Business Context and Reporting Period
Company: LTC Properties, Inc. (REIT)
Reporting Period: Quarter and six months ended June 30, 2003
Business Overview: LTC Properties invests primarily in long-term care facilities through mortgage loans, facility lease transactions, and other investments. As of June 30, 2003, the portfolio included 58 owned skilled nursing facilities (6,723 beds), 88 assisted living facilities (4,182 units), and 39 mortgage loans secured by skilled nursing and assisted living facilities.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2003 | Six Months Ended June 30, 2002 |
|---|---|---|
| Total Revenues | $31,930 | $34,172 |
| Net Income | $10,264 | $20,543 |
| Net Income Available to Common Stockholders | $2,747 | $13,024 |
| Diluted EPS (Common) | $0.15 | $0.71 |
| Net Cash Provided by Operating Activities | $17,252 | $20,386 |
| Cash and Cash Equivalents (End of Period) | $3,233 | $14,701 |
| Total Debt (Bank Borrowings + Mortgages + Bonds) | $193,902 | $200,753 |
| Secured Revolving Credit Outstanding | $49,557 | $48,421 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased $2.2 million (6.6%) year-over-year. Rental income dropped $1.1 million due to the elimination of rents from sold properties and the classification of nine properties leased to Sun Healthcare Group as non-accrual rents. Interest income from REMIC Certificates decreased $1.1 million due to asset amortization and early loan payoffs.
- Profitability Drop: Net income available to common stockholders fell $10.3 million (79%). This decline is primarily attributed to a $13.1 million gain on the sale of assets recorded in the prior year (discontinued operations), which was not replicated in the current period. Current period discontinued operations yielded only a $0.7 million gain.
- Impairment Charges: The company recorded a $1.3 million impairment charge for the six months ended June 30, 2003, compared to $4.9 million in the prior year. The current charge related to a fully reserved mortgage loan and adjustments to interest-only REMIC Certificates.
- Liquidity Reduction: Cash and cash equivalents decreased by $4.8 million to $3.2 million, driven by net cash used in financing activities ($20.6 million) for debt repayments, stock repurchases, and distributions, partially offset by operating cash flows.
Guidance, Outlook, and Risks
- Financing Outlook: On July 18, 2003, the company postponed a proposed offering of 3,000,000 shares of Series E Preferred Stock. Management is reviewing options to restructure the offering to retire the Secured Revolving Credit. There is no imminent need to raise funds, but no assurance exists that a feasible public financing will be completed.
- Major Lessee Risks:
- CLC Healthcare, Inc.: CLC has sustained operating losses and filed "going concern" disclosures. LTC Properties granted a rent abatement effective March 1, 2003, and has classified rents due from CLC as non-accrual. LTC Properties holds a $5.2 million line of credit with CLC and a $7 million promissory note from a CLC subsidiary.
- Alterra Healthcare Corporation: Alterra filed for Chapter 11 bankruptcy reorganization in January 2003. While Alterra is current on rents through August 2003, there is uncertainty regarding the assumption of leases under the reorganization plan.
- Industry Risks: The long-term care industry faces adverse changes, including operator bankruptcies and potential regulatory reforms affecting reimbursement levels. The company notes that future impairment charges cannot be predicted.
- Interest Rate Risk: The company has variable-rate debt (Secured Revolving Credit). A 1% increase in interest rates would increase annual interest expense by approximately $0.5 million.
Investor Verification Checklist
- CLC Healthcare Status: Verify the financial stability of CLC Healthcare, Inc., given the rent abatement, non-accrual status, and outstanding credit line exposure.
- Alterra Bankruptcy Outcome: Monitor the confirmation of Alterra's Plan of Reorganization to ensure leases are assumed and rent payments continue.
- Preferred Stock Offering: Confirm if the postponed Series E Preferred Stock offering is restructured and completed to refinance the revolving credit facility.
- REMIC Certificate Valuation: Review the assumptions regarding prepayments and credit losses for subordinated REMIC Certificates, which bear the first risk of loss.
- Dividend Sustainability: Assess whether operating cash flows ($17.3 million for six months) remain sufficient to cover debt service and the declared common dividend of $0.15 per share.