LTC Properties, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 22, 2016. The filing reports annual results and selected fourth-quarter data. LTC is a healthcare REIT investing primarily in senior housing and healthcare properties through owned real estate, leases, mortgage loans, and development.
Business context and portfolio
- At year-end, the portfolio spanned 30 states and 35 operators. Gross investments were approximately $1.418 billion: 51.2% skilled nursing, 41.3% assisted living, 3.1% range-of-care, 2.9% under development, and 1.5% other.
- Net real estate investments, including unconsolidated joint ventures, were $1.189 billion. Rental income and mortgage-loan interest accounted for approximately 83.0% and 16.2% of gross revenue, respectively.
- Leases are generally long-term, triple-net arrangements, with most providing annual rent escalations. Four major operators represented 45.4% of rental and mortgage-interest revenue and 45.7% of assets.
Financial results and condition
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenue | $136.2 million | $119.0 million | +14.5% |
| Operating income | $70.7 million | $68.4 million | +3.3% |
| Net income | $73.1 million | $73.4 million | -0.4% |
| Net income available to common stockholders | $70.1 million | $69.6 million | +0.7% |
| Diluted earnings per common share | $1.94 | $1.99 | -2.5% |
| NAREIT FFO attributable to common stockholders | $101.2 million; $2.77 diluted per share | $90.2 million; $2.55 diluted per share | FFO +12.2%; per share +8.6% |
- Revenue growth reflected acquisitions, development and capital improvements, along with increased mortgage-loan interest income. Operating expenses rose 29.7%, including higher interest, depreciation, general and administrative expense, and a $2.25 million real estate impairment. Operating margin was approximately 51.9%, versus 57.5% in 2014.
- Cash provided by operating activities was $102.3 million, compared with $95.8 million in 2014. Investing activities used $326.8 million and financing activities provided $212.2 million. Cash declined by $12.3 million to $12.9 million.
- Year-end debt was $571.9 million, up from $280.6 million. Debt to gross asset value increased to 37.4% from 23.6%; annual interest coverage was 6.6x and fixed-charge coverage 5.9x. LTC reported compliance with credit-facility covenants.
- Liquidity included $479.5 million available under the $600 million revolving facility at year-end; after a subsequent $32 million draw, availability was $447.5 million. LTC also had $200 million available under its equity distribution agreement and access to shelf-registration securities.
- Common distributions were $2.07 per share in 2015, up from $2.04 in 2014. The monthly dividend rose from $0.17 to $0.18 during 2015. The Series C preferred shares were converted into 2 million common shares in the fourth quarter; no preferred stock remained at year-end.
Material changes versus the prior year
- Revenue increased by $17.2 million, with rental income up $11.2 million and mortgage-loan interest income up $5.6 million.
- Debt increased substantially as LTC funded acquisitions and investments, including $200 million of new senior unsecured notes and increased revolving-credit borrowings. The company also expanded its revolving facility commitment to $600 million.
- Acquisitions totaled $218.6 million, including a 10-property senior housing portfolio for $142 million. LTC originated or funded additional mortgage loans and invested in a preferred-equity joint venture.
- Net income was nearly flat despite higher operating income: 2014 included $5.0 million of net real-estate sale gains, compared with $0.6 million in 2015; 2015 also included the $2.25 million impairment.
- Common shares outstanding increased following the preferred-stock conversion. Basic earnings per share declined, while FFO per diluted share increased.
Outlook, management commentary, and risks
- Management stated that available liquidity was sufficient for operations, development commitments, debt service and distributions, and could support additional investments if financially feasible. It noted that capital availability and cost are sensitive to capital-market conditions and interest rates.
- For leases in place at year-end, management projected 2016 cash rental income of $119.6 million versus $104.6 million in 2015, while straight-line rental income was projected to decline to $8.6 million from $10.1 million. These are management estimates based on stated assumptions, not broad earnings guidance.
- Management declared monthly common dividends of $0.18 per share for January, February and March 2016. Future distributions remain subject to board approval, earnings and financial condition.
- Key risks include operator or borrower distress and tenant concentration; Medicare and Medicaid reimbursement or regulatory changes; competition and occupancy pressures; access to capital and interest-rate changes; lease renewals and property re-leasing; development cost, timing and occupancy risks; real-estate illiquidity; and maintaining REIT qualification.
- Unusual item: LTC recorded a $2.25 million impairment on a Florida assisted-living property after agreeing to a contingent sale. It also reported $42.7 million of net straight-line rent receivable, subject to collectability assessment.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. Management concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Whether the major operators, especially the largest exposures, can sustain rent and loan payments; monitor operator performance and concentration.
- Whether projected 2016 cash rent growth materialized and whether the $42.7 million straight-line rent receivable is collectible.
- Debt growth, refinancing and interest costs, covenant headroom, and liquidity after subsequent borrowing and committed investment funding.
- Progress, costs and expected returns on development projects and remaining commitments; verify acquisition yields and actual rent coverage.
- Dividend coverage using operating cash flow and FFO, while distinguishing these non-GAAP or cash-flow measures from GAAP earnings and cash available for distribution.
- Effects of reimbursement, regulatory and market changes on operators, and the outcome of the Florida property sale and related impairment.