LTC Properties, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. LTC is a healthcare REIT investing mainly in seniors housing and healthcare properties through leases, mortgage loans and structured financing.
Financial performance and position
- Revenue: $41.8 million, down 1.9% from $42.6 million in Q1 2017. Rental income was $34.5 million; mortgage-loan interest income was $6.8 million.
- Profit: Net income was $20.4 million, down 5.4%; net income available to common stockholders was $20.3 million. Basic and diluted EPS were $0.51 versus $0.54. Operating income was $19.7 million; operating margin was approximately 47.2%, compared with 49.4%.
- FFO: NAREIT FFO attributable to common stockholders was $29.7 million, or $0.75 per share, versus $30.8 million, or $0.78 per share. FFO is a non-GAAP supplemental measure.
- Cash flow: Operating cash flow was $21.6 million, versus $21.1 million. Investing used $19.3 million, compared with $0.9 million provided in the prior-year quarter; financing used $3.7 million, versus $21.2 million. Cash declined $1.4 million to $3.8 million.
- Dividends: $0.57 per common share was declared and paid during the quarter, totaling $22.6 million. Operating cash flow was slightly below cash distributions. Management declared $0.19 monthly dividends for April through June 2018.
- Debt and liquidity: Total debt was $687.4 million ($120.5 million of bank borrowings and $566.9 million of senior unsecured notes), up from $667.5 million at year-end. Weighted-average stated rates were 3.21% on bank borrowings and 4.49% on notes; interest expense rose to $7.8 million from $7.5 million. The revolving facility was due October 14, 2018, with a one-year extension option; the company reported covenant compliance. At quarter-end it had $479.5 million of revolver availability and $67.8 million under its note shelf. After quarter-end it repaid $65.0 million on the revolver, leaving $55.5 million drawn and $544.5 million available.
- Balance sheet: Total assets were $1.479 billion and total equity was $756.9 million. Debt to gross asset value was 38.3%, up from 35.6% a year earlier; interest and fixed-charge coverage were each 4.7x, down from 5.0x.
Changes versus Q1 2017
- Revenue fell $0.8 million and common-stockholder net income fell $1.1 million. Rental income declined $0.5 million, primarily due to a defaulted master lease placed on cash-basis accounting and rent reductions from properties sold in 2017. Higher mortgage income partly offset the decline.
- Interest expense increased $0.4 million, mainly due to higher average revolver borrowings and lower capitalized interest. Income from unconsolidated joint ventures increased $0.2 million.
- Cash from operations increased $0.5 million, while investing cash flow deteriorated by $20.2 million, mainly because of increased development and loan funding and fewer mortgage payoffs and real-estate sale proceeds.
- Development investment rose to $8.6 million from $3.4 million; mortgage-loan funding rose to $9.6 million from $4.4 million. The prior-year quarter included $11.0 million of mortgage principal receipts.
Outlook, risks and notable items
- Liquidity outlook: Management said available cash, operating cash flow, borrowing capacity and potential capital-market access were expected to support operating costs, debt service and dividends sufficient to maintain REIT status. It also considered liquidity sufficient for additional 2018 capital investments. No numerical earnings or FFO guidance was provided.
- Post-quarter property sale: LTC sold six assisted-living communities in Ohio and Pennsylvania for $67.5 million. Their combined net book value was approximately $16.4 million; management expected a net gain of approximately $48.0 million. They were classified as held for sale at quarter-end. The gain was not included in Q1 results.
- Operator credit and concentration: The four largest operators shown represented 48.1% of revenue and 39.6% of assets. Prestige Healthcare represented 17.2% of revenue and 16.3% of assets. A default notice had been issued to Anthem Memory Care after partial rent payment; LTC was not pursuing enforcement at the time, subject to performance conditions and at least $5.2 million of cash rent through year-end 2018. Preferred Care and affiliates were in Chapter 11 bankruptcy; LTC said rent was current and the operating entities subleasing its 26 properties had not filed for bankruptcy.
- Other risks: Results and distributions depend on tenants’ and borrowers’ ability to pay, healthcare reimbursement and regulation, interest rates, access to capital, and the performance of concentrated operators. Management cited potential exposure to rising rates where variable-rate debt funds investments. The company reported no material change in risk factors or market risk and no material litigation expected to affect results.
- Accounting and controls: Adoption of the new revenue-recognition standard had no impact; the new lease standard was still under evaluation and was effective for the company in 2019. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification points
- Track rent collection, performance conditions and any enforcement action involving Anthem, and developments in Preferred Care’s bankruptcy.
- Confirm the completed sale proceeds and realized gain on the six held-for-sale communities.
- Review refinancing or extension of the revolver before its October 2018 maturity, covenant compliance and borrowing costs.
- Assess dividend coverage, given quarterly distributions exceeded operating cash flow and the declared dividend was above GAAP EPS per share.
- Monitor operator concentration, healthcare reimbursement changes and the effects of interest-rate movements on funding costs and investment returns.