LTC Properties, Inc. — Q2 2014 Form 10-Q
Business context and reporting period. LTC Properties is a healthcare REIT investing in senior housing and long-term care properties through ownership, development and mortgage lending. This unaudited filing covers the quarter and six months ended June 30, 2014. Its portfolio included 215 properties and investments across 29 states, with gross investments of $1.126 billion; approximately 99% of the portfolio was in senior housing and long-term care.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $29.2 million | $25.7 million | $58.7 million | $51.3 million |
| Operating income | $17.1 million | $13.9 million | $34.1 million | $26.8 million |
| Net income | $18.3 million | $12.9 million | $35.3 million | $25.9 million |
| Net income available to common stockholders | $17.3 million | $12.0 million | $33.4 million | $24.1 million |
| Diluted EPS | $0.50 | $0.36 | $0.96 | $0.76 |
| FFO per diluted share | $0.64 | $0.57 | $1.27 | $1.16 |
- Q2 revenue increased 13.8%; six-month revenue increased 14.3%. Mortgage-loan interest income rose to $4.1 million for Q2 and $8.2 million for the half year, largely reflecting a $124.4 million mortgage originated in late 2013 and additional loan funding. Rental income increased more modestly.
- Operating margin was approximately 58.6% in Q2 versus 54.1% a year earlier, and 58.2% for the first half versus 52.3%. Q2 included a $1.14 million net gain on property sales. The prior-year periods included a $1.014 million loss on sale reported in discontinued operations.
- Six-month cash from operations was $45.2 million, investing cash outflow $23.2 million and financing cash outflow $20.7 million. Cash increased to $8.1 million from $6.8 million at year-end. Operating cash flow exceeded $37.1 million of total stockholder distributions paid.
- At June 30, total assets were $945.2 million, liabilities $312.9 million and equity $632.3 million. Debt comprised $42.0 million of revolving borrowings, $251.6 million of senior notes and $1.4 million of bonds—about $295.0 million in total. The weighted-average rate on senior notes was 4.8%.
- The revolving credit facility had $198 million available at quarter-end; LTC reported covenant compliance. Cash plus available revolver capacity was $206.1 million. The company also had an $800 million effective shelf registration for potential capital-market issuance.
- Common dividends declared and paid were $0.51 per share for Q2 and $1.02 for the first half, up from $0.465 and $0.93, respectively. The July 2014 declaration maintained a $0.17 monthly common dividend for July through September.
Material changes and outlook
- Growth reflected investment activity, including development and capital improvements, and a significant increase in mortgage interest income. General and administrative expense declined year over year, partly because the first half of 2013 included severance and accelerated restricted-stock vesting costs. Interest expense increased with higher average borrowings and notes issued in 2013.
- During Q2, LTC sold two assisted-living properties and one school for $7.85 million gross proceeds, recognizing a $1.14 million net gain. The company early adopted the revised discontinued-operations guidance; these disposals were not considered strategic shifts and were not classified as discontinued operations.
- Management projected cash rental income on leases in place at June 30 to decline from $97.3 million in 2014 to $84.6 million in 2015, and straight-line rental income to decline from $2.2 million to $1.8 million. These estimates assume no replacement or modification of leases, no renewals—including the Extendicare/Enlivant lease—no new leased investments, and exclude non-accrual leases; they are not unconditional forecasts.
- The Extendicare/Enlivant master lease covering 37 assisted-living properties expires December 31, 2014. It generated approximately $5.5 million, or 9.4%, of first-half combined rental and mortgage interest income. LTC retained an adviser to pursue new leases or potential sales; it cautioned that timely re-leasing and equivalent rents are not assured.
- At June 30, remaining development, redevelopment and expansion commitments were $30.3 million; a further $11.3 million remained under a borrower capital-improvement commitment, and $2.1 million under notes and credit-line commitments. Subsequent to quarter-end, $2.8 million was funded against investment commitments and $3.0 million for an Arizona mortgage loan.
- After quarter-end, LTC locked in $30 million of senior unsecured notes at 4.5%, maturing July 31, 2026, with funding expected in Q3 and proceeds intended to repay revolver borrowings. The private shelf was then exhausted.
- Key risks include operator credit and concentration, lease renewals, Medicare and Medicaid reimbursement and regulatory changes, health-care operating conditions, access to capital and interest rates. Two operators each contributed more than 10% of first-half combined rental and mortgage interest income. Management reported no material change in market risk or risk factors from its 2013 Form 10-K.
Important facts for investors to verify
- Progress and economics of re-leasing, restructuring or selling the 37 Extendicare/Enlivant communities before the lease expiry.
- Operator financial condition and rent/interest collection, particularly for the major operators and the portfolio’s concentrated exposures.
- Whether reported earnings growth and FFO growth are sustained without the property-sale gain and amid scheduled portfolio changes.
- Funding and completion of development and loan commitments, and the resulting returns and liquidity needs.
- Post-quarter issuance and use of the $30 million notes, debt covenant headroom, and dividend coverage by operating cash flow and FFO.
- Potential effects of reimbursement, regulatory and financing changes on operators’ ability to meet lease and loan obligations.