LTC Properties, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. LTC is a healthcare REIT investing primarily in skilled nursing, assisted living, and other senior housing through owned properties and mortgage loans. Approximately 98% of its investment portfolio was in senior housing and long-term healthcare properties.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $21.2 million | $17.9 million | $41.4 million | $35.5 million |
| Income from continuing operations | $12.3 million | $11.7 million | $24.6 million | $22.3 million |
| Net income attributable to LTC | $12.2 million | $11.6 million | $24.3 million | $22.1 million |
| Net income available to common stockholders | $11.3 million | $7.7 million | $16.7 million | $14.4 million |
| Diluted EPS available to common stockholders | $0.37 | $0.33 | $0.59 | $0.61 |
| Operating cash flow | — | $34.5 million | $31.7 million |
Q2 rental income rose $3.5 million year over year, primarily from acquisitions; mortgage-loan interest income declined $0.2 million as loans paid off and amortized. For the first half, revenue growth was likewise led by rental income, while mortgage interest fell $0.5 million. Higher interest and depreciation expenses partly offset the revenue gains. First-half common earnings also reflect the $3.6 million preferred-stock redemption charge; diluted EPS decreased year over year despite higher net income.
At June 30, total assets were $614.4 million, total equity $470.1 million, and cash $6.4 million. Debt comprised $70.0 million of bank borrowings, $50.0 million of senior unsecured notes, and $3.2 million of bonds payable. Bank borrowings were up from $37.7 million at year-end 2010. The company reported covenant compliance. First-half investing used $50.4 million, chiefly for property acquisitions and improvements; financing provided $15.4 million. Cash declined $0.5 million during the period.
Material changes and transactions
- Acquired two South Carolina senior-housing properties for $11.45 million and four Texas skilled-nursing facilities for $50.84 million, including contingent earn-outs. The four-facility transaction included $41 million cash at closing and earn-outs of up to $11 million; the recorded fair value liability was $10.0 million at June 30.
- Issued 3.99 million common shares for net proceeds of $103.7 million. Proceeds funded redemption of all Series F preferred shares and reduced credit-facility borrowings. Series C preferred shares remained outstanding.
- Entered into a $210 million revolving credit agreement, expandable to $250 million, maturing April 18, 2015. At June 30, $70 million was drawn and $140 million available. Subsequent to quarter-end, LTC issued $50 million of 4.8% notes due 2021 and used proceeds to repay credit-facility borrowings.
- Subsequent to quarter-end, acquired a 140-bed Texas skilled-nursing property for $10 million at a stated incremental GAAP yield of 10.5%.
Outlook, risks, and unusual items
- Management projected cash rent from leases in place to rise from $73.6 million for 2011 to $76.5 million for 2012, while straight-line rental income was projected to decline from $3.3 million to $1.9 million. These estimates assume no lease changes, replacements, or new investments.
- Management said available cash, operating cash flow, credit capacity, and capital-market access were sufficient for operating needs, debt service, distributions, and some future investments. The filing provides no earnings or EPS guidance.
- CMS’s July 2011 final rule reduced Medicare skilled-nursing reimbursement rates by 11.1% for fiscal 2012 versus fiscal 2011. LTC warned that reimbursement cuts and other healthcare-law changes could weaken operators and, in turn, affect rent and loan collections.
- Results depend heavily on lessee and borrower performance. Three operators each represented approximately 9%–10% of assets and 12.9%–14.6% of rental and mortgage interest revenue. Management identified operator distress, reimbursement changes, economic and capital-market conditions, interest rates, and access to financing as risks.
- A related-party connection exists with Skilled Healthcare Group: a director was its CEO; LTC held $6.5 million face value of its 11% notes and received rental income from SHG subsidiaries. The filing also reports significant unobservable inputs in valuing the Texas acquisition earn-outs.
- The filing gives inconsistent post-quarter credit-facility balances: one passage says $25 million outstanding and another says $30 million, while both report $185 million available. This requires clarification.
Key facts for investors to verify
- Reconcile the reported post-quarter credit-facility balance and available borrowing capacity.
- Assess the effect of the 11.1% Medicare SNF rate reduction on major operators, rent coverage, and collection risk.
- Review the conditions and valuation assumptions for the Texas acquisition earn-outs, which could total up to $11 million.
- Confirm the sustainability of cash rents and the stated 2011–2012 projections, including the decline in straight-line rent income.
- Evaluate operator concentration and the related-party SHG investment and lease relationship.
- Track common and preferred distributions, debt costs, and liquidity following the equity issuance, preferred redemption, and subsequent note financing.