LTC Properties, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. LTC Properties is a healthcare REIT investing primarily in seniors housing and healthcare real estate through property ownership, mortgage loans, and structured financing. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are to the same periods in 2018 unless noted. The portfolio included 178 owned properties and 22 mortgage-loan properties across 28 states.
Financial performance and position
- Q2 revenue: $46.3 million, up 11.6% from $41.5 million. Rental income was $38.3 million and mortgage-loan interest income was $7.4 million.
- Q2 earnings: Net income attributable to LTC was $20.4 million, or $0.51 per diluted share, compared with $68.9 million, or $1.73, a year earlier. The decline principally reflects the prior-year $48.3 million real estate sale gain; Q2 2019 included a $0.5 million additional gain from escrow proceeds.
- FFO: NAREIT FFO attributable to common stockholders was $29.7 million, or $0.75 per diluted share, versus $29.6 million, or $0.75, in Q2 2018.
- Six-month results: Revenue was $91.7 million versus $83.3 million; net income attributable to LTC was $40.8 million versus $89.3 million; diluted EPS was $1.02 versus $2.25. Six-month FFO was $59.6 million, or $1.50 per diluted share, versus $59.3 million, or $1.50.
- Cash flow and distributions: Operating cash flow for the first half was $61.7 million, compared with $55.5 million. Investing activities used $44.1 million, versus providing $9.4 million in 2018, when property-sale proceeds were substantial. Cash distributions to stockholders were $45.6 million. Cash, cash equivalents, and restricted cash totaled $5.3 million at June 30.
- Debt and liquidity: Debt totaled $675.8 million at June 30, comprising $146.9 million of bank borrowings and $528.9 million of senior notes. Weighted-average stated borrowing cost was 4.33%; debt to gross asset value was 36.8%, and interest and fixed-charge coverage were each 4.8x. The company reported $453.1 million available on its revolving facility and $98.0 million under its senior-note shelf, plus a $200 million ATM equity program with no shares issued under it as of quarter-end. It reported covenant compliance.
- Balance sheet: Total assets were $1.50 billion and total equity was $787.6 million at June 30. Net investments were $1.42 billion. The company reported $43.7 million of net straight-line rent receivable.
Material changes and unusual items
- Revenue increased, reflecting acquisitions, development completions, mortgage funding, and a new presentation under ASC 842 of operator reimbursements for real estate taxes as rental income with corresponding property-tax expense. The six-month reimbursement amounts were $8.2 million in both revenue and expense; this presentation reduces comparability with 2018.
- Adoption of ASC 842 on January 1, 2019 resulted in a $42.8 million cumulative charge to opening equity, writing off straight-line rent receivables and lease incentives tied to leases with collection concerns. This was an accounting transition adjustment, not a current-period cash payment. The company also recorded $1.9 million of rental-income adjustment related to a terminated lease in Q1.
- Q2 2019 rental income included recoveries from Anthem, Thrive, Preferred Care, and Senior Care, including amounts previously written off. The filing reports $18 million of first-half rent received from these operators, including $17 million characterized as recoveries.
- Operating performance at certain counterparties remains stressed. Anthem’s estimated 2019 cash rent is $7.5 million, about half the contractual amount. Thrive did not pay January–July rent; LTC issued a default notice and transitioned its properties to other operators. Senior Care is in Chapter 11; it paid January–July rent, but LTC objected to its post-quarter motion to affirm the lease. Preferred Care’s bankruptcy-related lease status remains unresolved, and LTC is considering re-leasing or selling some properties.
- A preferred-equity joint-venture investment was placed on a cash basis in Q2 due to delinquent preferred returns, contributing to lower joint-venture income.
- LTC transitioned Thrive properties to new or existing operators during and after Q2. Additional transitions included new leases with specified initial rents, rent escalations, rent deferrals or free-rent periods, and purchase options; these terms create execution and collection risks.
Outlook, risks, and contingencies
- Management said available cash, operating cash flow, borrowing capacity, and potential capital-market access should be sufficient to meet operating costs, debt obligations, and dividends at a level sufficient to maintain REIT status. It also said liquidity was sufficient for additional 2019 capital investments. No earnings or FFO guidance was provided.
- Management’s outlook depends substantially on tenants’ and borrowers’ ability to pay rent and interest. Risks include operator distress and bankruptcy, reliance on major operators, healthcare reimbursement and regulatory changes, interest rates and capital-market access, competition, and the ability to re-lease properties.
- Two operators each represented at least 10% of combined rental and mortgage-interest revenue: Prestige Healthcare (18.1%) and Senior Lifestyle Corporation (11.7%). Together they represented 29.8% of that revenue measure.
- CMS finalized a projected 2.4% increase in aggregate Medicare SNF payments for fiscal 2020 and planned implementation of the Patient-Driven Payment Model on October 1, 2019. The filing cautions that healthcare payment and policy changes could affect operators’ ability to pay LTC.
- Subsequent to quarter-end, LTC borrowed $12.0 million on its revolver, paid $8.5 million of scheduled note principal, entered into Missouri SNF acquisition and development agreements expected to close in Q3, and declared monthly dividends of $0.19 per share for July through September 2019.
- The company reported no material change in market risk or risk factors, and stated that disclosure controls and procedures were effective. Ordinary-course claims and lawsuits were not expected to be material.
Important facts for investors to verify
- Whether rent collection and lease outcomes improve for Anthem, Thrive, Preferred Care, and Senior Care, and whether transitioned properties achieve the stated rents.
- How much reported rental-income growth reflects recurring contractual rent versus ASC 842 reimbursements and recoveries of previously written-off amounts.
- Whether operating cash flow and FFO continue to support the $0.19 monthly dividend, especially given first-half distributions of $45.6 million and operating cash flow of $61.7 million.
- Whether the preferred-equity JV delinquency or other operator issues lead to further cash-basis accounting, reserves, impairments, or reduced income.
- Completion, funding, and expected returns for the post-quarter Missouri transactions and existing investment commitments; total remaining commitments were $69.0 million at June 30.
- Debt availability, interest costs, and covenant compliance as borrowings and capital needs evolve.