LTC Properties, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise. LTC is a healthcare REIT investing in senior housing and long-term care properties through ownership, development, mortgage loans and other investments.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | First nine months 2015 | First nine months 2014 |
|---|---|---|---|---|
| Total revenue | $34.9m | $29.5m | $98.8m | $88.2m |
| Operating income | $19.0m | $17.1m | $53.6m | $51.3m |
| Net income | $19.6m | $17.1m | $55.1m | $52.4m |
| Net income available to common stockholders | $18.7m | $16.2m | $52.3m | $49.6m |
| Diluted EPS | $0.52 | $0.46 | $1.47 | $1.42 |
| NAREIT FFO per diluted share | $0.72 | $0.64 | $2.03 | $1.91 |
| Operating cash flow | — | — | $70.5m | $69.3m |
Q3 revenue grew 18% year over year, while common-stockholder net income rose about 16%. For the nine-month period, revenue grew 12% and common-stockholder net income grew about 5%. Growth reflected acquisitions, development and capital-improvement investments, as well as higher mortgage interest income. Expenses also increased, including interest, depreciation, general and administrative expense, and acquisition costs. Operating margin was approximately 54% in both the quarter and nine-month period, compared with approximately 58% in the comparable 2014 periods.
For the first nine months, investing activities used $263.1m, primarily for real estate purchases, development and mortgage originations; financing activities provided $179.0m. Cash decreased by $13.5m to $11.7m. The company paid $56.8m in stockholder distributions during the period. Common dividends were $0.17 per share monthly through September.
At September 30, 2015, total assets were $1,216.9m, including net investments of $1,135.9m. Total liabilities were $555.7m and equity was $661.2m. Bank borrowings and senior unsecured notes totaled $518.0m, with a weighted-average stated rate of 3.66%; debt to gross asset value was 35.4%, up from 23.7% at year-end 2014. The company reported compliance with all credit-facility covenants.
Material changes and business developments
- Completed a $142.0m purchase of 10 senior-housing properties with 891 units, leased under a 15-year triple-net master lease at an initial 6.5% cash yield. Also acquired a 60-unit memory-care property for about $14.3m.
- Real estate acquisitions during the first nine months totaled about $184.0m, versus $0.5m in the comparable 2014 period. Net real estate investments increased from $892.2m at year-end 2014 to $1,135.9m.
- Issued $100m of 4.5% senior unsecured notes with a 15-year final maturity. Outstanding debt increased substantially, and interest expense rose to $11.9m for the nine-month period from $9.4m.
- Invested $20.1m in preferred equity in an Arizona joint venture, with a further $5.5m commitment. The investment carries a 15% preferred return, some of which may be deferred if cash flow is insufficient.
- After quarter-end, expanded revolving-credit commitments from $400m to $600m and borrowed an additional $22m. The company reported $187.5m drawn and $412.5m available after this borrowing. It also locked a 4.26% rate on a planned $100m AIG note issuance.
Liquidity, outlook and risks
Management stated that cash, operating cash flow, borrowing capacity and potential capital-market access were expected to be sufficient for operations, debt service, development commitments and distributions, and that liquidity was adequate for additional investments in 2015 and 2016. This is management’s assessment, not earnings guidance; the filing provides no specific earnings forecast.
At quarter-end, the company had $11.7m cash and $234.5m available on its revolving facility; it also had access to a $100m AIG shelf agreement and potential common-stock and other securities issuance. After quarter-end credit-facility expansion, reported revolving availability was $412.5m. Remaining commitments at September 30 included $64.3m for real estate projects, $26.7m for mortgage loans, $5.5m for the joint venture, and $2.0m for notes receivable; the commitments table reported total remaining commitments of $118.5m, including contingent payments and lease incentives.
- Operator and healthcare exposure: Cash flows depend on tenants and borrowers meeting lease and loan obligations. Four major operators accounted for 44.1% of revenue and 45.4% of assets; three each contributed approximately 10% or more of combined rental and mortgage interest income.
- Reimbursement and regulation: Medicare, Medicaid and other healthcare policy changes, reimbursement levels, operating costs and regulatory requirements could weaken tenant or borrower finances. CMS projected a 1.2% aggregate Medicare payment increase for skilled nursing facilities in fiscal 2016, while proposed facility requirements could add costs.
- Debt, rates and capital access: Increased leverage and variable-rate borrowings expose the company to financing costs and refinancing or capital-market conditions. Management also noted potential margin pressure if medium- and long-term rates rise.
- Revenue quality and contingencies: Nine-month rental income included $7.1m of straight-line rent, and net straight-line rent receivable was $39.6m. The fair value of contingent payment liabilities was $13.3m; the filing’s commitments table lists $16.3m of earn-out liabilities as the commitment amount.
- Other items: The company increased its common monthly dividend after quarter-end by approximately 5.9%, from $0.17 to $0.18 per share. Ordinary-course claims and lawsuits were not considered material by management; no material changes to previously disclosed risk factors or market risk were reported.
Most important facts for investors to verify
- Whether rent and mortgage payments remain collectible, particularly from major operators, and how facility-level coverage and tenant financial condition evolve.
- Whether the $39.6m straight-line rent receivable converts to cash as expected, and whether reported revenue growth is supported by cash collections.
- How remaining development, mortgage, joint-venture and earn-out commitments are funded, and whether new investments achieve their stated yields and rent coverage conditions.
- Whether leverage, interest expense and debt maturities remain manageable as investment activity grows; confirm subsequent borrowing and note issuance status.
- Whether operating cash flow supports the increased dividend and other distributions, while preserving liquidity and REIT qualification.