LTC Properties, Inc. — Q2 2013 Form 10-Q
Business context and period. LTC Properties is a healthcare REIT investing in senior housing and long-term care properties through ownership, development, and mortgage lending. This unaudited report covers the quarter and six months ended June 30, 2013; dollar amounts below are in millions unless otherwise stated.
Financial performance and position
- Q2 revenue: $25.7, up 11.4% from $23.1 in Q2 2012. Rental income rose to $24.5 from $21.1, principally due to acquisitions, development, and capital improvements. Mortgage-loan interest income declined to $1.1 from $1.4.
- Q2 earnings: Income from continuing operations was $13.9, versus $13.1. Net income available to common stockholders was $12.0, versus $12.2; diluted EPS was $0.36, down from $0.40. A $1.0 loss on sale of a skilled nursing property was reported in discontinued operations.
- Six-month results: Revenue was $51.3 versus $45.7; income from continuing operations was $26.8 versus $26.0. Net income available to common stockholders was $24.1 versus $24.2, and diluted EPS was $0.76 versus $0.80.
- FFO: Diluted funds from operations per share, a non-GAAP measure, was $0.57 in Q2, unchanged year over year; for the first half it was $1.16 versus $1.13. FFO is not a substitute for GAAP earnings or operating cash flow.
- Cash flow: First-half operating cash flow was $38.7, compared with $36.8. Investing activities used $11.9 and financing activities provided $29.3. Cash increased to $63.3 from $7.2 at year-end 2012.
- Debt and liquidity: At June 30, bank borrowings were zero, senior unsecured notes were $185.8, and bonds payable were $2.0. The company reported $240.0 available under its unsecured credit facility and $100.0 available under a private shelf agreement. Total liabilities were $209.8; stockholders’ equity was $635.2. The company said it was in compliance with credit covenants.
- Portfolio and commitments: Gross real estate investments were $913.0, across 205 owned or mortgaged properties in 29 states and 42 operators. Remaining development and investment commitments were $46.5, excluding a conditional commitment of up to $5.0 per year through 2014 to an existing operator.
Material changes versus the prior period
- Rental growth was partly offset by higher interest expense: Q2 interest expense increased to $2.8 from $2.0, reflecting debt financing, borrowing costs, and line-of-credit pricing; the company had no bank balance at quarter-end.
- Common shares increased following a Q2 public offering of 4.025 million shares at $44.50 each. Net proceeds of $171.4 were used to reduce credit-line borrowings and support investments and general purposes.
- First-half G&A included a one-time $0.7 retirement-related charge, including $0.5 of accelerated restricted-stock compensation.
- The company sold a 47-bed Colorado skilled nursing property for $1,000 and recognized a $1.0 loss. In the prior-year period, a Texas property sale produced a $0.016 gain.
Outlook, risks, and unusual items
- Management stated that available cash, operating cash flow, borrowing capacity, and capital-market access were sufficient for operations, debt service, distributions, development commitments, and potential investments. It anticipated sufficient liquidity for additional 2013 capital investments; no earnings or FFO guidance was provided.
- For leases in place at quarter-end, assuming no new investments or lease changes, management projected cash rental income of $95.9 for 2013 and $98.3 for 2014; straight-line rental income was projected to decline from $3.6 to $1.9. These are management estimates, not guaranteed results.
- After quarter-end, the company entered into a $141.0 mortgage loan agreement secured by Michigan facilities. It expected to fund approximately $126.0 in Q4 2013; the 30-year loan carries 9.41% interest for five years, with annual increases thereafter. The agreement includes additional conditional lending capacity and borrower prepayment provisions.
- Other post-quarter activity included completion and opening of a 60-unit memory care property, additional funding of development and loan commitments, and declaration of common dividends of $0.155 per share monthly for July through September 2013.
- Key risks include operator or borrower financial distress, reliance on major operators, Medicare and Medicaid reimbursement or regulatory changes, healthcare labor and operating conditions, interest rates, capital-market access, and the ability to maintain REIT status. Three operators each accounted for more than 10% of rental income and mortgage interest income; each represented approximately 10.5%–10.7%.
- The filing reported no material changes in risk factors or market risk from the 2012 Form 10-K, no material change in internal control over financial reporting, and no individually or collectively material legal proceedings.
Important facts for investors to verify
- Whether the $141.0 Michigan mortgage loan was funded as expected, and the resulting concentration, credit, and capital-allocation exposure.
- Operator performance and rent/interest collection, particularly for the three operators each exceeding 10% of relevant revenue.
- Progress, costs, and funding of the $46.5 remaining investment commitments and the separate conditional operator commitment.
- Cash rental growth and the stated 2013–2014 projections, including the effect of straight-line rent accounting.
- How share issuance, dividends, debt costs, and future investment funding affect per-share earnings, FFO, and liquidity.