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LTC Properties (LTC)

Filed: 5 Nov 18, 4:37pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition period from ____ to ____

 

Commission file number 1-11314

 

LTC PROPERTIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

 

 

 

Maryland

 

 

 

71-0720518

(State or other jurisdiction of

 

 

 

(I.R.S. Employer

incorporation or organization)

 

 

 

Identification No.)

 

2829 Townsgate Road, Suite 350

Westlake Village, California  91361

(Address of principal executive offices, including zip code)

 

(805) 981-8655

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☑  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☑  No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐  No  ☑

 

The number of shares of common stock outstanding on November 1, 2018 was 39,656,737.

 

 


 


 

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share)

 

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

 

 

 

(unaudited)

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Land

 

$

125,533

 

$

124,041

 

Buildings and improvements

 

 

1,280,491

 

 

1,262,335

 

Accumulated depreciation and amortization

 

 

(304,337)

 

 

(304,117)

 

Operating real estate property, net

 

 

1,101,687

 

 

1,082,259

 

Properties held-for-sale, net of accumulated depreciation: 2018—$2,887; 2017—$1,916

 

 

5,356

 

 

3,830

 

Real property investments, net

 

 

1,107,043

 

 

1,086,089

 

 

 

 

 

 

 

 

 

Mortgage loans receivable, net of loan loss reserve: 2018—$2,444; 2017—$2,255

 

 

242,609

 

 

223,907

 

Real estate investments, net

 

 

1,349,652

 

 

1,309,996

 

Notes receivable, net of loan loss reserve: 2018—$128; 2017—$166

 

 

12,642

 

 

16,402

 

Investments in unconsolidated joint ventures

 

 

30,511

 

 

29,898

 

Investments, net

 

 

1,392,805

 

 

1,356,296

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

20,408

 

 

5,213

 

Restricted cash

 

 

2,163

 

 

 —

 

Debt issue costs related to bank borrowings

 

 

3,202

 

 

810

 

Interest receivable

 

 

19,290

 

 

15,050

 

Straight-line rent receivable, net of allowance for doubtful accounts: 2018—$739; 2017—$814

 

 

73,114

 

 

64,490

 

Lease incentives

 

 

21,102

 

 

21,481

 

Prepaid expenses and other assets

 

 

3,767

 

 

2,230

 

Total assets

 

$

1,535,851

 

$

1,465,570

 

LIABILITIES

 

 

 

 

 

 

 

Bank borrowings

 

$

120,000

 

$

96,500

 

Senior unsecured notes, net of debt issue costs: 2018—$981; 2017—$1,131

 

 

550,986

 

 

571,002

 

Accrued interest

 

 

3,468

 

 

5,276

 

Accrued incentives and earn-outs

 

 

9,292

 

 

8,916

 

Accrued expenses and other liabilities

 

 

28,812

 

 

25,228

 

Total liabilities

 

 

712,558

 

 

706,922

 

EQUITY

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding:     2018—39,657; 2017—39,570

 

 

397

 

 

396

 

Capital in excess of par value

 

 

861,226

 

 

856,992

 

Cumulative net income

 

 

1,224,998

 

 

1,100,783

 

Cumulative distributions

 

 

(1,270,779)

 

 

(1,203,011)

 

Total LTC Properties, Inc. stockholders’ equity

 

 

815,842

 

 

755,160

 

Non-controlling interests

 

 

7,451

 

 

3,488

 

Total equity

 

 

823,293

 

 

758,648

 

Total liabilities and equity

 

$

1,535,851

 

$

1,465,570

 

 

See accompanying notes.

 

 

3


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

  

2018

  

2017

  

2018

  

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

34,211

 

$

33,233

 

$

102,646

 

$

103,533

 

Interest income from mortgage loans

 

 

7,087

 

 

6,677

 

 

20,910

 

 

20,050

 

Interest and other income

 

 

478

 

 

1,336

 

 

1,502

 

 

2,753

 

Total revenues

 

 

41,776

 

 

41,246

 

 

125,058

 

 

126,336

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

7,497

 

 

7,644

 

 

22,981

 

 

22,266

 

Depreciation and amortization

 

 

9,447

 

 

9,519

 

 

28,159

 

 

28,186

 

Impairment charges

 

 

 —

 

 

 —

 

 

 —

 

 

1,880

 

Provision (recovery) for doubtful accounts

 

 

106

 

 

(96)

 

 

76

 

 

(139)

 

Transaction costs

 

 

 9

 

 

34

 

 

19

 

 

56

 

General and administrative expenses

 

 

4,879

 

 

4,144

 

 

14,392

 

 

13,270

 

Total expenses

 

 

21,938

 

 

21,245

 

 

65,627

 

 

65,519

 

Operating income

 

 

19,838

 

 

20,001

 

 

59,431

 

 

60,817

 

Income from unconsolidated joint ventures

 

 

746

 

 

615

 

 

2,103

 

 

1,635

 

Gain on sale of real estate, net

 

 

14,353

 

 

 —

 

 

62,698

 

 

5,054

 

Net income

 

 

34,937

 

 

20,616

 

 

124,232

 

 

67,506

 

Income allocated to non-controlling interests

 

 

(17)

 

 

 —

 

 

(17)

 

 

 —

 

Net income attributable to LTC Properties, Inc.

 

 

34,920

 

 

20,616

 

 

124,215

 

 

67,506

 

Income allocated to participating securities

 

 

(138)

 

 

(80)

 

 

(504)

 

 

(281)

 

Net income available to common stockholders

 

$

34,782

 

$

20,536

 

$

123,711

 

$

67,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.88

 

$

0.52

 

$

3.13

 

$

1.71

 

Diluted

 

$

0.88

 

$

0.52

 

$

3.12

 

$

1.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

39,487

 

 

39,428

 

 

39,470

 

 

39,403

 

Diluted

 

 

39,865

 

 

39,748

 

 

39,845

 

 

39,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.57

 

$

0.57

 

$

1.71

 

$

1.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

34,937

 

$

20,616

 

$

124,232

 

$

67,506

 

Comprehensive income

 

$

34,937

 

$

20,616

 

$

124,232

 

$

67,506

 

 

See accompanying notes.

4


 

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Cumulative

 

 

 

 

 

Total

 

 

Non-

 

 

 

 

 

 

Common Stock

 

 

Excess of

 

 

Net

 

 

Cumulative

 

 

Stockholder's

 

 

Controlling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Income

 

 

Distributions

 

 

Equity

 

 

Interests

 

 

Equity

 

Balance—December 31, 2016

 

39,221

 

$

392

 

$

839,005

 

$

1,013,443

 

$

(1,112,792)

 

$

740,048

 

$

 —

 

$

740,048

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,552)

 

 

(22,552)

 

 

 —

 

 

(22,552)

 

Proceeds from common stock issued, net of issuance costs

 

313

 

 

 3

 

 

14,526

 

 

 —

 

 

 —

 

 

14,529

 

 

 —

 

 

14,529

 

Issuance of restricted stock

 

75

 

 

 1

 

 

(7)

 

 

 —

 

 

 —

 

 

(6)

 

 

 —

 

 

(6)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,259

 

 

 —

 

 

 —

 

 

1,259

 

 

 —

 

 

1,259

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

21,513

 

 

 —

 

 

21,513

 

 

 —

 

 

21,513

 

Other

 

(36)

 

 

 —

 

 

(1,651)

 

 

 —

 

 

 —

 

 

(1,651)

 

 

 —

 

 

(1,651)

 

Balance—March 31, 2017

 

39,573

 

$

396

 

$

853,132

 

$

1,034,956

 

$

(1,135,344)

 

$

753,140

 

$

 —

 

$

753,140

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,558)

 

 

(22,558)

 

 

 —

 

 

(22,558)

 

Issuance of restricted stock

 

 8

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Cancelation of restricted stock

 

(14)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock option exercises

 

 3

 

 

 —

 

 

79

 

 

 —

 

 

 —

 

 

79

 

 

 —

 

 

79

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,425

 

 

 —

 

 

 —

 

 

1,425

 

 

 —

 

 

1,425

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

25,377

 

 

 —

 

 

25,377

 

 

 —

 

 

25,377

 

Other

 

(6)

 

 

 —

 

 

(296)

 

 

 —

 

 

 —

 

 

(296)

 

 

 —

 

 

(296)

 

Balance—June 30, 2017

 

39,564

 

$

396

 

$

854,340

 

$

1,060,333

 

$

(1,157,902)

 

$

757,167

 

$

 —

 

$

757,167

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,554)

 

 

(22,554)

 

 

 —

 

 

(22,554)

 

Issuance of restricted stock

 

 3

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Cancelation of restricted stock

 

(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock option exercises

 

 5

 

 

 —

 

 

123

 

 

 —

 

 

 —

 

 

123

 

 

 —

 

 

123

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,283

 

 

 —

 

 

 —

 

 

1,283

 

 

 —

 

 

1,283

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

20,616

 

 

 —

 

 

20,616

 

 

 —

 

 

20,616

 

Balance—September 30, 2017

 

39,571

 

$

396

 

$

855,746

 

$

1,080,949

 

$

(1,180,456)

 

$

756,635

 

$

 —

 

$

756,635

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,555)

 

 

(22,555)

 

 

 —

 

 

(22,555)

 

Issuance of restricted stock

 

 —

 

 

 —

 

 

(14)

 

 

 —

 

 

 —

 

 

(14)

 

 

 —

 

 

(14)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,282

 

 

 —

 

 

 —

 

 

1,282

 

 

 —

 

 

1,282

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

19,834

 

 

 —

 

 

19,834

 

 

 —

 

 

19,834

 

Non-controlling interest contributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,488

 

 

3,488

 

Other

 

(1)

 

 

 —

 

 

(22)

 

 

 —

 

 

 —

 

 

(22)

 

 

 —

 

 

(22)

 

Balance—December 31, 2017

 

39,570

 

$

396

 

$

856,992

 

$

1,100,783

 

$

(1,203,011)

 

$

755,160

 

$

3,488

 

$

758,648

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,578)

 

 

(22,578)

 

 

 —

 

 

(22,578)

 

Issuance of restricted stock

 

82

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock option exercises

 

 5

 

 

 —

 

 

123

 

 

 —

 

 

 —

 

 

123

 

 

 —

 

 

123

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,376

 

 

 —

 

 

 —

 

 

1,376

 

 

 —

 

 

1,376

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

20,359

 

 

 —

 

 

20,359

 

 

 —

 

 

20,359

 

Other

 

(28)

 

 

 —

 

 

(1,065)

 

 

 —

 

 

 —

 

 

(1,065)

 

 

 —

 

 

(1,065)

 

Balance—March 31, 2018

 

39,629

 

$

396

 

$

857,426

 

$

1,121,142

 

$

(1,225,589)

 

$

753,375

 

$

3,488

 

$

756,863

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,590)

 

 

(22,590)

 

 

 —

 

 

(22,590)

 

Issuance of restricted stock

 

 9

 

 

 —

 

 

(8)

 

 

 —

 

 

 —

 

 

(8)

 

 

 —

 

 

(8)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,521

 

 

 —

 

 

 —

 

 

1,521

 

 

 —

 

 

1,521

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

68,936

 

 

 —

 

 

68,936

 

 

 —

 

 

68,936

 

Non-controlling interest contributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,081

 

 

1,081

 

Other

 

(3)

 

 

 —

 

 

(107)

 

 

 —

 

 

 —

 

 

(107)

 

 

 —

 

 

(107)

 

Balance—June 30, 2018

 

39,635

 

$

396

 

$

858,832

 

$

1,190,078

 

$

(1,248,179)

 

$

801,127

 

$

4,569

 

$

805,696

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,600)

 

 

(22,600)

 

 

 —

 

 

(22,600)

 

Proceeds from common stock issued, net of issuance costs

 

22

 

 

 1

 

 

928

 

 

 —

 

 

 —

 

 

929

 

 

 —

 

 

929

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,487

 

 

 —

 

 

 —

 

 

1,487

 

 

 —

 

 

1,487

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

34,920

 

 

 —

 

 

34,920

 

 

17

 

 

34,937

 

Non-controlling interest contributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,882

 

 

2,882

 

Non-controlling interest distributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17)

 

 

(17)

 

Other

 

 —

 

 

 —

 

 

(21)

 

 

 —

 

 

 —

 

 

(21)

 

 

 —

 

 

(21)

 

Balance—September 30, 2018

 

39,657

 

$

397

 

$

861,226

 

$

1,224,998

 

$

(1,270,779)

 

$

815,842

 

$

7,451

 

$

823,293

 

 

 

 

 

 

 

 

 

5


 

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

  

2018

  

2017

 

OPERATING ACTIVITIES:

 

 

    

 

 

    

 

Net income

 

$

124,232

 

$

67,506

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

28,159

 

 

28,186

 

Stock-based compensation expense

 

 

4,384

 

 

3,967

 

Impairment charges

 

 

 —

 

 

1,880

 

Gain on sale of real estate, net

 

 

(62,698)

 

 

(5,054)

 

Income from unconsolidated joint ventures

 

 

(2,103)

 

 

(1,635)

 

Income distributions from unconsolidated joint ventures

 

 

1,727

 

 

1,236

 

Insurance proceeds for damaged property

 

 

2,619

 

 

 —

 

Payment for remediation of damaged property

 

 

(455)

 

 

 —

 

Straight-line rental income

 

 

(8,629)

 

 

(7,362)

 

Lease incentives funded

 

 

(1,272)

 

 

(5,713)

 

Amortization of lease incentives

 

 

1,651

 

 

1,681

 

Provision for doubtful accounts

 

 

76

 

 

(139)

 

Non-cash interest related to contingent liabilities

 

 

377

 

 

476

 

Non-cash income related to earn-out and related lease inducement write-off

 

 

 —

 

 

(842)

 

Other non-cash items, net

 

 

923

 

 

958

 

Increase in interest receivable

 

 

(4,240)

 

 

(3,967)

 

Decrease in accrued interest payable

 

 

(1,808)

 

 

(567)

 

Net change in other assets and liabilities

 

 

495

 

 

(4,477)

 

Net cash provided by operating activities

 

 

83,438

 

 

76,134

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in real estate properties

 

 

(40,408)

 

 

(54,804)

 

Investment in real estate developments

 

 

(25,717)

 

 

(13,939)

 

Investment in real estate capital improvements

 

 

(2,063)

 

 

(2,308)

 

Capitalized interest

 

 

(850)

 

 

(627)

 

Proceeds from sale of real estate, net

 

 

82,340

 

 

14,106

 

Investment in real estate mortgage loans receivable

 

 

(20,530)

 

 

(9,333)

 

Principal payments received on mortgage loans receivable

 

 

1,636

 

 

17,351

 

Investments in unconsolidated joint ventures

 

 

(580)

 

 

(3,847)

 

Payment of working capital reserve

 

 

 —

 

 

(439)

 

Advances and originations under notes receivable

 

 

(50)

 

 

 —

 

Principal payments received on notes receivable

 

 

3,848

 

 

25

 

Net cash used in investing activities

 

 

(2,374)

 

 

(53,815)

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Bank borrowings

 

 

96,500

 

 

64,500

 

Repayment of bank borrowings

 

 

(73,000)

 

 

(116,600)

 

Proceeds from issuance of senior unsecured notes

 

 

 —

 

 

100,000

 

Principal payments on senior unsecured notes

 

 

(20,166)

 

 

(19,167)

 

Proceeds from common stock issued

 

 

1,005

 

 

14,578

 

Stock option exercises

 

 

123

 

 

202

 

Distributions paid to stockholders

 

 

(67,768)

 

 

(67,664)

 

Contribution from non-controlling interests

 

 

3,963

 

 

 —

 

Financing costs paid

 

 

(3,162)

 

 

(363)

 

Other

 

 

(1,201)

 

 

(1,954)

 

Net cash used in financing activities

 

 

(63,706)

 

 

(26,468)

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

17,358

 

 

(4,149)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

5,213

 

 

7,991

 

Cash, cash equivalents and restricted cash, end of period

 

$

22,571

 

$

3,842

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

23,869

 

$

21,877

 

 

See accompanying notes.

 

 

6


 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.General

LTC Properties, Inc., a health care real estate investment trust (“REIT”), was incorporated on May 12, 1992 in the State of Maryland and commenced operations on August 25, 1992. We invest primarily in seniors housing and health care properties primarily through sale-leaseback transactions, mortgage financing and structured finance solutions including mezzanine lending.  We conduct and manage our business as one operating segment, rather than multiple operating segments, for internal reporting and internal decision making purposes. Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in seniors housing and health care properties managed by experienced operators. Our primary seniors housing and health care property classifications include skilled nursing centers (“SNF”), assisted living communities (“ALF”), independent living communities (“ILF”), memory care communities (“MC”) and combinations thereof. To meet these objectives, we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders and diversify our investment portfolio by geographic location, operator, property classification and form of investment.

We have prepared consolidated financial statements included herein without audit and in the opinion of management have included all adjustments necessary for a fair presentation of the consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to rules and regulations governing the presentation of interim financial statements. The accompanying consolidated financial statements include the accounts of our company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2018 and 2017 are not necessarily indicative of the results for a full year.

No provision has been made for federal or state income taxes. Our company qualifies as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As such, we generally are not taxed on income that is distributed to our stockholders.

Restricted Cash

During the third quarter of 2017, a 170-bed skilled nursing center in our portfolio was evacuated due to damages caused by Hurricane Harvey. This property is located in Texas and operated under a triple net master lease agreement. We periodically evaluate properties for impairment when events or changes in circumstances indicate that the asset may be impaired or the carrying amount of the asset may not be recoverable through future undiscounted cash flows. Based upon a quarterly assessment of this property using the recoverability test, we concluded the property has not been impaired.

As of September 30, 2018, the gross value and the carrying value of the property were $2,021,000 and $1,146,000, respectively.

The provisions of our triple net lease agreements impose certain obligations on our operators including:

·

Acquire property insurance, subject to certain criteria;

·

Continue paying rent in the event of any property damage or destruction; and

·

Return the leased property back to us at the end of the lease term, in the same condition originally received.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

During the second quarter of 2018, our operator provided us with insurance proceeds of $2,619,000 to be used for remediation of the property as noted in the provisions of our master lease agreement. Accordingly, we have classified the insurance proceeds as restricted cash on our consolidated financial statements.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While this ASU specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate. Additionally, the FASB has issued targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and Licensing, and ASU 2016-12, Narrow-Scope Improvements and Practical Expedients. The new standard and its amendments were effective on January 1, 2018 and permitted reporting entities to apply the standard using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or full retrospective approach. We assessed our revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. We evaluated the provisions of ASU 2014-09 and its related additional guidance to determine the potential impact of the new standard. We concluded that adoption of this standard did not have an impact on our results of operations or financial condition, as our revenue consists of rental income from leasing arrangements and interest income from loan arrangements, both of which are specifically excluded from ASU 2014-09. We adopted this standard using the modified retrospective adoption method on January 1, 2018.

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842). The objective of this ASU is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. ASU 2016-02 modifies existing guidance by requiring lessees to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance of operating leases. ASU 2016-02 requires the lessors to identify lease and non-lease components of a lease agreement. ASU 2016-02 will govern the recognition of revenue for lease components. Revenue related to non-lease components under lease agreements will be subject to the revenue recognition standard, upon adoption of this ASU. Entities are required to use a modified retrospective approach for leases that exist or are entered into after January 1, 2017, the beginning of the earliest comparative period presented in the 2019 consolidated financial statements with a cumulative adjustment to the opening balance of retained earnings.

Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements (“ASU 2018-11”), which provides lessors with the option to elect a practical expedient allowing them to not separate lease and non-lease components and instead, to account for those components as a single lease component. This practical expedient is limited to circumstances in which: (i) the timing and pattern of transfer are the same for the non-lease component and the related lease component and (ii) the lease

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

component, if accounted for separately, would be classified as an operating lease. This practical expedient causes an entity to assess whether a contract is predominantly lease-based or service-based and recognize the entire contract under the relevant accounting guidance (i.e., predominantly lease-based would be accounted for under ASU 2016-02 and predominantly service-based would be accounted for under the Revenue ASUs). This practical expedient option is available as a single election that must be consistently applied to all existing leases at the date of adoption. ASU 2018-11 also provides a practical expedient that allows companies to use an optional transition method. Under the optional transition method, a cumulative adjustment to retained earnings during the period of adoption is recorded and prior periods would not require restatement. Consequently, entities that elect both the practical expedient and the optional transitional method will apply the new lease ASU prospectively to leases commencing or modified after January 1, 2019, and will not be required to apply the disclosures under the new lease ASU to comparative periods.

Consistent with present standards, we will continue to account for lease revenue on a straight-line basis when applicable. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements from both the lessee and lessor perspective. As a result of the adoption of this guidance, we may be required to increase our revenue and expense for lessor costs paid directly by lessees under triple-net leases, if the amount paid is readily determinable (i.e. real estate taxes). Additionally, we have begun our process for implementing this guidance, including identifying any non-lease components in our lease arrangements. We plan to finalize our assessment during the fourth quarter of 2018.

In August 2016, FASB issued ASU No. 2016-15 (“ASU 2016-15”), Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the Emerging Issues Task Force). ASU 2016-15 provides guidance that reduces the diversity in practice of the classification of certain cash receipts and cash payments within the statement of cash flows. This guidance is effective for fiscal periods beginning after December 15, 2017. We adopted this standard on January 1, 2018. The adoption of this guidance did not have a material impact on our financial statements.

In January 2017, the FASB issued ASU No. 2017-01(“ASU 2017-01”), Business Combinations (Topic 805): Clarifying Definition of a Business. ASU 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements. We adopted ASU 2017-01 during the second quarter of 2017. Historically, our acquisitions qualified as either a business combination or asset acquisition. The adoption of this ASU did not have a material impact on the company’s results of operations or financial condition as most of our acquisitions of investment properties will continue to qualify as asset acquisitions.

In February 2017, the FASB issued ASU No. 2017-05 (“ASU 2017-05”), Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets. ASU 2017-05 defines an in-substance nonfinancial asset and clarifies guidance related to partial sales of nonfinancial assets. This standard is

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this ASU did not have a material impact on the consolidated financial statements and related notes.

In 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard requires a new forward looking “expected loss” model to be used for receivables, held-to-maturity debt, loans, and other instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

.

2.Real Estate Investments

Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (or collectively ALF).

Any reference to the number of properties or facilities, number of units, number of beds, number of operators and yield on investments in real estate are unaudited and outside the scope of our independent registered public accounting firm’s review of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.

Owned Properties. The following table summarizes our investments in owned properties at September 30, 2018 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Percentage

 

Number

 

Number of

 

Investment

 

 

 

Gross

 

of

 

of

 

SNF

 

ALF

 

per

 

Type of Property

 

Investment

 

Investment

 

Properties (1)

 

Beds

 

Units

 

Bed/Unit

 

Assisted Living

 

$

802,484

 

56.8

103

 

 —

 

5,885

 

$

136.36

 

Skilled Nursing

 

 

569,141

 

40.2

%  

73

 

8,919

 

261

 

$

62.00

 

Under Development (2)

 

 

31,602

 

2.2

 —

 

 —

 

 —

 

 

 —

 

Other (3)

 

 

11,040

 

0.8

 1

 

118

 

 —

 

 

 —

 

Total

 

$

1,414,267

 

100.0

177

 

9,037

 

6,146

 

 

 

 


(1)

We own properties in 28 states that are leased to 29 different operators.

 

(2)

Represents three development projects, consisting of a 143-bed SNF in Kentucky, a 78-unit ALF/MC located in Oregon and a 110-unit ILF/ALF/MC in Wisconsin.

 

(3)

Includes three parcels of land held-for-use, and one behavioral health care hospital.

 

Owned properties are leased pursuant to non-cancelable operating leases generally with an initial term of 10 to 15 years. Each lease is a triple net lease which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and non-capital expenditures and other costs necessary in the operations of the facilities. Many of the leases contain renewal options. The leases provide for fixed minimum base rent during the initial and renewal periods. The majority of our leases contain provisions for specified annual increases over the rents of the prior year that are generally computed in one of four ways depending on specific provisions of each lease:

(i)

a specified percentage increase over the prior year’s rent, generally between 2.0% and 3.0%;

(ii)

a calculation based on the Consumer Price Index;

(iii)

as a percentage of facility net patient revenues in excess of base amounts; or

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

(iv)

specific dollar increases.

Acquisitions and Developments: The following table summarizes our acquisitions for the nine months ended September 30, 2018 and 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Number

 

Number

 

 

 

 

Purchase

 

Transaction

 

Acquisition

 

of

 

of

Year

 

Type of Property

 

Price

 

Costs (1)

 

Costs

 

Properties

 

Beds/Units

2018

 

Assisted Living (2) (3)

 

$

39,600

 

$

65

 

$

39,665

 

 3

 

177

 

 

Land (3)

 

 

695

 

 

48

 

 

743

 

 —

 

 —

Total

 

 

 

$

40,295

 

$

113

 

$

40,408

 

 3

 

177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

Assisted Living (4)

 

$

54,463

 

$

341

 

$

54,804

 

 3

 

240

Total

 

 

 

$

54,463

 

$

341

 

$

54,804

 

 3

 

240


(1)

Represents cost associated with our acquisitions; however, upon adoption of ASU 2017-01, our acquisitions meet the definition of an asset acquisition resulting in capitalization of transaction costs to the properties’ basis. For our land purchases with forward development commitments, transaction costs are capitalized as part of construction in progress. Transaction costs per our consolidated statements of income and comprehensive income represents current and prior year transaction costs due to timing and terminated transactions.

 

(2)

We acquired two MC in Texas.

 

(3)

We entered into a joint venture (“JV”) to develop, purchase and own senior housing properties. During the second quarter of 2018, the JV purchased land for the development of a 78-unit ALF/MC in Oregon for a total anticipated project cost of $18,108. The non-controlling partner contributed $1,081 of cash and we committed to fund the remaining $17,027 project cost. During the third quarter of 2018, in a sale-leaseback transaction, the JV purchased an existing operational 89-unit ILF adjacent to the 78-unit ALF/MC we are developing for $14,400. The non-controlling partner contributed $2,857 of equity and we contributed $11,543 in cash. Upon completion of the development project, our combined economic interest in the JV will be approximately 88%. We account for the JV on a consolidated basis. See Note 7. Equity for further discussion related to our partnerships and non-controlling interests.

 

(4)

We acquired an ALF and a MC in California. Additionally, we acquired a MC in Ohio.

 

During the nine months ended September 30, 2018 and 2017, we invested the following in development and improvement projects (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

Nine months ended September 30, 2017

Type of Property

 

Developments

 

Improvements

 

 

Developments

 

 

Improvements

Assisted Living Communities

 

$

19,251

 

$

1,131

 

 

$

10,366

 

$

951

Skilled Nursing Centers

 

 

6,466

 

 

500

 

 

 

3,573

 

 

1,357

Other

 

 

 —

 

 

432

 

 

 

 —

 

 

 —

Total

 

$

25,717

 

$

2,063

 

 

$

13,939

 

$

2,308

 

Completed Developments. The following table summarizes our completed developments during the nine months ended September 30, 2018 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

Type

 

Number

 

 

 

 

 

 

 

of

 

of

 

of

 

 

 

 

Total

Type of Project

 

Properties

 

Property

 

Beds/Units

 

State

 

Investment

Development

 

1

 

MC

 

66

 

Illinois

 

$

13,974

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Properties held-for-sale. The following table summarizes our properties held-for-sale as of September 30, 2018 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Number

 

 

 

 

 

 

 

Number

 

 

of

 

of

 

 

Gross

 

 

Accumulated

 

of

State

 

Property

 

Properties

 

 

Investment

 

 

Depreciation

 

Beds/units

Florida (1)

 

SNF

 

 1

 

$

2,497

 

$

971

 

60

Texas

 

ILF

 

 1

 

 

5,746

 

 

1,916

 

140

Totals

 

 

 

 2

 

$

8,243

 

$

2,887

 

200


(1)

Subsequent to September 30, 2018, we sold this 60-bed SNF for $5,000 and will recognize a gain of approximately $3,400.

Properties sold. The following table summarizes property sales during the nine months ended September 30, 2018 and 2017(dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Number

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

of

 

of

 

of

 

 

Sales

 

 

Carrying

 

 

Net

Year

 

State

 

Properties

 

Properties

 

Beds

 

 

Price

 

 

Value

 

 

Gain

2018

 

Alabama

 

SNF

 

2

 

285

 

$

17,525

 

$

3,272

 

$

14,253

 

 

Kansas

 

ALF

(1)

 —

 

 —

 

 

350

 

 

346

 

 

 —

 

 

Ohio and Pennsylvania

 

ALF

 

6

 

320

 

 

67,500

 

 

16,352

 

 

48,445

Total 2018

 

 

 

 

 

 8

 

605

 

$

85,375

 

$

19,970

 

$

62,698

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

Indiana and Iowa

 

ALF

 

4

 

175

 

$

14,250

 

$

8,726

 

$

5,054

Total 2017

 

 

 

 

 

4

 

175

 

$

14,250

 

$

8,726

 

$

5,054


(1)

We sold land adjacent to an existing ALF community in Kansas.

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at September 30, 2018 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Percentage

 

Number of

 

Investment

 

 

 

 

Gross

 

of

 

of

 

 

 

 

 

SNF

 

per

Interest Rate (1)

 

Maturity

 

Investment

 

Property

 

Investment

 

Loans (2)

 

Properties (3)

 

Beds

 

Bed/Unit

9.5%

 

2043

 

$

186,495

 

SNF

 

76.1

%

 1

 

15

 

2,029

 

$

91.91

9.2%

 

2045

 

 

33,028

 

SNF

 

13.5

%

 1

 

 4

 

501

 

$

65.92

9.4%

 

2045

 

 

14,797

 

SNF

 

6.0

%

 1

 

 1

 

157

 

$

94.25

9.5%

 

2020

 

 

10,733

 

SNF

 

4.4

%

 1

 

 2

 

205

 

$

52.36

Total

 

 

 

$

245,053

 

 

 

100.0

%

 4

 

22

 

2,892

 

$

84.73


(1)

The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 2.25%.

 

(2)

Some loans contain certain guarantees, provide for certain facility fees and the majority of the mortgage loans have a 30-year term.

 

(3)

We have investments in properties located in one state that includes mortgages to one operator.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

The following table summarizes our mortgage loan activity for the nine months ended September 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

2018

 

2017

Originations and funding under mortgage loans receivable

 

$

20,530

(1)

$

9,333

Pay-offs received

 

 

(1,086)

 

 

(16,665)

Scheduled principal payments received

 

 

(550)

 

 

(686)

Net increase (decrease) in mortgage loans receivable

 

$

18,894

 

$

(8,018)


(1)

During 2018, we funded an additional $7,400 under an existing mortgage loan for the purchase of a 112-bed skilled nursing center in Michigan. The incremental funding bears interest at 8.7%, fixed for five years, and escalating by 2.25% thereafter. Also, we funded additional loan proceeds of $7,125 under an existing mortgage loan for the purchase of a 126-bed skilled nursing center in Michigan. This incremental funding bears interest at 9.41%, fixed for five years, and escalating by 2.25% thereafter.

 

 

3.Investment in Unconsolidated Joint Ventures

Our investment in unconsolidated joint ventures consists of a preferred equity investment and two mezzanine loans which are accounted for as unconsolidated joint ventures in accordance with GAAP. The following table summarizes our investment in unconsolidated joint ventures (dollar amounts in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Type

 

Total

 

 

Currently

 

 

Number

 

 

 

 

 

 

 

 

 

of

 

of

 

Preferred

 

 

Paid in

 

 

of

 

 

Investment

 

 

Carrying

 

State

 

Properties

 

Investment

 

Return

 

 

Cash

 

 

Beds/ Units

 

 

Commitment

 

 

Value

 

Arizona

 

ALF/MC/ILF

 

Preferred Equity

(1)

15

%

 

7

%

 

585

 

$

25,650

 

$

23,942

 

Florida

 

ALF/IL/MC

 

Mezzanine

(2)

15

%

 

12

%

 

99

 

 

2,900

(3)

 

3,169

(3)

Florida

 

UDP-ALF/MC

 

Mezzanine

(2)

15

%

 

10

%

 

127

 

 

3,400

 

 

3,400

 

Total

 

 

 

 

 

 

 

 

 

 

 

811

 

$

31,950

 

$

30,511

 


(1)

We have concluded that the JV is a variable interest entity (“VIE”) in accordance with GAAP. However, because we do not control the entity, nor do we have any role in the day-to-day management, we are not the primary beneficiary of the JV. Therefore, we account for the JV investment using the equity method.

 

(2)

We evaluated these acquisition, development and construction (“ADC”) arrangements and determined that the characteristics are similar to jointly-owned investments or partnerships, and accordingly, these investments are accounted for as unconsolidated joint ventures under the equity method of accounting instead of loan accounting.

 

(3)

Since interest payments were deferred and no interest was recorded for the first twelve months of the loan, we used the effective interest method in accordance with GAAP to recognize interest income and recorded the difference between the effective interest income and cash interest income to the loan principal balance.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

The following table summarizes our capital contributions, income recognized, and cash interest received related to our investments in unconsolidated joint ventures (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

Type

 

2018

 

2017

 

of

 

 

Capital

 

 

Income

 

 

Cash Interest

 

 

Capital

 

 

Income

 

 

Cash Interest

 

Properties

 

 

Contribution

 

 

Recognized

 

 

Received

 

 

Contribution

 

 

Recognized

 

 

Received

 

ALF/MC/ILF

 

$

580

 

$

1,490

 

$

1,436

 

$

1,100

 

$

1,134

 

$

1,020

 

ALF/IL/MC

 

 

 —

 

 

383

 

 

291

 

 

 —

 

 

383

 

 

216

 

UDP-ALF/MC

 

 

 —

 

 

230

 

 

 —

(1)

 

2,747

 

 

118

 

 

 —

(1)

Total

 

$

580

 

$

2,103

 

$

1,727

 

$

3,847

 

$

1,635

 

$

1,236

 


(1)   We withheld $653 at the time of loan origination which is being applied to interest. As of September 30, 2018, we still hold $257 which will be applied to future interest.

 

4.Notes Receivable

Notes receivable consists of mezzanine loans and other loan arrangements. The following table is a summary of our notes receivable components as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

At September 30, 2018

 

 

At December 31, 2017

Mezzanine loans

$

9,869

 

$

13,700

Other loans

 

2,901

 

 

2,868

Notes receivable reserve

 

(128)

 

 

(166)

Total

$

12,642

 

$

16,402

The following tables summarizes our notes receivable activity for the nine months ended September 30, 2018 and 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

2018

 

 

2017

Advances under notes receivable

$

50

 

$

 —

Principal payments received under notes receivable

 

(3,848)

 

 

(25)

Total

$

(3,798)

 

$

(25)

 

 

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

5.Lease Incentives

The following summarizes lease incentives by component as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

At September 30, 2018

 

 

At December 31, 2017

Non-contingent lease incentives

 

$

14,883

 

$

14,904

Contingent lease incentives

 

 

6,219

 

 

6,577

Total

 

$

21,102

 

$

21,481

The following table summarizes our lease incentive activity for the nine months ended September 30, 2018 and 2017(in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

2018

 

2017

 

 

 

Funding

 

 

Amortization

 

 

Funding

 

 

Amortization

 

 

Write off

 

Non-contingent lease incentives

$

1,272

 

$

(1,292)

 

$

5,713

 

$

(1,181)

 

$

(1,205)

(1)

Contingent lease incentives (3)

 

 —

 

 

(359)

 

 

 —

 

 

(500)

 

 

(2,634)

(2)

Total

$

1,272

 

$

(1,651)

 

$

5,713

 

$

(1,681)

 

$

(3,839)

 


(1)

Represents the write-off of lease incentives related to two MC communities due to negotiations to transition these properties to another operator in our portfolio.

 

(2)

Represents the write-off of lease incentive related to an ALF community due to change to the business model at the property that resulted in lower net operating income and the improbability of paying the earn-out.

 

(3)

Subsequent to September 30, 2018, we entered into an amended master lease agreement with Senior Lifestyle Management, LLC (“Senior Lifestyle”). Among the provisions of the amendment, the contingent lease incentive payable to Senior Lifestyle was removed. Therefore, subsequent to September 30, 2018, we will write-off the Senior Lifestyle contingent lease incentive of $6,219 and the related earn-out liability of $9,292 which will result in income of approximately $3,000.

 

Non-contingent lease incentives represent payments made to our lessees for various reasons including entering into a new lease or lease amendments and extensions. Contingent lease incentives represent potential contingent earn-out payments that may be made to our lessees in the future, as part of our lease agreements. From time to time, we may commit to provide contingent payments to our lessees, upon our properties achieving certain rent coverage ratios. Once the contingent payment becomes probable and estimable, the contingent payment is recorded as a lease incentive. Lease incentives are amortized as a yield adjustment to rental income over the remaining life of the lease.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

 

6.Debt Obligations

Bank Borrowings.  During 2018, we amended and restated our unsecured credit agreement to replace the previous unsecured credit agreement, prior to its expiration on October 14, 2018. The amended credit agreement maintains the $600,000,000 aggregate commitment of the lenders under the prior agreement and provides for the opportunity to increase the commitment size of the credit agreement up to a total of $1,000,000,000. The amended credit agreement extends the maturity of the credit agreement to June 27, 2022 and provides for a one-year extension option at our discretion, subject to customary conditions. Additionally, the amended credit agreement decreases the interest rate margins and converts from the payment of unused commitment fees to a facility fee. Based on our leverage at September 30, 2018, the facility provides for interest annually at LIBOR plus 115 basis points and a facility fee of 20 basis points. At September 30, 2018, we were in compliance with all covenants.

Senior Unsecured Notes. During 2017, we amended our shelf agreement with affiliates and managed accounts of Prudential Investment Management, Inc. (“Prudential”) to increase our shelf commitment to $337,500,000.

The debt obligations by component as of September 30, 2018 and December 31, 2017 are as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2018

 

At December 31, 2017

 

 

 

Applicable

 

 

 

Available

 

 

 

Available

 

 

 

Interest

 

Outstanding

 

for

 

Outstanding

 

for

 

Debt Obligations

 

Rate (1)

 

Balance

 

Borrowing

 

Balance

 

Borrowing

 

Bank borrowings (2)

 

3.38%

 

$

120,000

 

$

480,000

 

$

96,500

 

$

503,500

 

Senior unsecured notes, net of debt issue costs

 

4.49%

 

 

550,986

 

 

79,833

 

 

571,002

 

 

63,667

 

Total

 

4.29%

 

$

670,986

 

$

559,833

 

$

667,502

 

$

567,167

 


(1)

Represents weighted average of interest rate as of September 30, 2018.

 

(2)

Subsequent to September 30, 2018, we paid down $20,000 under our unsecured revolving line of credit. Accordingly, we have $100,000 outstanding under our unsecured revolving line of credit with $500,000 available for borrowing.

Our borrowings and repayments are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

2018

 

2017

Debt Obligations

 

 

Borrowings

 

 

Repayments

 

Borrowings

 

Repayments

Bank borrowings

 

$

96,500

 

$

(73,000)

 

$

64,500

 

$

(116,600)

Senior unsecured notes

 

 

 —

 

 

(20,166)

 

 

100,000

(1)

 

(19,167)

Total

 

$

96,500

 

$

(93,166)

 

$

164,500

 

$

(135,767)


(1)

During 2017, we sold 15-year senior unsecured notes in the aggregate amount of $100,000 to a group of investors, which included Prudential, in a private placement transaction. The notes bear interest at an annual rate of 4.5%, have scheduled principal payments and mature on February 16, 2032.

 

 

 

 

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

7.Equity

Common Stock. We have an equity distribution agreement to issue and sell, from time to time, up to $200,000,000 in aggregate offering price of our company common shares. During the nine months ended September 30, 2018 and 2017, under our equity distribution agreement, we sold 22,244 shares of common stock for $1,005,000 in net proceeds and 312,881 shares of common stock for $14,578,000 in net proceeds, respectively. In conjunction with the sale of common stock, during the nine months ended September 30, 2018 and 2017, we paid $18,000 and $260,000, respectively, as compensation to our sales agents and we reclassified $76,000 and $49,000, respectively, of accumulated costs associated with this agreement to capital in excess of par value. At September 30, 2018, and 2017, we had $184,139,000 and $185,162,000, respectively, available under our equity distribution agreement.

During the nine months ended September 30, 2018 and 2017, we acquired 31,326 shares and 41,592 shares, respectively, of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.

Non-controlling Interests. During 2018 and 2017, we entered into partnerships to develop and/or own real estate. Given that our limited members do not have the substantive kick-out rights, liquidation rights, or participation rights, we have concluded that the partnerships are VIEs. And since we exercise power over and receive benefits from the VIEs, we are considered the primary beneficiary. Accordingly, we consolidate the VIEs and record the non-controlling interests at cost. 

As of September 30, 2018, we have the following consolidated VIEs (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

Investment

 

 

 

Property

 

 

 

 

Consolidated

 

 

Non-Controlling

 

Year

 

Purpose

 

Type

 

State

 

 

Assets

 

 

Interests

 

2018

 

Owned real estate

 

ILF

 

OR

 

$

14,400

(1)

$

2,857

(1)

2018

 

Owned real estate and development

 

UDP

 

OR

 

 

2,881

(1)

 

1,081

(1)

2017

 

Owned real estate and development

 

UDP

 

WI

 

 

10,316

(2)

 

2,272

(2)

2017

 

Owned real estate

 

ALF

 

SC

 

 

10,571

 

 

1,241

 

Total

 

 

 

 

 

 

 

$

38,168

 

$

7,451

 


(1)

We entered into a joint venture (“JV”) to develop, purchase and own senior housing properties. During the second quarter of 2018, the JV purchased land for the development of a 78-unit ALF/MC for a total anticipated project cost of $18,108. The non-controlling partner contributed $1,081 of cash and we committed to fund the remaining $17,027 project cost. During the third quarter of 2018, in a sale-leaseback transaction, the JV purchased an existing operational 89-unit ILF adjacent to the 78-unit ALF/MC we are developing for $14,400. The non-controlling partner contributed $2,857 of equity and we contributed $11,543 in cash. Upon completion of the development project, our combined economic interest in the JV will be approximately 88%. We account for the JV on a consolidated basis.   

 

(2)

We entered into a partnership to own the real estate and develop a 110-unit ILF/ALF/MC community in Wisconsin. The commitment totals approximately $22,471.

 

Available Shelf Registrations. We have an automatic shelf registration statement on file with the SEC, and currently have the ability to file additional automatic shelf registration statements, to provide us with capacity to publicly offer an indeterminate amount of common stock, preferred stock, warrants, debt, depositary shares, or units. We may from time to time raise capital under our automatic shelf registration statement in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Distributions. We declared and paid the following cash dividends (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

 

 

 

 

Declared

 

Paid

 

Declared

 

Paid

 

 

Common Stock

 

$

67,768

(1)

$

67,768

(1)

$

67,664

(1)

$

67,664

(1)

 


(1)

Represents $0.19 per share per month for the nine months ended September 30, 2018 and 2017.

In October 2018, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of October, November and December 2018, payable on October 31, November 30, and December 31, 2018, respectively, to stockholders of record on October 23, November 21, and December 21, 2018, respectively.

Stock-Based Compensation.  Under our 2015 Equity Participation Plan (“the 2015 Plan”), 1,400,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2015 Plan are set by our compensation committee at its discretion.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

During the nine months ended September 30, 2018 and 2017, no stock options were granted. The stock options exercised during the nine months ended September 30, 2018 and 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Options

 

Exercise

 

Option

 

Market

 

 

 

Exercised

 

Price

 

Value

 

Value (1)

 

2018

 

5,000

 

$

24.65

 

$

123,000

 

$

205,000

 

2017

 

8,334

 

$

24.31

 

$

202,566

 

$

410,797

 


(1)

As of exercise date.

At September 30, 2018, we had 20,000 stock options outstanding and exercisable. Compensation expense related to the vesting of stock options was $0 and $2,000 for the nine months ended September 30, 2018 and 2017, respectively.

The following table summarizes our restricted stock and performance-based stock units activity for the nine months ended September 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

Outstanding, January 1

 

 

244,181

 

 

210,573

 

Granted

 

 

156,718

 

 

143,057

 

Vested

 

 

(75,149)

 

 

(84,363)

 

Cancelled

 

 

 —

 

 

(24,106)

 

Outstanding, September 30

 

 

325,750

 

 

245,161

 

During the nine months ended September 30, 2018 and 2017, we granted restricted stock and performance-based stock units under the 2015 Plan as follows:

 

 

 

 

 

 

 

 

 

 

 

No. of 

 

Price per

 

 

 

Year

 

Shares/Units

 

Share

 

Vesting Period

 

2018

 

81,819

 

$

38.18

 

ratably over 3 years

 

 

 

66,171

 

$

38.18

 

TSR targets (1)

 

 

 

8,728

 

$

41.25

 

ratably over 1 year

 

 

 

156,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

74,760

 

$

45.76

 

ratably over 3 years

 

 

 

57,881

 

$

45.76

 

TSR targets (1)

 

 

 

7,416

 

$

48.55

 

ratably over 1 year

 

 

 

3,000

 

$

50.55

 

ratably over 3 years

 

 

 

143,057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Vesting is based on achieving certain total shareholder return (“TSR”) targets in 4 years with acceleration opportunity in 3 years.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Compensation expense recognized related to the vesting of restricted common stock and performance-based stock units for the nine months ended September 30, 2018 and 2017 were $4,384,000 and $3,965,000, respectively. At September 30, 2018, the remaining compensation expense to be recognized related to the future service period of unvested outstanding restricted common stock and performance-based stock units are as follows:

 

 

 

 

 

 

 

 

 

Remaining 

 

 

Compensation

Vesting Date

 

Expense

2018

 

$

1,486,000

2019

 

 

4,250,000

2020

 

 

2,210,000

2021

 

 

238,000

Total

 

$

8,184,000

 

 

8.Commitments and Contingencies

At September 30, 2018, we had commitments as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

Investment

 

2018

 

Commitment

 

Remaining

 

 

Commitment

 

Funding

 

Funded

 

Commitment

Real estate properties (Note 2. Real Estate Investments)

 

$

77,882

(1)

$

17,973

 

$

35,417

 

$

42,465

Accrued incentives and earn-out liabilities

 

 

23,000

(3)

 

 —

 

 

 —

 

 

23,000

Mortgage loans (Note 2. Real Estate Investments)

 

 

65,700

(2)

 

6,005

 

 

23,256

 

 

42,444

Joint venture investments (Note 3. Investments in Unconsolidated Joint Ventures)

 

 

25,650

 

 

580

 

 

23,594

 

 

2,056

Notes receivable (Note 4. Notes Receivable)

 

 

700

 

 

50

 

 

50

 

 

650

Total

 

$

192,932

 

$

24,608

 

$

82,317

 

$

110,615


(1)

Represents commitments to purchase land and improvements, if applicable, and to develop, re-develop, renovate or expand seniors housing and health care properties.

 

(2)

$39,700 represents commitments to expand and renovate the seniors housing and health care properties securing the mortgage loans and $26,000 represents contingent funding upon the borrower achieving certain coverage ratios.

 

(3)

Subsequent to September 30, 2018, we entered into an amended master lease agreement with Senior Lifestyle. Among the provisions of the amendment, the contingent lease incentive payable to Senior Lifestyle was removed. Therefore, subsequent to September 30, 2018, we wrote-off the Senior Lifestyle contingent lease incentive of $6,219 and the related earn-out liability of $9,292 which will result in income of approximately $3,000.

 

We are a party from time to time to various general and professional liability claims and lawsuits asserted against the lessees or borrowers of our properties, which in our opinion are not singularly or in the aggregate material to our results of operations or financial condition. These types of claims and lawsuits may include matters involving general or professional liability, which we believe under applicable legal principles are not our responsibility as a non-possessory landlord or mortgage holder. We believe that these matters are the responsibility of our lessees and borrowers pursuant to general legal principles and pursuant to insurance and indemnification provisions in the applicable leases or mortgages. We intend to continue to vigorously defend such claims.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

9.Major Operators

We have four operators from each of which we derive approximately 10% or more of our combined rental revenue and interest income from mortgage loans. The following table sets forth information regarding our major operators as of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Number of

 

Percentage of

 

 

 

 

 

 

 

SNF

 

ALF

 

Total

 

 

Total

 

 

Operator

 

SNF

 

ALF

 

Beds

 

Units

 

Revenue (1)

 

 

Assets

 

 

Prestige Healthcare

 

24

 

 —

 

3,010

 

93

 

18.0

%

 

16.4

%

 

Senior Lifestyle Corporation

 

 —

 

23

 

 —

 

1,457

 

11.9

%

 

10.4

%

 

Brookdale Senior Living 

 

 —

 

37

 

 —

 

1,702

 

10.1

%

 

4.6

%

 

Senior Care Centers

 

11

 

 —

 

1,444

 

 —

 

9.8

%

 

7.1

%

 

Total

 

35

 

60

 

4,454

 

3,252

 

49.8

%

 

38.5

%

 


(1)

Includes rental income and interest income from mortgage loans and excludes income from properties sold and mortgage loans paid off during 2018.

Our financial position and ability to make distributions may be adversely affected if Prestige Healthcare, Senior Lifestyle Corporation, Brookdale Senior Living, Senior Care Centers, or any of our lessees and borrowers face financial difficulties, including any bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with us.

10.Earnings per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

Net income

 

$

34,937

 

$

20,616

 

$

124,232

 

$

67,506

 

 

Less net income allocated to non-controlling interests

 

 

(17)

 

 

 

 

(17)

 

 

 

 

Less net income allocated to participating securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-forfeitable dividends on participating securities

 

 

(89)

 

 

(80)

 

 

(268)

 

 

(269)

 

 

Income allocated to participating securities

 

 

(49)

 

 

 —

 

 

(236)

 

 

(12)

 

 

Total net income allocated to participating securities

 

 

(138)

 

 

(80)

 

 

(504)

 

 

(281)

 

 

Net income available to common stockholders

 

 

34,782

 

 

20,536

 

 

123,711

 

 

67,225

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Participating securities

 

 

138

 

 

80

 

 

504

 

 

281

 

 

Net income for diluted net income per share

 

$

34,920

 

$

20,616

 

$

124,215

 

$

67,506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares for basic net income per share

 

 

39,487

 

 

39,428

 

 

39,470

 

 

39,403

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 4

 

 

 9

 

 

 3

 

 

11

 

 

Performance-based stock units

 

 

217

 

 

170

 

 

217

 

 

170

 

 

Participating securities

 

 

157

 

 

141

 

 

155

 

 

154

 

 

Total effect of dilutive securities

 

 

378

 

 

320

 

 

375

 

 

335

 

 

Shares for diluted net income per share

 

 

39,865

 

 

39,748

 

 

39,845

 

 

39,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.88

 

$

0.52

 

$

3.13

 

$

1.71

 

 

Diluted net income per share

 

$

0.88

 

$

0.52

 

$

3.12

 

$

1.70

 

 

 

 

21


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

 

 

 

11.Fair Value Measurements

In accordance with the accounting guidance regarding the fair value option for financial assets and financial liabilities, entities are permitted to choose to measure certain financial assets and liabilities at fair value, with the change in unrealized gains and losses reported in earnings. We did not elect the fair value option for any of our financial assets and financial liabilities.

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments. We do not invest our cash in auction rate securities. The carrying value and fair value of our financial instruments as of September 30, 2018 and December 31, 2017 assuming election of fair value for our financial assets and financial liabilities were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2018

 

At December 31, 2017

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair 

 

 

 

Value

 

Value

 

Value

 

Value

 

Mortgage loans receivable

 

$

242,609

 

$

274,698

(1)

$

223,907

 

$

278,224

(1)

Bank borrowings

 

 

120,000

 

 

120,000

(2)

 

96,500

 

 

96,500

(2)

Senior unsecured notes, net of debt issue costs

 

 

550,986

 

 

529,805

(3)

 

571,002

 

 

577,126

(3)

Accrued incentives and earn-outs

 

 

9,292

 

 

9,292

(4)

 

8,916

 

 

8,916

(4)

(1)

Our investment in mortgage loans receivable is classified as Level 3. The fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows. The discount rate is determined using our assumption on market conditions adjusted for market and credit risk and current returns on our investments. The discount rate used to value our future cash inflows of the mortgage loans receivable at September 30, 2018 and December 31, 2017 was 9.7% and 8.7%, respectively.

 

(2)

Our bank borrowings bear interest at a variable interest rate. The estimated fair value of our bank borrowings approximated their carrying values at September 30, 2018 and December 31, 2017 based upon prevailing market interest rates for similar debt arrangements.

 

(3)

Our obligation under our senior unsecured notes is classified as Level 3 and thus the fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows. The discount rate is measured based upon management’s estimates of rates currently prevailing for comparable loans available to us, and instruments of comparable maturities. At September 30, 2018, the discount rate used to value our future cash outflow of our senior unsecured notes was 5.00% for those maturing before year 2026 and 5.25% for those maturing at or beyond year 2026. At December 31, 2017, the discount rate used to value our future cash outflow of our senior unsecured notes was 4.10% for those maturing before year 2026 and 4.30% for those maturing at or beyond year 2026.

 

(4)

Our accrued incentives and earn-outs are classified as Level 3. We estimated the fair value of the accrued incentives and earn‑out payments using a discounted cash flow analysis. The discount rate that we use consists of a risk‑free U.S. Treasury rate plus a company specific credit spread which we believe is acceptable by willing market participants. The discount rate used to value our accrued incentives and earn-outs was 6.0% at September 30, 2018 and 6.2% at December 31, 2017.

 

 

 

12.Subsequent Events

Subsequent to September 30, 2018 the following events occurred:

Real Estate:   We sold a 60-bed SNF in Florida for $5,000,000 with a net book value of $1,526,000 and will recognize a gain of approximately $3,400,000 in the fourth quarter.

Lease Incentives: We entered into an amended master lease agreement with Senior Lifestyle. Among the provisions of the amendment, the contingent lease incentive payable to Senior Lifestyle was

22


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

removed. Therefore, subsequent to September 30, 2018, we will write-off the Senior Lifestyle contingent lease incentive of $6,219,000 and the related earn-out liability of $9,292,000 which will result in income of approximately $3,000,000.

Debt:  We paid down $20,000,000 under our unsecured revolving line of credit.  Accordingly, we have $100,000,000 outstanding under our unsecured revolving line of credit with $500,000,000 available for borrowing.

Equity: We declared a monthly cash dividend of $0.19 per share on our common stock for the months of October, November and December 2018, payable on October 31, November 30, and December 31, 2018, respectively to stockholders of record on October 23, November 21, and December 21, 2018, respectively.

 

23


 

Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Statement Regarding Forward Looking Disclosure

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some of the forward-looking statements by their use of forward-looking words, such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or the negative of those words or similar words. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, the status of the economy; the status of capital markets (including prevailing interest rates) and our access to capital; the income and returns available from investments in health care related real estate (including our ability to re-lease properties upon expiration of a lease term); the ability of our borrowers and lessees to meet their obligations to us; our reliance on a few major operators; competition faced by our borrowers and lessees within the health care industry; regulation of the health care industry by federal, state and local governments; changes in Medicare and Medicaid reimbursement amounts (including due to federal and state budget constraints); compliance with and changes to regulations and payment policies within the health care industry; debt that we may incur and changes in financing terms; our ability to continue to qualify as a real estate investment trust; the relative illiquidity of our real estate investments; potential limitations on our remedies when mortgage loans default; and risks and liabilities in connection with properties owned through limited liability companies and partnerships. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and in our publicly available filings with the Securities and Exchange Commission. We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

Business and Investment Strategy

We are a self-administered health care real estate investment trust (“REIT”) that invests in seniors housing and health care properties primarily through sale-leaseback transactions, mortgage financing and structured finance solutions including mezzanine lending. We conduct and manage our business as one operating segment, rather than multiple operating segments, for internal reporting and internal decision making purposes. Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in seniors housing and health care properties managed by experienced operators.

24


 

The below graph summarizes our gross investments as of September 30, 2018:

Picture 2

Our seniors housing and health care property classifications include skilled nursing centers (“SNF”), assisted living communities (“ALF”), independent living communities (“ILF”), memory care communities (“MC”) and combinations thereof. ALF, ILF, MC, and combinations thereof are included in the ALF property classification. As of September 30, 2018, seniors housing and long-term health care properties comprised approximately 99.4% of our real estate investment portfolio. We have been operating since August 1992.

Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable. Our investments in owned properties and mortgage loans represent our main source of liquidity to fund distributions and are dependent upon the performance of the operators on their lease and loan obligations and the rates earned thereon. To the extent that the operators experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by the type of health care facility and operator. Our monitoring process includes periodic review of financial statements for each facility, periodic review of operator credit, scheduled property inspections and review of covenant compliance.

In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk. Some operating leases and loans are credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans secured by multiple properties.

25


 

Real Estate Portfolio Overview

The following tables summarize our real estate investment portfolio by owned properties and mortgage loans and by type, as of September 30, 2018 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

September 30, 2018

 

Percentage

 

 

Number

 

Number of 

 

 

Gross

 

of 

 

Rental

 

Interest

 

of

 

 

of

 

SNF

 

ALF

Owned Properties

 

Investments

 

Investments

 

Income (5)

 

Income (6)

 

Revenues

 

 

Properties (1)

 

Beds (2)

 

Units (2)

Assisted Living

 

$

802,484

 

48.4

%

$

49,053

 

$

 —

 

40.6

%

 

103

 

 —

 

5,885

Skilled Nursing

 

 

569,141

 

34.3

%

 

50,111

 

 

 —

 

41.5

%

 

73

 

8,919

 

261

Under Development (3)

 

 

31,602

 

1.9

%

 

 —

 

 

 —

 

 —

%

 

 —

 

 —

 

 —

Other (4)

 

 

11,040

 

0.6

%

 

689

 

 

 —

 

0.6

%

 

1

 

118

 

 —

Total Owned Properties

 

 

1,414,267

 

85.2

%

 

99,853

 

 

 —

 

82.7

%

 

177

 

9,037

 

6,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled Nursing

 

 

245,053

 

14.8

%

 

 —

 

 

20,853

 

17.3

%

 

22

 

2,892

 

 —

Total Mortgage Loans

 

 

245,053

 

14.8

%

 

 —

 

 

20,853

 

17.3

%

 

22

 

2,892

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Portfolio

 

$

1,659,320

 

100.0

%

$

99,853

 

$

20,853

 

100.0

%

 

199

 

11,929

 

6,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

September 30, 2018

 

Percentage

 

 

Number

 

Number of

 

 

Gross

 

of

 

Rental

 

Interest

 

of

 

 

of

 

SNF

 

ALF

Summary of Properties by Type

 

Investments

 

Investments

 

Income (5)

 

Income (6)

 

Revenues

 

 

Properties (1)

 

Beds (2)

 

Units (2)

Skilled Nursing

 

$

814,194

 

49.1

%

$

50,111

 

$

20,853

 

58.8

%

 

95

 

11,811

 

261

Assisted Living

 

 

802,484

 

48.4

%

 

49,053

 

 

 —

 

40.6

%

 

103

 

 

5,885

Under Development (3)

 

 

31,602

 

1.9

%

 

 —

 

 

 —

 

 —

%

 

 

 

Other (4)

 

 

11,040

 

0.6

%

 

689

 

 

 —

 

0.6

%

 

 1

 

118

 

Total Portfolio

 

$

1,659,320

 

100.0

%

$

99,853

 

$

20,853

 

100.0

%

 

199

 

11,929

 

6,146


(1)

We have investments in 28 states leased or mortgaged to 29 different operators.

 

(2)

See Item 1. Financial Statements – Note 2. Real Estate Investments for discussion of bed/unit count.

 

(3)

Represents three development projects consisting of a 143-bed SNF located in Kentucky, a 78-unit ALF/MC located in Oregon and a 110-unit ILF/ALF/MC located in Wisconsin.

 

(4)

Includes three parcels of land held-for-use and one behavioral health care hospital.

 

(5)

Excludes rental income from properties sold.

 

(6)

Represents interest income from mortgage loans and excludes interest income from paid-off mortgage loans.

As of September 30, 2018, we had $1.3 billion in carrying value of net real estate investments, consisting of $1.1 billion or 82.0% invested in owned and leased properties and $0.2 billion or 18.0% invested in mortgage loans secured by first mortgages. Our investment in mortgage loans contain interest rates between 9.2% and 9.5%. Approximately 76.1% of those mortgage loans mature in 2043 and have an interest rate of 9.5%.

For the nine months ended September 30, 2018, rental income and interest income from mortgage loans represented 82.1% and 16.7%, respectively, of total gross revenues. In most instances, our lease structure contains fixed annual rental escalations, which are generally recognized on a straight-line basis over the minimum lease period. Certain leases have annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property.  For those certain leases, the revenue is not recognized until the appropriate contingencies have been resolved.

During the nine months ended September 30, 2018, there were no lease renewals. During 2018, we transitioned two operating skilled nursing centers to another operator in our portfolio. This transition had no economic impact on us. For the nine months ended September 30, 2018, we recorded $8.6 million in straight-line rental income and recovered a net of $0.1 million in straight-line rent receivable reserve. During the nine months ended September 30, 2018, we received $95.7 million of cash rental revenue and

26


 

recorded amortization of lease incentives cost of $1.7 million. At September 30, 2018, the straight-line rent receivable balance, net of reserves, on the balance sheet was $73.1 million.

Update on Anthem Memory Care and Preferred Care

During 2017, we issued a notice of default to Anthem Memory Care (“Anthem”) resulting from Anthem’s partial payment of minimum rent. Anthem operates 11 operational memory care communities under a master lease. We are currently not pursuing enforcement of our rights and remedies pertaining to known events of default under the master lease and our guarantees, with the stipulation that Anthem Memory Care achieve certain level of performance and pay a minimum of $5.2 million of cash rent for these 11 properties through December 31, 2018. We receive regular financial performance updates from Anthem and continue to monitor Anthem’s performance obligations under the master lease agreement closely.

Also, during 2017, Preferred Care, Inc. (“Preferred Care”) and several affiliated entities filed for Chapter 11 bankruptcy as a result of a multi-million dollar judgement in a lawsuit in Kentucky against Preferred Care and certain affiliated entities. The affiliated entities named in the lawsuit operate properties in Kentucky and New Mexico. According to Preferred Care, it is subject to the judgement because it was included in the lawsuit. Preferred Care leases 24 properties under two master leases from us and none of the 24 properties are located in Kentucky or New Mexico. Those 24 properties are in Arizona, Colorado, Iowa, Kansas, Texas and Virginia. Additionally, the Preferred Care operating entities that sublease those properties did not file for bankruptcy. Our annual rental revenue from Preferred Care represented 6.5% of total rental and interest income as of September 30, 2018. Preferred Care is current on its rent due to us and provides us updates on the bankruptcy proceedings.

27


 

2018 Activities Overview

The following tables summarize our transactions during the nine months ended September 30, 2018 (dollar amounts in thousands):

Investment in Owned Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

Type

 

Number

 

Initial

 

 

 

 

 

 

Total

 

 

Total

 

 

 

of

 

of

 

of

 

Cash

 

 

 

Purchase

 

 

Transaction

 

 

Acquisition

 

State

 

Properties

 

Properties

 

Beds/Units

 

Yield

 

 

 

Price

 

 

Costs

 

 

Costs

 

Oregon

 

1

(1)

ILF

 

89

 

6.75

%

 

$

14,400

 

$

 —

 

$

14,400

 

Oregon

 

 —

(1)

UDP

 

 —

 

 —

%

 

 

600

 

 

36

 

 

636

 

Texas

 

2

 

MC

 

88

 

7.25

%

 

 

25,200

 

 

66

 

 

25,266

 

Wisconsin

 

 

UDP

 

 —

 

 —

%

 

 

95

 

 

11

 

 

106

 

Total

 

3

 

 

 

177

 

 

 

 

$

40,295

 

$

113

 

$

40,408

 


(1)

During the second quarter of 2018, we entered into a partnership to develop and own real estate. Under the partnership agreement, we acquired a parcel of land to develop a 78-unit assisted living and memory care community in Medford, OR for a total commitment of $18,108, and an existing operational 89-unit independent living community in Oregon for $14,400, during the second and third quarter of 2018, respectively.

Investment in Development and Improvement projects

 

 

 

 

 

 

 

 

 

Developments

 

Improvements

Assisted Living Communities

 

$

19,251

 

$

1,131

Skilled Nursing Centers

 

 

6,466

 

 

500

Other

 

 

 —

 

 

432

Total

 

$

25,717

 

$

2,063

Completed Developments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

Type

 

Number

 

 

 

 

 

 

 

of

 

of

 

of

 

 

 

 

Total

Type of Project

 

Properties

 

Property

 

Beds/Units

 

State

 

Investment

Development

 

1

 

MC

 

66

 

Illinois

 

$

13,974

Properties Sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Number

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

of

 

of

 

of

 

 

Sales

 

 

Carrying

 

 

Net

 

State

 

Properties

 

Properties

 

Beds/Units

 

 

Price

 

 

Value

 

 

Gain

 

Alabama

 

SNF

 

2

 

285

 

$

17,525

 

$

3,272

 

$

14,253

 

Kansas

 

ALF

(1)

 —

 

 —

 

 

350

 

 

346

 

 

 —

 

Ohio and Pennsylvania

 

ALF

 

 6

 

320

 

 

67,500

 

 

16,352

 

 

48,445

 

Total

 

 

 

 8

 

605

 

$

85,375

 

$

19,970

 

$

62,698

 


(1)

We sold land adjacent to an existing ALF community in Kansas.

Investment in Mortgage Loans

 

 

 

 

 

Originations and funding under mortgage loans receivable

 

$

20,530

(1)

Pay-offs received

 

 

(1,086)

 

Scheduled principal payments received

 

 

(550)

 

Net increase in mortgage loans receivable

 

$

18,894

 


(1)

During 2018, we funded an additional $7,400 under an existing mortgage loan for the purchase of a 112-bed skilled nursing center in Michigan. The incremental funding bears interest at 8.7%, fixed for five years, and escalating by 2.25% thereafter. Also, we funded additional loan proceeds of $7,125 under an existing mortgage loan for the purchase of a 126-bed skilled nursing center in Michigan. This incremental funding bears interest at 9.41%, fixed for five years, and escalating by 2.25% thereafter.

28


 

Investment in Unconsolidated Joint Ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Type

 

Total

 

 

Currently

 

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

of

 

of

 

Preferred

 

 

Paid in

 

 

of

 

 

Investment

 

 

Carrying

 

 

Capital

 

 

Income

 

 

Interest

 

State

   

Properties

   

Investment

   

Return

 

   

Cash

 

   

Beds/ Units

   

 

Commitment

   

 

Value

   

 

Contribution

   

 

Recognized

 

 

Received

 

Arizona

 

ALF/MC/ILF

 

Preferred Equity

 

15

%

  

7

%

  

585

   

$

25,650

 

$

23,942

 

$

580

  

$

1,490

  

$

1,436

 

Florida

 

ALF/IL/MC

 

Mezzanine

 

15

%

 

12

%

 

99

 

 

2,900

(1)

 

3,169

(1)

 

 —

 

 

383

 

 

291

 

Florida

 

UDP-ALF/MC

 

Mezzanine

 

15

%

 

10

%

 

127

 

 

3,400

 

 

3,400

 

 

 —

 

 

230

 

 

 —

(2)

 

 

 

 

 

 

 

 

 

 

 

 

811

 

$

31,950

 

$

30,511

 

$

580

 

$

2,103

 

$

1,727

 


(1)

Since interest payments were deferred and no interest was recorded for the first twelve months of the loan, we used the effective interest method in accordance with GAAP to recognize interest income and recorded the difference between the effective interest income and cash interest income to the loan principal balance.

 

(2)

We withheld $653 at the time of loan origination which is being applied to interest. As of September 30, 2018, we still hold $257 which will be applied to future interest.

Notes Receivable

 

 

 

Advances under notes receivable

$

50

Principal payments received under notes receivable

 

(3,848)

Total

$

(3,798)

Debt Obligations

During 2018, we amended and restated our unsecured credit agreement to replace the previous unsecured credit agreement, prior to its expiration on October 14, 2018. The amended credit agreement maintains the $600.0 million aggregate commitment of the lenders under the prior agreement and provides for the opportunity to increase the commitment size of the credit agreement up to a total of $1.0 billion. The amended credit agreement extends the maturity of the credit agreement to June 27, 2022 and provides for a one-year extension option at our discretion, subject to customary conditions. Additionally, the amended credit agreement decreases the interest rate margins and converts from the payment of unused commitment fees to a facility fee.

29


 

Health Care Regulatory Climate

The Centers for Medicare & Medicaid Services (“CMS”) annually updates Medicare skilled nursing facility prospective payment system rates and other policies. On July 31, 2017, CMS released a final rule updating Medicare skilled nursing facility rates and policies for fiscal year 2018, which began on October 1, 2017. CMS expected the rule to increase overall payments to SNFs by $370 million in fiscal year 2018, or 1.0%, compared to fiscal year 2017 levels. The 1% update for fiscal year 2018 was set by Congress in 2015 legislation.

On April 27, 2018, CMS released its proposed update to Medicare skilled nursing facility rates for fiscal year 2019, which CMS projected would increase overall payments to skilled nursing facilities by $850 million in fiscal year 2019 relative to fiscal year 2018 levels. The proposed rate update for fiscal year 2019 was 2.4%, as mandated by the Bipartisan Budget Act of 2018. Furthermore, CMS proposed replacing the existing Resource Utilization Groups, Version IV (“RUG–IV”) case mix classification system with a new model beginning in fiscal year 2020. The new case mix classification system, called the “Patient-Driven Payment Model,” would base Medicare payment on resident needs rather than the amount of therapy a resident receives.

On July 31, 2018, CMS released a final rule updating skilled nursing facility rates and policies for fiscal year 2019. The final rule adopts the proposed 2.4% payment increase, which CMS projects will increase overall payments to skilled nursing facilities by $820 million in fiscal year 2019 as compared to fiscal year 2018 levels ($30 million less than projected in the proposed rule). CMS also finalized the Patient-Driven Payment Model, effective for fiscal year 2020. Finally, CMS confirm that, as required by statute, beginning October 1, 2018, the SNF Value-Based Purchasing (“VBP”) Program will go into effect. Under the VBP Program, CMS will reduce Medicare payments to skilled nursing facilities by 2%. CMS will then return approximately 60% of the withheld amount to skilled nursing facilities based on their relative performance on a readmission measure. The remaining portion of the withheld amount will be retained in the Medicare Trust Fund.

On September 28, 2016, CMS released a final rule revising the requirements that long-term care facilities must meet to participate in the Medicare and Medicaid programs. This major rule addresses requirements for improving quality of care and patient safety, nursing facility staffing, care planning, infection control, and residents’ rights and compliance and ethics programs, among other key provisions.  While the rule also banned pre-dispute arbitration agreements, that provision was stayed due to litigation challenging the requirement. On June 8, 2017, CMS published a proposed rule that would eliminate the prohibition on pre-dispute binding arbitration agreements and otherwise modify these requirements; this rule has not been finalized.  There can be no assurance that these rules or future regulations modifying Medicare skilled nursing facility payment rates or other requirements for Medicare and/or Medicaid participation will not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.

Congress periodically considers legislation revising Medicare and Medicaid policies, including legislation that could have the impact of reducing Medicare reimbursement for skilled nursing facilities and other Medicare providers, limiting state Medicaid funding allotments, encouraging home and community-based long-term care services as an alternative to institutional settings, or otherwise reforming payment policy for post-acute care services. On February 9, 2018, President Trump signed into law the Bipartisan Budget Act of 2018, which, as noted, establishes a 2.4% increase to fiscal year 2019 Medicare skilled nursing facility rates; the update otherwise would have been based on the change in the skilled nursing facility market basket index, reduced by a productivity adjustment. There can be no assurances that enacted or future legislation will not have an adverse impact on the financial condition of our borrowers and lessees, which subsequently could materially adversely impact our company.

30


 

Additional reforms affecting the payment for and availability of health care services have been proposed at the federal and state level and adopted by certain states. Increasingly, state Medicaid programs are providing coverage through managed care programs under contracts with private health plans, which is intended to decrease state Medicaid costs. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodologies may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third-party payors.

Key Performance Indicators, Trends and Uncertainties

We utilize several key performance indicators to evaluate the various aspects of our business.  These indicators are discussed below and relate to concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results in making operating decisions and for budget planning purposes.

Concentration Risk. We evaluate by gross investment our concentration risk in terms of asset mix, investment mix, operator mix and geographic mix. Concentration risk is valuable to understand what portion of our investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our investments that are real property or mortgage loans. In order to qualify as an equity REIT, at least 75 percent of our total assets must be represented by real estate assets, cash, cash items and government securities. Investment mix measures the portion of our investments that relate to our various property classifications. Operator mix measures the portion of our investments that relate to our top five operators. Geographic mix measures the portion of our investment that relate to our top five states.

The following table reflects our recent historical trends of concentration risk (gross investment, in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9/30/18

 

6/30/18

 

3/31/18

 

12/31/17

 

9/30/17

 

Asset mix:

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Real property

 

$

1,414,267

 

$

1,401,303

 

$

1,401,506

 

$

1,392,122

 

$

1,359,586

 

Loans receivable

 

 

245,053

 

 

236,178

 

 

235,734

 

 

226,162

 

 

224,095

 

Investment mix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing centers

 

$

814,194

 

$

814,208

 

$

813,542

 

$

803,691

 

$

803,853

 

Assisted living communities

 

 

802,484

 

 

787,373

 

 

795,036

 

 

789,520

 

 

759,896

 

Under development

 

 

31,602

 

 

25,077

 

 

17,922

 

 

14,465

 

 

9,716

 

Other (1)

 

 

11,040

 

 

10,823

 

 

10,740

 

 

10,608

 

 

10,216

 

Operator mix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prestige Healthcare (1)

 

$

258,186

 

$

249,311

 

$

247,769

 

$

238,184

 

$

236,105

 

Senior Lifestyle Corporation

 

 

189,945

 

 

189,945

 

 

189,226

 

 

189,226

 

 

189,025

 

Senior Care Centers

 

 

138,109

 

 

138,109

 

 

138,109

 

 

138,109

 

 

138,109

 

Anthem Memory Care

 

 

135,946

 

 

135,342

 

 

131,527

 

 

126,120

 

 

121,138

 

Brookdale Senior Living

 

 

126,991

 

 

126,991

 

 

126,991

 

 

126,991

 

 

126,991

 

Remaining operators

 

 

810,143

 

 

797,783

 

 

803,618

 

 

799,654

 

 

772,313

 

Geographic mix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

$

292,317

 

$

292,317

 

$

267,051

 

$

267,051

 

$

269,279

 

Michigan

 

 

245,996

 

 

237,121

 

 

235,579

 

 

225,994

 

 

223,916

 

Wisconsin

 

 

137,056

 

 

133,794

 

 

130,941

 

 

129,398

 

 

126,313

 

Colorado

 

 

114,923

 

 

114,923

 

 

114,923

 

 

114,923

 

 

114,923

 

California

 

 

102,254

 

 

102,254

 

 

102,254

 

 

102,254

 

 

102,254

 

Remaining states

 

 

766,774

 

 

757,072

 

 

786,492

 

 

778,664

 

 

746,996

 


(1)

We have three parcels of land as of September 30, 2018. These parcels are located adjacent to properties securing the Prestige Healthcare mortgage loan and are managed by Prestige.

 

 

31


 

Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to gross asset value and debt to market capitalization. The leverage ratios indicate how much of our consolidated balance sheet capitalization is related to long-term obligations. Our coverage ratios include interest coverage ratio and fixed charge coverage ratio. The coverage ratios indicate our ability to service interest and fixed charges (interest). The coverage ratios are based on earnings before interest, taxes, depreciation and amortization for real estate (“EBITDAre”) as defined by National Association of Real Estate Investment Trusts (“NAREIT”). EBITDAre is calculated as net income available to common stockholders (computed in accordance with GAAP) excluding (i) interest expense, (ii) income tax expense, (iii) real estate depreciation and amortization, (iv) impairment write-downs of depreciable real estate, (v) gains or losses on the sale of depreciable real estate, and (vi) adjustments for unconsolidated partnerships and joint ventures. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. The following table reflects the recent historical trends for our credit strength measures:

Balance Sheet Metrics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date

 

Quarter Ended

 

 

 

9/30/18

 

9/30/18

 

 

6/30/18

 

 

3/31/18

 

 

12/31/17

 

 

9/30/17

 

Debt to gross asset value

 

36.4

36.4

%

 

36.1

%

(1)

38.3

%

(3)

37.6

%

(3)

36.8

%

Debt to market capitalization ratio

 

27.7

27.7

%

 

27.8

%

(2)

31.4

%

(4)

27.9

%

(4)

25.5

%

Interest coverage ratio (5)

 

4.7

x

4.8

x

 

4.7

x

 

4.7

x

 

4.8

x

 

4.8

x

Fixed charge coverage ratio (5)

 

4.7

x

4.8

x

 

4.7

x

 

4.7

x

 

4.8

x

 

4.8

x


(1)

Decreased due to decrease in outstanding debt and increase in gross asset value from acquisitions partially offset by sold properties and loan payoffs.

 

(2)

Decreased due to decrease in outstanding debt and increase in market capitalization.

 

(3)

Increased primarily due to increase in outstanding debt partially offset by the increase in gross asset value from acquisitions, additional development and capital improvement funding.

 

(4)

Increased primarily due to increase in outstanding debt and decrease in market capitalization.

 

(5)

In calculating our interest coverage and fixed charge coverage ratios above, we use EBITDAre, which is a financial measure not derived in accordance with U.S. generally accepted accounting principles (“GAAP”) (non-GAAP financial measure). EBITDAre is not an alternative to net income, operating income or cash flows from operating activities as calculated and presented in accordance with GAAP. You should not rely on EBITDAre as a substitute for any such GAAP financial measures or consider it in isolation, for the purpose of analyzing our financial performance, financial position or cash flows. Net income is the most directly comparable GAAP measure to EBITDAre.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date

 

Quarter Ended

 

 

 

9/30/18

 

9/30/18

 

6/30/18

 

3/31/18

 

12/31/17

 

9/30/17

 

Net income

 

$

124,232

 

$

34,937

 

$

68,936

 

$

20,359

 

$

19,834

 

$

20,616

 

(Less): gain on sale |Add: loss on sale

 

 

(62,698)

 

 

(14,353)

 

 

(48,345)

 

 

 —

 

 

1,240

 

 

 —

 

Add: Impairment charges

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Add: Interest expense

 

 

22,981

 

 

7,497

 

 

7,655

 

 

7,829

 

 

7,683

 

 

7,644

 

Add: Depreciation and amortization

 

 

28,159

 

 

9,447

 

 

9,268

 

 

9,444

 

 

9,424

 

 

9,519

 

Total EBITDAre

 

$

112,674

 

$

37,528

 

$

37,514

 

$

37,632

 

$

38,181

 

$

37,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

22,981

 

$

7,497

 

$

7,655

 

$

7,829

 

$

7,683

 

$

7,644

 

Add: Capitalized interest

 

 

850

 

 

298

 

 

293

 

 

259

 

 

281

 

 

256

 

Interest incurred

 

$

23,831

 

$

7,795

 

$

7,948

 

$

8,088

 

$

7,964

 

$

7,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

 

4.7

x

 

4.8

x

 

4.7

x

 

4.7

x

 

4.8

x

 

4.8

x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest incurred

 

$

23,831

 

$

7,795

 

$

7,948

 

$

8,088

 

$

7,964

 

$

7,900

 

Total fixed charges

 

$

23,831

 

$

7,795

 

$

7,948

 

$

8,088

 

$

7,964

 

$

7,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed charge coverage ratio

 

 

4.7

x

 

4.8

x

 

4.7

x

 

4.7

x

 

4.8

x

 

4.8

x

 

32


 

We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. This may be a result of various factors, including, but not limited to

 

·

The status of the economy;

·

The status of capital markets, including prevailing interest rates;

·

Compliance with and changes to regulations and payment policies within the health care industry;

·

Changes in financing terms;

·

Competition within the health care and seniors housing industries; and

·

Changes in federal, state and local legislation.

 

Management regularly monitors the economic and other factors listed above. We develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends.

33


 

Operating Results (unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

September 30, 

 

 

 

 

 

2018

 

2017

 

Difference

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

34,211

 

$

33,233

 

$

978

(1)

Interest income from mortgage loans

 

 

7,087

 

 

6,677

 

 

410

(2)

Interest and other income

 

 

478

 

 

1,336

 

 

(858)

(3)

Total revenues

 

 

41,776

 

 

41,246

 

 

530

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

7,497

 

 

7,644

 

 

147

(4)

Depreciation and amortization

 

 

9,447

 

 

9,519

 

 

72

 

Provision (recovery) for doubtful accounts

 

 

106

 

 

(96)

 

 

(202)

(5)

Transaction costs

 

 

 9

 

 

34

 

 

25

 

General and administrative expenses

 

 

4,879

 

 

4,144

 

 

(735)

(6)

Total expenses

 

 

21,938

 

 

21,245

 

 

(693)

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

19,838

 

 

20,001

 

 

(163)

 

Income from unconsolidated joint ventures

 

 

746

 

 

615

 

 

131

(7)

Gain on sale of real estate, net

 

 

14,353

 

 

 —

 

 

14,353

(8)

Net income

 

 

34,937

 

 

20,616

 

 

14,321

 

Income allocated to non-controlling interests

 

 

(17)

 

 

 —

 

 

(17)

 

Net income attributable to LTC Properties, Inc.

 

 

34,920

 

 

20,616

 

 

14,304

 

Income allocated to participating securities

 

 

(138)

 

 

(80)

 

 

(58)

 

Net income available to common stockholders

 

$

34,782

 

$

20,536

 

$

14,246

 


(1)

Increased due to acquisitions, capital improvement investments and higher cash rental income from Anthem partially offset by a reduction related to properties sold during 2017 and 2018.

 

(2)

Increased primarily due to mortgage originations and capital improvement funding partially offset by payoffs.

 

(3)

Decreased due to the net write-off of an earn-out liability and the related lease incentive asset during the third quarter of 2017 resulting from the lessee’s business model change, which negatively impacted the lessee’s operating results and caused the payment of the earn-out within the exercisable window improbable.

 

(4)

Decreased due to scheduled principal payments under our senior unsecured notes and an increase in capitalized interest related to development projects partially offset by a higher average outstanding balance on our line of credit and an increase in LIBOR rates.

 

(5)

Increased primarily due to (2) above and the reversal of straight-line rent reserve in 2017.

 

(6)

Increased primarily due to lower incentive compensation in the prior year related to a previously disclosed defaulted master lease.

 

(7)

Increased primarily due to income generated from additional funding under a preferred capital contribution commitment and income from a mezzanine loan accounted for as an unconsolidated joint venture in accordance with GAAP which was previously deferred.

 

(8)

Represents the net gain on sale of two senior living centers in Alabama during the third quarter of 2018.

34


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

September 30, 

 

 

 

 

 

2018

 

2017

 

Difference

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

102,646

 

$

103,533

 

$

(887)

(1)

Interest income from mortgage loans

 

 

20,910

 

 

20,050

 

 

860

(2)

Interest and other income

 

 

1,502

 

 

2,753

 

 

(1,251)

(3)

Total revenues

 

 

125,058

 

 

126,336

 

 

(1,278)

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

22,981

 

 

22,266

 

 

(715)

(4)

Depreciation and amortization

 

 

28,159

 

 

28,186

 

 

27

 

Impairment charges

 

 

 —

 

 

1,880

 

 

1,880

(5)

Provision (recovery) for doubtful accounts

 

 

76

 

 

(139)

 

 

(215)

(6)

Transaction costs

 

 

19

 

 

56

 

 

37

 

General and administrative expenses

 

 

14,392

 

 

13,270

 

 

(1,122)

(7)

Total expenses

 

 

65,627

 

 

65,519

 

 

(108)

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

59,431

 

 

60,817

 

 

(1,386)

 

Income from unconsolidated joint ventures

 

 

2,103

 

 

1,635

 

 

468

(8) 

Gain on sale of real estate, net

 

 

62,698

 

 

5,054

 

 

57,644

(9)

Net income

 

 

124,232

 

 

67,506

 

 

56,726

 

Income allocated to non-controlling interests

 

 

(17)

 

 

 —

 

 

(17)

 

Net income attributable to LTC Properties, Inc.

 

 

124,215

 

 

67,506

 

 

56,709

 

Income allocated to participating securities

 

 

(504)

 

 

(281)

 

 

(223)

 

Net income available to common stockholders

 

$

123,711

 

$

67,225

 

$

56,486

 


(1)

Decreased due to Anthem’s default, as previously discussed, and the reduction of rent related to properties sold during 2017 and 2018, partially offset by acquisitions and capital improvement investments.

 

(2)

Increased primarily due to mortgage originations and capital improvement funding partially offset by payoffs.

 

(3)

Decreased due to non-accrual of interest on a loan to Anthem and the net write-off of an earn-out liability and the related lease incentive asset during the third quarter of 2017 resulting from the lessee’s business model change, which negatively impacted the lessee’s operating results and caused the payment of the earn-out within the exercisable window improbable, partially offset by interest income from mezzanine loans.

 

(4)

Increased primarily due to a higher average outstanding balance on our line of credit and an increase in LIBOR rates , partially offset by scheduled principal payments under our senior unsecured notes and an increase in capitalized interest related to development projects.

 

(5)

Represents the write-off of straight-line rent and other receivables in 2017 related to two properties due to negotiations to transition these properties to another operator in our portfolio.

 

(6)

Increased primarily due to (2) above and the reversal of straight-line rent reserve in 2017.

 

(7)

Increased primarily due to lower incentive compensation in the prior year related to a previously disclosed defaulted master lease.

 

(8)

Increased primarily due to income generated from additional funding under a preferred capital contribution commitment and income from a mezzanine loan accounted for as an unconsolidated joint venture in accordance with GAAP which was previously deferred.

 

(9)

Represents the net gain on sale of six assisted living communities in Ohio and Pennsylvania and net gain on sale of two skilled nursing centers in Alabama during 2018 partially offset by a net gain on sale of four assisted living communities in Indiana and Iowa during 2017.

Funds From Operations Available to Common Stockholders

Funds from Operations (“FFO”) available to common stockholders, basic FFO available to common stockholders per share and diluted FFO available to common stockholders per share are supplemental measures of a REIT’s financial performance that are not defined by GAAP. Real estate values historically rise and fall with market conditions, but cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time.  We

35


 

believe that by excluding the effect of historical cost depreciation, which may be of limited relevance in evaluating current performance, FFO facilitates comparisons of operating performance between periods.

We use FFO as a supplemental performance measurement of our cash flow generated by operations. FFO does not represent cash generated from operating activities in accordance with GAAP, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income available to common stockholders.

We calculate and report FFO in accordance with the definition and interpretive guidelines issued by NAREIT. FFO, as defined by NAREIT, means net income available to common stockholders (computed in accordance with GAAP) excluding gains or losses on the sale of real estate and impairment write-downs of depreciable real estate plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that have a different interpretation of the current NAREIT definition from us; therefore, caution should be exercised when comparing our FFO to that of other REITs.

The following table reconciles GAAP net income available to common stockholders to NAREIT FFO available to common stockholders (unaudited, amounts in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

 

2017

 

2018

 

2017

 

GAAP net income available to common stockholders

 

$

34,782

 

$

20,536

 

$

123,711

 

$

67,225

 

Add: Depreciation and amortization

 

 

9,447

 

 

9,519

 

 

28,159

 

 

28,186

 

Add: Impairment charges

 

 

 —

 

 

 —

 

 

 —

 

 

1,880

 

Less: Gain on sale of real estate, net

 

 

(14,353)

 

 

 —

 

 

(62,698)

 

 

(5,054)

 

NAREIT FFO attributable to common stockholders

 

$

29,876

 

$

30,055

 

$

89,172

 

$

92,237

 

NAREIT FFO attributable to common stockholders per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.76

 

$

0.76

 

$

2.26

 

$

2.34

 

Diluted

 

$

0.75

(1)  

$

0.76

(1)  

$

2.25

(1)

$

2.33

(1)

Weighted average shares used to calculate NAREIT FFO per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

39,487

 

 

39,428

 

 

39,470

 

 

39,403

 

Diluted

 

 

39,865

(2)

 

39,748

(2)

 

39,845

(2)

 

39,738

(2)


(1)

Includes the effect of the participating securities.

 

(2)

Includes the effect of stock option equivalents, participating securities and performance-based stock units.

Liquidity and Capital Resources

Sources and Uses of Cash

As of September 30, 2018, we had a total of $20.4 million of cash and cash equivalents, $480.0 million available under our unsecured revolving line of credit, $79.8 million available under our senior unsecured note shelf agreement and the potential ability to access the capital markets through the issuance of $184.1 million of common stock under our equity distribution agreement. Subsequent to September 30, 2018, we paid down $20.0 million under our unsecured revolving line of credit. Accordingly, we have $500.0 million available under our unsecured line of credit. Furthermore, we have the ability to access the capital markets through the issuance of debt and/ or equity securities under an automatic shelf registration statement.

We believe that our current cash balance, cash flow from operations available for distribution or reinvestment, our borrowing capacity and our potential ability to access the capital markets are sufficient to provide for payment of our current operating costs, meet debt obligations and pay common dividends

36


 

at least sufficient to maintain our REIT status and repay borrowings at, or prior to, their maturity. The timing, source and amount of cash flows used in financing and investing activities are sensitive to the capital markets environment, especially to changes in interest rates. We continuously evaluate the availability of cost-effective capital and believe we have sufficient liquidity for additional capital investments in 2018 and 2019.

We expect our future income and ability to make distributions from cash flows from operations to depend on the collectibility of our rents and mortgage loans receivable. The collection of these loans and rents will be dependent, in large part, upon the successful operation by the operators of the seniors housing and health care properties we own or that are pledged to us. The operating results of the facilities will be impacted by various factors over which the operators/owners may have no control. Those factors include, without limitation, the status of the economy, changes in supply of or demand for competing seniors housing and health care facilities, ability to control rising operating costs, and the potential for significant reforms in the health care industry. In addition, our future growth in net income and cash flow may be adversely impacted by various proposals for changes in the governmental regulations and financing of the health care industry. We cannot presently predict what impact these proposals may have, if any. We believe that an adequate provision has been made for the possibility of loans proving uncollectible but we will continually evaluate the financial status of the operations of the seniors housing and health care properties. In addition, we will monitor our borrowers and the underlying collateral for mortgage loans and will make future revisions to the provision, if considered necessary.

Our investments, principally our investments in mortgage loans and owned properties, are subject to the possibility of loss of their carrying values as a result of changes in market prices, interest rates and inflationary expectations. The effects on interest rates may affect our costs of financing our operations and the fair market value of our financial assets. Generally, our loans have predetermined increases in interest rates and our leases have agreed upon annual increases. Inasmuch as we may initially fund some of our investments with variable interest rate debt, we would be at risk of net interest margin deterioration if medium and long-term rates were to increase.

Our primary sources of cash include rent and interest receipts, borrowings under our primary unsecured credit facility, public and private issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures and construction advances), loan advances and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows as summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

Change

 

 

Cash provided by (used in):

 

2018

 

2017

 

 

$

 

 

Operating activities

 

$

83,438

 

$

76,134

 

$

7,304

 

 

Investing activities

 

 

(2,374)

 

 

(53,815)

 

 

51,441

 

 

Financing activities

 

 

(63,706)

 

 

(26,468)

 

 

(37,238)

 

 

Increase in cash and cash equivalents

 

 

17,358

 

 

(4,149)

 

 

21,507

 

 

Cash and cash equivalents, beginning of period

 

 

5,213

 

 

7,991

 

 

(2,778)

 

 

Cash and cash equivalents, end of period

 

$

22,571

 

$

3,842

 

$

18,729

 

 

 

Debt Obligations

Bank Borrowings. During 2018, we amended and restated our unsecured credit agreement to replace the previous unsecured credit agreement, prior to its expiration on October 14, 2018. The amended credit agreement maintains the $600.0 million aggregate commitment of the lenders under the prior agreement and provides for the opportunity to increase the commitment size of the credit agreement

37


 

up to a total of $1.0 billion. The amended credit agreement extends the maturity of the credit agreement to June 27, 2022 and provides for a one-year extension option at our discretion, subject to customary conditions. Additionally, the amended credit agreement decreases the interest rate margins and converts from the payment of unused commitment fees to a facility fee. Based on our leverage at September 30, 2018, the facility provides for interest annually at LIBOR plus 115 basis points and a facility fee of 20 basis points. At September 30, 2018, we were in compliance with all covenants.

Senior Unsecured Notes. We have a $337.5 million shelf agreement with affiliates and managed accounts of Prudential Investment Management, Inc. (“Prudential”) with $79.8 million available for borrowing.

The debt obligations by component as of September 30, 2018 are as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

Applicable

 

 

 

 

Available

 

 

Interest

 

Outstanding

 

for

Debt Obligations

 

Rate (1)

 

Balance

 

Borrowing

Bank borrowings (2)

 

3.38%

 

$

120,000

 

$

480,000

Senior unsecured notes, net of debt issue costs

 

4.49%

 

 

550,986

 

 

79,833

Total

 

4.29%

 

$

670,986

 

$

559,833


(1)

Represents weighted average of interest rate as of September 30, 2018.

 

(2)

Subsequent to September 30, 2018, we paid down $20,000 under our unsecured revolving line of credit. Accordingly, we have $100,000 outstanding under our unsecured revolving line of credit with $500,000 available for borrowing.

Our debt borrowings and repayments during the nine months ended September 30, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

Debt Obligations

 

 

Borrowings

 

 

Repayments

Bank borrowings

 

$

96,500

 

$

(73,000)

Senior unsecured notes

 

 

 —

 

 

(20,167)

Total

 

$

96,500

 

$

(93,167)

Equity

At September 30, 2018, we had 39,656,737 shares of common stock outstanding, equity on our balance sheet totaled $823.3 million and our equity securities had a market value of $1.7 billion. During the nine months ended September 30, 2018, we declared and paid $67.8 million of cash dividends.

Subsequent to September 30, 2018, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of October, November and December 2018, payable on October 31, November 30, and December 31, 2018, respectively, to stockholders of record on October 23, November 21, and December 21, 2018, respectively.

At-The-Market Program. We have an equity distribution agreement with sales agents to issue and sell, from time to time, up to $200.0 million in aggregate offering price of our common shares. The equity distribution agreement provides that sales of common shares are to be made by means of ordinary brokers’ transactions, which may include block trades, or transactions that are deemed to be “at the market” offerings. During the nine months ended September 30, 2018, we sold 22,244 shares of common stock for $1.0 million in net proceeds under our equity distribution agreement. In conjunction with the sale of common stock, we paid $18,000 as compensation to our sales agents and we reclassified $76,000 of accumulated costs associated with this agreement to additional paid in capital. At September 30, 2018, we had $184.1 million available under our equity distribution agreement.

38


 

Available Shelf Registrations. We have an automatic shelf registration statement on file with the SEC and currently have the ability to file additional automatic shelf registration statements to provide us with capacity to publicly offer an indeterminate amount of common stock, preferred stock, warrants, debt, depositary shares, or units. We may from time to time raise capital under our automatic registration statement in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering.

Stock-Based Compensation. During the nine months ended September 30, 2018, we granted restricted stock and performance-based stock units under the 2015 Plan as follows:

 

 

 

 

 

 

 

No. of

 

Price per

 

 

 

Shares

 

Share

 

Vesting Period

 

81,819

 

$

38.18

 

ratably over 3 years

 

66,171

 

$

38.18

 

TSR targets (1)

 

8,728

 

$

41.25

 

ratably over 1 year

 

156,718

 

 

 

 

 

 


(1)

Vesting is based on achieving certain total shareholder return (“TSR”) targets in 4 years with acceleration opportunity in 3 years.

Critical Accounting Policies

There have been no material changes from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in our market risk during the nine months ended September 30, 2018. For additional information, refer to Item 7A as presented in our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended). As of the end of the period covered by this report based on such evaluation our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective.

There has been no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

39


 

PART II

 

OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

We are and may become from time to time a party to various claims and lawsuits arising in the ordinary course of business, which in our opinion are not singularly or in the aggregate anticipated to be material to our results of operations or financial condition. Claims and lawsuits may include matters involving general or professional liability asserted against the lessees or borrowers related to our properties, which we believe under applicable legal principles are not our responsibility as a non-possessory landlord or mortgage holder. We believe that these matters are the responsibility of our lessees and borrowers pursuant to general legal principles and pursuant to insurance and indemnification provisions in the applicable leases or mortgages. We intend to continue to vigorously defend such claims and lawsuits.

 

Item 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended September 30, 2018, we did not make any unregistered sales of equity securities.

During the three months ended September 30, 2018, we acquired shares of common stock held by employees who tendered shares to satisfy tax withholding obligations. Specifically, the number of shares of common stock acquired from employees and the average prices paid per share for each month in the quarter ended September 30, 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number

 

 

 

 

 

 

 

 

 

 

of Shares

 

Maximum

 

 

 

 

 

 

 

 

Purchased as

 

Number of

 

 

 

 

 

Average

 

Part of

 

Shares that May

 

 

 

Total Number

 

Price

 

Publicly

 

Yet Be

 

 

 

of Shares

 

Paid per

 

Announced

 

Purchased

 

Period

 

Purchased

 

Share

 

Plan

 

Under the Plan

 

July 1- July 31, 2018

 

 —

 

$

 —

 

 —

 

 —

 

August 1 - August 31, 2018

 

487

 

$

42.91

 

 —

 

 —

 

September 1 - September 30, 2018

 

 —

 

$

 —

 

 —

 

 —

 

Total

 

487

 

 

 

 

 —

 

 —

 

 

 

 

 

 

40


 

Item 6. Exhibits

 

3.1

LTC Properties, Inc. Articles of Restatement (incorporated by reference to Exhibit 3.1.2 to LTC Properties Inc.’s Current Report on Form 8‑K (File No. 1‑11314) filed June 6, 2016)

 

 

3.2

Bylaws of LTC Properties, Inc., as restated June 2, 2015 (incorporated by reference to Exhibit 3.2 to LTC Properties Inc.’s Current Report on Form 8-K (File No. 1-11314) filed June 5, 2015)

 

 

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101

The following materials from LTC Properties, Inc.’s Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2018 and December 31, 2017; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017; (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017; and (iv) Notes to Consolidated Financial Statements

 

41


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

LTC PROPERTIES, INC.

 

Registrant

 

 

 

 

 

 

 

 

 

Dated:  November 5, 2018

             By:

/s/ Pamela Kessler

 

 

Pamela Kessler

 

 

Executive Vice President, Chief Financial
Officer and Corporate Secretary

 

 

(Principal Financial and Accounting Officer)

 

 

 

42