LTC Properties, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. Health care REIT investing mainly in senior housing and long-term care properties through leases and mortgage loans. This unaudited filing covers the quarter and six months ended June 30, 2012; balance-sheet comparisons are with December 31, 2011. Unless noted, financial amounts below are in millions.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $23.1 | $21.2 | $45.7 | $41.4 |
| Income from continuing operations | $13.1 | $12.4 | $26.1 | $24.6 |
| Net income attributable to LTC | $13.1 | $12.2 | $26.0 | $24.3 |
| Net income available to common stockholders | $12.2 | $11.3 | $24.2 | $16.7 |
| Basic EPS available to common stockholders | $0.40 | $0.38 | $0.80 | $0.59 |
| FFO available to common stockholders | $17.6 | $16.3 | $34.7 | $26.2 |
| Basic FFO per share | $0.58 | $0.54 | $1.15 | $0.93 |
| Cash provided by operating activities | — | $36.8 | $34.4 |
- Q2 revenue rose about 9% year over year, principally from acquisitions increasing rental income; mortgage-loan interest income declined with loan payoffs and amortization. Six-month revenue rose about 10%.
- Six-month common earnings and FFO comparisons are affected by 2011’s $3.6 million preferred-stock redemption charge, which did not recur in 2012. FFO is a non-GAAP supplemental measure, not operating cash flow.
- At June 30, total assets were $654.9 million, total liabilities $189.4 million, and total equity $465.5 million. Cash was $10.3 million. Debt comprised $68.0 million of bank borrowings, $100.0 million of senior notes, and $2.6 million of bonds payable. Preferred stock outstanding had $38.5 million carrying value.
- Six-month investing cash outflow was $11.5 million and financing cash outflow was $19.5 million. The company paid $28.1 million in stockholder distributions, including $26.5 million on common stock and $1.6 million on preferred stock.
Material changes and business developments
- During the first half, LTC acquired a 144-bed Texas skilled nursing property for $18.6 million, sold a 140-bed Texas skilled nursing property for $1.2 million, and purchased Colorado land for a 60-unit memory-care development with a commitment of up to $7.9 million.
- After quarter-end, LTC acquired three skilled nursing properties for a combined $60.5 million: one in Texas and two in Ohio. It also issued $85.8 million of 12-year senior notes at 5.03%, using proceeds partly to reduce its credit line and partly to fund acquisitions.
- The amended unsecured credit facility had a $240 million commitment, expandable to $350 million, and maturity in May 2016, with a one-year extension option. At June 30, $68 million was drawn and $172 million remained available; LTC reported covenant compliance. After subsequent borrowing and repayment activity, it reported $35.5 million drawn and $204.5 million available.
- Six-month FFO increased 32.5% to $34.7 million; Q2 FFO increased 7.8% to $17.6 million. Management attributed operating revenue growth mainly to acquisitions and capital improvements.
Outlook, risks and unusual items
- Management projected cash rental income of $84.6 million for 2012 and $89.8 million for 2013, while straight-line rental income was projected to decline from $3.1 million to $2.4 million, assuming no lease changes or additional investments. These are estimates, not formal earnings guidance.
- In August 2012, LTC raised its common monthly dividend from $0.145 to $0.155 per share, a 6.9% increase. Its board also terminated the share repurchase authorization after quarter-end.
- Management said available cash, operating cash flow, borrowing capacity, and capital-market access were sufficient for operations, debt service, distributions, and some further investment. Future investment and liquidity depend on capital-market conditions and access to cost-effective funding.
- Operator credit and concentration are key risks. Three operators each generated more than 10% of rental and mortgage interest income; together they represented approximately 36%. A financial downturn, nonpayment, or loss of a major operator could materially affect results and distributions.
- Health care reimbursement and regulation pose risks: the filing discusses an 11.1% reduction in average Medicare skilled-nursing rates for fiscal 2012, proposed reductions in Medicare bad-debt reimbursement, and potential Medicare sequestration reductions capped at 2% beginning in January 2013. Such changes could weaken tenants’ and borrowers’ ability to pay.
- Other notable items include $6.5 million of related-party Skilled Healthcare Group notes redeemed at par, and a $6.5 million contingent earn-out liability measured using Level 3 assumptions. LTC disclosed no material change in risk factors or market risk; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether tenant and borrower operating performance supports rent and loan collections, especially for the three largest operators and facilities exposed to government reimbursement.
- Whether acquired properties and the memory-care development deliver the stated yields, and whether planned construction funding and rent commencement proceed as expected.
- How the post-quarter $85.8 million note issuance, acquisitions, and credit-line activity affect leverage, interest costs, maturities, and covenant headroom.
- Whether cash rental forecasts, straight-line rent receivables, and the increased common dividend are sustainable; review the distinction between GAAP earnings, FFO, and cash available for distributions.
- The assumptions and potential payment timing underlying the $6.5 million earn-out liability, and the implications of the disclosed related-party leasing and investment relationships.