Stand-alone memory care properties challenge LTC Properties in second quarter
Stand-alone memory care communities are posing a “short-term challenge” to LTC Properties Inc., Chairman, CEO and President Wendy Simpson said Thursday during a second-quarter earnings call.
The Westlake Village, CA-based healthcare real estate investment trust, which is celebrating its 25th anniversary this year, has issued a default notice to its primary operator in the segment and is planning to transition two properties away from the other operator of stand-alone memory care communities in its portfolio.
“I don't think we would do another stand-alone memory care development project,” Simpson said, “but in four, five years when the absorption has happened, it might change.” No operator is asking the REIT to develop stand-alone memory care properties right now, she added.
LTC issued the default notice on a master lease covering 11 memory care communities operated by Anthem Memory Care, two of which are under development. As of July, Anthem is paying approximately $1 million of its $2.6 million quarterly rent to LTC on a temporary basis, although the company contractually owes LTC the full amount.
Staffing challenges, including executive director positions, at three open communities in particular — 66-unit Porter Place in Tinley Park, IL; 66-unit Harvester Place in Burr Ridge, IL; and 60-unit Greenridge Place in Westminster, CO — “resulted in distractions that we believe have impacted lease-ups in these buildings,” Simpson said.
“I am holding a weekly call with one of the Anthem principles to keep them focused on corporate cost reductions and to give more current occupancy reports,” she added.
Occupancy from June to July has improved — from 25% to 29% at Porter Place, 42% to 47% at Harvester Place, and 80% to 88% at Greenridge Place — and all three properties are showing positive occupancy trends so far in August, she said.
LTC is negotiating to transfer two open Anthem communities — Morningside Place in Overland Park, KS, and Chisholm Place in Wichita, KS, with a total of 120 units — to a new operator, Simpson said. “Anthem took over operation of these properties post-acquisition and soon realized that turning around existing properties was not part of their core DNA,” she said. Transferring them to a new operator, she added, “would help elevate some of Anthem's current burden and better allow them to focus on their core competencies.”
For the remaining nine properties that are operated by Anthem, LTC is evaluating its options and may transition some or all of them to another operator or sell some or all of them, Simpson said. The REIT expects the matter to be resolved by the end of the year, she said.
LTC has spoken with “a couple” of operators to gauge interest in the properties, Simpson said, adding that “if we got serious about it,” the REIT would talk to some of the larger operators in memory care, such as Silverado.
The REIT also is not pursuing any new development projects with Anthem, she added, but will finish the two Anthem communities that are in development. A 66-unit community in Glenview, IL, should be complete in October or November, and a 66-unit community in Oak Lawn, IL, should be finished in the first quarter of 2018, according to LTC.
“It would be difficult to sell those as projects that are under development” if they were not completed, she said.
LTC also is transitioning the leases for two communities operated by the other memory care provider in its portfolio, Clarity Pointe, to Atlanta-based Thrive Senior Living due to occupancy challenges, said Clint Malin. He is the REIT's executive vice president and chief investment officer.
All of Clarity Pointe's seven communities are managed by Life Care Services, according to the Clarity Pointe website.
The communities now known as Clarity Pointe Jacksonville, in Florida, and Clarity Pointe Louisville, in Kentucky, with 60 units each, should be under Thrive control by September or October, Malin said.
“We proactively elected to bring a new operator into Jacksonville and Louisville to maximize the value of the properties and enhance our relationship with an existing regional operating partner that has been successful in growing their footprint,” Malin said. Thrive currently operates 21 communities in eight states.
“While we were initially hopeful about growing our relationship with Clarity Pointe, they're a smaller company without adequate resources to scale the business or remediate some of the lease-up challenges facing our Jacksonville property in particular,” Malin said.
Occupancy at the Jacksonville property has increased from 43% at the end of the first quarter to 62% at the end of the second quarter, however, he said. “This is a result of changes to the admissions policy of introducing companion suite options,” he added.
Challenges with stand-alone memory care
So why have stand-alone memory care properties been problematic? Simpson said that one reason is that the communities typically are smaller than other types of senior living communities, “and each unit is a bigger percentage than the whole.” So if financial issues occur, they are magnified.
“The memory care only properties, I think, are a little bit more of a challenge in lease up,” Simpson said. “The properties that we have financed that our operators convinced us that it's better to have assisted living and memory care, or three levels — independent, assisted and memory care — have leased up better.”
Anthem also has seen more success now that it has changed its marketing approach for dual-occupancy units, she said.
It's also a cyclical issue, Executive Vice President and Chief Financial Officer Pam Kessler said.
“If you flash back six years ago, memory care stand-alone was selling at a premium, and there was no supply. So, we were first in, reacting to that and building,” she said. “And now others have entered the market, and like any development cycle, it's lumpy. Typically what happens is, when there is that big demand, everybody sees it, they build, you have a short-term over-building, but in the long-run, it works itself out. I think that's where we are right now, just kind of in that lumpiness of a development cycle.”
Given the aging of the baby boomers and the increase in the prevalence of Alzheimer's disease, Simpson said that memory care communities will be sustainable in the long term.
LTC also expanded its relationship with Thrive Senior Living in the second quarter, Malin said.
In addition to transitioning operation of two properties from Clarity Pointe to the company, LTC acquired a 60-unit memory care community in West Chester, OH, for approximately $15.7 million and leased it to Thrive.
Also in the quarter, LTC acquired a three-year old, 107-unit assisted living community and an adjacent one-year-old senior living community with 25 independent living cottages and 48 memory care units, for a total of $38.8 million.
The communities, in Clovis, CA, will be operated by Frontier Management, a new operating partner for LTC.
Frontier owns, manages or leases senior living communities in 11 states, Malin said.
“We hope that this is something that leads to more growth opportunities for LTC,” he said.
LTC also sold four assisted living communities — three in Indiana and one in Iowa — in the quarter. The properties had a total of 175 units and sold for an aggregate of $14.3 million.
“These properties were legacy buildings constructed in the mid- and late-1990s and previously managed by Senior Lifestyle,” Malin said. “The sales reflect our accommodation of a request by Senior Lifestyle. We do not see them as a strategic fit.”
The REIT's current $40 million pipeline, he said, consists of a preferred equity transaction with a new operating partner for the development of an assisted living, memory care and independent living community near Milwaukee and the acquisition of a newly constructed assisted living and memory care community in the Kansas City market, which would be added to an existing master lease.
“Our industry is facing several headwinds that have made it somewhat difficult to substantially grow our portfolio through new investments,” Simpson said. The long-term trends for senior housing, however, “remain very favorable,” she added.