LTC Properties, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. LTC is a health care REIT investing in seniors housing and health care properties through leases, mortgage loans, and structured financing. Its portfolio was approximately 99% seniors housing and long-term health care investments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $40.8 million | $34.9 million | $119.4 million | $98.8 million |
| Operating income | $20.3 million | $19.0 million | $60.0 million | $53.6 million |
| Net income | $22.4 million | $19.6 million | $64.4 million | $55.1 million |
| Net income available to common stockholders | $22.3 million | $18.7 million | $64.2 million | $52.3 million |
| Diluted EPS | $0.57 | $0.52 | $1.68 | $1.47 |
| Diluted NAREIT FFO per share | $0.76 | $0.72 | $2.28 | $2.03 |
- For the nine months, rental income was $98.7 million and mortgage interest income was $20.3 million. Revenue growth primarily reflected acquisitions, completed developments, and capital improvements.
- Q3 operating margin was approximately 49.8%, compared with 54.3% a year earlier; higher interest and depreciation expenses contributed to expense growth outpacing revenue growth.
- Net income included real estate sale gains of $1.8 million in Q3 and $3.6 million for the nine months. FFO excludes real estate sale gains.
- Nine-month cash from operations was $79.6 million, versus $70.5 million. Investing activities used $120.5 million and financing activities provided $31.5 million. Cash and equivalents ended at $3.6 million.
- At September 30, debt was $589.3 million: $77.0 million of bank borrowings and $512.3 million of senior unsecured notes. Weighted-average stated interest rate was 4.19%; debt to gross asset value was 35.9%, and interest coverage was 5.2x.
- Liquidity included $523.0 million available on the revolving credit facility, $12.5 million under the Prudential note shelf, and $200.0 million of available capacity under the new equity distribution agreements. The revolving facility matures October 2018, with a one-year extension option. The company reported compliance with debt covenants.
- Common dividends were $0.18 per share monthly during the first nine months, or $1.62 per share. After quarter-end, LTC raised the monthly dividend approximately 5.6% to $0.19.
Material changes and transactions
- Nine-month acquisitions totaled $75.5 million for five properties or land investments; LTC also invested $35.6 million in development and $5.6 million in property improvements. Five developments and one improvement project were completed during the period.
- Compared with the first nine months of 2015, revenue increased 20.9% and common net income increased 22.7%. Interest expense rose to $19.6 million from $11.9 million, while depreciation and amortization rose to $26.6 million from $21.1 million.
- LTC issued $78.6 million net proceeds through its prior at-the-market program and sold $77.5 million of senior unsecured notes during the nine months. Common shares outstanding increased to 39.2 million from 37.5 million at year-end 2015.
- Debt increased by $17.4 million from December 31, 2015, as lower bank borrowings were more than offset by higher unsecured notes.
- The Series C preferred stock had been converted to common stock in 2015; no preferred stock was outstanding at September 30, 2016.
Outlook, risks, and unusual items
- Management gave no specific earnings or investment guidance. It said cash, operating cash flow, borrowing capacity, and capital-market access were expected to cover operating costs, debt obligations, dividends sufficient to maintain REIT status, and additional 2016–2017 investments.
- Cash generation and distributions depend on operators’ ability to pay rent and loan obligations. Four major operators accounted for 53.5% of combined rental and mortgage interest revenue; Prestige Healthcare alone represented 21.2%. Operator financial distress, bankruptcy, or nonrenewal could adversely affect results and liquidity.
- Health care reimbursement, Medicare and Medicaid policy, operating costs, and regulatory changes are material risks. CMS’s FY2017 SNF rule provided a net 2.4% payment-rate increase; a separate long-term-care rule added compliance requirements and estimated facility costs.
- At September 30, remaining commitments totaled $113.0 million, including $39.8 million for real estate, $47.4 million for mortgage loans, and $5.0 million for the preferred equity joint venture. The joint venture carries a 15% preferred return; LTC did not accrue the deferred portion during the nine months.
- Management identified interest-rate and capital-market sensitivity, tenant/operator concentration, health care regulation, and the relatively illiquid nature of real estate investments as risks. It reported no material change in market risk or risk factors, and disclosure controls were effective.
- Subsequent to quarter-end, LTC committed approximately $14.5 million to an Illinois memory-care development and declared the increased $0.19 monthly dividend.
Important facts for investors to verify
- Whether rent and mortgage collections remain strong, particularly among the largest operators and the joint venture investment.
- Whether acquisition and development returns exceed the rising interest, depreciation, and other costs associated with portfolio growth.
- Debt maturities, revolver extension conditions, covenant headroom, and the availability and potential dilution from future equity issuance.
- Whether operating cash flow supports dividends and the $113.0 million of remaining commitments; cash on hand was only $3.6 million at quarter-end.
- The sustainability of reported earnings growth excluding real estate sale gains, and the effect of straight-line rent receivables, which totaled $50.1 million net.