LTC Properties, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. LTC Properties is a self-administered healthcare REIT investing in senior housing and long-term care through property ownership, development, mortgage loans and other investments. The filing covers the three months ended March 31, 2015; interim financial statements are unaudited. The company reports one operating segment. Amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior balance |
|---|---|---|
| Total revenue | $31.5 | $29.4; up 6.9% |
| Operating income | $17.4 | $17.0 |
| Net income | $17.6 | $17.0; up 3.2% |
| Net income available to common stockholders | $16.6 | $16.1 |
| Basic / diluted EPS | $0.47 / $0.47 | $0.47 / $0.46 |
| FFO available to common stockholders (non-GAAP) | $23.4; $0.66 basic and $0.65 diluted per share | $22.4; $0.65 basic and $0.63 diluted per share |
| Net cash from operating activities | $17.9 | $19.8 |
| Cash and cash equivalents | $3.4 | $25.2 at December 31, 2014 |
| Debt | $314.0: $36.5 revolver and $277.5 senior notes | $281.6 senior notes and no revolver balance at December 31, 2014 |
Revenue comprised $26.7 rental income, $4.6 mortgage-loan interest and $0.2 interest and other income. Expenses totaled $14.0, including $3.8 interest, $6.8 depreciation and amortization, and $3.5 general and administrative costs. Net real estate investments were $917.2; total assets were $995.4 and total liabilities were $336.0 at quarter-end. The senior unsecured notes carried a 4.8% weighted-average rate.
Investing activities used $52.8, including $20.1 invested in an unconsolidated joint venture and $13.0 in real estate properties. Financing activities provided $13.1, including $36.5 of revolver borrowings, while $18.9 was paid in stockholder distributions. Common dividends were $0.17 per share monthly, or $0.51 for the quarter; preferred dividends were $0.8. Q1 operating cash flow was below total distributions paid.
Material changes versus the prior comparable period
- Revenue increased $2.0, primarily from acquisitions, development and capital improvements, as well as higher mortgage interest income.
- Net income increased $0.5; common-stockholder income increased $0.5. Basic EPS was unchanged, while diluted EPS increased one cent.
- Interest expense rose $0.6, mainly due to senior-note issuance and lower capitalized interest. Depreciation and amortization rose $0.5, and G&A rose $0.6, partly due to increased investment activity and restricted-stock compensation.
- Operating cash flow declined $2.0 from Q1 2014. Investing cash use increased to $52.8 from $15.9, reflecting property, mortgage and joint-venture investments.
- Quarter-end cash fell from $25.2 at year-end 2014, while revolver borrowings increased from zero to $36.5. Debt to gross asset value was 25.6%, versus 23.7% at year-end; interest coverage was 7.2x and fixed-charge coverage 5.9x.
Investments, liquidity and outlook
- The portfolio included $983.6 gross investment in owned real estate and $165.3 in mortgage loans, across 29 states and 35 operators. Senior housing and long-term care accounted for approximately 99% of the real estate investment portfolio.
- Q1 activity included purchasing a 106-bed Wisconsin skilled-nursing property for $13.9; completing a 60-unit Colorado memory-care development; and committing $28.7 to Texas and South Carolina development projects.
- The company invested $20.1 in preferred equity in an Arizona joint venture, with a further $5.5 commitment. It is entitled to a 15% preferred return, with certain purchase, put and call rights. The company reports maximum loss exposure from this investment is limited to its preferred contributions.
- At March 31, the company had $363.5 available on its $400.0 revolving facility, with an option to increase facility size by up to $200.0, and $775.1 available under its effective shelf registration. It reported compliance with credit covenants and stated these sources, together with operating cash flow, were expected to support operations, commitments, debt service and distributions. Management also believed there was sufficient liquidity for additional 2015 investments, subject to financial feasibility and access to cost-effective capital.
- After quarter-end, LTC amended its Prudential private shelf agreement, raising the agreement commitment to $200.0 and providing for possible issuance of up to $102.0 of additional fixed-rate senior notes. This is separate from the broader registered shelf capacity.
- No earnings or investment guidance was provided. The company declared common dividends of $0.17 per share for each of April, May and June 2015.
Risks, contingencies and unusual items
- Revenue and liquidity depend substantially on tenants’ and borrowers’ ability to meet rent and loan obligations. Three operators each generated approximately 10% or more of combined rental and mortgage interest income; Prestige Healthcare generated 13.2% and Brookdale Communities 12.4% in the quarter.
- Healthcare reimbursement, including Medicare and Medicaid policy, regulation, operator competition and operating costs could affect counterparties’ financial health and LTC’s collections. Management cited the proposed FY2016 Medicare SNF payment update of 1.4%; it was not final at the filing date.
- Interest-rate and capital-market changes could affect financing costs, investment values and access to capital. The company noted possible net interest-margin pressure if rates rise while investments are initially funded with variable-rate debt.
- Commitments included $69.9 remaining across real estate, mortgage-loan and notes-receivable funding commitments, plus a contingent commitment of up to $40.0 under a Michigan mortgage. Lease inducements and development funding are also subject to project completion and regulatory approvals.
- Earn-out liabilities were $3.3 at quarter-end, with up to $4.0 payable if specified rent-coverage conditions are met. The company reported ordinary-course claims and lawsuits that it did not expect to be material; it reported no material change to previously disclosed risk factors.
- The company early adopted ASU 2015-01, with no material effect, and was evaluating other newly issued accounting standards. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Tenant and borrower financial performance, rent coverage, and exposure to the largest operators, particularly Brookdale, Prestige Healthcare and Senior Care Centers.
- Cash distributions relative to operating cash flow and FFO, including the sustainability of the monthly common dividend.
- Execution, remaining funding needs and expected yields for development projects, mortgage commitments and the joint-venture preferred investment.
- Debt maturities, covenant headroom, actual issuance terms under the Prudential shelf, and sensitivity to interest-rate or capital-market changes.
- Healthcare reimbursement and regulatory developments, plus any changes in loan-loss reserves, straight-line rent collectibility or contingent obligations.