LTC Properties, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited interim results. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context
LTC is a health care REIT investing primarily in seniors housing and health care properties through leases, mortgage loans and structured financing. At quarter-end, its portfolio included 158 owned properties and 22 mortgage-financed properties across 27 states, with 29 operators. Management reports one operating segment.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $46.4 | $45.5 | Up 2.1% |
| Rental income | $38.0 | $37.6 | Up $0.4 |
| Mortgage-loan interest income | $7.8 | $7.3 | Up $0.5 |
| Total expenses | $26.8 | $26.1 | Up $0.7 |
| Net income | $63.7 | $20.4 | Includes $43.9 gain on real estate sales in 2020 |
| Net income available to common stockholders | $63.4 | $20.3 | $1.60 per diluted share versus $0.51 |
| NAREIT FFO attributable to common stockholders | $29.2 | $29.9 | $0.74 per diluted share versus $0.75 |
| Net cash from operating activities | $23.9 | $26.8 | Down $2.9 |
| Cash and cash equivalents, March 31 | $30.9 | — | Compared with $4.2 at December 31, 2019 |
| Total assets, March 31 | $1,524.8 | — | Compared with $1,514.2 at December 31, 2019 |
| Total debt, March 31 | $689.4 | — | $89.9 bank borrowings and $599.5 senior unsecured notes |
Cash provided by investing activities was $51.7 million, principally reflecting $71.9 million of net property-sale proceeds. Financing activities used $48.9 million, including $23.2 million of shareholder distributions and $18.0 million of share repurchases. The quarterly dividend was $0.19 per share per month, or $0.57 for the quarter.
At March 31, LTC reported $510.1 million available under its $600 million revolving credit facility. The facility matures June 27, 2022, with a one-year extension option. Weighted-average rates were 2.22% on bank borrowings and 4.39% on senior unsecured notes; total weighted-average debt rate was 4.10%. The company reported compliance with all debt covenants. Debt to gross asset value was 37.3%, and interest and fixed-charge coverage were each 4.7x.
Material changes versus the prior comparable period
- Revenue increased modestly, while FFO per share declined from $0.76 basic and $0.75 diluted to $0.74. GAAP earnings rose sharply mainly because of the Preferred Care property-sale gain, rather than comparable growth in recurring operating results.
- LTC sold 21 skilled nursing properties in the Preferred Care portfolio for $74.8 million gross sales price and approximately $71.9 million net proceeds. The sales produced a $43.9 million gain; the properties had a $29.1 million carrying value.
- Operating cash flow declined by $2.9 million year over year. Investing cash flow swung from a $28.4 million use in Q1 2019 to $51.7 million provided in Q1 2020, principally due to property-sale proceeds.
- Debt was $689.4 million, down from $693.4 million at year-end 2019. The reported debt-to-market-capitalization ratio rose to 36.3% from 28.0% at year-end, primarily because of lower market capitalization, partly offset by lower debt.
- During Q1, the company repurchased 615,827 shares for approximately $18.0 million at an average $29.25 per share. The board terminated the repurchase plan on March 25 amid market uncertainty and COVID-19 risks.
Outlook, management commentary and risks
- COVID-19: Management warned that infections, resident move-outs, reduced admissions and higher operator costs could weaken occupancy, rent-paying capacity and collections. At March 31, management said it lacked sufficient information to assess the pandemic’s effect on lease collectibility and planned quarterly reassessments.
- Rent deferrals: LTC agreed to defer $772,000 of April 2020 rent, approximately 7% of April contractual rent; $137,000 had been returned by the filing date. These were post-quarter events.
- Operator and collection exposure: Two operators represented 28.6% of combined rental and mortgage-interest revenue and 27.4% of total assets. Anthem Memory Care remained in default under a 2017 arrangement; LTC anticipated $9.9 million of 2020 cash rent but noted COVID-19 could impair payment. Senior Care emerged from bankruptcy in March 2020, affirmed its master lease and was current on rent and deposits.
- Dividend and liquidity: Management believed cash, operating cash flow, borrowing capacity and capital-market access were sufficient for operating costs, debt service and dividends, while warning that COVID-19 could adversely affect borrowing capacity, covenant compliance, capital access and distributions. LTC subsequently declared $0.19 monthly dividends for April, May and June 2020. No formal earnings or FFO guidance was provided.
- Other items: A completed Oregon seniors housing development was not yet open; LTC consented to delay its opening because of COVID-19. A joint venture property sale after quarter-end generated $17.2 million of partial liquidation proceeds; management expected approximately $1.3 million additional proceeds and a roughly $0.6 million Q2 liquidation loss.
- Accounting and contingencies: Adoption of the expected-credit-loss standard had no material effect at March 31. Management reported ordinary-course legal claims it did not expect to be material and stated disclosure controls were effective.
Important facts for investors to verify
- Whether operators’ occupancy, operating costs and liquidity translated into timely rent payments, especially for Anthem and the operators receiving deferrals.
- Subsequent quarterly updates to lease collectibility, straight-line rent receivables and any credit-loss reserves or write-offs.
- Whether reported earnings growth is sustainable: separate the $43.9 million property-sale gain from recurring performance and monitor FFO and operating cash flow.
- Actual proceeds and final accounting for the post-quarter joint-venture liquidation, including the anticipated Q2 loss.
- Dividend coverage, revolver availability, covenant headroom and leverage if COVID-19 effects persist or market capitalization remains weak.
- Concentration exposure to major operators and the effect of health-care reimbursement, regulatory changes and pandemic-related costs on their ability to meet obligations.