LTC Properties, Inc. — Q2 2016 Form 10-Q
Business context and period. LTC Properties is a healthcare REIT investing mainly in seniors housing and healthcare properties through leases, mortgage loans, and structured finance. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. The company reports as one operating segment.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $40.0 million | $32.4 million | $78.6 million | $63.9 million |
| Operating income | $20.1 million | $17.2 million | $39.7 million | $34.6 million |
| Net income | $22.2 million | $17.9 million | $42.0 million | $35.5 million |
| Net income available to common | $22.1 million | $17.0 million | $41.8 million | $33.6 million |
| Diluted EPS | $0.58 | $0.48 | $1.11 | $0.94 |
| NAREIT FFO per diluted share | $0.77 | $0.66 | $1.52 | $1.31 |
Revenue growth reflected acquisitions, development, capital improvements, and mortgage lending. Q2 net income included a $1.8 million gain from selling two Texas skilled nursing centers; excluding this item, reported net income is not a direct measure of recurring operating performance. Interest expense rose to $6.8 million from $3.9 million in Q2 and to $12.8 million from $7.6 million for the first half, principally reflecting increased borrowings. Depreciation and amortization also increased.
Cash flow and liquidity. First-half operating cash flow was $50.8 million, versus $44.0 million in 2015. Investing activities used $108.6 million, mainly for property acquisitions, development, improvements, and mortgage lending; financing activities provided $62.6 million. Cash and equivalents were $17.8 million at June 30. The company reported $122.0 million drawn on its $600 million revolving credit facility, with $478.0 million available at quarter-end. It reported compliance with all debt covenants.
Debt and balance sheet. Total debt was $606.7 million: $122.0 million of bank borrowings and $484.7 million of senior unsecured notes, at a reported weighted-average rate of 4.07%. Total assets were $1.38 billion and equity was $730.7 million. Debt to gross asset value was 36.8%; interest and fixed-charge coverage ratios were each 5.1x. Subsequent to quarter-end, LTC repaid $41.0 million on its revolver and issued $40.0 million of AIG-affiliated notes at 3.99%; it also made $12.5 million of scheduled note repayments.
Dividends. The company declared and paid $0.18 per common share monthly in the first half, or $1.08 per share for the period. It declared the same monthly rate for July through September 2016.
Material changes and transactions
- First-half revenue increased to $78.6 million from $63.9 million; net income available to common stockholders rose to $41.8 million from $33.6 million. The 2016 comparison benefited from a $1.8 million property-sale gain, while the 2015 comparison included preferred dividends; the Series C preferred stock had converted to common stock during 2015.
- In the first half, LTC acquired five properties for approximately $69.9 million, funded $26.3 million of development and $4.1 million of capital improvements, and originated $17.1 million of mortgage loans. It sold two Texas skilled nursing centers for $6.8 million, recognizing the $1.8 million gain.
- Common stock offerings generated $70.9 million net proceeds in the first half. At June 30, approximately $127.9 million remained available under the equity distribution agreements; subsequent sales reduced availability to approximately $120.0 million.
- At quarter-end, the portfolio included 216 properties across 30 states, with investments leased or mortgaged to 33 operators. Four operators accounted for 49.1% of rental and mortgage interest revenue.
Outlook, risks, and unusual items
The filing provides no quantified earnings or FFO guidance. Management said current cash, operating cash flow, borrowing capacity, and potential capital-market access were sufficient for operating costs, debt obligations, and dividends, and that liquidity was adequate for additional 2016 investments. Future rent collections, mortgage receipts, and distributions depend substantially on operators’ financial and operating performance.
- Key risks include operator concentration and tenant/borrower credit, healthcare reimbursement and regulation changes, capital-market access and interest rates, competition, and the relative illiquidity of real estate investments. The top four operators together represented 49.1% of revenue; the filing specifically warns that financial difficulties at major operators could adversely affect results, liquidity, and distributions.
- At June 30, remaining commitments totaled $116.7 million, including $38.6 million for real estate, $49.3 million for mortgage loans, and $5.0 million for the Arizona joint venture. Total stated commitments were $215.6 million.
- The Arizona preferred-equity investment carries a 15% preferred return, part of which may be deferred when cash flow is insufficient. LTC did not accrue the deferred portion during the first half; repayment of accrued preferred return is due upon redemption.
- Subsequent to quarter-end, LTC sold a New Jersey school for $3.85 million and recorded a $0.19 million loss. Management reported no material change in market risk or risk factors from the prior annual report, and said disclosure controls were effective.
Important facts for investors to verify
- Whether rent and mortgage payments from major operators remain current, particularly given the disclosed revenue concentration.
- Recurring earnings and FFO trends excluding the $1.8 million sale gain, and the effect of higher interest expense and share issuance.
- Funding, returns, and performance of development projects, mortgage commitments, and the Arizona joint venture, including deferred preferred returns.
- Liquidity and leverage after the reported post-quarter debt repayments and note issuance, along with upcoming maturities and covenant headroom.
- The sustainability of the $0.18 monthly common dividend relative to cash generation, investment needs, and financing costs.