texas with 235 assisted living units, with one 42-unit AL community in Ohio. As a result of the amendment, Brookdale will operate 17 properties under the new master lease with the initial annual rent of $9.3 million and the capital expenditure commitment will be $7.2 million. Additionally, the new master lease provides Brookdale with a purchase option on these seven properties.
Brookdale obviously is not getting all of the properties back in its orbit. Also subsequent to quarter end, LTC Properties leased six former-Brookdale assisted living communities in Oklahoma with 219 total units to a current LTC operator under a new master lease, which is expected to commence on November 1, subject to the issuance of licensure to the new operator. The lease term is set for three years with one four-year extension period and first year rent at $960,000, which increases to $984,000 in the second year and to $1.2 million in the third year. Additionally, the master lease includes a purchase option that can be exercised starting in November 2027 through October 2029 if the lessee exercises its four-year extension option.
Rent collection is still an issue in the industry, although it is improving. The REIT received the full deferred rent repayment of $384,000 related to a master lease on three assisted living communities with a total of 258 units. However, it provided $645,000 of abated rent during the third quarter of 2023 and $215,000 of abated rent in October 2023 to the same operator for whom abated rent has been previously provided. LTC has agreed to provide rent abatements up to $215,000 per month through the end of 2023.
The company also deferred $900,000 in interest payments in the third quarter under an agreement to defer up to $1.5 million, or up to $300,000 per month for May through September 2023, in interest payments due on a mortgage loan secured by 15 skilled nursing facilities in Michigan and operated by Prestige Healthcare. Subsequent to September 30, 2023, this loan was amended, allowing LTC to draw $2.8 million from Prestige Healthcare’s approximate $5.0 million letter of credit to repay all deferred interest outstanding through October 2023.
Plus, LTC will draw down approximately $334,000 in each of November and December 2023 to be applied toward interest then due on the loan at that point. As a result, LTC expects to receive all contractual interest of $19.5 million due from Prestige Healthcare in 2023. Effective January 1, 2024, the minimum mortgage interest payment due to LTC will be set based on an annual current pay rate of 8.5% on the outstanding loan balance. The contractual interest rate on the loan of 10.8% as of January 1, 2024 remains unchanged. From the retro-active Medicaid funds due to Prestige Healthcare, LTC expects the letter of credit will be replenished in 2024 and Prestige Healthcare will be able to pay all contractual interest during 2024 and 2025. That is some good news, provided the operational and economic conditions continue to improve.
