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LTC Properties (LTC)

Filed: 9 May 19, 4:53pm

 

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 March 31, 2019

 

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  ☑ 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $.01 par value

LTC

New York Stock Exchange

 

The number of shares of common stock outstanding on May 2, 2019 was 39,738,695.

 


 


 

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share)

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

(unaudited)

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Land

 

$

125,898

 

$

125,358

 

Buildings and improvements

 

 

1,313,952

 

 

1,290,352

 

Accumulated depreciation and amortization

 

 

(322,535)

 

 

(312,959)

 

Operating real estate property, net

 

 

1,117,315

 

 

1,102,751

 

Properties held-for-sale, net of accumulated depreciation: 2019—$1,916; 2018—$1,916

 

 

3,830

 

 

3,830

 

Real property investments, net

 

 

1,121,145

 

 

1,106,581

 

 

 

 

 

 

 

 

 

Mortgage loans receivable, net of loan loss reserve: 2019—$2,461; 2018—$2,447

 

 

244,314

 

 

242,939

 

Real estate investments, net

 

 

1,365,459

 

 

1,349,520

 

Notes receivable, net of loan loss reserve: 2019—$198; 2018—$128

 

 

19,558

 

 

12,715

 

Investments in unconsolidated joint ventures

 

 

27,515

 

 

30,615

 

Investments, net

 

 

1,412,532

 

 

1,392,850

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

6,715

 

 

2,656

 

Restricted cash

 

 

2,108

 

 

2,108

 

Debt issue costs related to bank borrowings

 

 

2,775

 

 

2,989

 

Interest receivable

 

 

22,176

 

 

20,732

 

Straight-line rent receivable, net of allowance for doubtful accounts: 2019—$0; 2018—$746

 

 

42,455

 

 

73,857

 

Lease incentives

 

 

2,263

 

 

14,443

 

Prepaid expenses and other assets

 

 

5,342

 

 

3,985

 

Total assets

 

$

1,496,366

 

$

1,513,620

 

LIABILITIES

 

 

 

 

 

 

 

Bank borrowings

 

$

146,900

 

$

112,000

 

Senior unsecured notes, net of debt issue costs: 2019—$900; 2018—$938

 

 

528,900

 

 

533,029

 

Accrued interest

 

 

4,193

 

 

4,180

 

Accrued expenses and other liabilities

 

 

28,220

 

 

31,440

 

Total liabilities

 

 

708,213

 

 

680,649

 

EQUITY

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding:  

2019—39,739; 2018—39,657

 

 

397

 

 

397

 

Capital in excess of par value

 

 

862,376

 

 

862,712

 

Cumulative net income

 

 

1,233,302

 

 

1,255,764

 

Cumulative distributions

 

 

(1,316,314)

 

 

(1,293,383)

 

Total LTC Properties, Inc. stockholders’ equity

 

 

779,761

 

 

825,490

 

Non-controlling interests

 

 

8,392

 

 

7,481

 

Total equity

 

 

788,153

 

 

832,971

 

Total liabilities and equity

 

$

1,496,366

 

$

1,513,620

 

 

See accompanying notes.

 

 

3


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

  

2019

  

2018

  

Revenues:

 

 

 

 

 

 

 

Rental income

 

$

28,024

 

$

34,505

 

Interest income from mortgage loans

 

 

7,311

 

 

6,816

 

Interest and other income

 

 

521

 

 

489

 

Total revenues

 

 

35,856

 

 

41,810

 

Expenses:

 

 

 

 

 

 

 

Recovery of written-off straight-line rent receivable

 

 

(9,600)

 

 

 —

 

Interest expense

 

 

7,467

 

 

7,829

 

Depreciation and amortization

 

 

9,607

 

 

9,444

 

Provision for doubtful accounts

 

 

83

 

 

 8

 

Transaction costs

 

 

 —

 

 

 4

 

Property tax expense

 

 

4,386

 

 

 —

 

General and administrative expenses

 

 

4,571

 

 

4,797

 

Total expenses

 

 

16,514

 

 

22,082

 

Operating income

 

 

19,342

 

 

19,728

 

Income from unconsolidated joint ventures

 

 

1,085

 

 

631

 

Net income

 

 

20,427

 

 

20,359

 

Income allocated to non-controlling interests

 

 

(81)

 

 

 —

 

Net income attributable to LTC Properties, Inc.

 

 

20,346

 

 

20,359

 

Income allocated to participating securities

 

 

(92)

 

 

(88)

 

Net income available to common stockholders

 

$

20,254

 

$

20,271

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.51

 

$

0.51

 

Diluted

 

$

0.51

 

$

0.51

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

Basic

 

 

39,532

 

 

39,451

 

Diluted

 

 

39,874

 

 

39,454

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.57

 

$

0.57

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

Net income

 

$

20,427

 

$

20,359

 

Comprehensive income

 

$

20,427

 

$

20,359

 

 

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, 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

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,604)

 

 

(22,604)

 

 

 —

 

 

(22,604)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,486

 

 

 —

 

 

 —

 

 

1,486

 

 

 —

 

 

1,486

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

30,766

 

 

 —

 

 

30,766

 

 

78

 

 

30,844

 

Non-controlling interest distributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(48)

 

 

(48)

 

Balance—December 31, 2018

 

39,657

 

$

397

 

$

862,712

 

$

1,255,764

 

$

(1,293,383)

 

$

825,490

 

$

7,481

 

$

832,971

 

Cumulative effect of the adoption of the ASC 842

 

 —

 

 

 —

 

 

 —

 

 

(42,808)

 

 

 —

 

 

(42,808)

 

 

 —

 

 

(42,808)

 

As Adjusted Balance at January 1, 2019

 

39,657

 

$

397

 

$

862,712

 

$

1,212,956

 

$

(1,293,383)

 

$

782,682

 

$

7,481

 

$

790,163

 

Common Stock cash distributions ($0.57 per share)

 

48

 

 

 —

 

 

 —

 

 

 —

 

 

(22,931)

 

 

(22,931)

 

 

 —

 

 

(22,931)

 

Issuance of restricted stock

 

78

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

(1)

 

 

 

 

 

(1)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,689

 

 

 —

 

 

 —

 

 

1,689

 

 

 —

 

 

1,689

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

20,346

 

 

 —

 

 

20,346

 

 

81

 

 

20,427

 

Non-controlling interest contributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

919

 

 

919

 

Non-controlling interest distributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(89)

 

 

(89)

 

Other

 

(44)

 

 

 —

 

 

(2,024)

 

 

 —

 

 

 —

 

 

(2,024)

 

 

 —

 

 

(2,024)

 

Balance—March 31, 2019

 

39,739

 

$

397

 

$

862,376

 

$

1,233,302

 

$

(1,316,314)

 

$

779,761

 

$

8,392

 

$

788,153

 

 

 

 

 

 

 

 

 

5


 

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

  

2019

  

2018

 

OPERATING ACTIVITIES:

 

 

    

 

 

    

 

Net income

 

$

20,427

 

$

20,359

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,607

 

 

9,444

 

Stock-based compensation expense

 

 

1,689

 

 

1,376

 

Income from unconsolidated joint ventures

 

 

(1,085)

 

 

(631)

 

Income distributions from unconsolidated joint ventures

 

 

1,105

 

 

543

 

Straight-line rental income

 

 

(1,238)

 

 

(3,440)

 

Adjustment for collectibility

 

 

1,926

 

 

 

Lease incentives funded

 

 

 —

 

 

(380)

 

Amortization of lease incentives

 

 

87

 

 

540

 

Provision for doubtful accounts

 

 

83

 

 

 8

 

Non-cash interest related to contingent liabilities

 

 

 —

 

 

126

 

Other non-cash items, net

 

 

252

 

 

323

 

Increase in interest receivable

 

 

(1,444)

 

 

(1,406)

 

Increase (decrease) in accrued interest payable

 

 

13

 

 

(1,162)

 

Net change in other assets and liabilities

 

 

(4,635)

 

 

(4,107)

 

Net cash provided by operating activities

 

 

26,787

 

 

21,593

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in real estate properties

 

 

(15,971)

 

 

 —

 

Investment in real estate developments

 

 

(6,957)

 

 

(8,591)

 

Investment in real estate capital improvements

 

 

(259)

 

 

(534)

 

Capitalized interest

 

 

(260)

 

 

(259)

 

Proceeds from sale of real estate, net

 

 

225

 

 

 —

 

Investment in real estate mortgage loans receivable

 

 

(1,454)

 

 

(9,610)

 

Principal payments received on mortgage loans receivable

 

 

65

 

 

37

 

Investments in unconsolidated joint ventures

 

 

(293)

 

 

(380)

 

Proceeds from payoff of joint venture agreements

 

 

3,400

 

 

 —

 

Advances and originations under notes receivable

 

 

(6,953)

 

 

 —

 

Principal payments received on notes receivable

 

 

41

 

 

 —

 

Net cash used in investing activities

 

 

(28,416)

 

 

(19,337)

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Bank borrowings

 

 

36,900

 

 

24,000

 

Repayment of bank borrowings

 

 

(2,000)

 

 

 —

 

Principal payments on senior unsecured notes

 

 

(4,167)

 

 

(4,166)

 

Stock option exercises

 

 

 —

 

 

123

 

Distributions paid to stockholders

 

 

(22,931)

 

 

(22,578)

 

Distributions paid to non-controlling interests

 

 

(90)

 

 

 —

 

Other

 

 

(2,024)

 

 

(1,064)

 

Net cash provided by (used in) financing activities

 

 

5,688

 

 

(3,685)

 

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

 

 

4,059

 

 

(1,429)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

4,764

 

 

5,213

 

Cash, cash equivalents and restricted cash, end of period

 

$

8,823

 

$

3,784

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

7,202

 

$

8,669

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

Right of use asset

 

$

1,445

 

$

 —

 

Lease liability

 

$

1,445

 

$

 —

 

Contribution from non-controlling interests

 

$

919

 

$

 —

 

 

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 months ended March 31, 2019 and 2018 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 March 31, 2019, the gross value and the carrying value of the property were $1,796,000 and $896,000 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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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

New Accounting Standards Adopted by Our Company

In August 2016, the Financial Accounting Standards Board (“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.

Revenue Recognition ASC Topic 606.  On January 1, 2018, we adopted Accounting Standard codification (“ASC”) Topic 606,  Revenue From Contracts With Customers (“ASC 606”) using the modified retrospective adoption method. ASC 606 outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We evaluated the impact of this standard by assessing our revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. 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 ASC 606.

Leases ASC Topic 842.  In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02 (“ASU 2016-02”), Leases.  ASU 2016-02 and its amendments have now formally entered into the FASB codification as ASC Topic 842, Leases (“ASC 842”). The objective of ASC 842 is to establish the principles for lessees and lessors to apply for reporting useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease.

ASC 842 requires 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.

ASC 842 requires the lessors to identify lease and non-lease components of a lease agreement. Revenue related to non-lease components under lease agreements will be subject to the revenue recognition standard, upon adoption of this standard. Also, the new standard narrows definition of initial direct costs. Accordingly, upon adoption of the new standard, certain costs (primarily legal costs related to lease negotiations) should be expensed rather than capitalized.

Further, per ASC 842 lessors are required to assess the probability of collecting substantially all of the lease payments. The standard defines collectibility as lessee’s ability and intent to pay. If collectibility of substantially all of the lease payments through maturity is not probable, the lease income recorded during the period would be limited to lesser of the income that would have been recognized if collection were probable, and the lease payments received. If the assessment of collectibility changes, any difference between the lease income that would have been recognized and the lease payments should be

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recognized as an adjustment to lease income. At adoption, lessors are required to perform a lease-by-lease analysis for collectibility of all lease payments through maturity. If at adoption, it is not probable that substantially all of the lease obligations through maturity will be collected, a cumulative adjustment to equity should be made to reflect all of the lease obligations which are not probable to be collected. Under the new standard, collections of rent subsequent to the straight-line rent receivable write-off are considered recoveries of amounts previously written-off and are recognized as a contra-expense rather than rental revenue until the cumulative amount of the recovery recognized equals the amount of straight-line rent receivable written-off.

Additionally, ASC 842 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 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 ASC 842 and predominantly service-based would be accounted for under the ASC 606). This practical expedient option is available as a single election that must be consistently applied to all existing leases at the date of adoption. Also, ASC 842 provides a practical expedient that allows companies to use an optional transition method. Under the optional transition method, a cumulative adjustment to equity 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 ASC prospectively to leases commencing or modified after January 1, 2019 and will not be required to apply the disclosures under the new lease standard to comparative periods.

ASC 842 has subsequently been amended by other issued Accounting Standards Update (“ASU”) to clarify and improve the standard as well as to provide certain practical expedients. In December 2018, the FASB issued ASU 2018-20 (“ASU 2018-20”), Narrow-Scope Improvements for Lessors, which amends ASC 842 to require the lessors to exclude the lessor costs that are directly paid by the lessee to third parties on lessor’s behalf from variable payments. However, the lessor costs that are paid by the lessor and reimbursed by the lessee are required to be included in variable payments. Furthermore, ASC 842 allows for several practical expedients which permit the following: no reassessment of lease classification or initial direct costs and use of the standard’s effective date as the date of initial application. In March 2019, the FASB issued ASU 2019-01 (“ASU 2019-01”), Leases (Topic 842), Codification Improvements which provides clarification regarding presentation and disclosures. ASC 842 and its amendments are effective January 1, 2019.

Adoption of ASC 842.  On January 1, 2019, we adopted ASC 842 using the modified retrospective approach as of the adoption date, whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated.

Upon adoption of the standard, we elected the practical expedients provided for in ASC 842, including:

·

No reassessment of whether any expired or existing contracts were or contained leases;

·

No reassessment of the lease classification for any expired or existing leases;  

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·

No reassessment of initial direct costs for any existing leases; and

·

No separation of lease and non-lease components.

As a lessee, we have an office lease agreement with a 5-year remaining term which was classified as an operating lease under ASC 840. Due to election of the package of practical expedients, upon adoption of ASC 842 this lease agreement will continue to be classified as operating lease. For the three months ended March 31, 2019, we recorded $75,000 of rent expense related to this lease agreement. Adoption of ASC 842 resulted in recording a right-of use asset and a lease liability of $1,445,000 which represents the present value of the remaining minimum lease payments using our incremental borrowing rate.

As a lessor, our properties are leased subject to non-cancelable operating leases. 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. Upon adoption of ASC 842, we recorded real estate taxes that are reimbursed by our operators as Rental Income with a corresponding Property tax expense in the Consolidated Statements of Income and Comprehensive Income. For the three months ended March 31, 2019, we have recognized $4,335,000 in Rental Income related to reimbursement of real estate taxes from our operators.

Furthermore, upon adoption of ASC 842, we assessed the probability of collecting substantially all of our lease payments through maturity. As previously reported, we have been monitoring Anthem Memory Care (“Anthem”), Thrive Senior Living, LLC (“Thrive”), Preferred Care, Inc. (“Preferred Care”) and Senior Care Centers, LLC. (“Senior Care”) due to cash flow concerns, performance concerns and/or bankruptcy filing. In conjunction with adoption of ASC 842, we evaluated our straight-line rent receivable and lease incentive balances related to the noted operators and determined that we do not have the level of collectibility certainty required by the standard to record the straight-line rent receivable. Accordingly, we wrote-off the straight-line rent receivable and lease incentive balances associated with these leases. Also, since the new guidance does not provide for general reserve for straight-line rent receivable, we wrote-off our 1% general straight-line rent receivable reserve. These balances totaled $42,808,000 and were written-off to equity effective January 1, 2019 as required by ASC 842.

During the three months ended March 31, 2019, we recognized $9,600,000 of cash rent received from Anthem, Thrive, Preferred Care and Senior Care as a contra-expense titled Recovery of written-off straight-line rent receivable on the consolidated statements of income and comprehensive income as required by ASC 842.

New Accounting Standards Not Yet Adopted by Our Company

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.

 

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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 March 31, 2019 (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

 

$

821,167

 

56.8

104

 

 —

 

5,959

 

$

137.80

 

Skilled Nursing

 

 

587,410

 

40.6

%

72

 

8,893

 

261

 

$

64.17

 

Under Development (2)

 

 

25,952

 

1.8

 —

 

 —

 

 —

 

 

 —

 

Other (3)

 

 

11,067

 

0.8

 1

 

118

 

 —

 

 

 —

 

Total

 

$

1,445,596

 

100.0

177

 

9,011

 

6,220

 

 

 

 


(1)

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

 

(2)

Represents two development projects, consisting of 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

(iv)

specific dollar increases.

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During the three months ended March 31, 2019, we terminated a lease agreement and transitioned two operating senior housing communities under the lease agreement to a new operator. As a result of the lease termination, we wrote-off $1,926,000 straight-line rent receivable to contra-revenue in accordance with the newly adopted ASC 842.

Future minimum base rents receivable under the remaining non-cancelable terms of operating leases excluding the effects of straight-line rent receivable, amortization of lease incentives and renewal options are as follows (in thousands):

 

 

 

 

 

 

    

Annual Cash

 

 

 

Rent (1)

 

2019

 

$

101,223

 

2020

 

 

140,189

 

2021

 

 

131,128

 

2022

 

 

121,228

 

2023

 

 

124,492

 

Thereafter

 

 

729,390

 


(1)

Represents contractual annual cash rent, except for four master leases which are based on agreed upon cash rents. See below for more information.

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 memory care communities under a master lease. We currently estimate that Anthem will pay $7,500,000 of annual cash rent during 2019. This amount represents approximately 50% of the contractual amount due under the lease in 2019. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Anthem and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance.

During 2017, Preferred Care, Inc. (“Preferred Care”) and affiliated entities filed for Chapter 11 bankruptcy as a result of a multi-million-dollar judgment 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. 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 and Texas. The Preferred Care operating entities that sublease those properties did not file for bankruptcy. The court ordered deadline for affirmation or rejection of the lease has passed without action by Preferred Care, but they continue to pay rent to us in a timely manner. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Preferred Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are working with Preferred Care on options for the portfolio which may include re-leasing or selling some of the properties.

On December 4, 2018, Senior Care Centers, LLC. and affiliates and subsidiaries (“Senior Care”) filed for Chapter 11 bankruptcy as a result of lease terminations from certain landlords and on-going operational challenges. Pursuant to the U.S. Bankruptcy Code, Senior Care has an initial period of 120

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days from the petition date to assume or reject the lease. However, the Bankruptcy Code also provides that the court may extend this initial 120-day period for an additional 90 days. Accordingly, Senior Care has requested, and the court has approved an additional 90 days, which ends on July 2, 2019, to assume or reject the lease. As security under the lease, we hold a letter of credit in the amount of approximately $2,000,000, maintenance and repair escrows of approximately $2,200,000 and property tax escrows of approximately $1,800,000. Senior Care did not pay us December 2018 rent, but has paid us January to April 2019 rent, real estate property tax and maintenance deposits. We have previously requested a consensual termination of the lease and have requested Senior Care to reject our lease in bankruptcy. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Senior Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are evaluating our options to transition or sell the properties under the lease with Senior Care.

During the three months ended March 31, 2019, we placed Thrive Senior Living, LLC. (“Thrive”) on a cash basis due to short-payment of contractual rent in November 2018 and non-payment of rent in December 2018 totaling $700,000. This rent was subsequently received in 2019. Thrive has not paid January to April 2019 rent. Subsequent to March 31, 2019, we issued a notice of default to Thrive. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Thrive and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are working with Thrive and exploring our options to maximize the value of these real estate assets.

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.

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The following table summarizes components of our rental income for the three months ended March 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

Rental Income

 

 

2019

 

 

2018

 

Base cash rental income

 

$

24,314

(1)

$

31,455

 

Variable cash rental income

 

 

4,485

(2)

 

150

(2)

Straight-line rent receivable

 

 

1,238

(3)

 

3,440

 

Adjustment for collectibility

 

 

(1,926)

(4)

 

 —

 

Amortization of lease incentives

 

 

(87)

 

 

(540)

 

Total

 

$

28,024

 

$

34,505

 


(1)

Decreased due to recognition of $9,600 of cash rent received from Anthem, Preferred Care, Senior Care and Thrive as contra-expense titled Recovery of written-off straight-line rent receivable on the consolidated statements of income and comprehensive income and decreased rent from properties sold in 2018, partially offset due to increased rent from acquisitions, developments and capital improvement projects. See Note 1. General for further discussion.

 

(2)

The 2019 variable rental income includes $150 related to contingent rental income and $4,335 related to our real estate taxes which were reimbursed by our operators. Per the provisions of ASC 842, any lessor cost, paid by the lessor and reimbursed by the lessee, must be included as a lease payment. As discussed above, we adopted ASC 842 using a modified retrospective approach as of the adoption date of January 1, 2019. Accordingly, we are not required to report this revenue stream for periods prior to January 1, 2019.

 

(3)

In accordance with the newly adopted ASC 842 lease accounting guidance, we evaluated the collectibility of lease payments through maturity and determined that it was not probable that we would collect substantially all of the contractual obligations from Anthem, Thrive, Preferred Care and Senior Care leases through maturity. Decreased due to these leases are placed on cash-basis.

 

(4)

Represents write-off of straight-line rent receivable related to a terminated lease discussed above.

Some of our lease agreements provide purchase options allowing the lessees to purchase the properties they currently lease from us. The following table summarizes information about purchase options included in our lease agreements (dollar amount in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Number

 

 

 

 

 

 

 

 

 

 

of

 

of

 

 

Gross

 

 

Carrying

 

Option

State

 

Property

 

Properties

 

 

Investments

 

 

Value

 

Window

California

 

ALF/MC

 

2

 

$

38,895

 

$

37,248

 

2024-2029

Kansas

 

MC

 

2

 

 

25,692

 

 

23,727

 

2019-2021

Texas

 

MC

 

2

 

 

25,265

 

 

24,800

 

2025-2027

Virginia

 

ALF/MC

 

1

 

 

16,890

 

 

16,822

 

2026-2029

Total

 

 

 

 

 

$

106,742

 

$

102,597

 

 

Acquisitions and Developments: The following table summarizes our acquisition for the three months ended March 31, 2019 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Number

 

Number

 

 

 

 

Purchase

 

Transaction

 

Acquisition

 

of

 

of

Year

 

Type of Property

 

Price

 

Costs (1)

 

Costs

 

Properties

 

Beds/Units

2019

 

Assisted Living (2) 

 

$

16,719

 

$

171

 

$

16,890

 

 1

 

74


(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 entered into a joint venture (“JV”) to purchase an existing operational 74-unit ALF/MC community. The non-controlling partner contributed $919 of equity and we contributed $15,971 in cash. Our economic interest in the real estate JV is approximately 95%.

 

 

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During the three months ended March 31, 2019 and 2018, we invested the following in development and improvement projects (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2019

 

2018

Type of Property

 

Developments

 

Improvements

 

Developments

 

 

Improvements

 

Assisted Living Communities

 

$

4,507

 

$

256

 

$

6,803

 

$

122

 

Skilled Nursing Centers

 

 

2,450

 

 

 —

 

 

1,788

 

 

279

 

Other

 

 

 —

 

 

 3

 

 

 —

 

 

133

 

Total

 

$

6,957

 

$

259

 

$

8,591

 

$

534

 

Completed Developments. The following table summarizes our completed development during the three months ended March 31, 2019 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

Type

 

Number

 

 

 

 

 

 

 

 

of

 

of

 

of

 

 

 

 

Total

 

Type of Project

 

Properties

 

Property

 

Beds/Units

 

State

 

Investment

 

Development

 

1

 

SNF

 

143

 

Kentucky

 

$

22,451

 

Properties held-for-sale. The following table summarizes our property held-for-sale as of March 31, 2019 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Number

 

 

 

 

 

 

 

Number

 

 

of

 

of

 

 

Gross

 

 

Accumulated

 

of

State

 

Property

 

Properties

 

 

Investment

 

 

Depreciation

 

Beds/units

Texas

 

ILF

 

1

 

 

5,746

 

 

1,916

 

140

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at March 31, 2019 (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

9.7%

 

2043

 

$

186,369

 

SNF

 

75.5

%

 1

 

15

 

2,029

 

$

91.85

9.2%

 

2045

 

 

34,038

 

SNF

 

13.8

%

 1

 

 4

 

501

 

$

67.94

9.4%

 

2045

 

 

14,950

 

SNF

 

6.1

%

 1

 

 1

 

157

 

$

95.22

9.4%

 

2020

 

 

11,418

 

SNF

 

4.6

%

 1

 

 2

 

205

 

$

55.70

Total

 

 

 

$

246,775

 

 

 

100.0

%

 4

 

22

 

2,892

 

$

85.33


(1)

The majority of the mortgage loans provide for annual increases in the interest rate after a certain time period 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)

The properties securing these mortgage loans are located in one state and are operated by one operator.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

The following table summarizes our mortgage loan activity for the three months ended March 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2019

 

2018

 

Originations and funding under mortgage loans receivable

 

$

1,454

 

$

9,610

(1)

Scheduled principal payments received

 

 

(65)

 

 

(37)

 

Mortgage loan (premiums)

 

 

 —

 

 

(1)

 

Provision for loan loss reserve

 

 

(14)

 

 

(96)

 

Net increase in mortgage loans receivable

 

$

1,375

 

$

9,476

 


(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.

 

3.Investment in Unconsolidated Joint Ventures

Our investments in unconsolidated joint ventures consists of a preferred equity investment and a mezzanine loan which is accounted for as unconsolidated joint ventures in accordance with GAAP. The following table summarizes our investments 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

 

$

24,325

 

Florida

 

ALF/IL/MC

 

Mezzanine

(2)

15

%

 

15

%

 

99

 

 

2,900

(3)

 

3,190

(3)

Total

 

 

 

 

 

 

 

 

 

 

 

684

 

$

28,550

 

$

27,515

 


(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 this acquisition, development and construction (“ADC”) arrangement and determined that the characteristics are similar to jointly-owned investments or partnerships, and accordingly, this investment is accounted for as unconsolidated joint venture 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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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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

 

 

 

 

of

 

 

Capital

 

 

Income

 

 

Cash Interest

 

Year

 

Properties

 

 

Contribution

 

 

Recognized

 

 

Received

 

2019

 

ALF/MC/ILF

 

$

293

 

$

553

 

$

552

 

 

 

ALF/IL/MC

 

 

 —

 

 

128

 

 

121

 

 

 

ALF/MC

(1)

 

 —

(1)

 

404

(1)

 

432

(1)

Total 2019

 

 

 

$

293

 

$

1,085

 

$

1,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

ALF/MC/ILF

 

 

380

 

 

429

 

 

446

 

 

 

ALF/IL/MC

 

 

 —

 

 

128

 

 

97

 

 

 

ALF/MC

(1)

 

 —

(1)

 

74

(1)

 

 —

(1)

Total 2018

 

 

 

$

380

 

$

631

 

$

543

 


(1)   We had a $3,400 mezzanine loan commitment for the development of a 127-unit seniors housing community in Florida with a total preferred return of 15%. The mezzanine loan was an ADC arrangement which we determined it to have characteristics similar to a jointly-owned arrangement and recorded it as an unconsolidated joint venture. During the first quarter of 2019, the mezzanine loan was paid off.

 

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 March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

At March 31, 2019

 

At December 31, 2018

 

Mezzanine loans

$

16,700

 

$

9,868

 

Other loans

 

3,056

 

 

2,975

 

Notes receivable reserve

 

(198)

 

 

(128)

 

Total

$

19,558

 

$

12,715

 

The following tables summarizes our notes receivable activity for the three months ended March 31, 2019 and 2018 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Advances under notes receivable

$

6,953

 

$

 —

 

Principal payments received under notes receivable

 

(41)

 

 

 —

 

Notes receivable reserve

 

(69)

 

 

 —

 

Total

$

6,843

 

$

 —

 

 

 

 

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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 March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

At March 31, 2019

 

 

At December 31, 2018

Non-contingent lease incentives

 

$

2,263

 

$

14,443

The following table summarizes our lease incentive activity for the three months ended March 31, 2019 and 2018(in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2019

 

2018

 

 

 

 

Funding

 

 

Amortization

 

 

Adjustment

 

 

Funding

 

 

Amortization

 

Non-contingent lease incentives

 

$

 —

 

$

(87)

 

$

(12,093)

(1)

$

380

 

$

(421)

 

Contingent lease incentives

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(119)

 

Net increase (decrease) in lease incentives

 

$

 —

 

$

(87)

 

$

(12,093)

 

$

380

 

$

(540)

 


(1)

In accordance with the newly adopted ASC 842 lease standard adopted on January 1, 2019, we wrote-off lease incentives related to leases for which we determined it is not probable we will collect substantially all of the contractual lease obligation through maturity. See Note 1. General for further discussion.

 

 

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.

 

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 March 31, 2019, the facility provides for interest annually at LIBOR plus 115 basis points and a facility fee of 20 basis points. At March 31, 2019, we were in compliance with all covenants.

Senior Unsecured Notes. We have a $337,500,000 shelf agreement with affiliates and managed accounts of Prudential Investment Management, Inc. (“Prudential”).

 

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

The debt obligations by component as of March 31, 2019 and December 31, 2018 are as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2019

 

At December 31, 2018

 

 

 

Applicable

 

 

 

Available

 

 

 

Available

 

 

 

Interest

 

Outstanding

 

for

 

Outstanding

 

for

 

Debt Obligations

 

Rate (1)

 

Balance

 

Borrowing

 

Balance

 

Borrowing

 

Bank borrowings

 

3.83%

 

$

146,900

 

$

453,100

 

$

112,000

 

$

488,000

 

Senior unsecured notes, net of debt issue costs

 

4.49%

 

 

528,900

 

 

98,000

 

 

533,029

 

 

93,833

 

Total

 

4.35%

 

$

675,800

 

$

551,100

 

$

645,029

 

$

581,833

 


(1)

Represents weighted average of interest rate as of March 31, 2019.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Debt Obligations

 

 

Borrowings

 

 

Repayments

 

Borrowings

 

Repayments

 

Bank borrowings

 

$

36,900

 

$

(2,000)

 

$

24,000

 

$

 —

 

Senior unsecured notes

 

 

 —

 

 

(4,167)

 

 

 —

 

 

(4,166)

 

Total

 

$

36,900

 

$

(6,167)

 

$

24,000

 

$

(4,166)

 

 

 

 

7.Equity

Common Stock. We have separate equity distribution agreements (collectively, “Equity Distribution Agreement”) to offer and sell, from time to time, up to $200,000,000 in aggregate offering price of shares of our common stock. As of March 31, 2019, no shares had been issued under the Equity Distribution Agreement. Accordingly, at March 31, 2019, we had $200,000,000 available under the Equity Distribution Agreement.

During the three months ended March 31, 2019 and 2018, we acquired 44,543 shares and 28,256 shares, respectively, of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.

Non-controlling Interests. We have 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. As 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. 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

As of March 31, 2019, we have the following consolidated VIEs (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

Investment

 

 

 

Property

 

 

 

 

Consolidated

 

 

Non-Controlling

 

Year

 

Purpose

 

Type

 

State

 

 

Assets

 

 

Interests

 

2019

 

Owned real estate

 

ALF/MC

 

VA

 

$

16,890

 

$

919

 

2018

 

Owned real estate

 

ILF

 

OR

 

 

14,400

(1)

 

2,857

(1)

2018

 

Owned real estate and development

 

UDP

 

OR

 

 

6,193

(1)

 

1,081

(1)

2017

 

Owned real estate and development

 

UDP

 

WI

 

 

19,759

(2)

 

2,272

(2)

2017

 

Owned real estate

 

ALF/MC

 

SC

 

 

11,451

 

 

1,263

 

Total

 

 

 

 

 

 

 

$

68,693

 

$

8,392

 


(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 Registration. 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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

 

 

 

Declared

 

Paid

 

Declared

 

Paid

 

 

Common Stock

 

$

22,931

(1)

$

22,931

(1)

$

22,578

(1)

$

22,578

(1)

 


(1)

Represents $0.19 per share per month for the three months ended March 31, 2019 and 2018.

In April 2019, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of April, May and June 2019, payable on April 30, May 31, and June 28, 2019, respectively, to stockholders of record on April 22, May 23, and June 20, 2019, 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)

 

At March 31, 2019, we had 20,000 stock options outstanding and exercisable. During the three months ended March 31, 2019 and 2018, no stock options were granted. The stock options exercised during the three months ended March 31, 2019 and 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Options

 

Exercise

 

Option

 

Market

 

 

 

Exercised

 

Price

 

Value

 

Value (1)

 

2019

 

 —

 

$

n.a

 

$

 —

 

$

 —

 

2018

 

5,000

 

$

24.65

 

$

123,000

 

$

205,000

 


(1)

As of exercise date.

The following table summarizes our restricted stock and performance-based stock units activity for the three months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Outstanding, January 1

 

 

325,750

 

 

244,181

 

Granted

 

 

139,112

 

 

147,990

 

Vested

 

 

(117,997)

(1)

 

(61,733)

 

Outstanding, March 31

 

 

346,865

 

 

330,438

 


(1)

Includes 48,225 performance-based stock units.

During the three months ended March 31, 2019 and 2018, 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

 

2019

 

78,276

 

$

46.54

 

ratably over 3 years

 

 

 

60,836

 

$

46.54

 

TSR targets (1)

 

 

 

139,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

81,819

 

$

38.18

 

ratably over 3 years

 

 

 

66,171

 

$

38.18

 

TSR targets (1)

 

 

 

147,990

 

 

 

 

 

 


(1)

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

Compensation expense recognized related to the vesting of restricted common stock and performance-based stock units for the three months ended March 31, 2019 and 2018 were $1,689,000 and $1,376,000, respectively. At March 31, 2019, 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 (in thousands):

 

 

 

 

 

 

 

 

 

Remaining 

 

 

Compensation

Vesting Date

 

Expense

2019

 

$

4,655

2020

 

 

4,461

2021

 

 

2,503

2022

 

 

189

Total

 

$

11,808

 

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

8.Commitments and Contingencies

At March 31, 2019, we had commitments as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

Investment

 

2019

 

Commitment

 

Remaining

 

 

Commitment

 

Funding

 

Funded

 

Commitment

Real estate properties (Note 2. Real Estate Investments)

 

$

77,882

(1)

$

7,216

 

$

53,003

 

$

24,879

Accrued incentives and earn-out liabilities

 

 

9,000

 

 

 —

 

 

 —

 

 

9,000

Mortgage loans (Note 2. Real Estate Investments)

 

 

64,200

(2)

 

1,454

 

 

20,045

 

 

44,155

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

 

 

25,650

 

 

293

 

 

23,976

 

 

1,674

Notes receivable (Note 4. Notes Receivable)

 

 

300

 

 

14

 

 

39

 

 

261

Total

 

$

177,032

 

$

8,977

 

$

97,063

 

$

79,969


(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)

Represents $35,700 of commitments to expand and renovate the seniors housing and health care properties securing the mortgage loans and $28,500 represents contingent funding upon the borrower achieving certain coverage ratios.

 

Also, some of our lease agreements provide purchase options allowing the lessee to purchase the properties they currently lease from us. See Note 2. Real Estate Investments for a table summarizing information about our purchase options.

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.

9.Major Operators

We have three 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 March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Number of

 

Percentage of

 

 

 

 

 

 

 

SNF

 

ALF

 

Total

 

 

Total

 

 

Operator

 

SNF

 

ALF

 

Beds

 

Units

 

Revenue (1)

 

 

Assets

 

 

Prestige Healthcare

 

24

 

 —

 

3,010

 

93

 

17.9

%

 

17.0

%

 

Senior Lifestyle Corporation

 

 —

 

23

 

 —

 

1,457

 

11.6

%

 

10.5

%

 

Brookdale Senior Living 

 

 —

 

37

 

 —

 

1,702

 

9.4

%

 

4.6

%

 

Total

 

24

 

60

 

3,010

 

3,252

 

38.9

%

 

32.1

%

 


(1)

Includes recovery of previously written-off straight-line rent receivable, rental income from owned properties and interest income from mortgage loans as of March 31, 2019 and excludes rental income due to lessee reimbursement of our real estate taxes and adjustment for collectibility.

Our financial position and ability to make distributions may be adversely affected if Prestige Healthcare, Senior Lifestyle Corporation, Brookdale Senior Living, or any of our lessees and borrowers face financial difficulties, including any bankruptcies, inability to emerge from bankruptcy, insolvency or

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

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):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

 

2019

 

2018

 

Net income

 

$

20,427

 

$

20,359

 

Less income allocated to non-controlling interests

 

 

(81)

 

 

 —

 

Less income allocated to participating securities:

 

 

 

 

 

 

 

Non-forfeitable dividends on participating securities

 

 

(92)

 

 

(88)

 

Net income available to common stockholders

 

 

20,254

 

 

20,271

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Participating securities

 

 

92

 

 

 —

(1)

Net income for diluted net income per share

 

$

20,346

 

$

20,271

 

 

 

 

 

 

 

 

 

Shares for basic net income per share

 

 

39,532

 

 

39,451

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options

 

 

 4

 

 

 3

 

Performance-based stock units

 

 

181

 

 

 —

(2)

Participating securities

 

 

157

 

 

 —

(1)

Total effect of dilutive securities

 

 

342

 

 

 3

 

Shares for diluted net income per share

 

 

39,874

 

 

39,454

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.51

 

$

0.51

 

Diluted net income per share

 

$

0.51

 

$

0.51

 


(1)

For the three months ended March 31, 2018, the participating securities have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.

 

(2)

At March 31, 2018, no performance-based stock units would be earned based on TSR targets.

 

 

 

 

 

 

 

 

 

 

 

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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 March 31, 2019 and December 31, 2018 assuming election of fair value for our financial assets and financial liabilities were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2019

 

At December 31, 2018

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair 

 

 

 

Value

 

Value

 

Value

 

Value

 

Mortgage loans receivable

 

$

244,314

 

$

297,355

(1)

$

242,939

 

$

295,492

(1)

Bank borrowings

 

 

146,900

 

 

146,900

(2)

 

112,000

 

 

112,000

(2)

Senior unsecured notes, net of debt issue costs

 

 

528,900

 

 

520,343

(3)

 

533,029

 

 

508,613

(3)

(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 both March 31, 2019 and December 31, 2018 was 9.0%.

 

(2)

Our bank borrowings bear interest at a variable interest rate. The estimated fair value of our bank borrowings approximated their carrying values at March 31, 2019 and December 31, 2018 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 March 31, 2019, the discount rate used to value our future cash outflow of our senior unsecured notes was 4.60% for those maturing before year 2026 and 4.80% for those maturing at or beyond year 2026. At December 31, 2018, the discount rate used to value our future cash outflow of our senior unsecured notes was 5.15% for those maturing before year 2026 and 5.40% for those maturing at or beyond year 2026. 

 

 

 

12.Subsequent Events

Subsequent to March 31, 2019 the following events occurred:

Equity: We declared a monthly cash dividend of $0.19 per share on our common stock for the months of April, May and June 2019, payable on April 30, May 31, and June 28, 2019, respectively to stockholders of record on April 22, May 23, and June 20, 2019, respectively.

 

24


 

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,” “could,” “would,” “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; our dependence on operators for revenue and cash flow; the bankruptcy, insolvency or financial deterioration of our lessees; potential limitations on our remedies when mortgage loans default; 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; 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, 2018 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 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.

25


 

The following graph summarizes our gross investments as of March 31, 2019:

Picture 2

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. ALF, ILF, MC, and combinations thereof are included in the ALF communities classification. As of March 31, 2019, seniors housing and long-term health care properties comprised approximately 99.3% 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, interest earned on outstanding loans receivable an income from investments in unconsolidated joint ventures. Our investments in owned properties and mortgage loans represent our primary 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 property type 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 are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates.

26


 

Real Estate Portfolio Overview

The following tables summarize our real estate investment portfolio by owned properties and mortgage loans and by type, as of March 31, 2019 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

March 31, 2019

 

Percentage

 

 

Number

 

Number of 

 

 

Gross

 

of 

 

Rental

 

Interest

 

of

 

 

of

 

SNF

 

ALF

Owned Properties

 

Investments

 

Investments

 

Income (1)

 

Income

 

Revenues

 

 

Properties (2)

 

Beds (3)

 

Units (3)

Assisted Living

 

$

821,167

 

48.5

%

$

17,356

 

$

 —

 

40.8

%

 

104

 

 —

 

5,959

Skilled Nursing

 

 

587,410

 

34.7

%

 

17,624

 

 

 —

 

41.4

%

 

72

 

8,893

 

261

Under Development (4)

 

 

25,952

 

1.5

%

 

 —

 

 

 —

 

 —

%

 

 —

 

 —

 

 —

Other (5)

 

 

11,067

 

0.7

%

 

235

 

 

 —

 

0.6

%

 

1

 

118

 

 —

Total Owned Properties

 

 

1,445,596

 

85.4

%

 

35,215

 

 

 —

 

82.8

%

 

177

 

9,011

 

6,220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled Nursing

 

 

246,775

 

14.6

%

 

 —

 

 

7,311

 

17.2

%

 

22

 

2,892

 

 —

Total Mortgage Loans

 

 

246,775

 

14.6

%

 

 —

 

 

7,311

 

17.2

%

 

22

 

2,892

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Portfolio

 

$

1,692,371

 

100.0

%

$

35,215

 

$

7,311

 

100.0

%

 

199

 

11,903

 

6,220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

March 31, 2019

 

Percentage

 

 

Number

 

Number of

 

 

Gross

 

of

 

Rental

 

Interest

 

of

 

 

of

 

SNF

 

ALF

Summary of Properties by Type

 

Investments

 

Investments

 

Income (1)

 

Income

 

Revenues

 

 

Properties (2)

 

Beds (3)

 

Units (3)

Skilled Nursing

 

$

834,185

 

49.3

%

$

17,624

 

$

7,311

 

58.6

%

 

94

 

11,785

 

261

Assisted Living

 

 

821,167

 

48.5

%

 

17,356

 

 

 —

 

40.8

%

 

104

 

 

5,959

Under Development (4)

 

 

25,952

 

1.5

%

 

 —

 

 

 —

 

 —

%

 

 

 

Other (5)

 

 

11,067

 

0.7

%

 

235

 

 

 —

 

0.6

%

 

 1

 

118

 

Total Portfolio

 

$

1,692,371

 

100.0

%

$

35,215

 

$

7,311

 

100.0

%

 

199

 

11,903

 

6,220


(1)

Includes $9,600 recovery of written-off straight-line rent receivable and excludes variable rental income of $4,335 related to our real estate taxes which were reimbursed by our operators and adjustment for collectibility.

 

(2)

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

 

(3)

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

 

(4)

Represents two development projects consisting of a 78-unit ALF/MC located in Oregon and a 110-unit ILF/ALF/MC located in Wisconsin.

 

(5)

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

 

As of March 31, 2019, we had $1.4 billion in carrying value of net real estate investments, consisting of $1.1 billion or 82.1% invested in owned and leased properties and $0.2 billion or 17.9% invested in mortgage loans secured by first mortgages. Our investment in mortgage loans contain interest rates between 9.2% and 9.7%. Approximately 95.4% of those mortgage loans mature in 2043 and beyond.

For the three months ended March 31, 2019, rental income and interest income from mortgage loans represented 78.2% and 20.4%, 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.  This revenue is not recognized until the appropriate contingencies have been resolved.

During the three months ended March 31, 2019, there were no lease renewals. During the three months ended March 31, 2019, we transitioned two senior housing communities to a new operator. This transition had no economic impact on our rental income. As a result of this transition, we wrote-off $1.9 million of straight-line rent receivable as a contra-revenue adjustment, in accordance with the newly adopted Accounting Standard Codification (“ASC”). For the three months ended March 31, 2019, we recorded $1.2 million in straight-line rental income and amortization of lease incentive cost of $0.1 million. During the three months ended March 31, 2019, we received $28.8 million of cash rental income,

27


 

which includes $4.3 million of operator reimbursements for our real estate taxes and excludes $9.6 million of cash rent received and recognized as a contra-expense on the consolidated statements of income and comprehensive income titled Recovery of written-off straight-line rent receivable. See Note 1. General for further discussion. At March 31, 2019, the straight-line rent receivable balance, net of reserves, on the balance sheet was $42.5 million.

Update on Certain Operators

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 memory care communities under a master lease. We currently estimate that Anthem will pay $7.5 million of annual cash rent during 2019. This amount represents approximately 50% of the contractual amount due under the lease in 2019. In accordance with the newly adopted ASC Topic 842, Leases (“ASC 842”) lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Anthem and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance.

During 2017, Preferred Care, Inc. (“Preferred Care”) and affiliated entities filed for Chapter 11 bankruptcy as a result of a multi-million-dollar judgment 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. 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 and Texas. The Preferred Care operating entities that sublease those properties did not file for bankruptcy. The court ordered deadline for affirmation or rejection of the lease has passed without action by Preferred Care, but they continue to pay rent to us in a timely manner. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Preferred Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. Furthermore, we placed Preferred Care on a cash basis on January 1, 2019. We are working with Preferred Care on options for the portfolio which may include re-leasing or selling some of the properties.

On December 4, 2018, Senior Care Centers, LLC. and affiliates and subsidiaries (“Senior Care”) filed for Chapter 11 bankruptcy as a result of lease terminations from certain landlords and on-going operational challenges. Pursuant to the U.S. Bankruptcy Code, Senior Care has an initial period of 120 days from the petition date to assume or reject the lease. However, the Bankruptcy Code also provides that the court may extend this initial 120-day period for an additional 90 days. Accordingly, Senior Care has requested, and the court has approved an additional 90 days, which ends on July 2, 2019, to assume or reject the lease. In December 2018 we placed Senior Care on a cash basis. As security under the lease, we hold a letter of credit in the amount of approximately $2.0 million, maintenance and repair escrows of approximately $2.2 million and property tax escrows of approximately $1.8 million. Senior Care did not pay us December 2018 rent, but has paid us January to April 2019 rent, real estate property tax and maintenance deposits. We have previously requested a consensual termination of the lease and have requested Senior Care to reject our lease in bankruptcy. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Senior Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are evaluating our options to transition or sell the properties under the lease with Senior Care.

28


 

During the three months ended March 31, 2019, we placed Thrive Senior Living, LLC. (“Thrive”) on a cash basis due to short-payment of contractual rent in November 2018 and non-payment of rent in December 2018 totaling $0.7 million. This rent was subsequently received in 2019. Thrive has not paid January to April 2019 rent. Subsequent to March 31, 2019, we issued a notice of default to Thrive. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Thrive and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are working with Thrive and exploring our options to maximize the value of these real estate assets.

2019 Activities Overview

The following tables summarize our transactions during the three months ended March 31, 2019 (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

 

Virginia

 

1

(1)

ALF/MC

 

74

 

7.4

%

 

$

16,719

 

$

171

 

$

16,890

 


(1)

We entered into a joint venture (“JV”) to purchase an existing operational 74-unit ALF/MC community. The non-controlling partner contributed $919 of equity and we contributed $15,971 in cash. Our economic interest in the real estate JV is approximately 95%. 

Investment in Development and Improvement projects

 

 

 

 

 

 

 

 

 

Developments

 

Improvements

Assisted Living Communities

 

$

4,507

 

$

256

Skilled Nursing Centers

 

 

2,450

 

 

 —

Other

 

 

 —

 

 

 3

Total

 

$

6,957

 

$

259

Completed Developments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

Type

 

Number

 

 

 

 

 

 

 

 

of

 

of

 

of

 

 

 

 

Total

 

Type of Project

 

Properties

 

Property

 

Beds/Units

 

State

 

Investment

 

Development

 

1

 

SNF

 

143

 

Kentucky

 

$

22,451

 

Investment in Mortgage Loans

 

 

 

 

 

Originations and funding under mortgage loans receivable

 

$

1,454

 

Scheduled principal payments received

 

 

(65)

 

Provision for loan loss reserve

 

 

(14)

 

Net increase in mortgage loans receivable

 

$

1,375

 

29


 

 

Investment in Unconsolidated Joint Ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Type

 

Total

 

 

Currently

 

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Received

 

 

 

of

 

of

 

Preferred

 

 

Paid in

 

 

of

 

 

Investment

 

 

Carrying

 

 

Capital

 

 

Recognized

 

 

Cash

 

State

 

Properties

 

Investment

 

Return

 

 

Cash

 

 

Beds/ Units

 

 

Commitment

 

 

Value

 

 

Contribution

 

 

Income

 

 

Interest

 

Arizona

 

ALF/MC/ILF

 

Preferred Equity

 

15

%

 

7

%

 

585

 

$

25,650

 

$

24,325

 

$

293

 

$

553

 

$

552

 

Florida

 

ALF/IL/MC

 

Mezzanine

 

15

%

 

15

%

 

99

 

 

2,900

(1)

 

3,190

(1)

 

 —

 

 

128

 

 

121

 

Florida (2)

 

UDP/ALF/MC

 

Mezzanine

 

n.a

 

 

n.a

%

 

n.a

 

 

 —

 

 

 —

 

 

 —

 

 

404

(2)

 

432

(2)

 

 

 

 

 

 

 

 

 

 

 

 

684

 

$

28,550

 

$

27,515

 

$

293

 

$

1,085

 

$

1,105

 


(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 had a $3,400 mezzanine loan commitment for the development of a 127-unit seniors housing community in Florida with a total preferred return of 15%. During the first quarter of 2019, the mezzanine loan was paid off.

Notes Receivable

 

 

 

 

Advances under notes receivable

$

6,953

 

Principal payments received under notes receivable

 

(41)

 

Notes receivable reserve

 

(69)

 

Total

$

6,843

 

 

30


 

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, 2018, CMS released a final rule updating skilled nursing facility rates and policies for fiscal year 2019. The final rule adopts a 2.4% payment increase, as mandated by the Bipartisan Budget Act of 2018. CMS projects this update will increase overall payments to skilled nursing facilities by $820 million in fiscal year 2019 as compared to fiscal year 2018 levels. Furthermore, CMS finalized a plan to replace 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,” will base Medicare payment on resident needs rather than the amount of therapy a resident receives. CMS also confirmed that the SNF Value-Based Purchasing (“VBP”) Program would go into effect beginning October 1, 2018, as required by statute. Under the VBP Program, CMS reduces Medicare payments to skilled nursing facilities by 2% and returns 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 April 19, 2019, CMS released a proposed rule to update skilled nursing facility rates and policies for fiscal year 2020, which starts October 1, 2019. CMS estimates that payments to skilled nursing facilities would rise by $887 million, or 2.5%, compared with fiscal year 2019 levels. CMS proposes to implement the Patient-Driven Payment Model in fiscal year 2020, as previously adopted, but CMS proposes to modify the definition of group therapy. CMS also proposes certain policy changes to the VBP and quality reporting program requirements that would affect Medicare payments to skilled nursing facilities.  CMS is expected to release the final rule by August 1, 2019.

 

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.

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

31


 

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, real estate investment mix, operator mix and geographic mix. Concentration risk is valuable to understand what portion of our real estate 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. The National Association of Real Estate Investment Trusts (“NAREIT”), an organization representing U.S. REITs and publicly traded real estate companies, classifies a company with 50% or more of assets directly or indirectly in the equity ownership of real estate as an equity REIT. 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 real estate investment that relate to our top five states.

32


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3/31/19

 

12/31/18

 

9/30/18

 

6/30/18

 

3/31/18

 

Asset mix:

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Real property

 

$

1,445,596

 

$

1,421,456

 

$

1,414,267

 

$

1,401,303

 

$

1,401,506

 

Loans receivable

 

 

246,775

 

 

245,386

 

 

245,053

 

 

236,178

 

 

235,734

 

Real estate investment mix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing centers

 

$

834,185

 

$

810,570

 

$

814,194

 

$

814,208

 

$

813,542

 

Assisted living communities

 

 

821,167

 

 

804,021

 

 

802,484

 

 

787,373

 

 

795,036

 

Under development

 

 

25,952

 

 

41,186

 

 

31,602

 

 

25,077

 

 

17,922

 

Other (1)

 

 

11,067

 

 

11,065

 

 

11,040

 

 

10,823

 

 

10,740

 

Operator mix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prestige Healthcare (1)

 

$

259,907

 

$

258,519

 

$

258,186

 

$

249,311

 

$

247,769

 

Senior Lifestyle Corporation

 

 

190,368

 

 

190,368

 

 

189,945

 

 

189,945

 

 

189,226

 

Senior Care Centers

 

 

138,109

 

 

138,109

 

 

138,109

 

 

138,109

 

 

138,109

 

Anthem Memory Care

 

 

136,397

 

 

136,397

 

 

135,946

 

 

135,342

 

 

131,527

 

Brookdale Senior Living

 

 

126,991

 

 

126,991

 

 

126,991

 

 

126,991

 

 

126,991

 

Remaining operators

 

 

840,599

 

 

816,458

 

 

810,143

 

 

797,783

 

 

803,618

 

Geographic mix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

$

292,091

 

$

292,317

 

$

292,317

 

$

292,317

 

$

267,051

 

Michigan

 

 

247,718

 

 

246,329

 

 

245,996

 

 

237,121

 

 

235,579

 

Wisconsin

 

 

146,750

 

 

143,657

 

 

137,056

 

 

133,794

 

 

130,941

 

Colorado

 

 

114,923

 

 

114,923

 

 

114,923

 

 

114,923

 

 

114,923

 

California

 

 

102,254

 

 

102,254

 

 

102,254

 

 

102,254

 

 

102,254

 

Remaining states

 

 

788,635

 

 

767,362

 

 

766,774

 

 

757,072

 

 

786,492

 


(1)

We have three parcels of land located adjacent to properties securing the Prestige Healthcare mortgage loan and are managed by Prestige.

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 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

33


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

3/31/19

 

 

12/31/18

 

 

9/30/18

 

 

6/30/18

 

 

3/31/18

 

Debt to gross asset value

 

37.1

%

(1)

35.2

%

(4)

36.4

%

 

36.1

%

(7)

38.3

%

Debt to market capitalization ratio

 

27.1

%

(2)

28.1

%

(5)

27.7

%

 

27.8

%

(8)

31.4

%

Interest coverage ratio (9)

 

4.9

x

(3)

5.2

x

(6)

4.8

x

 

4.7

x

 

4.7

x

Fixed charge coverage ratio (9)

 

4.9

x

(3)

5.2

x

(6)

4.8

x

 

4.7

x

 

4.7

x


(1)

Increased due to increase in outstanding debt and decrease in gross asset value. The decrease in gross asset value was primarily due to adoption of ASC 842 during the three months ended March 31, 2019. ASC 842 requires a lease-by-lease collectibility analysis of receivables and related balances. Based on our assessment, we determined that it was not probable that we would collect substantially all of the contractual lease obligations for certain leases through maturity. Accordingly, we wrote-off the balance of straight-line rent receivable and lease incentives related to these leases as a cumulative adjustment to equity, as required by the transition guidance.

 

(2)

Decreased due to increase in market capitalization.

 

(3)

Decreased due to decrease in other income compared to the fourth quarter of 2018. See (6) below for explanation.

 

(4)

Decreased due to decrease in outstanding debt partially offset by decrease in gross asset value.

 

(5)

Increased due to decrease in market capitalization, partially offset by decrease in outstanding debt.

 

(6)

Increased due to decrease in interest expense and increase in other income from the net write-off of Senior Lifestyle contingent lease incentive and the related earn-out liability.

 

(7)

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

properties and loan payoffs.

 

(8)

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

 

(9)

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

3/31/19

 

12/31/18

 

9/30/18

 

6/30/18

 

3/31/18

 

Net income

 

$

20,427

 

$

30,844

 

$

34,937

 

$

68,936

 

$

20,359

 

Less: Gain loss on sale

 

 

 —

 

 

(7,984)

 

 

(14,353)

 

 

(48,345)

 

 

 —

 

Add: Interest expense

 

 

7,467

 

 

7,215

 

 

7,497

 

 

7,655

 

 

7,829

 

Add: Depreciation and amortization

 

 

9,607

 

 

9,396

 

 

9,447

 

 

9,268

 

 

9,444

 

Total EBITDAre

 

$

37,501

 

$

39,471

 

$

37,528

 

$

37,514

 

$

37,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

7,467

 

$

7,215

 

$

7,497

 

$

7,655

 

$

7,829

 

Add: Capitalized interest

 

 

260

 

 

398

 

 

298

 

 

293

 

 

259

 

Interest incurred

 

$

7,727

 

$

7,613

 

$

7,795

 

$

7,948

 

$

8,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

 

4.9

x

 

5.2

x

 

4.8

x

 

4.7

x

 

4.7

x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest incurred

 

$

7,727

 

$

7,613

 

$

7,795

 

$

7,948

 

$

8,088

 

Total fixed charges

 

$

7,727

 

$

7,613

 

$

7,795

 

$

7,948

 

$

8,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed charge coverage ratio

 

 

4.9

x

 

5.2

x

 

4.8

x

 

4.7

x

 

4.7

x

 

34


 

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.

35


 

Operating Results (unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

 

 

 

 

2019

 

2018

 

Difference

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

28,024

 

$

34,505

 

$

(6,481)

(1) (2)

Interest income from mortgage loans

 

 

7,311

 

 

6,816

 

 

495

(3)

Interest and other income

 

 

521

 

 

489

 

 

32

 

Total revenues

 

 

35,856

 

 

41,810

 

 

(5,954)

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Recovery of written-off straight-line rent receivable

 

 

(9,600)

 

 

 —

 

 

9,600

(1)

Interest expense

 

 

7,467

 

 

7,829

 

 

362

(4)

Depreciation and amortization

 

 

9,607

 

 

9,444

 

 

(163)

 

Provision for doubtful accounts

 

 

83

 

 

 8

 

 

(75)

 

Transaction costs

 

 

 —

 

 

 4

 

 

 4

 

Property tax expense

 

 

4,386

 

 

 —

 

 

(4,386)

(2)

General and administrative expenses

 

 

4,571

 

 

4,797

 

 

226

(5)

Total expenses

 

 

16,514

 

 

22,082

 

 

5,568

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

19,342

 

 

19,728

 

 

(386)

 

Income from unconsolidated joint ventures

 

 

1,085

 

 

631

 

 

454

(6)

Net income

 

 

20,427

 

 

20,359

 

 

68

 

Income allocated to non-controlling interests

 

 

(81)

 

 

 —

 

 

(81)

 

Net income attributable to LTC Properties, Inc.

 

 

20,346

 

 

20,359

 

 

(13)

 

Income allocated to participating securities

 

 

(92)

 

 

(88)

 

 

(4)

 

Net income available to common stockholders

 

$

20,254

 

$

20,271

 

$

(17)

 


(1)

Decreased due to recognition of $9,600 of cash rent received from Anthem, Preferred Care, Senior Care and Thrive as contra- expense, in accordance with the newly adopted ASC 842 and decreased rent from properties sold in 2018, partially offset by (2) below and increased rent from acquisitions, developments and capital improvement projects. 

 

(2)

Increased due to recording $4,335 real estate taxes that are reimbursed by our operators as rental income with a corresponding property tax expense. We adopted ASC 842 using a modified retrospective approach as of the adoption date of January 1, 2019. Accordingly, we are not required to report the expense and revenue stream for periods prior to January 1, 2019.

 

(3)

Increased primarily due to mortgage originations and capital improvement funding.

 

(4)

Decreased due to a decrease in line of credit interest rate and lower debt outstanding under our senior unsecured notes.

 

(5)

Decreased primarily due to lower accrual of incentive compensation in 2019.

 

(6)

Increased primarily due to the additional interest related to a mezzanine loan which was paid off during the three months ended March 31, 2019.

 

 

 

36


 

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 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

 

 

 

March 31, 

 

 

 

2019

 

2018

 

GAAP net income available to common stockholders

 

$

20,254

 

$

20,271

 

Add: Depreciation and amortization

 

 

9,607

 

 

9,444

 

NAREIT FFO attributable to common stockholders

 

$

29,861

 

$

29,715

 

NAREIT FFO attributable to common stockholders per share:

 

 

 

 

 

 

 

Basic

 

$

0.76

 

$

0.75

 

Diluted

 

$

0.75

(1)  

$

0.75

(1)  

Weighted average shares used to calculate NAREIT FFO per share:

 

 

 

 

 

 

 

Basic

 

 

39,532

 

 

39,451

 

Diluted

 

 

39,874

(2)

 

39,603

(3)


(1)

Includes the effect of the participating securities.

 

(2)

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

 

(3)

Includes the effect of stock option equivalents and participating securities.

Liquidity and Capital Resources

Sources and Uses of Cash

As of March 31, 2019, we had a total of $6.7 million of cash and cash equivalents, $453.1 million available under our unsecured revolving line of credit, $98.0 million available under our senior unsecured note shelf agreement and the potential ability to access the capital markets through the issuance of $200.0 million of common stock under our Equity Distribution Agreement. 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.

37


 

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 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 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

Change

 

Cash provided by (used in):

 

2019

 

2018

 

 

$

 

Operating activities

 

$

26,787

 

$

21,593

 

$

5,194

 

Investing activities

 

 

(28,416)

 

 

(19,337)

 

 

(9,079)

 

Financing activities

 

 

5,688

 

 

(3,685)

 

 

9,373

 

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

 

 

4,059

 

 

(1,429)

 

 

5,488

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

4,764

 

 

5,213

 

 

(449)

 

Cash, cash equivalents and restricted cash, end of period

 

$

8,823

 

$

3,784

 

$

5,039

 

 

Debt Obligations

Bank Borrowings. We have an Unsecured Credit Agreement that provides for a revolving line of credit up to $600.0 million in aggregate commitment of the lenders and the opportunity to increase the

38


 

commitment size of the credit agreement up to a total of $1.0 billion. The Unsecured Credit Agreement matures on June 27, 2022 and provides for a one-year extension option at our discretion, subject to customary conditions. Based on our leverage at March 31, 2019, the facility provides for interest annually at LIBOR plus 115 basis points and a facility fee of 20 basis points. At March 31, 2019, 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 $98.0 million available for borrowing.

The debt obligations by component as of March 31, 2019 are as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

Applicable

 

 

 

 

Available

 

 

Interest

 

Outstanding

 

for

Debt Obligations

 

Rate (1)

 

Balance

 

Borrowing

Bank borrowings

 

3.83%

 

$

146,900

 

$

453,100

Senior unsecured notes, net of debt issue costs

 

4.49%

 

 

528,900

 

 

98,000

Total

 

4.35%

 

$

675,800

 

$

551,100


(1)

Represents weighted average of interest rate as of March 31, 2019.

 

Our debt borrowings and repayments during the three months ended March 31, 2019 are as follows (in thousands):

 

 

 

 

 

 

 

Debt Obligations

 

 

Borrowings

 

 

Repayments

Bank borrowings

 

$

36,900

 

$

(2,000)

Senior unsecured notes

 

 

 —

 

 

(4,167)

Total

 

$

36,900

 

$

(6,167)

Equity

At March 31, 2019, we had 39,738,695 shares of common stock outstanding, equity on our balance sheet totaled $788.2 million and our equity securities had a market value of $1.8 billion. During the three months ended March 31, 2019, we declared and paid $22.9 million of cash dividends.

Subsequent to March 31, 2019, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of April, May and June 2019, payable on April 30, May 31, and June 28, 2019, respectively, to stockholders of record on April 22, May 23, and June 20, 2019, respectively.

At-The-Market Program.  On March 1, 2019, we entered into new separate equity distribution agreements (collectively, “Equity Distribution Agreement”) with four sales agents, replacing prior equity distribution agreements dated August 1, 2016.  Under the terms of the new Equity Distribution Agreement, we may offer and sell, from time to time, up to $200.0 in aggregate offering price of shares of our common stock. As of March 31, 2019, no shares had been issued under the Equity Distribution Agreement. Accordingly, at March 31, 2019, we had $200.0 available under the Equity Distribution Agreement.

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

39


 

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 three months ended March 31, 2019, we granted restricted stock and performance-based stock units under the 2015 Plan as follows:

 

 

 

 

 

 

 

No. of

 

Price per

 

 

 

Shares

 

Share

 

Vesting Period

 

78,276

 

$

46.54

 

ratably over 3 years

 

60,836

 

$

46.54

 

TSR targets (1)

 

139,112

 

 

 

 

 

 


(1)

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

Critical Accounting Policies

Our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q are prepared in conformity with U.S. generally accepted accounting principles for interim financial information set forth in the Accounting Standards Codification as published by the Financial Accounting Standards Board, which require us to make estimates and assumptions regarding future events that affect the amounts reported in our financial statements and accompanying footnotes. We base these estimates on our experience and assumptions regarding future events we believe to be reasonable under the circumstances. Actual results could differ from those estimates and such differences may be material to the consolidated financial statements. We have described our most critical accounting policies in our 2018 Annual Report on Form 10-K for the year ended December 31, 2018.

There have been no changes to our critical accounting policies or estimates since December 31, 2018, with exception of the adoption of ASC Topic 842, Leases. Please refer to Note 1. General of these unaudited consolidated financial statements under Part 1, Item 1 of this Quarterly Report on Form 10-Q for information regarding recently adopted standards.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in our market risk during the three months ended March 31, 2019. For additional information, refer to Item 7A as presented in our Annual Report on Form 10-K for the year ended December 31, 2018.

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.

40


 

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, 2018.

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

During the three months ended March 31, 2019, we did not make any unregistered sales of equity securities.

During the three months ended March 31, 2019, 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 March 31, 2019 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

 

January 1- January 31, 2019

 

722

 

$

43.25

 

 —

 

 —

 

February 1 - February 28, 2019

 

20,345

 

$

46.70

 

 —

 

 —

 

March 1 -March 31, 2019

 

23,476

 

$

44.42

 

 —

 

 —

 

Total

 

44,543

 

 

 

 

 —

 

 —

 

 

 

 

 

 

41


 

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)

 

 

10.1

Equity Distribution Agreement, dated March 1, 2019, by and between LTC Properties, Inc.

and JMP Securities LLC. (incorporated by reference to Exhibit 1.1 to LTC Properties Inc.’s

Current Report on Form 8-K filed March 1, 2019)

 

 

10.2

Equity Distribution Agreement, dated March 1, 2019, by and between LTC Properties, Inc.

and Credit Agricole Securities (USA) Inc. (incorporated by reference to Exhibit 1.2 to LTC Properties Inc.’s Current Report on Form 8-K filed March 1, 2019)

 

 

10.3

Equity Distribution Agreement, dated March 1, 2019, by and between LTC Properties, Inc.

and KeyBanc Capital Markets Inc. (incorporated by reference to Exhibit 1.3 to LTC Properties Inc.’s Current Report on Form 8-K filed March 1, 2019)

 

 

10.4

Equity Distribution Agreement, dated March 1, 2019, by and between LTC Properties, Inc.

and Mizuho Securities USA Inc. (incorporated by reference to Exhibit 1.4 to LTC Properties Inc.’s Current Report on Form 8-K filed March 1, 2019)

 

 

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 March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at March 31, 2019 and December 31, 2018; (ii) Consolidated Statements of Income for the three months ended March 31, 2019 and 2018; (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018; and (iv) Notes to Consolidated Financial Statements

 

42


 

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:  May 9, 2019

             By:

/s/ Pamela Kessler

 

 

Pamela Kessler

 

 

Executive Vice President, Chief Financial
Officer and Corporate Secretary

 

 

(Principal Financial and Accounting Officer)

 

 

 

43