LTC Properties, Inc. — Q3 2013 Form 10-Q
Business context and reporting period
Health care REIT investing primarily in senior housing and long-term care properties through owned real estate, development and mortgage lending. This unaudited report covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. At quarter-end, its portfolio spanned 29 states and 40 operators.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $25.8m | $23.4m | $76.4m | $68.4m |
| Continuing-operations income | $14.4m | $12.3m | $40.8m | $37.8m |
| Net income attributable to LTC | $17.3m | $12.5m | $43.2m | $38.5m |
| Net income available to common stockholders | $16.4m | $11.6m | $40.4m | $35.8m |
| Basic / diluted EPS | $0.47 / $0.47 | $0.38 / $0.38 | $1.24 / $1.24 | $1.18 / $1.18 |
| FFO per common share, basic / diluted | $0.58 / $0.57 | $0.58 / $0.57 | $1.76 / $1.72 | $1.73 / $1.69 |
Quarterly revenue grew 10.4%, led by rental income, while continuing-operations income rose 17.8%. Nine-month revenue rose 11.7%; continuing-operations income increased 7.9%. Common-stockholder income benefited from property-sale gains, so reported EPS growth exceeded the increase in continuing-operations EPS. Rental income increased with acquisitions, developments and capital improvements; mortgage-loan interest income declined year over year.
For the first nine months, operating cash flow was $60.2m versus $57.4m. Investing activities used $12.3m versus $73.2m in the prior period; financing provided $5.3m versus $19.6m. Cash was $60.3m at September 30, versus $7.2m at December 31, 2012. Total liabilities were $205.2m, including $185.8m of senior unsecured notes and $2.0m of bonds; no credit-line borrowings were outstanding at quarter-end. The company reported covenant compliance. Total equity was $636.0m.
Common dividends declared and paid were $0.46 per share in Q3 and $1.39 for the first nine months, compared with $0.45 and $1.32, respectively, in 2012. In October, the monthly common dividend increased 9.7%, from $0.155 to $0.17 per share.
Material changes, outlook and unusual items
- Rental-income growth was partly offset by higher depreciation and amortization and general and administrative expenses. Nine-month interest expense increased, primarily due to senior notes and higher credit-line pricing; Q3 interest expense declined with lower average borrowings and more capitalized development interest.
- Q3 included a $2.6m gain from selling six Ohio skilled-nursing properties for $11.0m. Nine-month sale results also included a $1.0m loss on a Colorado property sold for $1,000. A $7.0m acquisition-related contingent payment was settled; no related liability remained at quarter-end.
- Common shares issued in a public offering generated $171.4m net proceeds, used for debt repayment, investments and general corporate purposes. The increased share count is relevant to per-share comparisons.
- Management projected, for leases then in place and assuming no changes or new investments, annual cash rental income of $95.6m in 2013 and $96.9m in 2014; straight-line rental income was projected to decline from $3.9m to $2.1m. Management said available liquidity and capital sources were sufficient for operations, debt service, distributions, development commitments and some prospective investments; this is not earnings guidance.
- At quarter-end, remaining development and redevelopment commitments were $57.9m, excluding a conditional commitment of up to $5.0m annually through December 2014. Subsequent to quarter-end, LTC funded a $124.4m, 30-year mortgage loan secured by 15 Michigan skilled-nursing properties, with a further $12m capital-improvement commitment and potential additional advances of up to $40m subject to conditions. It used approximately $55m cash and borrowed $86m under its credit line; management then reported about $5m cash and $154m of remaining line availability.
- Major risks include operators’ ability to meet rent and loan obligations, reliance on several significant operators, health-care reimbursement and regulatory changes, access to capital and interest-rate changes. Medicare SNF rates for fiscal 2014 were estimated by CMS to increase 1.3%; management cautioned that future payment or policy changes could adversely affect operators and LTC. No material changes to previously disclosed risk factors or market risk were reported.
Important facts for investors to verify
- Separate recurring performance from property-sale gains: reconcile GAAP EPS with FFO and continuing-operations results.
- Assess the post-quarter Michigan mortgage’s credit, concentration and funding risks, including the added commitments and credit-line borrowing.
- Monitor operator concentration and tenant/borrower payment capacity; four operators each generated more than 10% of rental revenue and mortgage interest income.
- Compare the dividend increase and distribution burden with recurring cash flows, development commitments and remaining liquidity.
- Confirm the assumptions behind management’s 2013–2014 cash-rent projections and the timing and cost of completing committed projects.