Earnings Call Transcript - LTC Q4 2020

Operator, Operator

Good day and welcome to the LTC Properties’ Fourth Quarter 2020 Analyst Investor Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Before management begins its presentation, please know that today’s comments, including the question-and-answer session, may include forward-looking statements, subject to risk and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in LTC Properties filings with the Securities and Exchange Commission from time to time, including the Company’s most recent 10-K dated December 31st of 2020. LTC undertakes no obligation to revise or update these forward-looking statements to reflect the events or circumstances after the date of this presentation. Please note this event is being recorded. I would now like to turn the conference over to Wendy Simpson. Please go ahead, ma’am.

Wendy Simpson, Co-President and CEO

Thank you, operator, and good morning to everyone. Welcome to LTC’s 2020 Fourth Quarter Conference Call. Joining me today are Pam Kessler, Co-President and Chief Financial Officer; and Clint Malin, Co-President and Chief Investment Officer. I’d like to start off today’s call by offering our sincerest thanks for 2020 coming to an end and to again thank our operators for all they have done and continue to do to keep their patients, residents, and staff safe. It continues to be a somewhat uneasy road, but our partners have shown amazing resilience and grace. Operating through the pandemic has been different from any other cycle in the history of our industry. During the '08, '09 financial crisis, certain levers could be pulled while waiting out a return to normalcy. Similar levers do not exist in this current cycle. By now, you have read news reports or heard earnings calls of other health care REITs, citing squeezed margins, move-in challenges, labor exhaustion, decreasing length of stay, home health care growth, and holds on elective surgeries, all creating challenges for operators. We do believe that the industry census is close to or has hit bottom. As the current vaccines and hopefully a third from Johnson & Johnson become more widely available and utilized, visitation opens up, communities and facilities continue to aggressively market their services, and consumer confidence in these settings improves, we should see the current census stabilize and even improve. However, visibility to these events remains low. So, we can’t predict when that might happen or when the industry will be able to fully recover from the effect of the pandemic. Because LTC has built a conservative foundation with a strong and flexible balance sheet, we can continue to provide support to our operators if needed, and take advantage of investment opportunities as they arise, without placing undue strain on LTC. The need for senior care hasn’t abated and states in which we have some of our highest concentration of properties are also states with the highest projected increases in the 80-plus population cohort over the next 10 years. Government support for our industry remains vitally important, and our industry associations have successfully lobbied and are continuing to lobby for much-needed ongoing aid and support. With the new administration likely comes more spending on and attention to the COVID crisis. It remains to be seen how much additional aid and with it, additional government regulation will be forthcoming and when it will arrive. We believe this extra support is necessary. Last month, the federal public health emergency declaration related to the coronavirus pandemic was extended through April 20, keeping in place a temporary 6.2% increase in federal Medicaid matching funds, including the three-day hospital stay waiver. We believe a further extension is likely. Additionally, a bipartisan bill was drafted to help ensure that senior care communities and facilities can maintain adequate staffing levels by allowing temporary nurse aides to retain their certification status after the COVID-19 emergency declaration has been lifted. In addition to the new stimulus package being negotiated, about $30 billion of prior earmarked aid remains unallocated, which will hopefully provide some incremental support to operators in the industry. Moving now to more LTC-specific discussions, I’ll start with rent deferrals and abatements. Fourth quarter rent and mortgage interest income collections were strong at 98%. As previously disclosed, we provided partial relief to all eligible operators in the form of reduced 2021 rent escalations. We thought it was prudent to proactively offer relief to our partners so that they had additional funds early in 2021. The rent credit is expected to have an approximate $530,000 impact on our 2021 GAAP revenue and an approximate $1.3 million impact on our 2021 FAD. As we noted when we announced this program, our Board discussed various ways for LTC to provide support while balancing our fiduciary responsibilities to shareholders. So, while FAD will be reduced, we are focusing efforts on replacing the funds with accretive transactions this year. We will evaluate requests for additional support from operating partners as we receive them, and we’ll review them on a case-by-case basis with careful evaluation of each operator’s ongoing operations, rent coverage, corporate financial health, and liquidity. Pam will provide additional color shortly. Next, I’ll discuss our Senior Lifestyle portfolio, which is currently a main area of focus for us as we work to transition the 23 communities they have operated for LTC. So far, in the first quarter, we have transitioned 11 assisted living communities to two operators. One operator is new to LTC and the other is an existing partner. Our goal is to complete all SLC-related transitions by the end of the second quarter. Clint will spend some time on the specifics. The M&A market remains challenging for the industry. While there are deals being done, we do not plan to relax our underwriting standards, opting instead to wait until we can complete deals that provide accretive growth for our shareholders. We do not expect to engage in any large transactions for the foreseeable future, but we are seeing interesting opportunities to participate in growth through structured finance deals with reduced risk profiles and strong returns, especially for development projects that are not dependent for success on immediate lease-up or current census. When the market begins to open up, we plan to use our considerable balance sheet to provide a wide range of regional operating partners with the financing they need to help grow their businesses. Until then, we will continue to develop new relationships and solidify existing ones so that we’re ready to act when we see appropriate opportunities. Right now, we see too many uncertainties in 2021, and we feel we cannot reasonably provide guidance at this time.

Pam Kessler, Co-President and CFO

Thank you, Wendy. Total revenue declined $190,000 compared with last year’s fourth quarter. Impacting our results were abated, delinquent, and deferred rent granted in 2020, a reduction in property tax revenue, and lower rental revenue from the sale of the Preferred Care portfolio in 2020. Additionally, in the fourth quarter of 2019, we collected past due rent from senior care. Partially offsetting the decline was rent from acquisitions and completed development projects, higher rent payments from Anthem, and contractual rent increases. Mortgage interest income increased $226,000 due to the funding of expansion and renovation projects. Interest expense decreased $490,000 due to lower outstanding balances and interest rates under our line of credit in the fourth quarter of 2020 and scheduled principal payments on our senior unsecured notes. Property tax expense decreased $809,000, primarily due to the timing of Senior Lifestyle property tax escrow receipts and the payment of related taxes. G&A expense increased $675,000 compared with the fourth quarter of 2019 due to the reimbursement of legal fees from senior care in the prior year period as well as the timing of certain expenditures. Income from unconsolidated joint ventures decreased $270,000 due to a dissolution in 2019 of a preferred equity investment in a joint venture, offset by two preferred equity investments we made in 2020. During the fourth quarter of 2020, we recorded a $3 million impairment charge associated with a memory care community in Colorado operated by Senior Lifestyle. The impairment related to our re-lease efforts of this property. During the fourth quarter of 2019, we recognized a $5.5 million impairment charge related to the Senior Lifestyle joint venture. The four properties comprising the JV were sold in the second quarter of 2020. Accordingly, we received liquidation proceeds of $17.5 million and recognized a loss on liquidation of unconsolidated joint ventures of $620,000. During the fourth quarter of 2020, we recognized an additional loss of $138,000 related to the final liquidation of this unconsolidated joint venture. In the fourth quarter of 2019, we recognized a $2.1 million gain from insurance proceeds related to a closed skilled nursing center in Texas. This property sustained hurricane damage and rather than rebuild it, we sold it and two other properties in the fourth quarter of 2019, resulting in a cumulative loss of $4.6 million. We provided Senior Lifestyle deferred rent in the amount of $394,000 in April of last year. While this amount has since been fully repaid, they failed to pay full rent during the second quarter of 2020. As a result, we wrote off a total of $17.7 million of straight-line rent receivable and lease incentives related to this master lease, and transitioned rental revenue recognition to a cash basis, effective July 2020. During the fourth quarter of 2020, we applied their letter of credit and deposits totaling $3.7 million to accrued second quarter 2020 rent receivable of $2.5 million and notes receivable of $125,000, with the remaining $1.1 million to third and fourth quarter 2020 rent. At December 31, 2020, Senior Lifestyle’s unaccrued delinquent rent balance was $1 million. Net income available to common shareholders for the fourth quarter of 2020 increased by $5 million, primarily resulting from acquisitions and completed development projects, rent increases, lower interest expense, the prior year’s loss on sale, and the fourth quarter of 2019 $5.5 million impairment charge. Offsets included the $3 million impairment charge, decreased rent related to the Preferred Care property sales, abated and deferred rent net of repayment, a decrease in property tax revenue, the 2019 receipt of 2018 past due rent from senior care, and the fourth quarter 2019 gain from insurance proceeds. NAREIT FFO per fully diluted share is $0.78 in the fourth quarter of 2020 and $0.81 in the prior year fourth quarter. Excluding the gain from insurance proceeds in the fourth quarter of 2019, FFO per fully diluted share was $0.76. The $0.02 increase in FFO, excluding the gain, was due to lower weighted average shares outstanding in 2020, resulting from the purchase of shares in the first quarter of 2020 under our share buyback program. Moving now to our investment activity. During the fourth quarter of 2020, we invested $5 million under our previously announced $13 million preferred equity commitment related to the development of a 267-unit independent and assisted living community in Vancouver, Washington. Our investment earns an initial cash rate of 8% and a 12% IRR. We expect to fund our remaining $8 million investment before the end of the first quarter of 2021. The preferred equity investment is accounted for as an unconsolidated joint venture. We also funded $6.3 million in development and capital improvement projects at a weighted average rate of 8% on properties we own and paid $22.4 million in common dividend. Our 2020 FAD payout ratio was 77%. We currently have remaining commitments under mortgage loans of $1.7 million related to expansions and renovations on three properties in Michigan. We also paid $7 million in regular scheduled principal payments under our senior unsecured notes. Subsequent to the end of the quarter, we borrowed $9 million under our unsecured line of credit. Including this borrowing, we have $7.8 million in cash, $501.1 million available on our line of credit, under which $98.9 million is outstanding, and $200 million under our ATM program, providing LTC with liquidity of approximately $709 million. As a reminder, we have no significant long-term debt maturities over the next five years. At the end of the 2020 fourth quarter, our credit metrics remained favorably compared with the health care REIT industry average, with net debt to annualized adjusted EBITDA for real estate of 4.3 times and an annualized adjusted fixed charge coverage ratio of 5.3 times and a debt to enterprise value of approximately 30%. I’ll conclude my remarks with a discussion of rent deferrals and abatements. We collected 98% of fourth quarter rent and mortgage interest income, including the application of Senior Lifestyle’s letter of credit and deposit. Of the rent not collected, $360,000 related to rent abatements and $369,000 related to rent deferral, net of repayments, which were provided to three private pay operators Clint mentioned on our previous earnings call. As I mentioned earlier, Senior Lifestyle remains delinquent in their 2020 contractual rent by $1 million, and they have paid no rent so far in 2021. For all of 2020, we collected 98% of contractual rent, including the application of Senior Lifestyle’s letter of credit and deposits. Of the 2% we did not collect, 0.7% was abated, 0.7% was net deferred, and the remaining 0.6% was delinquent. To date so far, in 2021, rent deferrals totaled $689,000, net of $14,000 of deferred rent repayments. These deferrals relate to the same three private pay operators previously mentioned. Excluding the rent credit related to the rent escalation reduction already discussed, abated rent to date in 2021 is $360,000. We did receive rent from the operators who transitioned former SLC operated communities to date. Clint will provide more detail. Now, I’ll turn things over to Clint.

Clint Malin, Co-President and CIO

Thanks, Pam. I’ll start my discussion with Senior Lifestyle. As Wendy said earlier, thus far, in the first quarter of 2021, we have transitioned 11 of the 23 assisted living communities under their master lease. 6 of these communities were transferred to Randall Residence, a current LTC operator, and 5 were transitioned to Encore Senior Living, an operator new to us. At Randall communities, 5 of which are located in Ohio and 1 in Illinois, were transferred on January 1st. Combined, these communities contain 344 units. We first began working with Randall in 2019 when we acquired 2 properties in Michigan, and they are now the operator of 8 LTC properties. Randall already operates properties in Ohio and Illinois and has a strong regional presence in the Upper Midwest. The 6 properties were added to an existing master lease with Randall. Terms of the amended master lease were extended by one year with nine years remaining. Incremental cash rent under the amended lease is $2.7 million for the first year, $3.7 million for the second year, and $3.9 million for the third year, escalating by 2% annually thereafter. On February 15th, we transferred 5 communities, all in Wisconsin, with a total of 374 units to Encore Senior Living. Encore, founded in 2011, is a major player in the Wisconsin market, operating 34 locations before assuming these communities. The new master lease covers a 10-year period with three five-year renewal options. Cash rent under the lease is $2.6 million for the first year, $3.3 million for the second year, and $3.4 million for the third year, escalating by 2% annually thereafter. Partnering with regional operators is an important part of LTC’s long-term strategy, and expanding our relationship with Randall while building a new one with Encore are great examples of our ability to partner with operators who have a solid presence in their local markets and regions. There are now 12 buildings remaining in the Senior Lifestyle portfolio. Of those, we will be transferring 5 and selling 3 and continue to evaluate options for the remaining 4 properties. Of the 5 that will be transferred, 4 are expected to be transferred by the end of Q1 and the fifth by the end of Q2. The three properties we intend to sell are under contract with an expected closing at the end of the second quarter, subject to timely completion of due diligence. The 4 remaining properties have a net book value of approximately $4.5 million. One of those properties is being closed and will be sold for alternative use, and we are evaluating our options for the remaining 3. Now, I’d like to quickly update you on our most recent development projects to come online. Weatherly Court, which is located in Medford, Oregon, and operated by Fields Senior Living, began accepting residents last September. As of February 15th, occupancy was 23%, up from 10% on October 23rd. The opening of this community was delayed due to the pandemic. As a result of the delay and because as a newly opened property, Fields was not eligible for government stimulus money. We have agreed to provide them $1.3 million of additional free rent. Ignite Medical Resort in Blue Springs, which is located in Independence, Missouri, began welcoming patients last October. At February 15th, occupancy was 64%, up from 23% on October 23rd. Last quarter, we discussed Genesis and its disclosed doubt regarding its ability to continue as a growing concern. Genesis remains current on all of its lease obligations to LTC. They operate 6 properties for us, 5 in New Mexico and 1 in Alabama. Brookdale’s master lease matures on December 31, 2021. The first renewal option is for a four-year period. The notice period for the renewal option began on January 1, 2021, and ends on April 30, 2021. In 2020, we extended a $4 million capital commitment to Brookdale, which is available through December 31, 2021, at a 7% yield. To date, we have funded $2 million of this commitment. Of note, aside from the Brookdale lease renewal, we have only one other lease that expires in 2021. The SNF operated under this lease is under contract for sale with closing expected in the second quarter. Next, I’ll discuss our portfolio numbers. As a reminder, given the pandemic and the challenging environment it has created, we don’t believe coverage is a good indicator of future performance at this time and are focused mainly on occupancy trends, which I’ll discuss shortly. Q3 trailing 12-month EBITDARM and EBITDAR coverage using a 5% management fee was 1.14 times and 0.94 times, respectively, for our assisted living portfolio. These metrics are the same with and without stimulus funds as no operators allocated these funds to their P&L statements. Excluding Senior Lifestyle from our assisted living portfolio, EBITDARM and EBITDAR coverages would increase to 1.25 times and 1.04 times, respectively. For our skilled nursing portfolio, EBITDARM and EBITDAR coverage was 1.85 times and 1.39 times, respectively. Excluding stimulus funds, EBITDARM coverage was 1.58 times and EBITDAR coverage was 1.13 times. Now for some occupancy trends in our portfolio, which is as of January 31. As a reminder, for our private pay portfolio, occupancy is of that date specifically; and for our skilled portfolio, occupancy is the average for the month. Because our partners have provided January data to us on a voluntary and expedited basis, the information we are providing includes approximately 71% of our total private pay units and approximately 93% of our skilled nursing beds. Private pay occupancy was 79% at September 30th, 72% at December 31st, and 71% at January 31st. For skilled nursing, average monthly occupancy for the same time periods, respectively, was 70%, 66%, and 66%. We cannot predict when occupancy might begin trending upward. Regarding 2021 growth, when we are confident that we can complete deals at the right price for the right return, we will use our liquidity to provide strong regional operators with the growth capital they need. Until that time, we will focus on smaller investments with what we believe to be a better risk-reward profile using vehicles such as mezzanine and preferred equity financing while building new and existing relationships that will serve us far into the future. The preferred equity transactions we announced last quarter validate our ability to successfully transact in this market. With that, I’ll turn the call back to Wendy for her closing remarks.

Wendy Simpson, Co-President and CEO

Thank you, Pam and Clint. The pandemic has caused considerable disruption within our industry, and we can’t determine exactly when things will begin to return to pre-pandemic levels. The rollout of the COVID vaccines, a new administration that is focused on getting the country through the pandemic, and an industry that is working hard to stabilize occupancy and restore consumer confidence give us hope that things are starting to turn and will continue to get better. As a company that has always viewed its operators as partners and a company that has worked hard to build a balance sheet capable of withstanding the very type of crisis through which we have been managing, LTC is ready and able to continue enhancing its portfolio, diversifying its investments, and generating new opportunities to allow us to continue to serve as a growth partner of choice as a REIT done differently.

Operator, Operator

We will now begin the question-and-answer session. And the first question will come from Juan Sanabria with BMO. Please go ahead.

Juan Sanabria, Analyst

Hi. Good morning. I hope everybody is doing well. I just wanted to dig a little deeper on Senior Lifestyles. You’ve transitioned 11 out of 23. You’ve given us some numbers on the go-forward rents on the assets that have transitioned. But I guess, holistically, are you planning to keep those assets that have been transitioned, those 11 assets, or are those potentially up for sale? And could you give us a sense of the EBITDAR that the assets that, holistically, you’re looking to sell or generating just some rough guideposts as to maybe how to think about the go-forward run rate around Senior Lifestyles.

Clint Malin, Co-President and CIO

Hey Juan, this is Clint. Right now, as we’re in the midst of these transitions and a few sales, which I mentioned in my remarks, it’s hard to give specific guidance right now going forward. We’ve provided the detail to date of what’s happened with the transition of the 11 buildings. And we do anticipate having all transitions in sales completed by the end of Q2, which at that time we’ll be able to give numbers. But, as we said last quarter, I think, one thing to expect is because of the impacts of COVID on the performance, not only to these buildings but in our portfolio and other buildings across the country, there’s going to be a ramp-up in rent over time, which you’ve seen in the information we provided with these two operators, as you can see the rent staggers over and builds up over a two to three-year period.

Juan Sanabria, Analyst

Can you provide maybe the total units under those 23 assets and maybe how you think about asset values on a per unit basis given that NOIs may not really be meaningful at this point?

Clint Malin, Co-President and CIO

Right now, I don’t think the per unit metric is significant. However, regarding the units, I don’t have the exact numbers for the 23, but I will find them for you shortly.

Juan Sanabria, Analyst

Okay. Can you give us an update on what discussions are happening regarding Genesis and how involved you are, considering that it seems to be mainly managed by the two primary creditors at this stage? Any insights into those discussions would be appreciated.

Clint Malin, Co-President and CIO

Sure. We are a very small part of Genesis’ overall portfolio. We have a long-term relationship with them and are actively discussing performance and conducting property inspections. There is a dialogue in place, and we’ve been interacting with them. However, we’re still just a small component of their overall portfolio.

Pam Kessler, Co-President and CFO

But we’re not aware of any discussions that are going on for restructuring or anything like that. So, if you’re asking, are we part of a discussion of a restructuring or a reorganization, we haven’t been invited into, if there are any of those discussions going on.

Wendy Simpson, Co-President and CEO

And as a reminder, we restructured our lease last year to, I guess, 2019 now. So, a couple of years ago, we restructured our lease. So, we don’t believe that we’re part of their problem.

Clint Malin, Co-President and CIO

And one thing we’ve seen, and as we talked about on previous calls, as I mentioned, five of the buildings are in New Mexico. And New Mexico has had Medicaid rate increases over the last couple of years with provider tax as well as just a flat Medicaid rate increase. So, they’ve seen some substantial increase rate or increase this revenue on the Medicaid side, which has been positive for the portfolio.

Juan Sanabria, Analyst

Great. Just one last one from me. For Brookdale, what’s the sense of whether they’ll renew or not, and could you give us a sense of their coverage as to help us think about how they might be thinking about that lease option?

Clint Malin, Co-President and CIO

I’m not going to hazard a guess in that they will or not renew. I think it’s encouraging that they asked for a capital commitment last time.

Wendy Simpson, Co-President and CEO

And they’re spending it.

Clint Malin, Co-President and CIO

They are definitely using the funds. As I mentioned, we have provided $2 million to date, which is a positive indication. This shows that even if Brookdale decides not to renew, they have invested capital in the buildings, which is a good sign. The performance of the Brookdale portfolio has been strong, although it did decline a bit during the pandemic. Overall, the portfolio has performed quite well. Ultimately, the decision for Brookdale to renew or not will likely be strategic. The buildings we have with them are located in various states, and the type of product we offer is a core part of their portfolio. Therefore, we are not working with assets that differ from what they manage on a larger scale. At this point, we are in communication with Brookdale, and during our next call, we should be able to share their decision. As for the units for Senior Lifestyle, the total is 1,456 units.

Operator, Operator

The next question will come from Jordan Sadler with KeyBanc. Please go ahead.

Jordan Sadler, Analyst

So, I wanted to just pick off where Juan left off on Brookdale, if I could, for a second. Just can you offer us any additional color surrounding the renewal options? So, renewal option one, the window is open through April 30th, and I think that’s the four-year renewal retention.

Clint Malin, Co-President and CIO

That’s correct.

Jordan Sadler, Analyst

If they don’t exercise by April 30th, can you explain options two and three?

Clint Malin, Co-President and CIO

I mean if they don’t renew by April 30th, we’ll initiate to find additional operators to take over those properties.

Jordan Sadler, Analyst

And they basically have to let you know. They said they have to let you know by April 30th, whether or not they’re renewing for 12/31/21?

Clint Malin, Co-President and CIO

That is correct.

Jordan Sadler, Analyst

Thank you for the clarification. Regarding SLC, could you provide some insights? I understand there are still many details to finalize, but could we focus on the 11 out of the 23? Please share what the effective year one rent reduction would be for those 11 if we apply the pro-rata reduction.

Pam Kessler, Co-President and CFO

Jordan, this is Pam. Since those are in a master lease with Senior Lifestyle, we don’t allocate rent. So, however, for your model, however you want to allocate it would be just the best way, I guess, if you were...

Jordan Sadler, Analyst

Is there any reason that a pro-rata allocation wouldn't be appropriate?

Pam Kessler, Co-President and CFO

Well, no, I mean I guess, you have to do some sort of proration. We’re still in the process of working with Senior Lifestyle on what the wind-down analysis looks like and what cash would be coming back to LTC in 2021 for rent. That would be the best number to use, but we’re still working on that right now. So, I don’t have that for you. But, as soon as we do, we will update you.

Jordan Sadler, Analyst

Okay, that's fair. Can you give me the dates for the remaining transfers that are scheduled? Out of the 12, you are transferring five, and you expect to complete four of those by the end of the first quarter and one by the end of the second quarter?

Clint Malin, Co-President and CIO

Yes.

Jordan Sadler, Analyst

And are those two a new operator or existing?

Clint Malin, Co-President and CIO

One will be to an existing operator, and there’ll be another new operator to our portfolio.

Jordan Sadler, Analyst

Okay. And then, lastly, regarding the properties that are being sold, what are the coverages that the 11 were underwritten to?

Clint Malin, Co-President and CIO

I would say we have targeted year one, which is a little challenging due to COVID expenses. It’s difficult to assess year one effectively. We’re going off...

Jordan Sadler, Analyst

It’s so how you look at it.

Clint Malin, Co-President and CIO

We have provided coverage and taken a long-term view to ensure that these new operators have the necessary credit support moving forward. Our approach to re-leasing involves setting rents that allow for coverage for the operators, ensuring that the new leases complement their existing agreements related to these assets.

Jordan Sadler, Analyst

Okay. Lastly, regarding Senior Lifestyle, I understand they haven't made payments for January and February. What is your perspective on the likelihood or ability to make any additional payments from this point forward, given that you have fully utilized the line of credit, the letter of credit, and the deposits?

Clint Malin, Co-President and CIO

We’re hopeful there’ll be additional rent coming from this. And I think from Senior Lifestyle’s standpoint, they look at this a little bit similar to the joint venture that we did a wind down with them previously, in that they’re trying to not be exposed from a liability standpoint. You can get a management fee and turn the additional funds over to us. As Pam mentioned, they’re going through a wind-down analysis right now to see what those mill liabilities are. So, we are hopeful that there will be some additional rent once that analysis is complete by Senior Lifestyle to see what the cash position is.

Operator, Operator

The next question will come from Connor Siversky with Berenberg. Please go ahead.

Connor Siversky, Analyst

First question is just high level and kind of asking this in reference to what’s going on in the Midwest right now with the weather. I’m just wondering if there’s a kind of worst-case scenario you’ve made for occupancy take-up in the coming months, and what that looks like.

Clint Malin, Co-President and CIO

I think it's quite uncertain right now, which is why we haven't provided guidance. Speculating on that would not be appropriate. However, there are some positive developments regarding the vaccine rollouts, particularly with Johnson & Johnson. Recent news about Pfizer's vaccinations suggests that a single dose may be effective, and the studies indicate that the vaccines can be stored at less extreme temperatures than previously thought. These factors may contribute to a more stable situation in the communities, though it's important to note that this information is anecdotal and we are observing how things unfold on a quarterly basis.

Wendy Simpson, Co-President and CEO

Yes. NIC put out some data that showed that layered on cases in, I think, it’s senior housing and skilled nursing on top of the vaccine rollout. And I think that was encouraging for the industry showing a sharp decrease in new cases coinciding with the vaccine rollout. So, that is, I think, a positive, if that continues. That would mean, hopefully, that we’ve troughed here in occupancy, but we’re not quite willing to call that yet.

Pam Kessler, Co-President and CFO

Well, Clint and I were on a call yesterday with the operator who is taking 3 or 4, 3 of the Senior Lifestyle buildings. And there was only one incident and I think it was an employee who had COVID. So, those three buildings are COVID-free. So, that is a great touch point for the industry.

Connor Siversky, Analyst

That’s helpful. I appreciate the color there. And then, one last one from me, excuse me, if I missed this. For the 12.4% of rental income maturing in 2021, part of that’s Brookdale, part of that I believe is the skilled nursing facility that Clint mentioned. And then, for that other operator, that other lease, can you provide any color as to what the coverage is and how conversations may be progressing on that end?

Clint Malin, Co-President and CIO

It’s actually simpler. It’s just Brookdale and the one building we have for sale. So, that accounts for all the renewals in 2021. It’s just two leases in the Brookdale lease and then a single asset lease, which, as I mentioned, is under contract for sale.

Operator, Operator

The next question will come from Michael Carroll with RBC Capital Markets. Please go ahead.

Michael Carroll, Analyst

Clint, can you provide some color, or Pam, on the wind down of the Senior Lifestyle, I guess, portfolio? And, I know, you’re talking about is that you’re going to expect to get some rent when that’s completed. I guess, what’s the timing of that or what has to go into to get that completed?

Clint Malin, Co-President and CIO

We were hoping for an update yesterday. It's part of the process. You can look at any trade payables, and there's paid time off to consider during the transition. There are leased equipment and related issues; if a new operator doesn't take on those leases, it may result in termination costs and insurance implications. Senior Lifestyle has been addressing these matters. At this point, we expect to have an initial assessment next week to understand the situation better. We anticipate providing more details on our next call regarding additional rent.

Wendy Simpson, Co-President and CEO

Pending stimulus funds...

Clint Malin, Co-President and CIO

And stimulus funds, too.

Michael Carroll, Analyst

Should we anticipate any rent payments in the first quarter of 2021, or do the transitions and sales need to be fully completed before we start seeing rent from the legacy Senior Lifestyle assets?

Clint Malin, Co-President and CIO

There’s only one asset that we have with Senior Lifestyle we’ll be transferring whereby there would be a single asset where there would be effectively support no rent in year one of a single asset lease, but everything else has rent associated with it.

Michael Carroll, Analyst

I guess, my really question relates to is how long does it take to finish this? I know you said you’re getting your initial look next week. I mean, should we expect that you’re going to receive some rents once this wind down is completed in the first quarter, or do we need to see all the assets transition to new operators before they have the final numbers and are willing to kind of start paying you that backdated rent?

Clint Malin, Co-President and CIO

Our hope is that we’ll see it come in on a current basis.

Michael Carroll, Analyst

Okay. And then, can you talk a little bit about the other operator that you disclosed that you’d agree to defer rent as needed through the first quarter of ‘21? I know there was about, what, $355,000 balance at the end of the year. I mean, what’s the status of that operator? And, was there additional rent deferred in January, February from them?

Clint Malin, Co-President and CIO

There was some additional rent deferred in January and February, which Pam mentioned regarding those numbers. It was connected to that operator. However, we were also encouraged in Q4, as that operator repaid some of the deferred rent they had taken. They had some lease-up assets in their portfolio, which contributed to this situation. We've observed this trend in our portfolio as well. Buildings focused on lease-up or value-add efforts to boost census faced delays due to the pandemic. This is what occurred with this operator.

Pam Kessler, Co-President and CFO

Of the $689,000 of deferred net deferred rents I mentioned in the first quarter of 2021, about $560,000 related to that operator. So, most of that came from them.

Clint Malin, Co-President and CIO

Majority.

Michael Carroll, Analyst

Okay. And then, just one last question for me, returning to Senior Lifestyle briefly. I understand there is some uncertainty regarding the details you can share. Can you specify what percentage of the EBITDARM from that asset portfolio is related to those 11 communities, or is that information not available?

Clint Malin, Co-President and CIO

We haven’t provided that information. With COVID expenses and some stimulus funds, it’s a hard metric to look at. So, we’ve not provided that information.

Operator, Operator

The next question will come from Rich Anderson with SMBC. Please go ahead.

Rich Anderson, Analyst

So, on the rent credit, the $1.3 million FAD impact, did that all happen in the first quarter?

Pam Kessler, Co-President and CFO

Majority of it, yes.

Rich Anderson, Analyst

Yes. And is the way it works that it’s essentially the credit totals $1.3 million, but then you recalculate the straight line, and that’s why the GAAP revenue is a lower impact, is that correct?

Pam Kessler, Co-President and CFO

Yes. Yes, essentially, for those that are on a GAAP basis, yes, are on accrual basis. Yes. We have product releases that are cost basis. Yes.

Rich Anderson, Analyst

I understand. Okay, great. So regarding the process, there is no change to the actual escalators, correct? We've discussed this before, and I just want to clarify that this is how you arrived at the rent credit. Moving forward, the escalations will continue based on the original rent level.

Pam Kessler, Co-President and CFO

That is correct.

Rich Anderson, Analyst

Okay. I just want to make sure. Clint, you said you don’t want to talk too much about coverages. It’s not a reflection of current times, and of course, I get that. But 1.13 times on skilled nursing, excluding stimulus is quite good. I would say you should be perhaps quite proud of that relative to other numbers that I’ve heard. That being said, it was calculated a quarter in arrears, of course. So, you’re about 400 basis points lower occupancy. Do you have a math at your fingertips that would say, well, we’re 400 basis points lower in occupancy than we were starting at 1.13, we’re probably around parity now, or is it not that dramatic of an impact?

Clint Malin, Co-President and CIO

We haven’t conducted that analysis at this moment. However, we have heard informally from operators and observed in our portfolio that the skilled mix has been trending upward. This may change as COVID cases decrease. It's difficult to predict the specific impact of this situation. However, we noted that occupancy levels between December and January remained fairly stable, and you may have noticed a decrease in COVID cases and an increase in vaccinations from our three clinics. We hope these factors contribute positively to occupancy stabilization.

Rich Anderson, Analyst

Okay. Last question for me is, do you guys know what the employee, the health care worker vaccine rate is? Has there been a hesitancy? Because we’ve been hearing that the patients and the residents are accepting it, but not so much on the health care provider side. Are you hearing the same thing? Do you have knowledge of what the rate is in your portfolio?

Clint Malin, Co-President and CIO

We have observed that staff acceptance of vaccinations is generally lower than that of residents. When we collected occupancy data from our operating partners in January, we also asked for details about the clinics and vaccination rates. For instance, about 60% to 70% of our operators provided information about the clinics. Among the operators reporting from our skilled portfolio, 100% had completed the first clinic, which was encouraging, and approximately 55% had also completed the second clinic. In terms of staff acceptance at the resident level, our operators reported acceptance rates in the low-40s for both skilled and assistant staff.

Rich Anderson, Analyst

Yes. Hopefully, that picks up because that’s an important part, I think. Last question, Wendy, you mentioned you’re not planning to change your underwriting metrics, and there’s a lot of uncertainty regarding external growth. That’s clearly understood. But, are you receiving reverse inquiries at all? I’m curious to know if people are approaching you with assets that may not be of interest, but it would be interesting to find out if there’s a pool of motivated sellers that might be waiting for more visibility in the market.

Wendy Simpson, Co-President and CEO

We have had packages. We’ve looked at some packages recently that are really in the first stage of looking at them. So, I think, we are going to be seeing some assets coming to the market in the spring and the summer. So, we’re looking forward to being able to spend some of the money that Clint will be creating by selling some of the Senior Lifestyle assets.

Operator, Operator

The next question will come from Daniel Bernstein with Capital One. Please go ahead.

Daniel Bernstein, Analyst

I wanted to revisit the investment philosophy. Do investments need to be accretive from day one for you to move forward with them? When considering the restructuring of leases where initial rents are lower with significant increases in years two and three, would you consider deals like that, where there isn't much return initially but potential upside in the following years?

Clint Malin, Co-President and CIO

We consider each opportunity individually and prefer to work with existing operators so we can integrate it into an existing master lease. In markets where they already have a presence and understand the local dynamics, they can move quickly. We have explored a few deals with these operators that ultimately did not materialize, likely due to pricing issues. However, we are open to considering such deals on a case-by-case basis.

Daniel Bernstein, Analyst

But probably within more of your existing operator pool and where there is already some credit protection. Okay. And then, just going back as well, some of the comments from your peers in terms of leading indicators, tours not moving yet, but tours, leads, things like that. Have you heard from any of your operators about those leading indicators and where those trends may be heading, anything that would give us some confidence that seniors housing occupancy could be rebounding in the second quarter or second half of this year?

Clint Malin, Co-President and CIO

I would say that it has been somewhat subdued. The fourth quarter presented some challenges. After the holiday season, there was significant attention on the COVID situation. However, I believe that operators have been quite adaptable in exploring virtual tours and enhancing lead generation efforts. We have communicated with several operators who report positive trends, while others have remained stable. Therefore, it is anecdotal information that varies across different regions of the country.

Daniel Bernstein, Analyst

Okay. And then, kind of turning back to skilled nursing, kind of the same question of how are you thinking about the census of the industry. There’s been a lot of talk as to whether home health has permanently taken any market share from skilled nursing and what that might mean. Do you have any kind of view or a sense of what that might look like going forward, now that COVID cases are coming back down, the elective surgeries are maybe going back up? Do you have an expectation that census will improve in skilled nursing, or is that just a little bit too soon to know what’s going to happen?

Wendy Simpson, Co-President and CEO

Yes, we do have that expectation, Dan. As electives begin to be scheduled again, I understand many were postponed during the surge. However, it’s still early to say if home health has become a more permanent solution. There will definitely be higher acuity cases where home health will not be a suitable option. Those may be among the majority of electives that have been delayed, as these patients require 24-hour care and cannot transition to home health for recovery. Therefore, it’s premature to assess if discharge patterns have changed permanently. Currently, the general belief is that we will trend back to the normal conditions seen before COVID.

Clint Malin, Co-President and CIO

And also, Dan, that think of the reimbursement model through PDPM. Obviously, that has migrated to look at caring for more complex care for patients. So, skilled should be seeing, by and large, just more complexity in general. I think those are probably not viable discharges going into home care.

Operator, Operator

The next question will come from Omotayo Okusanya with Mizuho. Please go ahead.

Omotayo Okusanya, Analyst

I would like to revisit Juan's earlier question about Brookdale. Can you provide insights into the current rent coverage? Specifically, I’m interested in whether you are adjusting to the market EBITDA and coverage ratios. Additionally, if there is a renewal, what changes in rents should we expect?

Pam Kessler, Co-President and CFO

Hey Tayo, this is Pam. They have a straightforward renewal option without any rent resets. They can choose to take the rent credit we’ve offered if they renew, which would result in a 50% reduction in their 2021 escalator, similar to most of the rest of our portfolio. Therefore, we do not expect any change in rent.

Operator, Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.