Business Context and Reporting Period
Company: LTC Properties, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: LTC Properties is a self-administered health care real estate investment trust (REIT) investing primarily in senior housing and long-term care properties. The portfolio consists of skilled nursing facilities (SNF), assisted living facilities (ALF), and independent living facilities (ILF). The company operates as a single segment, generating revenue through triple-net operating leases and mortgage loans secured by health care real estate.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenues | $74.3 million | $69.4 million |
| Net Income (Total) | $46.1 million | $44.4 million |
| Net Income Allocable to Common Stockholders | $29.6 million | $29.4 million |
| Diluted EPS (Common) | $1.21 | $1.27 |
| Net Cash Provided by Operating Activities | $65.3 million | $60.3 million |
| Total Assets | $561.3 million | $490.6 million |
| Total Debt | $91.4 million | $25.4 million |
| Cash and Cash Equivalents | $6.9 million | $8.9 million |
| Dividends Declared (Common) | $1.58 per share | $1.56 per share |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7.1% to $74.3 million, driven primarily by a $5.5 million increase in rental income due to acquisitions in 2009 and 2010. This was partially offset by a $1.1 million decrease in interest income from mortgage loans due to payoffs and amortization.
- Debt Expansion: Total debt increased significantly from $25.4 million in 2009 to $91.4 million in 2010. This increase was due to the issuance of $50.0 million in senior unsecured term notes to Prudential and increased borrowings under the Unsecured Credit Agreement to fund real estate acquisitions.
- Acquisitions: The company acquired 10 properties (4 Assisted Living, 5 Skilled Nursing, 1 Other) for a total cost of approximately $94.6 million during 2010.
- Provisions for Doubtful Accounts: Increased by $1.2 million to $2.0 million, primarily due to a charge related to a private school property acquired via deed-in-lieu of foreclosure and a loan secured by land in Oklahoma.
- Preferred Stock Redemption: The company redeemed all outstanding Series E preferred stock and 40% of Series F preferred stock, recognizing a $2.4 million redemption charge.
Guidance, Outlook, and Risks
Liquidity and Capital Resources: Management believes liquidity is sufficient to fund operations, meet debt service, and finance future investments. As of December 31, 2010, the company had $6.9 million in cash and $72.3 million available under its $110.0 million Unsecured Credit Agreement (maturing July 2011). Subsequent to year-end, the company repaid $4.2 million on the credit agreement, leaving $76.5 million available. The company also has access to a private shelf agreement with Prudential for up to $50.0 million in term notes and an equity distribution agreement for up to $64.6 million in common stock.
Outlook and Commentary: The company projects cash rental income to increase from $62.2 million in 2010 to $69.9 million in 2011, assuming no new leases or modifications. Straight-line rental income is projected to decrease from $3.8 million in 2010 to $2.5 million in 2011. Management continues to focus on single-property transactions or small portfolios that meet investment criteria.
Key Risks and Contingencies:
- Health Care Regulation: Significant risk exists regarding changes in Medicare and Medicaid reimbursement rates, particularly under the Affordable Care Act, which could reduce operator revenues and impact their ability to make lease payments.
- Operator Concentration: The company relies on a few major operators. Extendicare REIT/ALC, Brookdale, and Preferred Care each account for over 10% of rental revenue. Financial difficulties of these operators could materially affect the company.
- Interest Rate Risk: The company has variable rate debt (credit facility) and fixed rate debt. A 1% increase in interest rates would decrease the estimated fair value of mortgage loans by approximately $2.1 million and senior notes by $2.1 million.
- REIT Qualification: Failure to maintain REIT status would subject the company to corporate income taxes, significantly reducing distributions to stockholders.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the Unsecured Credit Agreement covenants, specifically the total indebtedness to total asset value ratio (max 0.5:1) and EBITDA coverage ratios.
- Operator Financial Health: Review the financial stability of the top three operators (Extendicare/ALC, Brookdale, Preferred Care) given their concentration in the portfolio.
- Reimbursement Trends: Monitor state and federal Medicaid/Medicare reimbursement rate changes and their impact on the cash flow of skilled nursing facility lessees.
- Asset Impairment: Assess the valuation of the school property acquired via deed-in-lieu of foreclosure, which is classified as held-for-sale and contributed to the provision for doubtful accounts.
- Dividend Sustainability: Confirm that funds from operations (FFO) continue to cover the $1.58 per share annual common dividend and preferred stock obligations.