LTC Properties, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; fourth-quarter figures are noted where relevant. LTC is a healthcare REIT investing in seniors housing and healthcare real estate through property ownership and leases, mortgage loans, joint ventures, and mezzanine financing. At year-end, its portfolio spanned 29 states and 30 operators, with 202 properties reported across owned and financed investments.
Financial performance and position
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Total revenue | $168.1 million | $161.6 million | Up 4.0% |
| Net income | $87.3 million | $85.1 million | Up 2.6% |
| Net income available to common stockholders | $87.0 million; $2.21 basic / $2.20 diluted per share | $84.7 million; $2.21 basic / diluted | Common earnings rose, while diluted EPS was slightly lower |
| NAREIT FFO attributable to common stockholders | $122.7 million; $3.11 basic / $3.10 diluted per share | $117.8 million; $3.07 basic / $3.06 diluted | FFO per share increased |
| Operating cash flow | $105.3 million | $105.7 million | Down $0.4 million |
| Total assets / total debt | $1.466 billion / $667.5 million | $1.395 billion / $609.4 million | Debt increased $58.1 million |
| Cash and cash equivalents | $5.2 million | $8.0 million | Year-end balance; substantial credit capacity also available |
| Common dividends | $2.28 per share | $2.19 per share | Paid monthly; 2017 basic EPS was $2.21 and FFO per share was $3.11 |
Rental income was $137.7 million and mortgage-loan interest income was $26.8 million. Operating income was $81.3 million; operating and net margins, calculated from reported figures, were approximately 48.4% and 52.0%, respectively, versus approximately 49.8% and 52.7% in 2016. Interest expense rose to $29.9 million from $26.4 million, while depreciation and amortization increased to $37.6 million from $35.9 million.
At year-end, debt comprised $96.5 million of revolving bank borrowings and $571.0 million of senior unsecured notes, net of issuance costs. Weighted-average rates were 2.90% on bank borrowings and 4.50% on notes. The company reported a 37.6% debt-to-gross-asset-value ratio and 5.0x interest coverage. It was in compliance with credit covenants. The $600 million revolving facility matures in October 2018, with a one-year extension option. Contractual debt principal payments were $134.7 million for 2018, including the then-outstanding revolver balance.
Year-end liquidity included $503.5 million available under the revolving facility, $63.7 million available under the Prudential shelf agreement, and $185.2 million remaining under the common-stock distribution agreement. After year-end, LTC borrowed $24.0 million on the revolver and paid $4.2 million of scheduled note principal. Cash used in investing was $92.0 million; financing activities used $16.1 million. No off-balance-sheet arrangements were reported.
Material changes and notable items
- Revenue growth reflected acquisitions, development and capital improvements, partly offset by reduced rent from a defaulted lease and property sales. Mortgage interest income declined $0.6 million, mainly due to loan payoffs.
- Higher interest expense reflected additional senior notes and lower capitalized interest, partly offset by reduced revolver borrowings. LTC issued $100 million of 15-year notes at 4.50% in 2017.
- FFO increased to $122.7 million from $117.8 million. Net income included a $3.8 million net gain on real estate sales and $1.9 million of impairment charges/write-offs; the gain and impairment are excluded from the company’s reported NAREIT FFO calculation.
- Annual operating cash flow was broadly flat. Cash used in investing fell from $139.9 million to $92.0 million, principally due to reduced development activity and mortgage originations, partly offset by increased acquisitions and mezzanine lending.
- Fourth-quarter revenue was $41.7 million, versus $42.1 million in Q4 2016; net income available to common stockholders was $19.8 million versus $20.6 million, and diluted EPS was $0.50 versus $0.53.
Outlook, risks and contingencies
- Management outlook: LTC said available cash, operating cash flow, borrowing capacity and capital-market access were sufficient for operations, debt service, dividends and some future investments. It expected 2018 cash rental income of approximately $129.9 million, versus $129.2 million received in 2017, and projected straight-line rental income to decline to $7.2 million from $10.7 million. These projections assume no lease changes, replacements or new leased investments. The filing gives no formal earnings or FFO guidance.
- Anthem Memory Care: LTC issued a default notice in 2017 after partial rent payment under a master lease covering one development property and ten operating communities. It wrote off $1.9 million of rent and other receivables related to two properties. A forbearance agreement required $0.4 million monthly through year-end; LTC anticipated at least $5.2 million of cash rent from the 11 properties in 2018 and was negotiating a further agreement. Transition or sale of properties remained possible.
- Preferred Care bankruptcy: Preferred Care and affiliates filed Chapter 11 in Q4 after a large Kentucky lawsuit judgment. Preferred Care leased 26 LTC properties, representing 6.9% of annual income at year-end; the properties and operating entities were not included in the filing, and rent was current at December 31, 2017.
- Concentration and sector risks: Four major operators accounted for 47.9% of combined rental and mortgage-interest revenue and 39.5% of assets. Operator performance, healthcare reimbursement and regulation, competition, occupancy, and access to capital may affect rent and loan collections. Government reimbursement reductions, including Medicare and Medicaid policy changes, are key indirect risks.
- Other exposure: Remaining investment commitments were $112.7 million at year-end, including real estate, loan, lease-incentive and joint-venture commitments. Real estate is relatively illiquid; development, environmental, insurance, impairment, interest-rate and REIT-qualification risks are also disclosed. The company stated that ordinary-course legal matters were not expected to be material.
- Tax and reporting: The December 2017 Tax Cuts and Jobs Act introduced uncertainty about effects on LTC, operators and investors. LTC intended to maintain REIT status and reported no material impact expected from adopting the new revenue-recognition standard. The auditor gave an unqualified opinion; management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Progress and final terms of the Anthem forbearance, collections, and any operator transition or property sales.
- Effects of Preferred Care’s Chapter 11 proceedings on its lease obligations and the cash flows of the 26 properties.
- Rent coverage and financial health of major operators, particularly given the 47.9% revenue concentration among four operators.
- Refinancing or extension of the revolver maturing in October 2018, debt maturities, and the effect of interest rates on funding costs.
- Whether cash rent, FFO and operating cash flow support the $2.28 annual dividend per share and the company’s stated 2018 liquidity outlook.
- Execution, funding needs and lease-up of development projects, as well as fulfillment of the $112.7 million in remaining investment commitments.