LTC Properties, Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. LTC is a healthcare REIT investing primarily in senior housing and healthcare properties through ownership, leases, mortgage loans and development. At quarter-end, it reported 212 properties across 30 states and investments in 35 operators; approximately 99% of its real estate investment portfolio was senior housing and long-term healthcare.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $38.6 million | $31.5 million |
| Net income | $19.9 million | $17.6 million |
| Net income available to common stockholders | $19.8 million | $16.6 million |
| Diluted EPS | $0.53 | $0.47 |
| NAREIT FFO per diluted share | $0.76 | $0.65 |
| Operating cash flow | $19.6 million | $17.9 million |
| Cash distributions per common share | $0.54 | $0.51 |
- Revenue comprised $31.9 million rental income and $6.6 million mortgage-loan interest income. Rental income increased $5.2 million and mortgage interest increased $2.0 million year over year.
- Total expenses rose to $19.0 million from $14.0 million, including higher interest expense ($6.0 million versus $3.8 million), depreciation and amortization ($8.6 million versus $6.8 million), and general and administrative costs ($4.5 million versus $3.5 million). Operating income was $19.6 million, up from $17.4 million.
- Net income margin was approximately 51% versus 56% in Q1 2015; operating margin was approximately 51% versus 55%. These are simple calculations from reported revenue and income.
- Investing activities used $37.6 million, primarily for property acquisitions, development, improvements and mortgage lending. Financing activities provided $29.3 million. Cash increased $11.3 million to $24.3 million.
Balance sheet, debt and liquidity
- At March 31, total assets were $1.319 billion, total liabilities $646.2 million and equity $672.7 million. Net investments were $1.218 billion, including $970.5 million of net real property and $223.1 million of mortgage loans.
- Total debt was $608.3 million: $161.0 million revolving bank borrowings and $447.3 million senior unsecured notes, net of costs. Weighted-average applicable rates were 2.13% on bank borrowings and 4.63% on notes; total weighted average was 3.97%.
- Debt to gross asset value was 38.5%, up from 25.5% one year earlier; interest and fixed-charge coverage were both 5.1x, versus 7.2x and 5.9x, respectively, in Q1 2015. Management attributed the coverage decline primarily to higher debt and interest expense.
- At quarter-end, $439.0 million was available on the $600 million revolver; after an additional $37 million borrowing subsequent to quarter-end, availability was $402.0 million. The company also reported $185.1 million remaining under its equity distribution agreements and access to a new shelf registration. It stated liquidity was adequate for operations, commitments, debt service, distributions and feasible investments. It was in compliance with debt covenants.
- Cash dividends were $0.18 per share monthly in Q1, or $0.54 for the quarter, compared with diluted EPS of $0.53 and FFO per share of $0.76. The company declared the same monthly dividend for April through June 2016.
Material changes and transactions
- Revenue grew 23% and common-stockholder net income grew 19% year over year; diluted EPS rose from $0.47 to $0.53 and FFO per diluted share from $0.65 to $0.76.
- Growth reflected acquisitions, development and capital improvements, as well as mortgage originations. In Q1, LTC acquired a newly constructed 126-bed Texas skilled nursing center for $16.0 million at an initial incremental cash yield of 8.5%, and completed a 66-unit assisted-living development funded at $11.8 million.
- Q1 common-share issuance generated $14.6 million net proceeds. The company had no preferred stock outstanding, following conversion of its Series C preferred shares in 2015.
- After quarter-end, LTC acquired two Kansas memory-care communities for $25.0 million and a Kentucky memory-care community for $14.25 million, each added to existing master leases at an 8.0% initial yield. It also originated a $12.25 million, four-year mortgage loan at 9.41%, with $4.5 million of additional committed funding.
- After quarter-end, LTC locked a 4.15% rate on $37.5 million of senior unsecured notes, expected to be sold to Prudential around May 20, 2016, with a 12-year final maturity.
Outlook, risks and unusual items
- No specific earnings or FFO guidance was provided. Management said it believed liquidity and access to capital were sufficient and anticipated further investment in 2016 where financially feasible; future securities issuance could fund investments or repay revolver borrowings.
- Collections and distributions depend on lessees’ and borrowers’ financial performance. Four operators each contributed approximately 10% or more of combined rental and mortgage interest revenue; together they represented 49.6% of revenue and 44.4% of assets. Operator distress, non-renewal or bankruptcy could materially affect results and liquidity.
- Other disclosed risks include healthcare reimbursement and regulatory changes, competition and operating costs at facilities, capital-market access and interest rates, refinancing and leverage, and the relative illiquidity of real estate investments. Variable-rate borrowings could pressure margins if rates rise.
- CMS proposed a 2.1% net Medicare payment-rate increase for skilled nursing facilities for fiscal 2017; this was a proposal, not a finalized rate. LTC cautioned that reimbursement changes and new requirements could harm operators and indirectly affect its collections.
- Quarter-end commitments totaled $193.9 million, with $113.1 million remaining to fund, including property, mortgage, joint-venture and other commitments. Accrued contingent incentive and earn-out obligations were $12.6 million; their fair-value estimates use significant unobservable inputs.
- Straight-line rent receivable was $45.5 million, including $2.8 million of straight-line rental income recognized in Q1. This noncash accounting revenue is a collection-related item to monitor. The company also recorded $84,000 of doubtful-account provision and did not accrue the deferred portion of its JV preferred return because the JV common member’s capital account was zero.
- Ordinary-course legal claims were described as not expected to be material. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operators can sustain rent and loan payments, particularly the four major operators and the skilled-nursing exposure.
- Cash generation and collections relative to dividends, including the $45.5 million straight-line rent receivable and the dividend’s comparison with GAAP EPS.
- Debt growth, coverage trends, borrowing costs and remaining revolver capacity after subsequent borrowings and planned note issuance.
- Execution, funding needs and expected returns for development projects, post-quarter acquisitions, mortgage commitments and the remaining $113.1 million of commitments.
- Potential effects of Medicare/Medicaid reimbursement and regulatory changes on facility operators and LTC’s investment income.