Business context and reporting period
LTC Properties, Inc. is a healthcare REIT investing in senior housing and long-term care through property ownership, leases, development, and mortgage loans. This Form 10-K reports the fiscal year ended December 31, 2014; comparisons are primarily with fiscal 2013. LTC reported one operating segment.
At year-end, its portfolio included 198 properties across 29 states, with investments leased or mortgaged to 37 operators. Approximately 99.5% of 2014 revenue came from lease income and mortgage payments.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $119.0 million | $105.0 million |
| Operating income | $68.4 million | $55.4 million |
| Income from continuing operations | $73.4 million | $55.4 million |
| Net income available to common stockholders | $69.6 million | $54.2 million |
| Diluted EPS available to common stockholders | $1.99 | $1.63 |
| FFO available to common stockholders, diluted per share | $2.55 | $2.29 |
| Cash provided by operating activities | $95.8 million | $87.1 million |
Revenue increased 13.3%, while common-stockholder net income rose 28.6%. Operating income was approximately 57.5% of revenue, versus 52.8% in 2013, calculated from reported figures. FFO is a non-GAAP measure and is not equivalent to cash flow.
- Year-end assets were $965.8 million, including $726.5 million of net operating real estate and $165.7 million of net mortgage loans receivable. Equity was $660.1 million.
- Total debt was $281.6 million, primarily senior unsecured notes; the company had no revolver borrowings at December 31. Cash was $25.2 million. After year-end, LTC borrowed $18.0 million, leaving $382.0 million available on its $400.0 million revolving facility.
- Debt to gross asset value was 23.7%; year-end interest and fixed-charge coverage ratios were 7.3x and 6.0x, respectively. The company reported compliance with its debt covenants.
- Operating, investing, and financing cash flows were respectively $95.8 million provided, $29.0 million used, and $48.3 million used. Year-end development and improvement commitments totaled $16.5 million remaining to fund.
- Common distributions were $2.04 per share for 2014, up from $1.905 in 2013. The 8.5% Series C preferred stock remained outstanding, with $3.3 million of dividends paid in 2014.
Material changes versus the prior comparable period
- Mortgage-loan interest income rose to $16.6 million from $6.3 million, primarily reflecting loan originations and additional funding; rental income increased to $101.8 million from $98.2 million.
- Interest expense increased to $13.1 million from $11.4 million, principally following issuance of senior unsecured notes. Debt at year-end rose from $278.8 million to $281.6 million.
- 2014 net income included $5.0 million of net gains on real estate sales. In 2013, net income included $2.4 million from discontinued operations, including disposal gains. LTC adopted new discontinued-operations presentation guidance prospectively; its 2014 disposals were not classified as discontinued operations.
- The common dividend increased from $0.155 per month for the first nine months of 2013 to $0.17 per month beginning October 2013; it remained $0.17 monthly throughout 2014.
Outlook, management commentary, risks, and unusual items
- Management expected 2015 cash rental income of approximately $98.1 million, compared with $99.7 million in 2014, and straight-line rental income of $6.9 million, compared with $3.0 million. These estimates assume no further lease changes or new leased investments and reflect property sales, new leases, and completed developments.
- A lease covering 37 assisted-living properties expired at year-end. LTC sold 16 properties for $26.5 million, recognizing a $3.8 million gain; 20 were re-leased to Senior Lifestyle and Veritas effective January 1, 2015. The initial cash yield on the re-leased properties was described as comparable to the expiring leases. One property was closed, and LTC was exploring sale or lease options.
- Subsequent to year-end, LTC entered into development commitments totaling approximately $28.7 million for memory-care and assisted-living/memory-care projects. It also amended a major borrower’s loan to provide up to $20.0 million for redevelopment, in addition to existing capital-improvement commitments.
- Key risks include operator credit and concentration, lease renewals and re-leasing, healthcare regulation and Medicare/Medicaid reimbursement changes, competition, access to capital and interest-rate sensitivity, development execution, property illiquidity, impairment risk, and maintaining REIT qualification. Brookdale, Prestige, and Senior Care each generated more than 10% of combined rental and mortgage interest revenue in 2014.
- An acquisition-related contingent earn-out had a fair value of $3.3 million at year-end, with payments of up to $4.0 million subject to operating thresholds. LTC reported no real-estate or mortgage-loan impairment charges in 2014 and no off-balance-sheet arrangements. It described ordinary-course claims and lawsuits as not material in its judgment.
- The financial statements received an unqualified audit opinion; the auditor also gave an unqualified opinion on internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Track collections and rent coverage at operators, particularly the largest operators and the properties transferred after the Extendicare/Enlivant lease expiration.
- Compare actual 2015 cash rents and straight-line rent with management’s projections, and monitor the closed property and any further lease changes.
- Review FFO calculations alongside GAAP earnings and operating cash flow, including the contribution of property-sale gains and straight-line rent.
- Check funding, completion, lease-up, and expected returns for development projects, remaining commitments, and the expanded Prestige financing.
- Monitor debt maturities, revolving-credit usage, interest-rate exposure, covenant headroom, and the ability to sustain distributions while funding investments.
- Assess healthcare reimbursement and regulatory developments and their effects on operator financial health and payment capacity.