May 13, 2019, Alex Spanko, Skilled Nursing News - LTC Properties (NYSE: LTC) late last week announced a plan to sell off the majority of the 23 buildings in its portfolio operated by Preferred Care, Inc., citing the bankrupt provider’s desire to minimize its relationship with the real estate investment trust (REIT).
“We continue to work cooperatively with them to accommodate Preferred Care’s interest in reducing the number of LTC-owned properties under their operation,” CEO Wendy Simpson said during a Friday earnings call with investors and analysts. “As a result, we are pursuing a sale initiative to market the majority of LTC properties currently operated by Preferred.”
Any buildings not sold would be operated by Preferred affiliates, transferred to another operator, or eventually placed on the market, Simpson said.
The announcement marks the latest step in the two parties’ evolving relationship after 33 Preferred properties filed for bankruptcy protection in 2017, citing an untenable number of personal injury lawsuits. As of LTC’s last earnings update in March, the REIT was still deciding which Preferred buildings to keep and which to sell after the provider completed its restructuring efforts, though the operator was paying rent and LTC executives were optimistic about its future.
“Right now, we’re working with them to see if we can accommodate possibly removing some of the buildings from that master lease,” chief investment officer Clint Malin said at the time. “They do want to stay in, and have a viable entity coming out of bankruptcy.”
LTC has already begun the marketing process for the Preferred properties, Malin said Friday, anticipating the first set of offers to start flowing within the next 30 to 45 days. Malin also noted that LTC’s desire to reshuffle its relationship with Preferred predated the operator’s financial woes.
“We actually approached Preferred Care a number of years ago, prior to them filing bankruptcy and even during the course of the bankruptcy, to strategically work with them on recycling capital and selling assets back to them,” Malin said. “So when it comes to the Preferred Care portfolio, it’s something we’ve been looking at for a number of years.”
The Westlake Village, Calif.-based REIT also provided an update on Senior Care Centers, another bankrupt skilled nursing tenant in LTC’s portfolio. A federal judge recently approved a request to extend Senior Care Centers’ deadline to either affirm or reject its leases with LTC through July 2, Simpson said, and the Dallas-based operator is current on its 2019 rent.
“Should we get our properties back, we are prepared to quickly transition them to a different operator,” Simpson said, adding that the provider has been able to make some capital improvements to its properties even during the Chapter 11 process.
SCC filed for bankruptcy in December, blaming high rent burdens; the operator fell about $1.8 million behind in its lease payments to LTC in December in the wake of the filing, and Simpson in March said she does not expect the operator to emerge from bankruptcy as a going concern.
Private equity pricing
During the call, executives also blamed private equity players for cultivating a wide gulf between asking prices in the senior housing and care space and what buyers are willing to pay.
“While we are actively building our pipeline and evaluating multiple opportunities, closing transactions has been slower than we would like as a pricing disconnect remains between buyers and sellers,” Simpson said. “As long as private equity continues to pour money into the marketplace at what we believe are unreasonable valuations and risks, this discount is likely to continue.”
LTC looks to underwrite skilled nursing deals at 1.5 times coverage with a 5% management fee, according to Malin. In addition, LTC has targeted new skilled nursing properties for investment — such as Boonespring of Boone County, a new development in Kentucky that opened in early February — but hasn’t been able to find many attractive options on the open market.
“What we’ve seen over the last year have been a lot older properties in the market, and it has not been our focus, so that’s where we’ve been on skilled,” Malin said. “We have seen things stay on the market a little bit longer because of the disconnect on pricing. And we’ve seen some buildings come back around for the second or third time. So given that, we’re just being very selective and patient waiting for the opportunities for some of those prices to drop.”
That said, Malin hinted that LTC had identified some “interesting opportunities” to pick up newer skilled nursing facilities, and expressed overall optimism about the coming Patient-Driven Payment Model (PDPM) — as well as provider tax bills in Texas and New Mexico that he predicts will bring reimbursement relief to providers in those states.