LTC Properties, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. LTC Properties is a healthcare REIT investing in senior housing and long-term care properties through ownership, development, and mortgage lending. Figures below are in millions, except per-share amounts.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $29.5 | $25.8 | $88.2 | $76.4 |
| Operating income | $17.1 | $14.4 | $51.3 | $40.8 |
| Net income | $17.1 | $17.3 | $52.4 | $43.2 |
| Net income available to common stockholders | $16.2 | $16.4 | $49.6 | $40.4 |
| Basic / diluted EPS | $0.47 / $0.46 | $0.47 / $0.47 | $1.43 / $1.42 | $1.24 / $1.24 |
| FFO per diluted share | $0.64 | $0.57 | $1.91 | $1.72 |
| Cash provided by operating activities | Not presented by quarter in the supplied filing text | $69.3 | $60.9 |
Q3 operating margin was approximately 58.0%, compared with 55.9% a year earlier; nine-month operating margin was approximately 58.1%, versus 53.4%. The company declared and paid common dividends of $0.51 per share in Q3, up from $0.465, and $1.53 per share for the nine-month period, up from $1.395.
Balance sheet, debt, and liquidity
- At September 30, total assets were $952.6, net real estate investments were $902.7, cash was $7.6, and equity was $631.7.
- Debt comprised $19.5 of bank borrowings, $281.6 of senior unsecured notes, and $1.4 of bonds payable. Debt to gross asset value was 25.5%; interest coverage was 7.3x for Q3 and 7.5x year to date.
- Operating cash flow of $69.3 funded investing outflows of $36.6 and financing outflows of $31.9. Investing included $23.9 for properties under development and $12.2 for capital improvements; financing included $55.7 of distributions.
- At quarter-end, $220.5 was available under the $240.0 revolving credit facility. In October, the facility was increased to $400.0, with an accordion to $600.0, lower drawn pricing, and maturity extended to October 2018. After subsequent borrowing and repayment, $24.0 was outstanding and $376.0 available.
Changes and material developments
- Nine-month revenue increased 15.5%, led by mortgage interest income, which rose to $12.4 from $3.2. The filing attributes the increase principally to a $124.4 mortgage loan originated in late 2013 and additional mortgage-loan funding. Rental income rose to $75.4 from $72.9.
- Nine-month net income available to common stockholders increased to $49.6 from $40.4. Q3 net income was slightly lower than the prior year, which included $2.9 of discontinued-operations income and sale gains; Q3 2014 had no discontinued-operations income.
- FFO available to common stockholders rose to $22.5 in Q3 from $20.0 and to $67.4 for nine months from $57.3. The company cautions that FFO is a non-GAAP supplemental measure, not a substitute for cash flow or net income.
- The company early adopted the revised discontinued-operations guidance prospectively. The 2014 property disposals were not considered strategic shifts and were not classified as discontinued operations.
- In October, LTC agreed to sell 16 assisted-living properties for $26.5, expecting an approximately $3.9 gain; re-leased 13 properties to Senior Lifestyle and seven to Veritas, effective January 2015; and consented to close one property. The current Extendicare and Enlivant leases continue through December 31, 2014.
Outlook, risks, and contingencies
Management stated that available cash, operating cash flow, borrowing capacity, and potential capital-market access were sufficient to fund operations, debt service, distributions, and planned investments. It expected sufficient liquidity for additional capital investments in 2014 and 2015; no specific earnings or revenue guidance was provided.
- Portfolio cash generation depends on rent and mortgage payments from operators. Three operators each contributed more than 10% of combined rental and mortgage interest income for the first nine months; Brookdale, Prestige Healthcare, and Senior Care represented 12.2%, 11.2%, and 10.5%, respectively.
- Healthcare operator performance is exposed to reimbursement changes, Medicare and Medicaid policy, regulation, labor and operating costs, competition, and economic conditions. The filing discusses Medicare payment changes and ongoing federal and state healthcare reforms.
- Investment commitments at quarter-end totaled $60.3, of which $18.7 remained unfunded; subsequent October funding reduced the remaining amount to $14.3. Other commitments included $10.5 for borrower capital improvements and $1.8 under notes and credit lines. An additional potential $40.0 loan commitment was conditional and had not been funded.
- Management reported compliance with credit covenants and no material change in market risk or previously disclosed risk factors. Routine claims against lessees or borrowers were described as not material; the company intends to defend claims it considers the operators’ responsibility.
- Subsequent events included repayment at par of $1.4 of variable-rate bonds in November. At September 30, the filing reported $1.4 of variable-rate debt other than the revolving credit line.
Investor verification points
- Track completion and economics of the 16-property sale, the closure-related disposition, and the replacement leases starting in January 2015.
- Assess the financial condition and payment capacity of major operators, especially given the disclosed revenue and asset concentrations.
- Reconcile committed development and lending capital needs against available liquidity, credit-facility availability, and future investment plans.
- Monitor dividend coverage using operating cash flow and recurring property performance, rather than relying on FFO alone.
- Review healthcare reimbursement and regulatory developments for potential effects on tenant and borrower cash flows.