Business Context and Reporting Period
LTC Properties, Inc. is a self-administered real estate investment trust (REIT) investing primarily in long-term healthcare properties, including skilled nursing and assisted living facilities, through mortgage loans and property lease transactions. This Form 10-Q covers the quarterly period ended September 30, 2009.
Key Financial Metrics
| Metric | Three Months Ended 9/30/09 | Nine Months Ended 9/30/09 | Nine Months Ended 9/30/08 |
|---|---|---|---|
| Total Revenues | $17.3 million | $52.4 million | $52.7 million |
| Net Income (Total) | $11.3 million | $33.3 million | $33.4 million |
| Net Income Available to Common Stockholders | $7.4 million | $22.2 million | $22.5 million |
| Diluted EPS (Common) | $0.32 | $0.96 | $0.98 |
| Net Cash Provided by Operating Activities | N/A | $44.9 million | $42.5 million |
| Cash and Cash Equivalents (End of Period) | $5.1 million | $5.1 million | $16.2 million |
| Total Debt (Mortgage & Bonds) | $11.9 million | $11.9 million | $36.8 million |
| Debt to Book Capitalization | 2.6% | 2.6% | 7.4% |
Material Changes vs. Prior Period
- Revenue Mix: For the nine months ended September 30, 2009, rental income increased by $1.6 million compared to the prior year, driven by lease escalations and capital improvement investments. Conversely, interest income from mortgage loans decreased by $1.1 million due to loan payoffs and the conversion of a mortgage loan to an owned property in late 2008.
- Debt Reduction: The company significantly reduced its leverage, paying off $23.9 million in mortgage loans secured by 11 assisted living properties during the nine-month period. Total debt decreased from $36.8 million at September 30, 2008, to $11.9 million at September 30, 2009.
- Interest Expense: Interest expense decreased by $1.1 million for the nine-month period compared to 2008, primarily due to the reduction in average debt outstanding.
- Provisions for Doubtful Accounts: Provisions increased by $0.6 million for the nine-month period, primarily due to an increase in the straight-line rent receivable reserve.
Guidance, Outlook, and Risks
- Liquidity Position: As of September 30, 2009, the company held $5.1 million in cash and had $80.0 million available under an unsecured revolving credit agreement maturing in July 2011. Additionally, an equity distribution agreement allows for the sale of up to $75.0 million in common shares.
- Dividend Policy: The company declared a monthly cash dividend of $0.130 per common share for October, November, and December 2009.
- Capital Markets: Management anticipates that straight-line rental income on a same-store basis will decrease from a projected $4.2 million in 2009 to $2.8 million in 2010, while cash rental income is projected to increase from $56.3 million to $57.7 million.
- Risk Factors:
- Operator Concentration: Three major operators (Brookdale, Preferred Care, and Extendicare/ALC) represent significant portions of assets and revenue. Financial difficulties faced by these operators could materially impact the company.
- Regulatory Environment: Changes in Medicare and Medicaid reimbursement rates, specifically a 1.1% reduction in payments for fiscal year 2010, could adversely affect the financial condition of borrowers and lessees.
- Related Party Transactions: Significant transactions exist with Skilled Healthcare Group, Inc. (SHG), where a board member serves as CEO, involving rental income and marketable securities.
Investor Verification Checklist
- Verify the financial stability of the top three operators (Brookdale, Preferred Care, Extendicare/ALC) given their concentration in the portfolio.
- Monitor the impact of the 1.1% Medicare payment reduction on the ability of skilled nursing operators to meet lease obligations.
- Review the collectibility of the $16.5 million straight-line rent receivable, noting the recent $0.6 million increase in reserves.
- Assess the utilization of the $80 million credit facility and the $75 million equity distribution agreement for future investment opportunities.
- Confirm the status of the $6.5 million investment in SHG Senior Subordinated Notes and the related party nature of these transactions.