LTC Properties, Inc. — 2015 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; financial statements are unaudited. LTC is a healthcare REIT investing primarily in senior housing and long-term care properties through ownership, leases, development, and mortgage loans. Unless otherwise noted, amounts below are in millions of dollars.
Financial and operating results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $32.4 | $29.2 | $63.9 | $58.7 |
| Operating income | $17.2 | $17.1 | $34.6 | $34.1 |
| Net income | $17.9 | $18.3 | $35.5 | $35.3 |
| Net income available to common stockholders | $17.0 | $17.3 | $33.6 | $33.4 |
| Diluted EPS | $0.48 | $0.50 | $0.94 | $0.96 |
| NAREIT FFO per diluted share | $0.66 | $0.64 | $1.31 | $1.27 |
Revenue increased 10.8% in Q2 and 8.9% year to date, led by rental and mortgage interest income from investment activity. Operating income was nearly flat in Q2 and up 1.4% for the six months. Calculated operating margin was approximately 53.0% in Q2 2015 versus 58.6% in Q2 2014, and 54.2% year to date versus 58.2%. Common diluted EPS declined despite modest year-to-date growth in common earnings, partly as weighted average diluted shares increased. FFO per share rose in both comparisons.
- For the six months, rental income was $53.8 million and mortgage-loan interest income was $9.7 million. Straight-line rental income included $4.5 million, and the net straight-line rent receivable balance was $37.1 million.
- Six-month cash from operating activities was $44.0 million, compared with $45.2 million in 2014. Investing activities used $99.2 million; financing activities provided $38.0 million. Cash declined $17.2 million to $8.1 million.
- Common dividends were $0.17 per share monthly ($0.51 for Q2; $1.02 for the six months). The company also paid $1.6 million in preferred dividends. July declarations maintained the $0.17 monthly common dividend for July through September.
Balance sheet, debt, and liquidity
At June 30, total assets were $1.043 billion, total liabilities $383.5 million, and equity $659.5 million. Net investments were $976.9 million, including $752.1 million of net operating real estate, $204.0 million of net mortgage loans, and a $20.7 million unconsolidated joint-venture investment.
- Debt totaled $358.0 million: $80.5 million of revolving bank borrowings at a weighted average 1.67% and $277.5 million of senior unsecured notes at a weighted average 4.80%. The reported debt-to-gross-asset-value ratio was 27.9%; debt plus preferred stock to gross asset value was 30.9%. Interest coverage was 7.2x and fixed-charge coverage 6.0x.
- The $400 million revolving facility had $319.5 million available at quarter-end; the company reported covenant compliance. After quarter-end it borrowed $24 million and repaid $25 million of scheduled note principal.
- Management stated that cash, operating cash flow, borrowing capacity, and access to capital were expected to support operations, commitments, debt service, and distributions. Available capacity also included $775.1 million under its shelf registration and, at quarter-end, $102 million under its Prudential private shelf.
Material changes, outlook, and risks
- During the six months, LTC funded a $40 million additional advance under a Michigan skilled-nursing mortgage, originated an $11 million mortgage loan (with $9.5 million funded), acquired a skilled-nursing property, and made a $20.1 million preferred equity investment in an Arizona joint venture. The JV investment provides a 15% preferred return; $0.9 million of income was recognized year to date.
- At June 30, remaining real estate, mortgage, and notes-receivable commitments totaled $89.7 million. Separately, LTC had agreed to acquire a 10-property, 891-unit portfolio for $142 million, subject to contractual conditions, and anticipated closing in Q3 2015. The proposed 15-year triple-net lease carried a stated initial cash yield of 6.5%, with specified subsequent increases. This was a transaction expectation, not earnings guidance.
- Subsequent to quarter-end, LTC locked a 4.5% rate on $100 million of Prudential notes, expected to sell around August 31, and entered a separate $100 million AIG private shelf agreement. Actual issuance and funding remained subject to the relevant agreements.
- Expenses rose, including interest expense, depreciation, G&A, and provision for doubtful accounts. The doubtful-account provision was $0.4 million in Q2 versus $0.01 million a year earlier. Q2 2014 included a $1.1 million property-sale gain, while Q2 2015 included $0.8 million of joint-venture income.
- Key risks include operator ability to pay rent and debt service, concentration in major operators, healthcare reimbursement and regulatory changes, access to capital and interest-rate movements, and the execution and funding of development and acquisition commitments. Prestige, Brookdale Communities, and Senior Care generated 14.0%, 12.3%, and 9.7%, respectively, of six-month combined rental and mortgage-interest income. CMS’s FY2016 final rule projected a 1.2% increase in aggregate Medicare SNF payments; LTC cautioned that future policy changes could affect operators and, in turn, its collections.
- The filing reported no material changes to previously disclosed risk factors or market-risk disclosures, and no legal proceedings expected to be material. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $142 million portfolio acquisition closed as anticipated, and its final financing, lease terms, and realized yield.
- Collection performance and financial condition of major operators, particularly given revenue concentration and the increased doubtful-account provision.
- Funding and returns on the $89.7 million of remaining commitments, including the JV’s 15% preferred return and any deferred accruals.
- Post-quarter debt issuance, revolving-facility usage, covenant headroom, and sensitivity to interest rates and capital-market access.
- Whether operating cash flow can continue to support investment spending and dividends; also compare reported GAAP results with FFO, a non-GAAP supplemental measure.