LTC Properties, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013; the filing also provides fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context and reporting period
LTC is a health care REIT investing in senior housing and long-term care through property ownership and leases, development, and mortgage loans. It reports one operating segment. At year-end, its portfolio comprised 217 investments across 30 states and 40 operators; approximately 98.8% of gross investments were in senior housing and long-term care. Net real estate investments were $884.4 million: $718.9 million in owned property and $165.4 million in mortgage loans.
Financial performance and condition
- Revenue: $105.0 million, up 13.5% from $92.5 million in 2012. Rental income was $98.2 million and mortgage interest income $6.3 million.
- Profit: Income from continuing operations was $55.4 million versus $50.3 million. Net income was $57.8 million versus $51.3 million; net income available to common stockholders was $54.2 million versus $47.6 million. Diluted EPS was $1.63 versus $1.57. Continuing-operations income as a share of revenue was approximately 52.8%, compared with 54.4% in 2012.
- FFO: Funds from operations available to common stockholders, a non-GAAP measure, was $77.3 million versus $69.8 million. Diluted FFO per share was $2.29 versus $2.26.
- Cash flow: Operating cash flow was $86.2 million, compared with $76.7 million. Investing activities used $164.0 million and financing activities provided $77.3 million. Year-end cash was $6.8 million.
- Debt and leverage: Total debt was $278.8 million, down from $303.9 million; debt-to-gross-asset-value was 24.2%, and interest coverage was 8.1x. Debt included $255.8 million of senior unsecured notes, $21.0 million of revolving borrowings, and $2.0 million of bonds. The notes’ weighted-average rate was 4.85%; revolving borrowings were priced at LIBOR plus 1.25%. The company reported compliance with debt covenants.
- Liquidity: At year-end, $219.0 million remained available on the $240.0 million revolving facility and $30.0 million under a private shelf agreement; a further $11.5 million was borrowed after year-end, leaving $207.5 million on the revolver. The company also had an effective $800 million securities shelf.
- Dividends: Common distributions were $1.905 per share for 2013, up from $1.790. The company declared monthly dividends of $0.17 per share for January–March 2014.
Material changes versus the prior comparable period
- Revenue rose primarily due to acquisitions and completed developments; mortgage interest income also benefited from a new $124.4 million loan. Expense growth included higher interest, depreciation, general and administrative expense, and a $2.2 million doubtful-account provision versus a $0.1 million recovery in 2012.
- The company funded the $124.4 million first-mortgage loan to Prestige Healthcare, secured by 15 Michigan skilled nursing facilities, and issued $70.0 million of 3.99% senior notes due 2021.
- A public offering of 4.025 million common shares generated $171.4 million net proceeds, used for debt reduction, investments, development commitments, and general purposes. Year-end total assets increased to $931.4 million from $789.6 million.
- FFO per share increased modestly, while diluted EPS growth was partly offset by a larger weighted-average share count following equity issuance.
- In January 2014, LTC announced it would not renew leases expiring December 31, 2014 for 37 assisted living properties leased by Extendicare and ALC. Those properties represented about 10.5% of 2013 combined rental and mortgage interest revenue.
Outlook, commentary, risks, and unusual items
- Management expected cash rental income from leases in place to increase from $96.0 million in 2013 to $97.5 million in 2014, while straight-line rental income was projected to decline from $3.9 million to $2.2 million. These estimates assume no lease changes, replacements, or new investments.
- Management stated that available liquidity was sufficient for operations, development commitments, debt service, distributions, and some potential investments, subject to investment feasibility and capital-market conditions. It described a continued focus on selective investments and conservative liquidity management.
- The non-renewal of the Extendicare/ALC leases creates material re-leasing and rental-income uncertainty. The filing says re-leasing may not occur promptly, or at all, and replacement rents may differ from current rents.
- Key risks include operator financial distress and concentration, health-care reimbursement and regulatory changes, competition, access to capital and interest-rate exposure, property illiquidity, development execution, collectability of rents and loans, environmental and insurance exposures, and continued REIT qualification. Four operators each generated more than 10% of combined rental and mortgage interest revenue; Prestige’s new loan materially increased operator and Michigan exposure.
- Unusual items included a $0.9 million write-off of straight-line rent receivable associated with transferring four assisted living properties to a new lessee; a $7.0 million earn-out payment, leaving no earn-out liability at year-end; and a net $1.6 million gain on asset sales, including a gain on six Ohio facilities partly offset by a loss on a Colorado property.
- Disclosure item to reconcile: The notes state that no impairment charges were recorded in 2013, but a real-estate schedule footnote refers to a $4.19 million impairment charge on four facilities. The filing text is internally inconsistent on this point.
- The company reported no off-balance-sheet arrangements and no material legal proceedings. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Progress, timing, replacement operators, and expected rents for the 37 Extendicare/ALC properties whose leases expire in 2014.
- Operator credit quality and lease or loan coverage, especially for major operators and Prestige Healthcare; assess the Michigan mortgage’s concentration and terms.
- The impairment disclosure inconsistency and the basis for the $2.2 million doubtful-account provision and $0.9 million straight-line rent write-off.
- Remaining development and lending commitments: $56.9 million at year-end before $8.8 million funded in January 2014, plus other specified loan and operator commitments.
- Debt maturities, refinancing needs, floating-rate exposure, and the assumptions behind management’s liquidity and 2014 cash-rent outlook.
- Dividend coverage using operating cash flow and FFO, noting that FFO is non-GAAP and does not equal cash available for distribution.