LTC Properties, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. LTC is a healthcare REIT investing mainly in skilled nursing, assisted living, independent living and memory-care properties through leases, mortgage loans and development commitments. Its portfolio comprised 207 properties across 30 states and 41 operators; senior housing and long-term care represented about 98% of investments.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $23.8m | $21.4m | $69.5m | $62.9m |
| Income from continuing operations | $12.5m | $12.4m | $38.5m | $36.9m |
| Net income attributable to LTC | $12.5m | $12.4m | $38.5m | $36.7m |
| Net income available to common stockholders | $11.6m | $11.5m | $35.8m | $28.2m |
| Basic EPS | $0.38 | $0.38 | $1.18 | $0.98 |
| FFO available to common stockholders (non-GAAP) | $17.5m | $16.4m | $52.2m | $42.7m |
| Diluted FFO per share (non-GAAP) | $0.57 | $0.54 | $1.69 | $1.46 |
- Q3 revenue increased 11% year over year, primarily from acquisitions; rental income rose $2.7m, partly offset by lower mortgage-loan and other interest income. Nine-month revenue increased about 11%, with rental income up $7.2m.
- Q3 interest expense rose $1.2m year over year to $3.0m; nine-month interest expense rose $2.6m to $7.0m. Depreciation and amortization also increased, mainly due to acquisitions and capital improvements.
- Net income available to common stockholders rose modestly in Q3. The nine-month increase chiefly reflects lower preferred-stock allocations after the 2011 Series F redemption and related $3.6m charge. FFO rose 6.5% in Q3 and 22.4% for the nine-month period.
- Cash flow, nine months: Operating activities provided $57.4m, investing used $73.2m and financing provided $19.6m. Cash increased $3.9m to $8.3m. Cash dividends paid to stockholders were $42.8m; interest paid was $5.6m.
- Balance sheet at September 30: Total assets were $709.8m; net real estate investments were $661.1m; total liabilities were $244.9m and total equity was $464.9m. Debt comprised $35.5m of bank borrowings, $185.8m of senior unsecured notes and $2.6m of bonds, approximately $223.9m total. At December 31, 2011, those balances totaled about $159.2m.
- Liquidity: Cash was $8.3m, with $204.5m available under the $240m credit facility, $100m available under a private shelf agreement, $64.6m remaining under an equity distribution agreement and $167.6m available under the effective shelf registration. The company reported covenant compliance. After quarter-end it repaid $6m on the credit facility, leaving $29.5m outstanding and $210.5m available.
Material changes and significant transactions
- Acquired four skilled nursing properties and land for total investment of about $81.0m during the first nine months. Q3 acquisitions included two Ohio properties for $54m and a Texas property for $6.5m; stated GAAP yields were 10.1% and 10.7%, respectively.
- Issued $85.8m of 12-year senior unsecured notes in 2012. The filing describes the coupon as 5.0% in one note and 5.03% elsewhere; maturity is July 2024, with scheduled principal reductions in years 8–12. Proceeds funded acquisitions and reduced credit-facility borrowings.
- Amended the unsecured credit facility: commitment increased to $240m, with potential expansion to $350m; maturity extended to May 2016 with a one-year extension option. At quarter-end, pricing was LIBOR plus 1.25% and the unused fee was 0.25%.
- Sold one 140-bed Texas skilled nursing property for $1.2m, recognizing a $16,000 gain. A borrower gave notice to prepay seven assisted-living mortgages totaling approximately $15.2m plus accrued interest, expected around November 24, 2012; management intended to use proceeds to repay credit-facility borrowings.
- Redeemed $6.5m face value of related-party Skilled Healthcare Group notes at par plus accrued interest. The related party is a director who served as the issuer’s CEO; the filing reports board ratification with that director abstaining.
Outlook, risks and unusual items
- No formal earnings or FFO guidance was provided. For leases in place at quarter-end, assuming no lease changes and no new leased investments, management projected cash rental income increasing from $84.6m for 2012 to $89.8m for 2013, while straight-line rental income was expected to decline from $3.1m to $2.4m.
- Management stated that existing cash, operating cash flow, borrowing capacity and potential capital-market access should support operations, debt service, distributions and some further investment. It also said liquidity was sufficient for additional capital investments in 2012, subject to cost-effective capital availability.
- Common dividends were $0.145 per share monthly for January–July 2012 and $0.155 monthly for August–September. The company declared $0.155 monthly for October–December 2012.
- Risks include dependence on operator and borrower rent and debt payments, concentration in major operators, healthcare-sector competition and regulation, Medicare/Medicaid reimbursement changes, access to capital and interest-rate changes. Three operators each represented more than 10% of combined rental and mortgage interest income; the filing identifies Brookdale, Extendicare/ALC and Preferred Care. Medicare SNF rates increased 1.8% for fiscal 2013, while proposed bad-debt reimbursement reductions and possible federal sequestration were cited as risks to operators.
- Contingent earn-out liabilities related to a prior acquisition were $6.6m at quarter-end, measured using Level 3 valuation inputs. The filing reports no material change in risk factors or market risk and says disclosure controls were effective; it identifies no material litigation.
Important facts for investors to verify
- Whether operators, particularly the three largest, can sustain lease and loan payments amid reimbursement, cost and regulatory pressures.
- Whether the announced $15.2m mortgage payoff closed as expected, and how the proceeds affected debt and interest costs.
- Acquisition and development execution, including outstanding development commitments and the timing of rent commencement.
- Debt terms and refinancing exposure, including the new notes’ reported coupon (5.0% versus 5.03%), scheduled amortization and future capital requirements.
- Dividend coverage using cash flows and FFO, recognizing that FFO is a non-GAAP measure and is not equivalent to cash available for distribution.
- The quality and collectibility of straight-line rent receivables, which were $25.9m net at quarter-end, and the valuation assumptions behind Level 3 assets and liabilities.