LTC Properties, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. LTC is a healthcare REIT investing primarily in seniors housing and healthcare properties through leases, mortgage loans, and structured financing. Financial statement amounts below are in millions, except per-share data.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $41.2 | $40.8 | $126.3 | $119.4 |
| Operating income | $20.0 | $20.3 | $60.8 | $60.0 |
| Net income | $20.6 | $22.4 | $67.5 | $64.4 |
| Net income available to common stockholders | $20.5 | $22.3 | $67.2 | $64.2 |
| Diluted EPS | $0.52 | $0.57 | $1.70 | $1.68 |
| NAREIT FFO per diluted share | $0.76 | $0.76 | $2.33 | $2.28 |
- Q3 revenue rose about 1%, while net income fell about 8%. The prior-year quarter included a $1.8 million real estate sale gain; Q3 2017 had no such gain. Operating income was slightly lower.
- Nine-month revenue increased about 6% and net income about 5%. Higher rental income, joint-venture income, and a $5.1 million gain on property sales contributed; higher interest and depreciation expense and a $1.9 million receivables impairment offset growth.
- Q3 operating margin was approximately 48.5%, versus 49.8% a year earlier; nine-month operating margin was approximately 48.1%, versus 50.3%. These are calculated as operating income divided by revenue.
- Nine-month cash from operations was $76.1 million, down from $79.6 million. Investing used $53.8 million, compared with $120.5 million in 2016; financing used $26.5 million, versus $31.5 million provided in 2016. Cash ended the period at $3.8 million.
- Declared and paid dividends totaled $1.71 per common share for the first nine months, up from $1.62. The company declared monthly dividends of $0.19 per share for October–December 2017.
Balance sheet, debt and liquidity
- Total assets were $1.43 billion at September 30, 2017, up from $1.39 billion at year-end 2016. Net investments were $1.33 billion, including $1.06 billion in real property and $221.9 million in mortgage loans.
- Total liabilities were $674.6 million and equity was $756.6 million. Debt obligations were $638.0 million: $55.0 million drawn on the revolving credit facility and $583.0 million of senior unsecured notes, net of issuance costs. Weighted-average stated borrowing rates were 2.98% on bank borrowings and 4.49% on notes.
- The $600 million unsecured revolver matures October 14, 2018, with a one-year extension option subject to conditions. At quarter-end, $545 million was available; after a subsequent $15 million net draw, $70 million was outstanding and $530 million available. LTC reported compliance with all debt covenants at September 30.
- Other stated funding capacity at quarter-end included $51.7 million available under the senior-note shelf and $185.2 million under its equity distribution agreements. Management said available cash, operating cash flow, borrowing capacity, and market access were sufficient for operating needs, debt service, and dividends, and expected adequate liquidity for investment in 2017 and 2018.
- Credit indicators: debt to gross asset value was 36.8%; debt to market capitalization was 25.5%; interest and fixed-charge coverage were each 4.8x for Q3 and 5.0x year to date.
Portfolio developments, risks and outlook
- At September 30, the portfolio included 201 properties across 28 states and 28 operators. Seniors housing and long-term healthcare represented approximately 99.4% of the real estate investment portfolio. Four operators each generated approximately 10% or more of combined rental and mortgage interest income; the largest, Prestige Healthcare, represented 16.7% of that revenue measure.
- A lessee partially paid rent under a master lease covering two development properties and nine operational memory-care communities. LTC issued a default notice, placed the lease on a cash basis, and wrote off $1.9 million of straight-line rent and other receivables. It was negotiating transfer of two operating properties. A subsequent forbearance agreement runs through December 31, 2017 and requires $0.4 million monthly payments toward the lessee’s obligations.
- During Q3, LTC reversed a $3.5 million accrued contingent incentive liability and wrote off the related $2.6 million lease-incentive asset after concluding payment was no longer probable; the net $0.8 million benefit was recorded in interest and other income.
- LTC sold four assisted-living communities for $14.3 million, recognizing a $5.1 million gain, and acquired three assisted-living/memory-care properties for $54.8 million during the nine months. A further 73-unit Missouri acquisition for $16.6 million closed after quarter-end at an initial cash yield of 7%.
- Management identified operator financial performance and rent/loan collectibility as key dependencies. Risks include operator concentration or distress, healthcare reimbursement and regulatory changes, interest rates and capital-market access, competition, and the relative illiquidity of real estate. CMS estimated a 1.0% increase in SNF payments for fiscal 2018; LTC cautioned that regulatory or reimbursement changes could adversely affect operators and its collections.
- No specific earnings or FFO guidance was provided. Management stated that it believed liquidity supported further investment and distributions, but future income and distributions depend substantially on operator performance and collection of rent and loan payments.
- The company expected no material impact from adopting the new revenue-recognition standard in 2018, principally because rental and loan interest income are excluded; adoption was planned using the modified retrospective method. Lease-accounting adoption was still under evaluation.
Important facts for investors to verify
- Whether the defaulted memory-care lessee meets the forbearance payment terms and whether properties are transferred, re-leased, or sold.
- Potential effects of operator concentration and healthcare reimbursement or regulatory changes on rent and mortgage collections.
- The timing and terms of the October 2018 revolver maturity, its extension option, and continued access to debt and equity funding.
- How much reported earnings and cash generation depend on noncash straight-line rent, property-sale gains, and other unusual items; nine-month operating cash flow was below the prior-year period.
- Dividend sustainability relative to recurring cash flow, investment commitments, and debt service.