LTC Properties, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts below are in millions of dollars except per-share data. LTC is a health care REIT investing mainly in seniors housing and skilled nursing properties through leases, mortgage loans and structured financing.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $41.5 | $42.5 | $83.3 | $85.1 |
| Operating income | $19.9 | $19.7 | $39.6 | $40.8 |
| Net income | $68.9 | $25.4 | $89.3 | $46.9 |
| Net income available to common stockholders | $68.7 | $25.3 | $88.9 | $46.7 |
| Diluted GAAP EPS | $1.73 | $0.64 | $2.25 | $1.18 |
| NAREIT FFO per diluted share | $0.75 | $0.79 | $1.50 | $1.57 |
| Dividends per common share | $0.57 | $0.57 | $1.14 | $1.14 |
- Revenue declined 2.3% for Q2 and 2.1% for the first half. Rental income fell, partly due to a defaulted master lease being placed on cash basis and property sales; higher mortgage interest income partly offset the decline.
- GAAP net income increased sharply because Q2 included a $48.3 million gain on sale of real estate, compared with $5.1 million in the prior-year quarter. Excluding the sale gain and adding back real estate depreciation and amortization and impairment charges as defined by NAREIT, FFO declined: $29.6 million versus $31.4 million in Q2 and $59.3 million versus $62.2 million for the half year.
- Operating income was nearly flat in Q2 but fell 3.0% for the half year. Interest expense rose to $7.7 million in Q2 from $7.2 million, and to $15.5 million for the half year from $14.6 million, reflecting higher average credit-line borrowings, short-term rates and lower capitalized interest.
- Operating cash flow was $55.5 million for the half year, up from $47.3 million. Investing activities provided $9.4 million, mainly due to property sale proceeds, versus $47.0 million used in the prior-year period. Financing activities used $63.4 million, compared with $1.0 million provided in 2017. Cash, cash equivalents and restricted cash totaled $6.7 million at period-end, including $2.4 million of restricted insurance proceeds.
- At June 30, debt was $652.4 million: $85.5 million of bank borrowings and $566.9 million of senior unsecured notes, net of issuance costs. Weighted-average rates were 3.26% and 4.49%, respectively. Total liabilities were $693.9 million; total equity was $805.7 million. Debt to gross asset value was 36.1%; interest and fixed-charge coverage were each 4.7x.
- Liquidity included $514.5 million available on the revolving facility, $67.8 million available under the Prudential note shelf, and $185.2 million available under the equity distribution agreement. After quarter-end, LTC borrowed $14.5 million on its revolver and made $14.0 million of scheduled note principal payments.
Portfolio, changes and unusual items
- At June 30, the portfolio included 178 owned properties and 21 mortgage-loan properties across 28 states, with 30 operators. Gross portfolio investment was $1.64 billion; seniors housing and long-term care made up approximately 99.3% of the real estate investment portfolio.
- During Q2, LTC sold six assisted living communities in Ohio and Pennsylvania for $67.5 million, recognizing a $48.3 million gain. It acquired two Texas memory care communities for $25.2 million and funded development, improvement and mortgage investments. One 66-unit Illinois memory care development was completed during the half year.
- At June 30, the company reported $208.2 million of total investment commitments, with $115.5 million remaining to fund.
- The common dividend remained $0.19 per share monthly; LTC declared the same monthly dividend for July, August and September 2018.
Outlook, commentary and risks
- Management said existing cash, operating cash flow, borrowing capacity and potential capital-market access were sufficient for operating costs, debt obligations, investment needs and distributions, and expected adequate liquidity for additional 2018 capital investments. The filing provides no earnings or FFO guidance.
- Anthem Memory Care had previously received a default notice after partial rent payments. LTC was not then pursuing enforcement, subject to Anthem meeting performance conditions and paying at least $5.2 million in cash rent for 11 properties through December 31, 2018; LTC said it was monitoring performance closely.
- Preferred Care and affiliates were in Chapter 11 proceedings. Preferred Care was current on rent and its operating entities leasing 26 LTC properties had not filed for bankruptcy. Its rent represented 6.5% of LTC’s rental and mortgage interest income.
- Operator concentration is material: the four largest operators listed accounted for 48.6% of rental and mortgage interest revenue. Management cited operator financial distress, health care reimbursement and regulation, competition, interest rates, access to capital and lease renewals among factors that could affect results and distributions.
- CMS finalized a 2.4% Medicare SNF payment increase for fiscal 2019 and the Patient-Driven Payment Model for fiscal 2020; a SNF value-based purchasing program began October 1, 2018, including a 2% payment reduction with partial amounts returned based on performance. These changes could affect operator finances and, indirectly, rent and loan payments.
- The company reported compliance with credit covenants, effective disclosure controls and no material changes to risk factors or market risk during the period. It concluded that Hurricane Harvey-damaged property was not impaired; insurance proceeds received for remediation were classified as restricted cash.
Important facts for investors to verify
- Whether cash rent and operating performance under Anthem’s master lease meet the stated conditions through year-end, and whether any deferred or uncollected rent affects future results.
- Whether Preferred Care’s bankruptcy proceedings or other operator stress affect collections, occupancy, or property-level performance.
- Underlying recurring earnings and dividend coverage: GAAP net income benefited from the property-sale gain, while FFO per share declined year over year.
- Funding needs and returns on the $115.5 million of remaining commitments, alongside revolver use, debt maturities and interest-rate exposure.
- How CMS reimbursement and payment-policy changes affect operators and the collectibility of LTC’s rents and mortgage loans.