LTC Properties, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. LTC is a healthcare REIT investing primarily in seniors housing and healthcare properties through leases, mortgage loans and structured finance. Unless otherwise indicated, amounts below are in millions.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $47.1 | $41.8 | $138.8 | $125.1 |
| Net income | $27.3 | $34.9 | $68.2 | $124.2 |
| Net income available to common stockholders | $27.1 | $34.8 | $67.7 | $123.7 |
| Diluted EPS | $0.68 | $0.88 | $1.69 | $3.12 |
| NAREIT FFO available to common stockholders | $30.8 | $29.9 | $90.3 | $89.2 |
| Diluted NAREIT FFO per share | $0.77 | $0.75 | $2.26 | $2.25 |
- Revenue rose approximately 13% in Q3 and 11% year to date. Rental income and mortgage-loan interest drove the increase; rental income also included operator reimbursements of real estate taxes under the newly adopted lease standard.
- GAAP net income fell approximately 22% in Q3 and 45% year to date. Real-estate sale gains were substantially lower than in 2018: $6.2 million versus $14.4 million in Q3 and $6.7 million versus $62.7 million year to date. FFO, which excludes real-estate sale gains, increased approximately 3% in Q3 and 1% year to date.
- Q3 interest expense was $7.8 million, compared with $7.5 million; nine-month interest expense was $23.0 million, essentially unchanged. Q3 depreciation and amortization was $9.9 million; nine-month expense was $29.4 million.
- Net cash provided by operating activities was $90.1 million for the first nine months, up from $83.4 million. Investing used $57.1 million, compared with $2.4 million in 2018, reflecting lower property-sale proceeds and ongoing investments. Financing used $31.7 million. Cash, cash equivalents and restricted cash ended at $6.1 million.
- Declared and paid dividends were $0.57 per share for Q3 and $1.71 per share year to date, unchanged from 2018. Year-to-date cash distributions were $68.2 million.
Balance sheet, debt and liquidity
- At September 30, total assets were $1.512 billion, total liabilities $718.3 million, and total equity $793.9 million. Net investments were $1.427 billion, including $1.132 billion of real property and $253.2 million of mortgage loans.
- Debt totaled $683.9 million: $165.4 million of bank borrowings and $518.5 million of senior unsecured notes. Weighted-average stated rates were 3.39% on bank borrowings and 4.48% on notes; the combined rate was 4.22%. Debt to gross asset value was 36.8%; interest and fixed-charge coverage were each 4.9x. LTC reported compliance with all credit-facility covenants.
- At quarter-end, the company reported $434.6 million available on its $600 million revolving facility and $107.5 million available under its Prudential note shelf. It also had $200 million available under equity distribution agreements. Management said liquidity was sufficient for operating costs, debt obligations, dividends needed to maintain REIT status, and additional investments in 2019 and 2020.
- After quarter-end, LTC issued $100 million of 3.85% senior notes due 2031 and used the proceeds to repay $100 million on its revolver. It then reported $65.4 million drawn and $534.6 million available on the revolver, with $618.5 million of notes outstanding and $7.5 million remaining under the note shelf.
Material developments, outlook and risks
- Lease-accounting adoption: On January 1, 2019, ASC 842 adoption resulted in a $42.8 million reduction to equity for straight-line rent receivables and lease incentives associated principally with Anthem, Thrive, Preferred Care and Senior Care, plus a general reserve. Prior periods were not restated. The new standard also caused operator reimbursements of property taxes to be reported as rental income with corresponding property-tax expense.
- Operator and rent collection risk: Anthem was expected to pay about $7.5 million of 2019 cash rent—approximately half its contractual amount. Preferred Care began paying only $55,000 monthly against an approximately $1.0 million monthly obligation; LTC applied its security deposit to Q3 rent and entered into contracts to sell some properties while negotiating sales for others. Senior Care was in Chapter 11; a court affirmed its master lease and ordered payment of $1.6 million of unpaid rent, fees and costs. Thrive no longer operated LTC properties after all of its facilities were transitioned to other operators.
- A JV preferred-equity investment was placed on a cash basis because its preferred return was delinquent. The JV later pursued a property sale or refinancing; LTC said its September 30 recoverability test found the investment was not impaired.
- Two operators each represented at least 10% of rental and mortgage-interest revenue: Prestige Healthcare (17.0%) and Senior Lifestyle Corporation (10.8%). The filing identifies operator financial distress, concentration, healthcare reimbursement and regulatory changes, access to capital, interest rates and lessee/borrower performance as material risks. CMS projected a 2.4% increase in aggregate SNF Medicare payments for fiscal 2020; LTC cautioned that future policy changes could adversely affect operators and collections.
- No formal earnings guidance was provided. Management stated that it expected available cash, operating cash flow, borrowing capacity and capital-market access to support obligations and distributions, while noting that results depend heavily on rent and loan collection and operator performance. The monthly dividend of $0.19 per share was declared for October through December 2019.
Most important facts for investors to verify
- Current cash collections and lease status for Anthem, Preferred Care and Senior Care, including whether property-sale contracts close and whether ordered bankruptcy payments are received.
- Whether reported FFO and operating cash flow continue to cover dividends and planned property and loan investments.
- Operator and investment concentration, especially the exposure to Prestige Healthcare and Senior Lifestyle, and the status and recoverability of the delinquent JV preferred-equity investment.
- Post-quarter debt refinancing details, future borrowing costs, covenant headroom and liquidity needs.
- The continuing effects of ASC 842 collectibility judgments and the forthcoming expected-credit-loss accounting standard.