LTC Properties: Hard Won Year As Medicaid Rebasing Offers ‘Big Benefit,’ Affecting M&A Alongside Higher Acuity

February 16, 2023

LTC Properties (NYSE: LTC) will see progress from its nursing home operator tenants, as facilities find new ways to drive occupancy, increase revenue and lower costs in the midst of a favorable outlook for Medicaid rates rebasing by states.

“While the road has been long over the last few years, we are beginning to see operating improvements in our portfolio, although we can’t say with certainty how long the 2023 road may be,” CEO Wendy Simpson said during the company’s fourth quarter earnings call on Thursday.

As facilities strive to build up staff and are set to lose out on pandemic-era waivers tied to the public health emergency, some states are offering increased Medicaid rates to deal with the higher cost of care, and these can be a boon for the Calif.-based LTC, officials said.

In terms of how these changes affect rent renewals and potential deals down the line, Medicaid rebasing is a “big benefit” for nursing home operators and their landlords, Clint Malin, chief investment officer, said during LTC’s earning call.

Medicaid rates, coupled with higher acuity services, are reflected in LTC’s investments last year, Malin said.

“Operators are focusing on that higher acuity model and being able to take on patients that are in hospitals or other higher acuity settings,” noted Malin. “We think that has traction. The long term care side has been more challenged with home care, assisted living, and Medicaid waiver programs.”

A large rate increase already occurred last year in Florida, Malin said, pointing to a $293 million bump in the state budget. The real estate investment trust’s (REIT) formed a $62 million joint venture with Georgia-based operator PruittHealth to purchase three SNFs in the state.

Texas is another state many expect will get a Medicaid rate increase, where LTC purchased four newly built Texas facilities in 2Q for $52 million, operated by Ignite Medical Resorts.

“The session ends probably in mid- to end of May. We’ll have to see if a rate increase comes about. Everyone is hopeful that that will happen in Texas,” said Malin during the call.

LTC has a large concentration of skilled nursing in Michigan as well, and here Malin mentioned a beneficial 9% Medicaid rate increase for the state.

Occupancy, operating improvements

Simpson believes its SNF operator tenants will discover ways to improve occupancy, increase revenue and lower costs.

Average monthly occupancy for LTC’s skilled nursing portfolio was 73% in January 2023 – the same as summer and fall months in 2022, Malin said.

LTC reported net income at $17.8 million for 4Q, an increase compared to $12.7 million in 4Q 2021. Higher rental income was due in part to rent received from transitioned portfolios, and rent received from the newly acquired Texas properties, Malin said.

Diluted earnings per share was 72 cents, another jump compared to 56 cents for diluted earnings per share in 4Q 2021.

NAREIT funds from operations was $29.2 million, LTC reported, which is an increase from $22.1 million in 4Q 2021. That translates to 72 cents for NAREIT diluted FFO per common share. NAREIT diluted FFO per common share was 56 cents in 4Q 2021.

FFO earnings per share beat analyst expectations according to a note from BMO Capital Markets. There are “no new problem tenants,” according to the BMO note, a positive amid a still challenging environment.

The post-Covid recovery has been “frustratingly slow,” but there’s a possibility of upside as the environment normalizes, BMO analysts wrote.

Pipeline and investments

Simpson said 2022 was a “hard-won” positive year, with more than $170 million in investments made during 2022 making it the strongest investment year since 2015.

LTC’s business development team is already continuing this momentum into the new year, closing $128 million year-to-date. The team is working to identify additional opportunities to “fill the “financing void” for operators as a creative and flexible source in the marketplace.

Moving through this year, the REIT will remain “judicious capital allocators,” Malin said. Banks are lending at higher rates, thus making Simpson’s comments on a creative and flexible source of funding even more important as a point of pride against competition.

All potential transactions so far this year are off-market, he added, and are expected to close shortly; deals span a variety of financing vehicles and property types.

Post-4Q deals were all assisted living and memory care, including a notable 11 properties in North Carolina acquired for $121.3 million.

As of Dec. 31, LTC properties consist of 78 skilled nursing buildings, 137 assisted living assets and 7 “others,” for 222 properties.

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