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LTC PROPERTIES INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some of the forward-looking statements by their use of forward-looking words, such as "believes," "expects," "may," "will," "could," "would," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates," or the negative of those words or similar words. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, our dependence on our operators for revenue and cash flow; the duration and extent of the effects of the COVID-19 pandemic; government regulation of the health care industry; federal and state health care cost containment measures including reductions in reimbursement from third-party payors such as Medicare and Medicaid; required regulatory approvals for operation of health care facilities; a failure to comply with federal, state, or local regulations for the operation of health care facilities; the adequacy of insurance coverage maintained by our operators; our reliance on a few major operators; our ability to renew leases or enter into favorable terms of renewals or new leases; the impact of inflation, operator financial or legal difficulties; the sufficiency of collateral securing mortgage loans; an impairment of our real estate investments; the relative illiquidity of our real estate investments; our ability to develop and complete construction projects; our ability to invest cash proceeds for health care properties; a failure to qualify as a REIT; our ability to grow if access to capital is limited; and a failure to maintain or increase our dividend. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under "Risk Factors" contained in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and in our publicly available filings with theSecurities and Exchange Commission . We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise.
Executive Overview
Business and Investment Strategy
We are a real estate investment trust ("REIT") that invests in seniors housing
and health care properties through sale-leaseback transactions, mortgage
financing, joint ventures, construction financing and structured finance
solutions including mezzanine lending. Our primary objectives are to create,
sustain and enhance stockholder equity value and provide current income for
distribution to stockholders through real estate investments in seniors housing
and health care properties managed by experienced operators.
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The following graph summarizes our gross investments as of
[[Image Removed: Graphic]]
Our primary seniors housing and health care property classifications include
skilled nursing centers ("SNF"), assisted living communities ("ALF"),
independent living communities ("ILF"), memory care communities ("MC") and
combinations thereof. We conduct and manage our business as one operating
segment, rather than multiple operating segments, for internal reporting and
internal decision-making purposes. For purposes of this quarterly report and
other presentations, we generally include ALF, ILF, MC, and combinations thereof
in the ALF classification. As of June 30, 2022 , seniors housing and health care
properties comprised approximately 98.5% of our investment portfolio. We have
been operating since August 1992 .
Substantially all of our revenues and sources of cash flows from operations are
derived from operating lease rentals, interest earned on outstanding loans
receivable and income from investments in unconsolidated joint ventures. Income
from our investments in owned properties and mortgage loans represent our
primary source of liquidity to fund distributions and are dependent upon the
performance of the operators on their lease and loan obligations and the rates
earned thereon. To the extent that the operators experience operating
difficulties and are unable to generate sufficient cash to make payments to us,
there could be a material adverse impact on our consolidated results of
operations, liquidity and/or financial condition. To mitigate this risk, we
monitor our investments through a variety of methods determined by property type
and operator. Our monitoring process includes periodic review of financial
statements for each facility, periodic review of operator credit, scheduled
property inspections and review of covenant compliance.
In addition to our monitoring and research efforts, we also structure our
investments to help mitigate payment risk. Some operating leases and loans are
credit enhanced by guaranties and/or letters of credit. In addition, operating
leases are typically structured as master leases and loans are generally cross-
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defaulted and cross-collateralized with other loans, operating leases or
agreements between us and the operator and its affiliates.
Depending upon the availability and cost of external capital, we anticipate making additional investments in health care related properties. New investments are generally funded from cash on hand, proceeds from periodic asset sales, temporary borrowings under our unsecured revolving line of credit and internally generated cash flows. Our investments generate internal cash from rent and interest receipts and principal payments on mortgage loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured revolving line of credit, is expected to be provided through a combination of public and private offerings of debt and equity securities. We could also look to secured and unsecured debt financing. The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets' environment, especially to changes in interest rates. Changes in the capital markets' environment may impact the availability of cost-effective capital. We believe our business model has enabled and will continue to enable us to maintain the integrity of our property investments, including in response to financial difficulties that may be experienced by operators. Traditionally, we have taken a conservative approach to managing our business, choosing to maintain liquidity and exercise patience until favorable investment opportunities arise.
COVID-19
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of coronavirus ("COVID-19") as a pandemic, and onMarch 13, 2020 ,the United States declared a national emergency with regard to COVID-19. The COVID-19 pandemic has had repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries, includingthe United States , has significantly and adversely impacted public health and economic activity, and has contributed to significant volatility, dislocations and liquidity disruptions in financial markets. The operations and occupancy levels at our properties have been adversely affected by COVID-19 and could be further adversely affected by COVID-19 or another pandemic especially if there are infections on a large scale at our properties. The impact of COVID-19 has included, and another pandemic could include, early resident move-outs, our operators delaying accepting new residents due to quarantines, potential occupants postponing moves to our operators' facilities, and/or hospitals cancelling or significantly reducing elective surgeries thereby there were fewer people in need of skilled nursing care. Additionally, as our operators have responded to the pandemic, operating costs have begun to rise. A decrease in occupancy, ability to collect rents from residents and/or increase in operating costs could have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, including the payment of rent. In recognition of the ongoing pandemic impact affecting our operators, we have agreed to rent abatements totaling$6.4 million and rent deferrals for certain operators totaling$9.5 million betweenApril 2020 andJune 2022 , of which$1.8 million subsequently has been repaid. The$14.1 million in rent abatements and deferrals, net of repayments, represented approximately 3.8% of ourApril 2020 throughJune 2022 contractual rent and interest. As ofJune 30, 2022 , the outstanding balance of our deferred rent was$7.7 million of which$7.1 million represents the outstanding unaccrued deferred rent balance related to an operator of 12 assisted living communities that subsequent toJune 30, 2022 were transitioned to another operator. In connection with the termination of the master lease, the deferred rent balance was forgiven. The remaining balance of deferred rent of$0.6 million is due to us over the next 36 months or upon receipt of government funds from theU.S. Coronavirus Aid, Relief, and Economic Security (the "CARES Act"). 27 Table of Contents During the six months endedJune 30, 2021 , we proactively provided additional financial support to the majority of our operators by reducing 2021 rent and interest escalations by 50%. The rent and interest escalation reduction were given in the form of a rent and interest credit in recognition of operators' increased costs due to COVID-19. During six months endedJune 30, 2021 , we recognized a Generally Accepted Accounting Principles ("GAAP") revenue decrease of$0.5 million and a cash revenue decrease of$1.3 million related to the
50%
escalation reduction.
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Real Estate Portfolio Overview
The following tables summarize our real estate investment portfolio by owned properties and mortgage loans and by property type, as ofJune 30, 2022 (dollar amounts in thousands): Six Months Ended June 30, 2022 Number of Percentage Percentage Number of SNF ALF Gross of Rental of Total Owned Properties Properties (1) Beds Units Investments Investments Revenue Revenues Assisted Living 99 - 5,492$ 797,556 42.6 % $ 26,296 35.7 % Skilled Nursing 53 6,348 236 600,701 32.1 % 24,421 33.1 % Other (2) 1 118 - 11,680 0.6 % 489 0.7 %Total Owned Properties 153 6,466 5,728 1,409,937 75.3 % 51,206 (4) 69.5 % Number of Percentage Interest Income Percentage Number of SNF ALF Gross of from Mortgage of Total Mortgage Loans Properties (1) Beds Units Investments Investments Loans Revenues Assisted Living 18 - 808 95,207 5.1 % 2,813 3.8 % Skilled Nursing 23 2,916 - 285,894 15.3 % 16,843 22.9 % Other (3) - - - 2,546 0.2 % 77 0.1 % Total Mortgage Loans 41 2,916 808 383,647 20.6 % 19,733 26.8 % Number of Percentage Interest Percentage Number of SNF ALF Gross of and other of Total Notes Receivable Properties (1) Beds Units Investments Investments Income Revenues Assisted Living (5) 7 - 961 43,478 2.3 % 1,620 2.2 % Skilled Nursing (6) - - - 15,316 0.8 % 364 0.5 % Total Notes Receivable 7 - 961 58,794 3.1 % 1,984 2.7 % Number of Percentage Income from Percentage Number of SNF ALF Gross of Unconsolidated of Total Unconsolidated Joint Ventures Properties (1) Beds Units Investments Investments Joint Ventures Revenues Assisted Living (7) 1 - 95 6,340 0.3 % 224 0.3 % Under Development (8) - - - 13,000 0.7 % 527 0.7 %
Total Unconsolidated Joint Ventures 1 - 95
19,340 1.0 % 751 1.0 % Total Portfolio 202 9,382 7,592$ 1,871,718 100.0 % $ 73,674 100.0 % Number Number of Percentage of SNF ALF Gross of Summary of Properties by Type Properties (1) Beds Units Investments Investments Assisted Living 125 - 7,356$ 942,581 50.3 % Skilled Nursing 76 9,264 236 901,911 48.2 % Under Development - - - 13,000 0.7 % Other (2) (3) 1 118 - 14,226 0.8 % Total Portfolio 202 9,382 7,592$ 1,871,718 100.0 %
(1) We have investments in owned properties, mortgage loans, notes receivable and
unconsolidated joint ventures in 29 states to 32 operators.
(2) Includes three parcels of land held-for-use and one behavioral health care
hospital.
Includes one parcel of land in
(3) future development of a post-acute skilled nursing center and one parcel of
land in
of a seniors housing community.
(4) Excludes variable rental income from lessee reimbursement of
properties of$2,745 . Includes a mezzanine loan on a 204-unit combination ILF, ALF, and MC in
(5) five combination ILF, ALF and MC in
capital loans with interest rates between 5% and 7.5% and maturities between
2023 and 2031.
(6) Includes three working capital loans with interest rates between 4% and 8%
and maturities between 2022 and 2032.
Includes a preferred equity investment in an entity that developed and owns a
95-unit ALF and MC in
(7) total investment. The preferred equity investment earns an initial cash rate
of 7% increasing to 9% in year four until the internal rate of return ("IRR")
is 8%. After achieving an 8% IRR, the cash rate drops to 8% with an IRR
ranging between 12% to 14% depending on the timing of redemption.
Represents a preferred equity investment in an entity that will develop and
(8) own a 267-unit ILF/ALF in
estimated total investment. The preferred equity investment earns an initial
cash rate of 8% with an IRR of 12%.
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As of June 30, 2022 , we had $1.4 billion in net carrying value of investments,
consisting of $1.0 billion or 69.4% invested in owned and leased properties and
$0.4 billion or 25.4% invested in mortgage loans secured by first mortgages. Our
investment in mortgage loans mature between 2022 and 2045 and contain interest
rates between 7.3% and 10.4%.
For the six months ended June 30, 2022 , rental income represented 74.0% of total
gross revenues, mortgage interest income represented 23.5% of total gross
revenues and interest and other income represented 2.5% of total gross revenues.
In most instances, our lease structure contains fixed annual rental escalations
and/or annual rental escalations that are contingent upon changes in the
Consumer Price Index. Certain leases have annual rental escalations that are
contingent upon changes in the gross operating revenues of the property. This
revenue is not recognized until the appropriate contingencies have been
resolved.
For the six months ended June 30, 2022 , we recorded $0.5 million in
straight-line rental adjustment and amortization of lease incentive cost of $0.4
million and an adjustment of $0.2 million related to lease incentive balance of
two assisted living communities in California which were sold during the second
quarter of 2022. Also, during the six months ended June 30,2022 , we wrote-off a
$0.2 million lease incentive balance related to a property closure and
subsequent lease termination. During the six months ended June 30, 2022 , we
received $63.0 million of cash rental income, which includes $8.0 million of
operator reimbursements for our real estate taxes. At June 30, 2022 , the
straight-line rent receivable balance on the consolidated balance sheet was
$22.7 million .
For the six months ended June 30, 2022 , we recorded $19.7 million in Interest
income from mortgage loans which includes $14.5 million of interest received in
cash, $2.5 million of income from interest reserves and $2.7 million in mortgage
loans effective interest. At June 30, 2022 , the mortgage loans effective
interest receivable which is included in the Interest receivable line item in
our Consolidated Balance Sheets was $41.5 million .
Update on Certain Operators and Former Operators
Anthem Memory Care ("Anthem") operates 11 memory care communities under a master lease and was placed in default in 2017 resulting from Anthem's partial payment of its minimum rent. However, we did not enforce our rights and remedies pertaining to the event of default, under the stipulation that Anthem achieves sufficient performance and pays agreed upon rent. Anthem increased their rent payment every year between 2017 and 2021. Anthem paid us annual cash rent of$10.8 million in 2021 and$9.9 million in 2020. During the second quarter of 2022, we reduced the agreed upon 2022 second quarter rent of$2.7 million to$2.1 million . Additionally, we agreed to continue the reduced rent for third quarter of 2022 and expect to receive$1.8 million . However, we expect receiving total cash rent from Anthem in 2022 of approximately$10.8 million based on their anticipated receipt of Employee Retention Tax Credit funds in the fourth quarter of 2022. We receive regular financial performance updates from Anthem and continue to monitor their performance obligations under the master lease agreement. Anthem has paid their agreed upon rent throughJuly 2022 .
Brookdale Senior Living Communities, Inc's ("Brookdale") master lease was amended in the first quarter of 2021 to extend the term by one year throughDecember 31, 2022 . The renewal options under the amended master lease remained the same during the first quarter of 2022 and provided three renewal options consisting of a three-year renewal option, a five-year renewal option and a
10-year renewal
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option. The notice period for the first renewal option wasJanuary 1, 2022 toApril 30, 2022 . During the second quarter of 2022, Brookdale's master lease was again amended to extend the maturity toDecember 31, 2023 . The renewal options under the new amended master lease remained unchanged except the term of the first renewal option was reduced from three years to two. Also, the notice period for the first renewal option was changed toNovember 1, 2022 throughFebruary 28, 2023 . During 2020, we extended to Brookdale a$4.0 million capital commitment which was fully funded during 2021, and a$2.0 million capital commitment which is available betweenJanuary 1, 2022 throughDecember 31, 2022 . Under the new amendment, the$2.0 million capital commitment was increased to$4.0 million and the maturity was extended toFebruary 28, 2023 . The yield on these capital commitments is 7% with a reduced rate for qualified ESG projects. During the six months endedJune 30, 2022 , we funded$0.9 million under the$4.0 million capital commitment. Accordingly, we have a remaining commitment of$3.1 million under this commitment. Brookdale is current on rent payments throughJuly 2022 . Other Operators During 2020, we consolidated our two master leases with an operator into one combined master lease and agreed to abate$0.7 million of rent and allow the operator to defer rent as needed throughMarch 31, 2021 . The combined master lease covering 12 assisted living communities with a total of 625 units, was amended during 2021 and 2022 to extend the rent deferral period throughApril 30, 2022 . The operator deferred rent of$2.1 million during the six months endedJune 30, 2022 . Subsequent toJune 30, 2022 , we terminated the master lease and transitioned the communities to an existing operator. In connection with the lease termination, we abated rent forJune 2022 and have forgiven the former operator's$7.1 million outstanding unaccrued deferred rent balance. Subsequent toJune 30, 2022 , we paid the former operator a$0.5 million lease termination fee in exchange for cooperation and assistance in facilitating an orderly transition. The transition of the communities will be pursuant to a new two-year master lease with zero rent for the first four months. Thereafter, cash rent will be based on mutually agreed upon fair market rent. In connection with the new lease, we paid the new operator a$0.4 million lease incentive payment which will be amortized as a yield adjustment to rental income over the two-year lease term. Additionally, we agreed to defer$0.2 million of the$0.4 million monthly contractual rent for August and September of 2022 from a lessee that operates eight assisted living communities under a master lease. The operator requested rent assistance due to protracted lease-up of their portfolio during COVID. We anticipate they will be able to repay the total$0.3 million of deferred rent in 2023, upon receipt of additional stimulus funds from the Employee Retention Credit program. This operator is current on rent throughJuly 2022 . Also, we provided$0.2 million of abated rent inJuly 2022 and agreed to provide rent abatements up to$0.2 million for each of August and September of 2022 to an operator pursuant to a master lease covering two assisted living communities. We are evaluating options for these communities.
During 2020, an affiliate of Senior Lifestyle ("Senior Lifestyle") failed to pay
its contractual obligations under its master lease. As a result, we applied
their letter of credit and deposits to past due rent and to their outstanding
notes receivable. Senior Lifestyle has not paid rent or its other obligations
under the master lease since 2021. During 2021, we transitioned 18 assisted
living communities previously leased to Senior Lifestyle to six operators. These
communities are located in Illinois , Ohio , Wisconsin , Colorado , Pennsylvania and
Nebraska . Also, during 2021, we sold three Wisconsin communities and a closed
community in Nebraska previously leased to Senior Lifestyle for a combined total
of $35.9 million . We received total proceeds of $34.8 million and recorded
a net gain on sale of$5.4 31 Table of Contents million. During 2022, an assisted living community located inColorado , which transitioned from Senior Lifestyle to a new operator during the first quarter of 2021, was closed and the lease was terminated. We have engaged a broker and intend to sell this assisted living community. Additionally, during 2022, we transitioned the remaining community located inNew Jersey under the Senior Lifestyle master lease to an existing operator. Accordingly, as ofJune 30, 2022 , Senior Lifestyle does not operate any properties in our portfolio.
Senior Care Centers, LLC and affiliates and subsidiaries ("Senior Care") filed for Chapter 11 bankruptcy inDecember 2018 . During 2019, while in bankruptcy, Senior Care assumed LTC's master lease and, inMarch 2020 , Senior Care emerged from bankruptcy. Concurrent with their emergence from bankruptcy, in accordance with the order confirming Senior Care's plan of reorganization,Abri Health Services, LLC ("Abri Health ") was formed as the parent company of reorganized Senior Care and became co-tenant and co-obligor with reorganized Senior Care under our master lease. InMarch 2021 ,Senior Care and Abri Health (collectively, "Lessee") failed to pay rent and additional obligations owed under the master lease. Accordingly, we sent a notice of default and applied proceeds from letters of credit to certain obligations owed under the master lease. Furthermore, we sent the Lessee a notice of termination of the master lease to be effectiveApril 17, 2021 . OnApril 16, 2021 , the Lessee filed for Chapter 11 bankruptcy. InAugust 2021 , theUnited States Bankruptcy Court approved a settlement agreement between Lessee and LTC. The settlement provided for, among other things, a one-time payment of$3.3 million from LTC to the affiliates of Lessee in exchange for cooperation and assistance in facilitating an orderly transition of the 11 skilled nursing centers from the Lessee and its affiliates to affiliates ofHMG Healthcare, LLC ("HMG") which occurred onOctober 1, 2021 . As ofOctober 1, 2021 ,Senior Care and Abri Health no longer operate any properties in our portfolio.
2022 Activities Overview
The following tables summarize our transactions during the six months ended
Investment in
Number Type Number Initial Total Total
of of of Cash Purchase Transaction Acquisition
State Properties Properties Beds/Units Yield Price Costs Costs
Texas (1) 4 SNF 339 8.0 % $ 51,534 $ 281 $ 51,815
The properties are leased to an affiliate of an existing operator under a
10-year lease with two 5-year renewal options. Additionally, the lease
provides for either an earn-out payment or purchase option but not both. If
neither option is elected within the timeframe defined in the lease, both
elections are terminated. The earn-out payment is available, contingent on
achieving certain thresholds per the lease, beginning at the end of the
second lease year through the end of the fifth lease year. The purchase
(1) option is available beginning at the end of the fifth lease year through the
end of the seventh lease year. The initial cash yield is 8% for the first
year, increasing to 8.25% for the second year, then increases annually by
2.0% to 4.0% based on the change in the Medicare Market Basket Rate. In
connection with the transition, we provided the lease a 10-year working
capital loan for up to
first year, increasing to 8.25% for the second year, the increasing annually
with the lease rate.
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Investment in Improvement projects
Improvements
Assisted Living Communities $ 1,964
Skilled Nursing Centers 620
Other 321
Total $ 2,905
Properties Sold
Type Number Number
of of of Sales Carrying Net
State Properties Properties Beds/Units Price Value Gain (1)
California ALF 2 232 $ 43,715 $ 17,832 $ 25,867
California SNF 1 121 13,250 1,846 10,849
Virginia ALF 1 74 16,895 15,549 1,336 (2)
n/a n/a - - - - 144 (3)
Total 2022 4 427 $ 73,860 $ 35,227 $ 38,196
(1) Calculation of net gain includes cost of sales.
(2) In connection with this sale, the former operator paid us a lease termination
fee of
We recognized additional gain due to the reassessment adjustment of the
(3) holdbacks related to properties sold during 2019 and 2020, under the expected
value model per Accounting Standard Codification ("ASC") Topic 606, Contracts
with Customers ("ASC 606").
Investment in Mortgage Loans
Originations and funding under mortgage loans receivable
Application of interest reserve
2,451 Scheduled principal payments received (625) Mortgage loan premium amortization (3) Provision for loan loss reserve (358) Net increase in mortgage loans receivable$ 35,375
We originated two senior mortgage loans, secured by four ALFs operated by an
existing operator, as well as a land parcel in
communities have a combined total of 217 units, with an average age of less
(1) than four years. The land parcel is approximately 7.6 acres adjacent to one
of the ALFs and is being held for the future development of a seniors housing
community. The mortgage loans have a four-year term, an interest rate of
7.25% and an IRR of 8%.
Investment in
Type Type Total Contractual Number Cash
of of Preferred Cash of Carrying Income Interest
State Properties Investment Return Portion
Beds/ Units Value Recognized Received Washington (1) ALF/MC Preferred Equity (1) 12 % 7 % 95$ 6,340 $ 224 $ 224 Washington (2) UDP Preferred Equity (2) 12 % 8 % - 13,000 527 527 95$ 19,340 $ 751 $ 751
Represents a preferred equity in an entity that developed and owns a 95-unit
ALF and MC in
investment. The preferred equity investment earns an initial cash rate of 7%
increasing to 9% in year four until the internal rate of return ("IRR") is
(1) 8%. After achieving an 8% IRR, the cash rate drops to 8% until achieving an
IRR ranging between 12% to 14%, depending upon timing of redemption. During
the fourth quarter of 2021, the entity completed the development project and
received its certificate of occupancy. We have the option to require the JV
partner to purchase our preferred equity interest at any time between August
17, 2031 andDecember 31, 2036 . Represents a preferred equity in an entity that will develop and own a
267-unit ILF and ALF in
estimated total investment. The preferred equity investment earns an initial
cash rate of 8% with an IRR of 12%. The JV partner has the option to buy out
(2) our investment at any time after
have the option to require the JV partner to purchase our preferred equity
interest at any time between
leasing the property, prior to the end of the first renewal term of the
lease.
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Notes Receivable
Advances under notes receivable $ 36,788 (1)
Principal payments received under notes receivable (6,618)
Provision for credit losses
(301) Net increase in notes receivable$ 29,869
Includes the origination of a
of five assisted living communities located in
total of 621 units. The mezzanine loan has a term of approximately five years
(1) with two one-year extension options. It bears interest at 8% with IRR of 11%.
Also includes origination of a working capital loan for a commitment of up to
capital loan to HMG.
Health Care Regulatory Climate
TheCenters for Medicare & Medicaid Services ("CMS") annually updates Medicare skilled nursing facility ("SNF") prospective payment system rates and other policies. OnJuly 30, 2019 , CMS issued its final fiscal year 2020 Medicare skilled nursing facility update. Under the final rule, CMS projected aggregate payments to SNFs would increase by$851 million , or 2.4%, for fiscal year 2020 compared with fiscal year 2019. The final rule also addressed implementation of the Patient-Driven Payment Model case mix classification system that became effective onOctober 1, 2019 , changes to the group therapy definition in the skilled nursing facility setting, and various SNF Value-Based Purchasing and quality reporting program policies. OnApril 10, 2020 , CMS issued a proposed rule to update SNF rates and policies for fiscal year 2021, which startedOctober 1, 2020 , and issued the final rule onJuly 31, 2020 . CMS estimated that payments to SNFs would increase by$750 million , or 2.2%, for fiscal year 2021 compared to fiscal year 2020. CMS also adopted revised geographic delineations to identify a provider's status as an urban or rural facility and to calculate the wage index, applying a 5% cap on any decreases in a provider's wage index from fiscal year 2020 to fiscal year 2021. Finally, CMS also finalized updates to the SNF value-based purchasing program to reflect previously finalized policies, updated the 30-day phase one review and correction deadline for the baseline period quality measure quarterly report, and announced performance periods and performance standards for the fiscal year 2023 program year. OnApril 8, 2021 , CMS issued a proposed rule to update SNF rates and policies for fiscal year 2022, which startedOctober 1, 2021 , and issued the final rule onJuly 29, 2021 . CMS estimated that the aggregate impact of the payment policies in the final rule would result in an increase of approximately$410 million in Medicare Part A payments to SNFs in fiscal year 2022. The final rule also includes several policies that update the SNF Quality Reporting Program and the SNF Value-Based Program for fiscal year 2022. OnApril 11, 2022 , CMS issued a proposed rule to update SNF rates and policies for fiscal year 2023. CMS estimated that the aggregate impact of the payment policies in the proposed rule would result in a decrease of approximately$320 million in Medicare Part A payments to SNFs in fiscal year 2023 compared to fiscal year 2022. CMS also sought input on the effects of direct care staffing requirements to improve long-term care requirements for participation and promote thoughtful, informed staffing plans and decisions within facilities to meet residents' needs, including maintaining or improving resident function and quality of life. Specifically, CMS sought input on establishing minimum staffing requirements for long-term care facilities. OnJune 29, 2022 , CMS issued updates to guidance on minimum health and safety standards that long-term care facilities must meet to participate in Medicare and Medicaid, and updated and developed new guidance in the State Operations Manual to address issues that significantly affect residents of long-term care facilities. There can be no assurance that these rules or future regulations modifying Medicare skilled nursing facility payment rates or other requirements for Medicare and/or Medicaid participation will not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us. 34
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Since the announcement of the COVID-19 pandemic and beginning as ofMarch 13, 2020 , CMS has issued numerous temporary regulatory waivers and new rules to assist health care providers, including SNFs, respond to the COVID-19 pandemic. These include waiving the SNF 3-day qualifying inpatient hospital stay requirement, flexibility in calculating a new Medicare benefit period, waiving timing for completing functional assessments, waiving requirements for health care professional licensure, survey and certification, provider enrollment, and reimbursement for services performed by telehealth, among many others. CMS also announced a temporary expansion of its Accelerated and Advance Payment Program to allow SNFs and certain other Medicare providers to request accelerated or advance payments in an amount up to 100% of the Medicare Part A payments they received from October-December 2019 ; this expansion was suspendedApril 26, 2020 in light of other CARES Act funding relief. The Continuing Appropriations Acts, 2021 and Other Extensions Act, enacted onOctober 1, 2020 , amended the repayment terms for all providers and suppliers that requested and received accelerated and advance payments during the COVID-19 public health emergency. Specifically,Congress gave providers and suppliers that received Medicare accelerated and advance payment(s) one year from when the first loan payment was made to begin making repayments. In addition, CMS enhanced requirements for nursing facilities to report COVID-19 infections to local, state and federal authorities. OnJuly 15, 2022 , HHS Secretary Becerra announced that he had renewed, effectiveJuly 15, 2022 , the declared public health emergency for an additional 90-day period. OnMarch 26, 2020 ,President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), sweeping legislation intended to bolster the nation's response to the COVID-19 pandemic. In addition to offering economic relief to individuals and impacted businesses, the law expands coverage of COVID-19 testing and preventative services, addresses health care workforce needs, eases restrictions on telehealth services during the crisis, and increases Medicare regulatory flexibility, among many other provisions. Notably, the CARES Act temporarily suspended the 2% across-the-board "sequestration" reduction during the periodMay 1, 2020 throughDecember 31, 2020 , and extended the current Medicare sequester requirement through fiscal year 2030. In addition, the law provides$100 billion in grants to eligible health care providers for health care related expenses or lost revenues that are attributable to COVID-19. OnApril 10, 2020 , CMS announced the distribution of$30 billion in funds to Medicare providers based upon their 2019 Medicare fee for service revenues. Eligible providers were required to agree to certain terms and conditions in receiving these grants. In addition, theDepartment of Health and Human Services ("HHS") authorized$20 billion of additional funding for providers that have already received funds from the initial distribution of$30 billion . Unlike the first round of funds, which came automatically, providers were required to apply for these additional funds and submit the required supporting documentation, using the online portal provided by HHS. Providers were required to attest to and agree to specific terms and conditions for the use of such funds. HHS expressed a goal of allocating the whole$50 billion proportionally across all providers based on those providers' proportional share of 2018 net Medicare fee-for-service revenue, so that some providers would not be eligible for additional funds. OnMay 22, 2020 , HHS announced that it had begun distributing$4.9 billion in additional relief funds to SNFs to offset revenue losses and assist nursing homes with additional costs related to responding to the COVID-19 public health emergency and the shipments of personal protective equipment provided to nursing homes by theFederal Emergency Management Agency . OnJune 9, 2020 , HHS announced that it expected to distribute approximately$15 billion to eligible providers that participate in state Medicaid andChildren's Health Insurance Program ("CHIP") programs and have not received a payment from theProvider Relief Fund General Allocation. OnJuly 22, 2020 ,President Trump announced that HHS would devote$5 billion in Provider Relief Funds to Medicare-certified long-term care facilities and state veterans' homes to build nursing home skills and enhance nursing homes' response to COVID-19, including enhanced infection control. Nursing homes were required to participate in the Nursing Home COVID-19 training to qualify for this funding. OnAugust 27, 2020 , HHS announced that it had distributed almost$2.5 billion to nursing homes to support increased testing, staffing, and personal protective equipment needs. OnSeptember 3, 2020 , HHS announced a$2 billion 35
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performance-based incentive payment distribution to nursing homes and SNFs. Finally, onOctober 1, 2020 , HHS announced$20 billion in additional funding for several types of providers, including thosewho previously received, rejected, or accepted a general distribution provider relief fund payment. The application deadline for these Phase 3 funds wasNovember 6, 2020 . OnDecember 27, 2020 ,President Trump signed the Consolidated Appropriations Act, 2021 (H.R. 133). The$1.4 trillion omnibus appropriations legislation funds the government throughSeptember 30, 2021 and was attached to a$900 billion COVID-19 relief package. Of the$900 billion in COVID-19 relief,$73 billion was allocated to HHS. Notably, the bill adds an additional$3 billion to theProvider Relief Fund , includes language specific to reporting requirements, and allows providers to use any reasonable method to calculate lost revenue, including the difference between such provider's budgeted and actual revenue budget if such budget had been established and approved prior toMarch 27, 2020 , to demonstrate entitlement for these funds. This change reverts to HHS' previous guidance fromJune 2020 on how to calculate lost revenues. The Consolidated Appropriations Act, 2021 also extended the CARES Act's sequestration suspension toMarch 31, 2021 . OnJanuary 15, 2021 , HHS announced that it would be amending the reporting timeline for Provider Relief Funds and indicated that it was working to update theProvider Relief Fund requirements to be consistent with the passage of the Consolidated Appropriations Act, 2021. OnApril 14, 2021 ,President Biden signed an Act to Prevent Across-the-Board Direct Spending Cuts, and for Other Purposes (H.R. 1868), which extended the sequestration suspension period toDecember 31, 2021 . OnJune 11, 2021 , HHS issued revised reporting requirements for recipients ofProvider Relief Fund payments. The announcement included expanding the amount of time providers would have to report information, aimed to reduce burdens on smaller providers, and extended key deadlines for expendingProvider Relief Fund payments for recipientswho received payments afterJune 30, 2020 . The revised reporting requirements are applicable to providerswho received one or more payments exceeding, in the aggregate,$10,000 during a single Payment Received Period from the PRF General Distributions, Targeted Distributions, and/or Skilled Nursing Facility and Nursing Home Infection Control Distributions. OnJuly 1, 2021 , HHS, through theHealth Resources and Services Administration ("HRSA"), notified recipients ofProvider Relief Fund payments by e-mail that the Provider Relief Fund Reporting Portal was open for recipientswho were required to report on the use of funds in Reporting Period 1, as described by HHS'sJune 11, 2021 update to the reporting requirements. OnSeptember 10, 2021 , HHS announced a final 60-day grace period of theSeptember 30, 2021 reporting deadline for Provider Relief Funds exceeding$10,000 in aggregate payments received fromApril 10, 2020 toJune 30, 2020 . Although theSeptember 30, 2021 reporting deadline remained in place, HHS explained that recoupment or other enforcement actions would not be initiated during the 60-day grace period, which began onOctober 1, 2021 and ended onNovember 30, 2021 . Reporting Period 2, for providerswho received one or more payments exceeding$10,000 , in the aggregate, fromJuly 1, 2020 toDecember 31, 2020 , was fromJanuary 1, 2022 toMarch 31, 2022 .The Provider Relief Fund reporting portal opened for Reporting Period 3 onJuly 1, 2022 for providerswho received one or moreProvider Relief Fund payments exceeding$10,000 , in the aggregate, fromJanuary 1, 2021 toJune 30, 2021 . OnSeptember 10, 2021 , theBiden Administration announced$25.5 billion in new funding for health care providers affected by the COVID-19 pandemic, including$8.5 billion in American Rescue Plan ("ARP") resources for providerswho serve rural Medicaid, CHIP, or Medicare patients, and an additional$17 billion for Phase 4 Provider Relief Funds for a broad range of providerswho can document revenue loss and expenses associated with the pandemic, including assisted living facilities that were state-licensed/certified on or beforeDecember 31, 2020 . Approximately 25% of the Phase 4 allocation was for bonus payments based on the amount and type of services provided to Medicaid, CHIP, and Medicare beneficiaries fromJanuary 1, 2019 throughSeptember 30, 2020 . The deadline for submitting applications for Phase 4 funds wasOctober 26, 2021 . 36
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On
American Farmers from Sequester Cuts Act, which suspended the Medicare 2%
sequestration reduction through
sequestration cuts to 1% from April through
OnDecember 14, 2021 , HHS announced the distribution of approximately$9 billion in Provider Relief Fund Phase 4 payments to health care providerswho have experienced revenue losses and expenses related to the COVID-19 pandemic. Further, onJanuary 25, 2022 , HHS announced that it would be making more than$2 billion in Provider Relief Fund Phase 4 General Distribution payments to more than 7,600 providers across the country that same week. OnMarch 22, 2022 , HHS announced more than$413 million in Provider Relief Fund Phase 4 payments to more than 3,600 providers across the country. OnApril 13, 2022 , HRSA announced the disbursement of more than$1.75 billion inProvider Relief Fund payments to 3,680 providers across the country.Congress periodically considers legislation revising Medicare and Medicaid policies, including legislation that could have the impact of reducing Medicare reimbursement for SNFs and other Medicare providers, limiting state Medicaid funding allotments, encouraging home and community-based long-term care services as an alternative to institutional settings, or otherwise reforming payment policy for post-acute care services.Congress continues to consider further legislative action in response to the COVID-19 pandemic. There can be no assurances that enacted or future legislation will not have an adverse impact on the financial condition of our lessees and borrowers, which subsequently could materially adversely impact our company. Additional reforms affecting the payment for and availability of health care services have been proposed at the federal and state level and adopted by certain states. Increasingly, state Medicaid programs are providing coverage through managed care programs under contracts with private health plans, which is intended to decrease state Medicaid costs. State Medicaid budgets may experience shortfalls due to increased costs in addressing the COVID-19 pandemic.Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodologies may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third-party payors.
Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results in making operating decisions and for budget planning purposes. Concentration Risk. We evaluate by gross investment our concentration risk in terms of asset mix, real estate investment mix, operator mix and geographic mix. Concentration risk is valuable to understand what portion of our real estate investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our investments that are real property or mortgage loans.The National Association of Real Estate Investment Trusts ("NAREIT"), an organization representingU.S. REITs and publicly traded real estate companies, classifies a company with 50% or more of assets directly or indirectly in the equity ownership of real estate as an equity REIT. Investment mix measures the portion of our investments that relate to our various property classifications. Operator mix measures the portion of our investments that relate to our top five operators. Geographic mix measures the portion of our real estate investment that relate to our top five states. 37
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The following table reflects our recent historical trends of concentration risk
(gross investment, in thousands):
6/30/22 3/31/22 12/31/21 9/30/21 6/30/21
Asset mix:
Real property $ 1,409,937 $ 1,409,625 $ 1,408,557 $ 1,407,098 $ 1,412,329
Loans receivable 383,647 350,037 347,915 261,437 259,641
Notes receivable 58,794 62,127 28,623 18,864 13,869
Unconsolidated joint ventures 19,340 19,340 19,340
19,340 19,340 Real estate investment mix: Assisted living communities$ 942,581 $ 956,642 $ 929,113 $ 868,081 $ 860,573 Skilled nursing centers 901,911 858,150 849,182 812,518 820,246 Under development 13,000 13,000 13,000 13,000 13,000 Other (1) 14,226 13,337 13,140 13,140 11,360 Operator mix: Prestige Healthcare (1)$ 271,853 $ 272,326 $ 272,453 $ 272,789 $ 272,773 HMG Healthcare 175,532 180,662 171,920 23,705 23,705Anthem Memory Care 139,176 139,176 139,176 139,176 139,176 ALG Senior (2) 110,075 76,715 74,888 26,881 26,853 Brookdale Senior Living 103,831 103,136 102,921 102,261 101,240 Remaining operators (2) 1,071,251 1,069,114 1,043,077 1,141,927 1,141,432 Geographic mix: Texas$ 326,983 $ 274,803 $ 274,626 $ 274,204 $ 273,588 Michigan 280,934 281,407 281,512 282,022 281,762 Wisconsin 114,729 114,729 114,538 114,288 114,250 Colorado 104,651 104,514 104,514 104,445 104,347 North Carolina (3) 92,639 59,217 57,521 13,602 13,487 Remaining states (3) 951,782 1,006,459 971,724 918,178 917,745
(1) Includes three parcels of land located adjacent to properties securing the
Prestige Healthcare mortgage loan and are managed by Prestige. During the three months endedJune 30, 2022 , as a result of recent
transactions, ALG Senior is a top five operator under our operator mix and
(2) replaces
properties were reclassified from "Remaining operators" and our "Carespring
for all periods presented.
During the three months ended June 30, 2022 , as a result of recent
transactions,
(3) mix and is replaced by
properties were reclassified from "Remaining states" and our "California"
properties were reclassified back to "Remaining States" for all periods
presented.
Credit Strength. We measure our credit strength both in terms of leverage ratios
and coverage ratios. Our leverage ratios include debt to gross asset value and
debt to market capitalization. The leverage ratios indicate how much of our
Consolidated Balance Sheets capitalization is related to long-term obligations.
Our coverage ratios include interest coverage ratio and fixed charge coverage
ratio. The coverage ratios indicate our ability to service interest and fixed
charges (interest). The coverage ratios are based on earnings before interest,
taxes, depreciation and amortization for real estate ("EBITDAre") as defined by
NAREIT. EBITDAre is calculated as net income available to common stockholders
(computed in accordance with GAAP) excluding (i) interest expense, (ii) income
tax expense, (iii) real estate depreciation and amortization, (iv) impairment
write-downs of depreciable real estate, (v) gains or losses on the sale of
depreciable real estate, and (vi) adjustments for unconsolidated partnerships
and joint ventures. Leverage ratios and coverage ratios are widely used by
investors, analysts and rating agencies in the valuation, comparison, rating and
investment recommendations of companies. The following table reflects the recent
historical trends for our credit strength measures:
38
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