LTC Properties, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
LTC is a healthcare REIT investing primarily in seniors housing and healthcare properties through triple-net leases, mortgage loans and structured financing. At quarter-end, its portfolio included 177 owned properties and 22 properties securing mortgage loans, across 28 states and 29 operators. Seniors housing and long-term care represented approximately 99.4% of the real estate portfolio.
Financial performance and position
- Revenue: Q3 revenue was $41.8 million, up 1.3% year over year; nine-month revenue was $125.1 million, down 1.0%. Q3 rental income rose to $34.2 million from $33.2 million, while nine-month rental income declined to $102.6 million from $103.5 million. Mortgage interest income increased 6.4% for the nine-month period to $20.9 million.
- Profit: Q3 net income was $34.9 million ($0.88 per diluted share), compared with $20.6 million ($0.52) a year earlier. Nine-month net income was $124.2 million ($3.12 diluted), versus $67.5 million ($1.70). The increase largely reflects real estate sale gains: $14.4 million in Q3 and $62.7 million year to date, compared with $5.1 million year to date in 2017.
- Recurring performance measure: NAREIT FFO was $29.9 million, or $0.75 per diluted share, in Q3 versus $30.1 million and $0.76. Nine-month FFO was $89.2 million, or $2.25 per diluted share, versus $92.2 million and $2.33.
- Operating results and margins: Operating income was $19.8 million in Q3 and $59.4 million year to date, down 0.8% and 2.3%, respectively. Operating margin, calculated as operating income divided by revenue, was approximately 47.5% for Q3 versus 48.5% and 47.5% year to date versus 48.1%.
- Cash flow: Nine-month operating cash flow was $83.4 million, up from $76.1 million. Investing cash outflow was $2.4 million, compared with $53.8 million, reflecting $82.3 million of property-sale proceeds. Financing cash outflow was $63.7 million, including $67.8 million of stockholder distributions. Cash, cash equivalents and restricted cash totaled $22.6 million at period-end.
- Debt and liquidity: Debt carrying value was $671.0 million ($120.0 million of bank borrowings and $551.0 million of senior notes), versus $667.5 million at year-end 2017. Weighted-average debt interest rate was 4.29%. The $600 million revolving facility had $480 million available at quarter-end; following a subsequent $20 million paydown, $500 million was available. The company reported compliance with debt covenants. Debt to gross asset value was 36.4%; interest and fixed-charge coverage were each 4.8x for Q3.
- Equity and distributions: Total equity was $823.3 million. The company declared and paid $0.57 per common share in Q3 and $1.71 year to date; it declared monthly dividends of $0.19 per share for October through December 2018.
Material changes and unusual items
- During the first nine months, LTC sold eight properties and adjacent land for $85.4 million, recognizing a net gain of $62.7 million. It also invested $40.4 million in property acquisitions and $25.7 million in development projects.
- Rental income for the first nine months was affected by Anthem’s partial rent payment/default and property sales, partly offset by acquisitions and capital improvements. Mortgage interest income increased with loan funding, partly offset by payoffs.
- After quarter-end, LTC sold a 60-bed Florida skilled nursing facility for $5.0 million and expected to recognize a gain of approximately $3.4 million in Q4.
- After quarter-end, an amended Senior Lifestyle master lease removed a contingent lease incentive. LTC expected to write off a $6.2 million lease incentive asset and a $9.3 million related earn-out liability, producing approximately $3.0 million of income.
- A Texas skilled nursing property damaged by Hurricane Harvey remained unimpaired under the company’s assessment. Insurance proceeds of $2.6 million were recorded as restricted cash for remediation.
Outlook, commentary and risks
- Management stated that cash, operating cash flow, borrowing capacity and potential capital-market access were expected to be sufficient for operating costs, debt service, investment needs and dividends, and described liquidity as adequate for additional investment in 2018 and 2019. No earnings or FFO guidance was provided.
- LTC was not pursuing enforcement of known Anthem lease defaults subject to Anthem achieving specified performance and paying at least $5.2 million cash rent through December 31, 2018; LTC said it was monitoring performance. Anthem operated 11 memory care communities.
- Preferred Care was in Chapter 11 bankruptcy proceedings. It leased 24 LTC properties outside the states involved in the lawsuit that prompted the filing, and was current on rent; its annual rental revenue represented 6.5% of rental and mortgage interest income.
- Operator concentration is material: the four largest operators listed represented 49.8% of portfolio revenue and 38.5% of assets. The filing warns that financial distress, bankruptcy, or nonrenewal by operators could impair rent and loan collections and distributions.
- Other risks include changes in Medicare and Medicaid reimbursement and regulation, operator performance, interest rates and capital-market access, tenant concentration, and the relative illiquidity of real estate. CMS finalized a 2.4% SNF Medicare payment increase for fiscal 2019, while the SNF Value-Based Purchasing program began October 1, 2018 and withholds 2% of Medicare payments subject to performance-based returns.
- The company was evaluating the impact of the new lease accounting standard, effective in 2019, and expected to complete its assessment in Q4 2018. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the large property-sale gains and post-quarter accounting items obscure trends in recurring FFO and per-share performance.
- Anthem’s rent payments and performance against the $5.2 million minimum through year-end, and any effects on lease collections.
- Developments in Preferred Care’s bankruptcy and its ability to remain current on rent.
- Operator concentration, rent coverage and collectibility, particularly among the largest tenants and borrowers.
- Debt costs, covenant headroom, available revolver capacity and the sensitivity of financing costs to interest rates.
- Completion and implications of the 2019 lease-accounting assessment, and the funding and execution of development commitments.