With its most recent earnings results out, LTC Properties reported a quarter of flux, transition and ongoing rent relief for its tenants. These can all certainly be good things for the company going forward, but we’re sure they would have liked to report some good operating news as well.
To start off, the REIT transitioned 11 assisted living communities previously leased to Senior Lifestyle to two new operators: Randall Residences, which is taking over six of them, and Encore Senior Living which took over the remaining five. This was not new news, as LTC announced the change in its fourth quarter earnings report in February. And the release of the other 12 properties could not come soon enough, with Senior Lifestyle’s nonpayment of its lease obligations in the first quarter totaling $13.65 million in contractual cash rent, net of rent received from releasing the 11 properties.
For the properties going to Randall Residences, five are in Ohio and one in Illinois, and this will bring the total relationship with LTC to eight properties. In the first year, annual cash rent will be $2.7 million, or about $7,850 per unit. This will bump up by 37% to $3.7 million ($10,755 per unit) in the second year, obviously to give the new provider some time to right the ship. This will then be followed by a normalized $3.9 million and the 2% annual escalators after that.
The other five communities will be leased to a new relationship for LTC, Encore Senior Living. All five with 374 units are in Wisconsin, where Encore already operates 34 communities, and LTC likes that regional dominance and local knowledge. For this group, first-year rent will be $2.6 million, or about $6,950 per unit. This bumps up by 27% to $3.3 million in year two, so we assume there is less of a turnaround involved. Year three will be normalized at $3.7 million followed by the 2% annual escalators. In total across the 11 properties, cash rent under these master lease agreements is expected to be $5.2 million for the first lease year, $7.1 million for the second lease year, and $7.3 million for the third lease year, escalating by 2% annually thereafter.
Following Senior Care Centers and Abri Health Services’ bankruptcy filing, LTC also applied their security deposits under the master lease to rent. LTC then sent a notice of default to both, followed by a notice of termination of the master lease which was effective April 17, 2021. The REIT was already in the process of transitioning the portfolio, which numbers 11 properties for annualized GAAP rent of just under $15 million, to Texas-based HMG Healthcare pursuant to a master lease, with the goal to complete the transition by the end of Q2:21.
LTC’s tenant woes continued, with rent deferrals totaling $1.1 million, net of $21 million of deferred rent repayments, through the end of Q1. The company also reduced its 2021 rent and interest escalations by 50% in order to support its operators during their difficult recovery period. These reductions were given in the form of a rent and interest credit, and LTC recognized a decrease of $292,000 in GAAP revenue in the first quarter, with further reductions of approximately $170,000, $34,000 and $32,000 expected in the second, third and fourth quarters, respectively. This is (hopefully) a one-time reduction, but much appreciated by its tenants, we imagine. It is a partnership, after all. On the plus side, LTC did report higher rental income from completed acquisitions, developments and its 11-property relationship with Anthem Memory Care.
As far as liquidity goes, LTC Properties appears to be in good shape, with some $488 million of its line of credit still available. But the REIT has $106.9 million from an unsecured line of credit set to mature in 2022, in addition to $48.16 million of senior unsecured notes, totaling around 23.5% of its total debt. Subsequent to the quarter, LTC paid off $5 million of that unsecured line of credit, so it got a head start.
