LTC Properties, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. LTC is a REIT focused primarily on senior housing and long-term care properties through leases, mortgage loans and other investments. Its direct investment portfolio included 207 properties across 30 states, comprising 169 owned properties and 38 properties securing mortgage loans.
Financial results and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $21.4 million | $18.4 million | $62.9 million | $53.9 million |
| Income from continuing operations | $12.5 million | $11.5 million | $37.0 million | $33.8 million |
| Net income attributable to LTC | $12.4 million | $11.5 million | $36.7 million | $33.6 million |
| Net income available to common stockholders | $11.5 million | $5.6 million | $28.2 million | $20.0 million |
| Diluted EPS available to common stockholders | $0.38 | $0.22 | $0.97 | $0.83 |
- Revenue growth was mainly driven by acquisitions and higher rental income: rental income rose to $19.6 million in Q3 from $16.2 million, and to $57.1 million for nine months from $47.4 million. Mortgage-loan interest income declined to $1.6 million in Q3 from $1.9 million and to $4.9 million for nine months from $5.7 million, primarily from loan payoffs and amortization.
- Interest expense rose to $1.8 million in Q3 from $0.9 million and to $4.4 million for nine months from $1.7 million. Depreciation and amortization also increased, reflecting acquisitions and capital improvements.
- Net cash provided by operating activities was $51.9 million for the nine months, versus $48.0 million a year earlier. Investing activities used $63.6 million, versus $39.6 million; financing activities provided $10.0 million, versus using $4.7 million. Cash declined to $5.2 million from $6.9 million at year-end 2010.
- At September 30, total assets were $619.0 million and total equity was $469.2 million. Debt comprised $28.4 million of bank borrowings, $100.0 million of senior unsecured notes and $3.2 million of bonds. Separately, earn-out liabilities were $6.2 million. Debt to book capitalization was 21.9%; interest coverage was 10.7x for Q3 and 12.6x year to date.
- Liquidity included $181.6 million available under the $210 million revolving credit facility at September 30; after subsequent borrowings, availability was $152.0 million. The company also reported $64.6 million available under its equity distribution agreement and $167.6 million under its shelf registration.
Material changes and notable transactions
- During the nine months, LTC issued 3.99 million common shares for net proceeds of $103.6 million and redeemed all 3.54 million outstanding Series F preferred shares. The redemption reduced preferred dividends but included a $3.6 million preferred-stock redemption charge. This shift in capital structure, along with higher common shares outstanding, affected per-share results.
- Acquisitions included four Texas skilled nursing properties with 524 beds for $50.8 million, partly subject to contingent earn-outs of up to $11.0 million; two South Carolina senior housing properties for $11.5 million; and a Texas skilled nursing property for $10.0 million. LTC paid $4.0 million toward the first earn-out during Q3; $6.2 million of earn-out liabilities remained at quarter-end.
- LTC issued $50 million of 4.80% senior unsecured notes due in 2021. The company entered a new $210 million credit agreement, maturing in April 2015, with an option to increase the facility to $250 million; it reported covenant compliance at quarter-end.
- After quarter-end, LTC acquired skilled nursing properties in Texas and California for $15.5 million and $17.5 million, respectively, and committed up to $8.25 million toward construction of a 120-bed facility. It also secured the possibility of issuing up to an additional $100 million of fixed-rate notes under a Prudential private shelf agreement.
Outlook, commentary and risks
- Management gave no formal earnings guidance. Assuming no lease changes or additional investments beyond specified subsequent transactions, it projected cash rental income to rise from $74.6 million for 2011 to $81.3 million for 2012, while straight-line rental income would decrease from $3.7 million to $2.4 million.
- Management stated that liquidity was sufficient for operations, debt service, distributions and financially feasible investments in 2011 and 2012. The common dividend was $0.14 per share per month; the company declared the same monthly amount for October through December 2011.
- A significant sector risk was the CMS final fiscal 2012 SNF payment update, which reduced rates by 11.1% versus fiscal 2011 levels. Management warned that Medicare and Medicaid changes, the Affordable Care Act, possible federal spending reductions, operator performance, capital-market access and interest rates could adversely affect tenants, borrowers, collections and distributions.
- Three operators each represented approximately 9% of total assets and generated 12.7%–13.3% of rental and mortgage interest revenue. Related-party exposures included rent and a $6.5 million face-value investment in Skilled Healthcare Group notes; an LTC director was SHG’s CEO.
- The filing reported no material change in market risk or risk factors, no material legal proceedings, and effective disclosure controls. It cautioned that interim results are not necessarily indicative of full-year results.
Investor verification checklist
- Verify rent collection, rent coverage and credit quality for major operators, particularly given payment-rate reductions and operator concentration.
- Review acquisition performance and the conditions, timing and estimated fair value of remaining earn-out payments.
- Track debt, interest costs, credit-facility availability and compliance with financial covenants as subsequent investments are funded.
- Assess the sustainability of projected 2012 cash rent, the common dividend and reliance on straight-line rental income.
- Review the related-party SHG note and lease exposure, including governance safeguards and collectibility of straight-line rent receivable.