Company Profile: LTC Stays Nimble

Seniors housing’s eighth largest REIT finds value in being small, agile.

By Jeff Shaw

In an industry with billion-dollar deals and massive REITs, LTC Properties Inc. is perfectly comfortable with its place in the industry. 

The Westlake Village, Calif.-based company is the eighth largest healthcare REIT and 26th largest overall owner of seniors housing in the United States by total units, according to the American Seniors Housing Association’s 2016 rankings. With skilled nursing included, LTC holds investments in 219 properties in 30 states. 

To put LTC’s size into perspective, consider that the equity market cap for Welltower Inc. was $24.2 billion as of Dec. 31, 2016, compared with $1.8 billion for LTC, according to the National Association of Real Estate Investment Trusts.

But LTC’s executives see their size relative to the industry’s REIT giants as a positive, not a negative.

“There’s tremendous advantage to being a smaller company,” says Clint Malin, the company’s chief investment officer and executive vice president. “Given that our target market is regional operators, LTC’s size aligns with the interests of such companies, giving them relevance in our portfolio compared to larger peers.”

LTC was founded in 1992 with an initial capital raise of $150 million. 

The company’s original mandate was to provide mortgages to small skilled nursing companies. LTC later saw the rise of assisted living and began investing in that segment of seniors housing as well.

Eventually the company transitioned from a mortgage REIT to an equity REIT, continuing to invest in both skilled nursing and private-pay seniors housing.

The company financed the construction of and took ownership of assisted living properties during the 1990s. The company switched its focus to acquisitions in the 2000s. Outside of the portfolio from the ‘90s, only a small percentage of LTC’s current balance sheet consists of properties where the company financed construction. 

However, the company began an initiative several years ago to reduce the average age of its portfolio by financing the development of new private-pay assets, and has invested approximately $300 million in this effort over the last five years, especially as assets available for acquisition had became expensive relative to development.

The company recently financed construction of an independent living property, but it is much more heavily focused on skilled nursing, assisted living and memory care. Part of LTC’s goals for development and acquisition is to reduce the average age of its properties.

The executive team has been very stable for several years. Malin, who worked with a lessee of LTC’s at the time for Sun Healthcare, joined the company in 2004.

The company’s current chairman, president and CEO, Wendy Simpson, started as a board member in 1995 before taking on the CFO role in 2000. She was promoted to CEO in 2007.

Pam Kessler, executive vice president and CFO, joined the company as a vice president and controller in 2000, which she described as “a tumultuous time” for the seniors housing industry due to the Clinton Balanced Budget Act and reimbursement changes that bankrupted several skilled nursing providers.

In late 2015, the company hired structured finance expert and Lancaster Pollard president Doug Korey to offer a mezzanine lending platform to operators that has not typically utilized sale-leaseback financing.

It’s good to be small

The company wears its comparatively small size as a badge of honor, and embraces the advantages that come along with that size.

For example, the CEO visits nearly every facility before it is acquired, something that would not be possible as a larger company.

“I see 99.9 percent of the assets we buy — not pictures, but physically going out and seeing them,” says Simpson.

Once a year, for the last several years, the board has visited a community. To Simpson’s surprise, staff members at the communities were not intimidated or annoyed, but happy to have the owners come for a visit.

“They were all so honored that we’d want to see the properties, and the staff was excited to show us around,” says Simpson. “I didn’t think it was so important to the frontline staff to meet the board, but they loved it. Over the past few years, instead of doing a golf outing, we have gone off-site to our communities in Michigan or Cincinnati, for example.”

The company’s size also allows LTC to pick and choose small portfolios and one-off transactions, rather than the massive portfolios typical of the larger REITs. The company’s investments total, on average, $150 million to $200 million annually, Kessler says, smaller than some single portfolios the big REITs purchase.

“If there was one word to describe LTC, it’s ‘opportunistic.’ We don’t have a mandate to invest in any certain way,” says Kessler. “We’re not forced to issue equity in a way that’s not smart at the time. We invest in skilled nursing, assisted living and memory care, and we don’t have a mandate to keep a specific ratio.”

“And we don’t make big promises to the analysts,” adds Simpson. “If you make promises to investors or analysts, you can create misalignment in your investment strategy or pursue deals that you otherwise might not pursue.”

LTC is still subject to the ebbs and flows of the market, of course. The company saw a spike of acquisition activity in 2015 to $414 million, followed by a return to normal in 2016 with $142 million. This reflects the general trend for seniors housing over those two years. (see M&A article, page 56)

The company has managed to hold to a steady return each year and steady growth for several years running, and hopes to hold to that trend.

“In terms of growth, our strategy is being the tortoise,” says Kessler. “We’re happy with slow, steady, measured growth.”

Skilled nursing opportunities

Although LTC followed the general REIT transaction trends in 2015 and 2016, the company separates itself from the other REITs in one key way: While the big REITs dispose of massive skilled nursing portfolios and spin their skilled nursing businesses off into separate companies, LTC has embraced the sector.

The 92 skilled nursing properties that the company owns represent 49.2 percent of its real estate investments and 55.3 percent of its revenue, according to LTC’s fourth-quarter 2016 report.

The company owns 112 assisted living properties; the sector accounts for 46.4 percent of the company’s investments and 41.2 percent of its revenues.

While Malin admits there will always be risk associated with skilled nursing, LTC finds both stability and availability in the sector.

“In the late 1990s, there were a lot of challenges and people thought skilled nursing was coming to an end. Here we sit nearly 20 years later and it’s still a critical component of the healthcare delivery system,” says Malin. “If there are fewer investors, then there will be more opportunities for us — as long as it’s the right relationships and the right assets.”

Representing just over half of LTC’s income, skilled nursing is a safe play because of the company’s strict underwriting standards and the diversification of its operating partners, emphasizes Simpson.

“While we do have some concentration in terms of invested dollars and rental flow, it’s not a bet-the-farm investment,” says Simpson. “Even if an operator went supernova, that wouldn’t be a bankruptcy-type situation for LTC.”

“We stuck to our underwriting, because skilled nursing is the most volatile sector in terms of both risk and reimbursement,” Simpson continues. “We never reduced our criteria.”

LTC takes an opportunistic approach to investing, frequently completing off-market transactions and larger transactions, from time to time, with existing operating partners.

In 2012, the company initiated one of its largest investments at the time: a $125 million portfolio of 15 skilled nursing facilities in Michigan operated by Prestige Healthcare.  Since that time, LTC has committed a total of $197 million to Prestige on this portfolio, including $20 million for major upgrades to two of the older properties.

“Trying to be opportunistic in the marketplace, we had a great opportunity to partner with Prestige in Michigan,” says Malin. “We got a very solid investment, even though it tipped the scales toward skilled nursing.”

Further diversifying its portfolio with existing partners, LTC also acquired $142 million in private-pay assets with Senior Lifestyle Corp., with which LTC already partnered on several properties.

Operating with Prestige

Based on LTC’s fourth-quarter 2016 report, Kentucky-based Prestige accounts for 15.8 percent of LTC’s income, the most of any operator, despite operating the fourth highest number of properties in the portfolio at 22, according to LTC’s fourth-quarter earnings report.

By comparison, Senior Lifestyle Corp. operates 27 LTC properties and accounts for 12 percent of income, and Brookdale Senior Living operates 37 LTC properties and accounts for 9.5 percent of income.

Prestige helped contribute in other ways as well. During LTC’s first-quarter 2016 earnings call, investors were expressing concern about the skilled nursing industry. The board decided to invite Prestige’s CEO, as well as a memory care operator’s CEO, to participate in the call. This allowed investors and analysts to hear directly from operators regarding the industry, and for the operators to answer direct questions from people on the call.

“We don’t have any fear of anybody contacting our operators,” says Simpson. “They’re very sophisticated business people and caregivers. We’ve gone out of our way to make that link to answer our analysts and investors.”

Despite Prestige’s importance to LTC’s portfolio, diversification of operators is equally essential. The company leases its 219 properties to 31 different operators.

By focusing on smaller, regional operators, LTC is able to better wrap its arms around its wide geographic spread of 30 states. Brookdale and Senior Lifestyle Corp. are the only large, national operators with LTC properties in many states, according to Simpson.

Because of the operationally intensive nature of seniors housing, and skilled nursing in particular, the operator is even more important than the property itself, says Simpson.

“The operator is the primary focus in terms of doing a deal. The secondary focus is the physical presence.”

When asked where she would like to see LTC in five years, Kessler looked to the past, which she hopes indicates the company’s future.

“Since 2008, we’ve invested a billion dollars, doubled revenues and doubled funds from operations (FFO) to shareholders,” says Kessler. “I’d be happy if we did that again.”