As cutbacks in government medical care reimbursements loom, investors in skilled nursing facilities such as Westlake Village real estate investment trust LTC Properties Inc. want to diversify.
LTC has been trying to focus on buying assisted-living facilities and developing Alzheimer’s patient care centers, which aren’t so dependent on government payments because the patients or their families tend to pay out of pocket.
But that diversification is easier said than done. In fact, the REIT announced last week that it had closed a deal to acquire a skilled nursing facility in a Dallas suburb for $18.6 million. And in a recent conference call with analysts, the company indicated more acquisitions of skilled nursing facilities are in the works for later this year.
If more such acquisitions take place, they would tip the company’s portfolio – currently weighted slightly in favor of assisted-living facilities – toward skilled nursing properties.
LTC executives acknowledge the risk in investing in nursing homes and have outlined an aggressive plan to diversify that includes purchasing more assisted-living facilities, developing specialized homes for Alzheimer’s patients and expanding senior care facilities.
But that will take time and, in the case of private-pay assisted-living facilities, the competition to buy them is great and prices have become high.
“Right now, a lot of investors sense difficulties on the government-pay side and are scouring for deals on the private-pay side with assisted-living facilities,” said James Milam, associate director with Sandler O’Neill & Partners LP in New York. “So right now, the valuations of assisted-living facilities are a little too high for LTC.”
In a recent conference call on earnings, Thomas Stokes, LTC’s senior vice president of marketing and strategic planning, noted that more nursing home facilities have come on the market recently. They’ve become relatively cheap, and he expects the prices will drop further. Even though the properties are less desirable, the company’s business model can make money from them, especially if the purchase price is low.
Skilled nursing facilities, which provide long-term medical care for seriously ill seniors, have lost much of their luster with investors because most patients in those homes rely on government Medicare or Medicaid payments. A major round of cutbacks in Medicare reimbursements took place last October and more are expected in coming years as the federal government tries to rein in costs. As a result, nursing homes are likely to struggle with lower reimbursements and become less profitable.
By contrast, assisted-living facilities, which have grown rapidly over the last 20 years as the baby boom generation ages, aren’t subject to the same pressure because the residents have lower medical needs. The cost of lodging in assisted living isn’t covered by Medicare or Medicaid; residents pay room and board costs out of their pockets or have family members pay on their behalf.
Until recently, stock investors had been bullish on LTC, sending its shares up to a 52-week high of $33 in early February. But the stock has slipped a bit in recent weeks amid concerns about the company’s ability to diversify away from nursing homes. Last week, the stock was trading at about $31.
Memory care
With tough competition on the assisted-living front, LTC is turning to the underdeveloped market for “memory care,” particularly housing for Alzheimer’s patients. Currently, Alzheimer’s patients are housed in special wings of assisted-living facilities that have staff trained to deal with patients suffering from memory loss.
But with the number of Alzheimer’s patients skyrocketing as the baby boom generation ages, LTC executives see a huge market for facilities dedicated to this subset of seniors and has formed a unit to search for development opportunities. LTC pursued a similar strategy 20 years ago at the beginning of the explosion of private-pay assisted-living facilities.
“Memory care is a really high priority,” Stokes said in the conference call. “The occupancies in this field are very high and very little supply has been added in the last five years. We think now is a good time to build Alzheimer’s facilities.”
During the same conference call, Clint Malin, LTC chief investment officer, told analysts the company wants to develop memory care facilities that can house 50 to 70 patients, with acquisition and construction costs ranging from $9 million to $14 million.
Malin said the company had recently signed a letter of intent to commit $9 million toward the acquisition of land and the construction of a private-pay memory care facility. He did not release further details on the location or size of the project.
Malin added that the company is in various stages of discussion on $40 million worth of renovation and expansion projects at several assisted-living facilities already in its portfolio.
