LTC Properties, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
LTC Properties is a healthcare real estate investment trust focused on seniors housing and healthcare properties, including skilled nursing and assisted living. It invests through owned properties, leases, mortgage and other loans, financing receivables, joint ventures, and structured finance. This unaudited filing covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022.
Financial results and key metrics
Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $49.3 | $43.5 | $147.0 | $127.3 |
| Net income attributable to LTC | $22.2 | $13.3 | $61.5 | $82.1 |
| Net income available to common stockholders | $22.1 | $13.2 | $61.1 | $81.6 |
| Diluted EPS | $0.54 | $0.32 | $1.48 | $2.04 |
| NAREIT FFO per diluted share | $0.65 | $0.60 | $1.97 | $1.83 |
- Q3 revenue was essentially flat in rental income ($31.6 million); higher financing-receivable and mortgage-loan interest income drove the overall increase. Q3 operating income was $22.3 million, versus $13.0 million.
- Nine-month revenue increased 15.5%, while net income attributable to LTC declined 25.1%. The comparison reflects lower real-estate sale gains ($20.5 million versus $37.8 million) and higher impairment losses ($12.5 million versus $1.3 million), including a $12.1 million impairment on two assisted-living communities.
- Q3 net income benefited from a $4.9 million property-sale gain; the comparable 2022 quarter included a $0.4 million net loss on sale. FFO, a non-GAAP REIT performance measure, excludes real estate depreciation, impairment, and sale gains or losses.
- Interest expense rose to $12.7 million in Q3 from $7.9 million, and to $34.6 million for nine months from $22.6 million, primarily due to higher revolving-credit borrowings and rates. Nine-month interest paid was $35.0 million.
- Nine-month operating cash flow was $78.9 million, compared with $72.8 million. Investing activities used $194.3 million, versus $110.5 million, reflecting increased investment in financing receivables and loans. Financing activities provided $116.2 million.
- Cash and equivalents were $11.3 million at quarter-end. Total assets were $1.868 billion and total equity was $860.4 million. The company declared and paid $0.57 per share in Q3 and $1.71 per share for the first nine months.
Balance sheet, debt, and liquidity
- Debt obligations totaled $956.2 million at September 30, 2023, compared with $767.9 million at year-end 2022. The weighted-average stated interest rate was 4.97%; the revolving line carried a 6.63% rate.
- The $400 million revolving facility had $362.3 million outstanding and $37.8 million available. Term loans were $99.6 million and senior unsecured notes were $494.4 million. Notes mature from 2024 through 2033; the revolving facility matures in November 2025, with a conditional one-year extension option.
- Debt to gross asset value was 42.1%, up from 37.4% at year-end 2022. Q3 interest-coverage and fixed-charge-coverage ratios were 3.2x, down from 4.4x at year-end. The company reported compliance with all applicable debt covenants.
- Management cited $11.3 million of cash, $37.8 million of revolver availability, $128.8 million of remaining capacity under its equity distribution agreements, and access to a shelf registration. It believes liquidity is sufficient for current operating costs, debt obligations, planned investments, and dividends, subject to capital-market conditions and other risks.
Material changes, outlook, and risks
- Portfolio investment increased, notably through a $121.3 million assisted-living and memory-care financing-receivable transaction and additional mortgage lending. At quarter-end the gross portfolio was $2.165 billion across 27 states and 29 operators; owned properties represented 65.0% of gross investment, mortgage loans 22.1%, and financing receivables 9.1%.
- Brookdale declined to renew its master lease covering 35 assisted-living properties, which matures December 31, 2023. LTC agreed to sell seven properties and arranged new leases for 17 properties with Brookdale, starting January 1, 2024, at initial annual rent of $9.3 million. Six Oklahoma properties were also leased to another operator, subject to licensure; LTC was still working on a new lease for the remaining five North Carolina properties.
- Prestige Healthcare, the largest operator by revenue, represented 16.6% of total revenue and 14.2% of assets. LTC deferred up to $1.5 million of 2023 mortgage interest. After quarter-end, it drew on Prestige’s letter of credit to cover deferred interest and expected to collect all $19.5 million of contractual 2023 interest. From January 2024, the minimum current-pay rate is 8.5% on the outstanding loan balance; the contractual rate remains unchanged. Collection depends in part on Prestige’s financial condition and anticipated Medicaid-related funding.
- Management gave no specific earnings or investment guidance. It said investments and liquidity depend on operator performance, access to capital, interest rates, and the ability to redeploy asset-sale proceeds. The October 2023 filing reports declared monthly dividends of $0.19 per share for October through December 2023.
- Key risks include operator financial distress and rent or interest collection, concentration among major operators, inflation and labor costs, higher borrowing costs, healthcare reimbursement and regulatory changes, proposed minimum nursing-home staffing standards, collateral values, and the ability to renew or replace leases. Management also cited the continuing effects of COVID-19 on operators. It reported no material change in previously disclosed risk factors.
- Other unusual items include $12.5 million of nine-month impairment losses, $20.5 million of property-sale gains, and $54.6 million of accrued interest receivable. The company said accrued interest receivable is not included in its expected-credit-loss allowance and is written off as appropriate when incurred.
Investor verification points
- Track Brookdale lease transitions and sales, including execution of a lease for the five remaining North Carolina properties and the timing and net proceeds from planned sales.
- Verify Prestige’s actual interest collections, letter-of-credit replenishment, and ability to meet the revised minimum-pay terms in 2024 and 2025.
- Assess the collectability of the $54.6 million accrued interest receivable, credit-loss allowances, and the performance of borrowers and operators, especially major counterparties.
- Monitor debt maturities, variable-rate exposure, borrowing capacity, coverage ratios, and whether investment spending and dividends remain supportable by operating cash flow.
- Review the assumptions behind the two impaired assisted-living assets and the impact of proposed staffing and reimbursement rules on tenants and borrowers.