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LTC Properties (LTC)

Filed: 29 Oct 20, 4:42pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

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)

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

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 þ 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 þ 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 þ

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 þ

The number of shares of common stock outstanding on October 22, 2020 was 39,242,225.

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share)

    

    

 

September 30, 2020

December 31, 2019

(unaudited)

(audited)

ASSETS

Investments:

Land

$

127,774

$

126,703

Buildings and improvements

 

1,320,990

 

1,295,899

Accumulated depreciation and amortization

 

(339,833)

 

(312,642)

Operating real estate property, net

 

1,108,931

 

1,109,960

Properties held-for-sale, net of accumulated depreciation: 2020—$0; 2019—$35,113

 

 

26,856

Real property investments, net

 

1,108,931

 

1,136,816

Mortgage loans receivable, net of loan loss reserve: 2020—$2,596; 2019—$2,560

 

257,671

 

254,099

Real estate investments, net

 

1,366,602

 

1,390,915

Notes receivable, net of loan loss reserve: 2020—$144; 2019—$181

 

14,297

 

17,927

Investments in unconsolidated joint ventures

7,069

19,003

Investments, net

 

1,387,968

 

1,427,845

Other assets:

Cash and cash equivalents

 

22,811

 

4,244

Debt issue costs related to bank borrowings

 

1,546

 

2,164

Interest receivable

 

31,248

 

26,586

Straight-line rent receivable

 

24,374

 

45,703

Lease incentives

2,401

2,552

Prepaid expenses and other assets

 

6,896

 

5,115

Total assets

$

1,477,244

$

1,514,209

LIABILITIES

Bank borrowings

$

89,900

$

93,900

Senior unsecured notes, net of debt issue costs: 2020—$696; 2019—$812

 

574,444

 

599,488

Accrued interest

 

3,300

 

4,983

Accrued expenses and other liabilities

 

30,779

 

30,412

Total liabilities

 

698,423

 

728,783

EQUITY

Stockholders’ equity:

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding: 2020—39,242; 2019—39,752

 

392

 

398

Capital in excess of par value

 

851,000

 

867,346

Cumulative net income

 

1,371,202

 

1,293,482

Cumulative distributions

 

(1,452,177)

 

(1,384,283)

Total LTC Properties, Inc. stockholders’ equity

 

770,417

 

776,943

Non-controlling interests

 

8,404

 

8,483

Total equity

 

778,821

 

785,426

Total liabilities and equity

$

1,477,244

$

1,514,209

See accompanying notes.

3

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share, unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

  

2020

  

2019

  

2020

  

2019

 

Revenues:

Rental income

$

30,010

$

38,665

$

88,320

$

114,566

Interest income from mortgage loans

 

7,890

7,646

 

23,487

 

22,308

Interest and other income

 

273

 

808

 

1,257

 

1,967

Total revenues

 

38,173

 

47,119

 

113,064

 

138,841

Expenses:

Interest expense

 

7,361

 

7,827

 

22,617

 

23,004

Depreciation and amortization

 

9,766

 

9,932

 

29,232

 

29,399

Impairment charges

941

941

(Recovery) provision for doubtful accounts

 

(2)

 

(14)

 

(1)

 

153

Transaction costs

63

75

197

275

Property tax expense

3,351

4,270

11,685

12,566

General and administrative expenses

 

4,814

 

4,745

 

14,494

 

13,912

Total expenses

 

26,294

 

26,835

 

79,165

 

79,309

Other operating income:

Gain on sale of real estate, net

30

6,236

44,073

6,736

Operating income

 

11,909

 

26,520

 

77,972

 

66,268

Gain from property insurance proceeds

373

373

Loss on unconsolidated joint ventures

(620)

Income from unconsolidated joint ventures

56

760

287

1,973

Net income

12,338

27,280

78,012

68,241

Income allocated to non-controlling interests

 

(121)

 

(88)

 

(292)

 

(257)

Net income attributable to LTC Properties, Inc.

 

12,217

 

27,192

77,720

 

67,984

Income allocated to participating securities

 

(103)

(112)

(339)

 

(298)

Net income available to common stockholders

$

12,114

$

27,080

$

77,381

$

67,686

Earnings per common share:

Basic

$

0.31

$

0.68

$

1.97

$

1.71

Diluted

$

0.31

$

0.68

$

1.97

$

1.69

Weighted average shares used to calculate earnings per common share:

Basic

 

39,061

 

39,586

 

39,218

 

39,565

Diluted

 

39,112

 

39,965

 

39,269

 

39,944

Dividends declared and paid per common share

$

0.57

$

0.57

$

1.71

$

1.71

Comprehensive Income:

Net income

$

12,338

$

27,280

$

78,012

$

68,241

Comprehensive income

$

12,338

$

27,280

$

78,012

$

68,241

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, 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)

(22,631)

(22,631)

(22,631)

Vesting of performance-based stock units

48

(300)

(300)

(300)

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

Common Stock cash distributions ($0.57 per share)

(22,653)

(22,653)

(22,653)

Issuance of restricted stock

8

(6)

(6)

(6)

Stock-based compensation expense

1,623

1,623

1,623

Net income

20,446

20,446

88

20,534

Non-controlling interest contributions

46

46

Non-controlling interest distributions

(87)

(87)

Balance—June 30, 2019

39,747

$

397

$

863,993

$

1,253,748

$

(1,338,967)

$

779,171

$

8,439

$

787,610

Common Stock cash distributions ($0.57 per share)

(22,658)

(22,658)

(22,658)

Stock option exercises

5

1

122

123

123

Stock-based compensation expense

1,626

1,626

1,626

Net income

27,192

27,192

88

27,280

Non-controlling interest distributions

(67)

(67)

Other

(20)

(20)

(20)

Balance—September 30, 2019

39,752

$

398

$

865,721

$

1,280,940

$

(1,361,625)

$

785,434

$

8,460

$

793,894

Common Stock cash distributions ($0.57 per share)

(22,658)

(22,658)

(22,658)

Stock-based compensation expense

1,625

1,625

1,625

Net income

12,542

12,542

89

12,631

Non-controlling interest distributions

(66)

(66)

Balance—December 31, 2019

39,752

$

398

$

867,346

$

1,293,482

$

(1,384,283)

$

776,943

$

8,483

$

785,426

Common Stock cash distributions ($0.57 per share)

(22,581)

(22,581)

(22,581)

Vesting of performance-based stock units

82

(586)

(586)

(586)

Issuance of restricted stock

76

1

(1)

Repurchase of common stock

(616)

(6)

(18,006)

(18,012)

(18,012)

Stock-based compensation expense

1,777

1,777

1,777

Net income

63,633

63,633

89

63,722

Non-controlling interest distributions

(146)

(146)

Other

(76)

(1)

(3,544)

(3,545)

(3,545)

Balance—March 31, 2020

39,218

$

392

$

847,572

$

1,357,115

$

(1,407,450)

$

797,629

$

8,426

$

806,055

Common Stock cash distributions ($0.57 per share)

(22,359)

(22,359)

(22,359)

Issuance of restricted stock

25

(7)

(7)

(7)

Stock-based compensation expense

1,761

1,761

1,761

Net income

1,870

1,870

82

1,952

Non-controlling interest distributions

(97)

(97)

Balance—June 30, 2020

39,243

$

392

$

849,326

$

1,358,985

$

(1,429,809)

$

778,894

$

8,411

$

787,305

Common Stock cash distributions ($0.57 per share)

(22,368)

(22,368)

(22,368)

Stock-based compensation expense

1,693

1,693

1,693

Net income

12,217

12,217

121

12,338

Non-controlling interest distributions

(128)

(128)

Other

(1)

(19)

(19)

(19)

Balance—September 30, 2020

39,242

$

392

$

851,000

$

1,371,202

$

(1,452,177)

$

770,417

$

8,404

$

778,821

5

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

Nine Months Ended September 30, 

  

2020

  

2019

  

OPERATING ACTIVITIES:

    

    

Net income

$

78,012

$

68,241

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

Depreciation and amortization

 

29,232

 

29,399

Stock-based compensation expense

 

5,231

 

4,938

Impairment charges

941

Gain on sale of real estate, net

 

(44,073)

 

(6,736)

Loss on unconsolidated joint ventures

620

Income from unconsolidated joint ventures

 

(287)

 

(1,973)

Income distributions from unconsolidated joint ventures

249

2,577

Straight-line rental income

(1,701)

 

(3,598)

Adjustment for collectibility of rental income and lease incentives

23,214

1,926

Lease incentives funded

(50)

(322)

Amortization of lease incentives

317

281

(Recovery) provision for doubtful accounts

 

(1)

 

153

Other non-cash items, net

 

772

 

760

Increase in interest receivable

 

(4,662)

 

(4,367)

Decrease in accrued interest payable

 

(1,683)

 

(184)

Net change in other assets and liabilities

 

(502)

 

(1,003)

Net cash provided by operating activities

 

85,629

 

90,092

INVESTING ACTIVITIES:

Investment in real estate properties

 

(13,581)

 

(38,334)

Investment in real estate developments

 

(13,384)

 

(15,052)

Investment in real estate capital improvements

 

(3,955)

 

(2,121)

Capitalized interest

(354)

(441)

Proceeds from sale of real estate, net

 

72,141

 

8,068

Investment in real estate mortgage loans receivable

 

(4,176)

 

(10,919)

Principal payments received on mortgage loans receivable

 

565

 

565

Investments in unconsolidated joint ventures

 

(6,398)

 

(394)

Proceeds from liquidation of investments in unconsolidated joint ventures

17,758

6,601

Advances and originations under notes receivable

 

(1,366)

 

(8,531)

Principal payments received on notes receivable

 

4,732

 

3,446

Net cash provided by (used in) investing activities

 

51,982

 

(57,112)

FINANCING ACTIVITIES:

Bank borrowings

 

24,000

 

73,400

Repayment of bank borrowings

 

(28,000)

 

(20,000)

Principal payments on senior unsecured notes

(25,160)

(14,667)

Stock repurchase plan

(18,012)

Stock option exercises

 

 

123

Distributions paid to stockholders

 

(67,894)

 

(68,241)

Contribution from non-controlling interests

 

 

46

Distributions paid to non-controlling interests

 

(371)

 

(243)

Financing costs paid

 

(35)

 

(41)

Withheld vested restricted stock and performance-based stock units

(3,564)

(2,047)

Other

 

(8)

 

(6)

Net cash used in financing activities

 

(119,044)

 

(31,676)

Increase in cash, cash equivalents and restricted cash

 

18,567

 

1,304

Cash, cash equivalents and restricted cash, beginning of period

 

4,244

 

4,764

Cash, cash equivalents and restricted cash, end of period

$

22,811

$

6,068

Supplemental disclosure of cash flow information:

Interest paid

$

23,531

$

22,431

Non-cash investing and financing transactions:

Right of use asset

$

$

1,354

Lease liability

$

$

1,354

Reclassification of notes receivable to lease incentives

$

300

$

200

See accompanying notes.

6

Table of Contents

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 1 operating segment, rather than multiple operating segments, for internal reporting and internal decision-making purposes. Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in seniors housing and health care properties managed by experienced operators. Our primary seniors housing and health care property classifications include skilled nursing centers (“SNF”), assisted living communities (“ALF”), independent living communities (“ILF”), memory care communities (“MC”) and combinations thereof. To meet these objectives, we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders and diversify our investment portfolio by geographic location, operator, property classification and form of investment.

We have prepared consolidated financial statements included herein without audit and in the opinion of management have included all adjustments necessary for a fair presentation of the consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to rules and regulations governing the presentation of interim financial statements. The accompanying consolidated financial statements include the accounts of our company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2020 and 2019 are not necessarily indicative of the results for a full year.

NaN 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.

New Accounting Pronouncements

New Accounting Standards Adopted by Our Company

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 (“ASU 2016-02”), Leases, which is codified under Accounting Standards Codification (“ASC”) as ASC Topic 842, Leases. Among other changes, ASU 2016-02 amends the previous accounting for lessors to:

Modify the accounting and lease classification criteria;

On a quarterly basis, on an individual lease basis, assess the collectibility of substantially all of the lease payments through maturity. If collectibility 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; and

7

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

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.

As a result of adopting ASU 2016-02 on January 1, 2019, using the modified retrospective transition approach, we evaluated the collectibility of our lease payments and determined that the level of collectibility certainty cannot be achieved for certain operators. Accordingly, we recognized a cumulative effect adjustment to equity of $42,808,000. Additionally, we now report 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. Furthermore, we assess the collectibility of substantially all of our lease payments through maturity and if collectibility is not probable, all or a portion of our straight-line rent receivable and other lease receivables may be written off and the rental income during the period would be limited to the lesser of the income that would have been recognized if collection were probable, and the lease payments received. Our assessment of collectibility of leases includes evaluating the data and assumptions used in determining whether substantially all of the future lease payments were probable based on the lessee’s payment history, the financial strength of the lessees, future contractual rents, and the timing of expected payments.

In April 2020, the FASB staff released guidance regarding accounting for lease concessions in response to the novel coronavirus (“COVID-19”) pandemic. The FASB staff guidance indicates that lessors could elect an accounting policy to not evaluate whether rent concessions provided in response to the COVID-19 pandemic are lease modifications. When only the timing of payments is impacted by the rent deferrals, but the amount of the consideration is substantially the same as required by the original lease agreement, the FASB listed two methods for lessors to account for the rent deferrals. We elected the first of the following two methods:

Account for the rent deferrals as if there were no changes made to the lease agreement. Accordingly, increase the lease receivable and continue to recognize income.

Account for the rent deferrals as variable lease payments.

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. When shared risk characteristics exist, ASU 2016-13 requires a collective basis measurement of expected credit losses of the financial assets. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019.

We adopted ASU 2016-13 on January 1, 2020 and determined our Mortgage loans receivable and Notes receivable are within the scope of this ASU. We utilize the probability of default and discounted cash flow methods to estimate expected credit losses. Additionally, we stress-tested the results to reflect the impact of unknown adverse future events including recessions. We concluded that the adoption of ASU 2016-13 did not have a material impact on our financial statements at September 30, 2020.

8

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

The expected credit losses for our financial instruments that are within the scope of ASU 2016-13 are as follows (in thousands):

Increase

/(Decrease)

Balance

in Expected

Balance

Balance Sheet

at

Credit Loss

at

Description

Location

12/31/2019

During the Quarter

9/30/2020

Expected credit losses for mortgage loans receivable

Mortgage loans receivable, net of loan loss reserve

$

2,560

$

36

$

2,596

Expected credit losses for notes receivable

Notes receivable, net of loan loss reserve

$

181

$

(37)

$

144

We elected not to measure an allowance for expected credit losses on accrued interest receivable under the expected credit loss standard as we have a policy in place to reserve or write off accrued interest receivable in a timely manner through our quarterly review of the loan and property performance. Therefore, we elected the policy to write off accrued interest receivable by reversing interest income and/or recognizing credit loss expense. As of September 30, 2020, the total balance of accrued interest receivable of $31,248,000 was not included in the measurement of expected credit loss. For the three and nine months ended September 30, 2020 and 2019, Company did not recognize any write-off related to accrued interest receivable.

2.

Real Estate Investments

Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (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. Our 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 4 ways depending on specific provisions of each lease:

(i)a specified percentage increase over the prior year’s rent, generally between 2.0% and 2.5%;
(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.

9

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

Our leases that contain fixed annual rental escalations and/or have annual rental escalations that are contingent upon changes in the Consumer Price Index, 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 gross operating revenues of the property. This revenue is not recognized until the appropriate contingencies have been resolved.

The following table summarizes our investments in owned properties at September 30, 2020 (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

$

880,307

60.8

107

6,164

$

142.81

Skilled Nursing

557,097

38.4

%

51

6,277

212

$

85.85

Other (2)

11,360

0.8

1

118

Total

$

1,448,764

100.0

159

6,395

6,376

(1)We own properties in 27 states that are leased to 29 different operators.

(2)Includes 3 parcels of land held-for-use, and 1 behavioral health care hospital.

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):

    

 Cash

 

Rent (1)

 

2020

$

33,758

2021

 

143,139

2022

 

131,294

2023

 

132,827

2024

 

131,766

Thereafter

 

632,675

(1)Represents contractual cash rent, except for Anthem Memory Care (“Anthem”) master lease which is based on estimated cash payments. See below for more disclosure relating to Anthem.

An affiliate of Senior Lifestyle Corporation (“Senior Lifestyle”) operates 23 properties under a master lease with a combination of independent living, assisted living and memory care units. Senior Lifestyle was provided deferral of partial rent in April 2020 and failed to pay full rent during the second quarter of 2020. In accordance with ASC 842, we evaluated the collectibility of receiving substantially all of our lease payments from the Senior Lifestyle master lease through maturity and determined that we did not have the level of certainty required by the standard. Accordingly, we wrote-off a total $17,742,000 of straight-line rent receivable and lease incentives related to this master lease during the second quarter of 2020 and we accounted for the Senior Lifestyle master lease on a cash basis effective July 2020. Contractual rent for April through September 2020 was $9,121,000 of which we collected $5,325,000. In October 2020, we received $1,341,000 of their contractual rent of $1,561,000. The outstanding accounts receivable balance on our Consolidated Balance Sheets of $2,670,000 is covered by a letter of credit and security deposit totaling $3,608,000. We continue to evaluate the collectibility of our Senior Lifestyle master lease quarterly. Additionally, we are evaluating our options for the portfolio which may include a combination of re-leasing and selling some or all of the properties.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

During the third quarter of 2020, an operator paid $542,000 of its contractual rent of $1,299,000. Additionally, during the three months ended September 30, 2020, we consolidated our 2 master leases with the operator into one combined master lease. Under the new combined master lease, we agreed to abate $570,000 of third quarter rent along with $80,000 that had been deferred in second quarter of 2020, totaling $650,000. Additionally, the new combined master lease allows the operator to defer rent as needed through March 31, 2021. In September 2020, the operator deferred $186,000 of its $374,000 contractual rent. During the three months ended September 30, 2020, we recorded an impairment charge of $941,000 related to an assisted living community that was operated by the operator. The community was closed in October 2020 and we are evaluating our options for this community. In accordance with ASC 842, we evaluated the collectibility of receiving substantially all of our lease payments under our master lease with the operator through maturity and determined that we did not have the level of certainty required by the standard. Accordingly, we wrote-off $1,156,000 of straight-line rent receivable related to this master lease during the third quarter of 2020.

On August 10, 2020, in the Quarterly Report on Form 10-Q, Genesis Healthcare, Inc. (“Genesis”) reported doubt regarding its ability to continue as a going concern. Accordingly, in accordance with ASC 842, we evaluated the collectibility of receiving substantially all of our lease payments from the Genesis master lease through maturity and determined that we did not have the level of certainty required by the standard. Accordingly, we wrote-off $4,316,000 of straight-line rent receivable related to this master lease during the third quarter of 2020. Genesis is current on rent payments through October 2020.

Anthem operates 11 memory care communities under a master lease and was placed in default in 2017 resulting from Anthem’s partial payment of its minimum rent. However, we did not enforce our rights and remedies pertaining to the event of default, under the stipulation that Anthem achieves sufficient performance and pays agreed upon rent. In accordance with 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 of January 1, 2019, as required by the ASC 842 transition guidance. We continue to evaluate the collectibility of our Anthem master lease on a quarterly basis. We currently anticipate that Anthem will pay $9,900,000 of annual cash rent during 2020. However, COVID-19 may adversely impact Anthem’s operating cash flow and ability to pay rent. Anthem is current on 2020 rent payments through October 2020.

Preferred Care, Inc. (“Preferred Care”) and affiliated entities filed for Chapter 11 bankruptcy in 2017 as a result of a multi-million-dollar judgment in a lawsuit in Kentucky against Preferred Care and certain affiliated entities. Preferred Care leased 24 properties (“Properties”) under 2 master leases from us and the Preferred Care operating entities that sublease those Properties did not file for bankruptcy. In accordance with 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 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 of January 1, 2019, as required by the ASC 842 transition guidance. Preferred Care did not affirm our master leases and subsequently filed for Chapter 7 bankruptcy in 2019.

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(Unaudited)

During the fourth quarter of 2019, we entered into multiple contracts to sell the Properties, all of which were completed during the first quarter of 2020. The combined net proceeds from the sales, including the 2019 transactions, was approximately $77,900,000 resulting in a total gain of approximately $44,000,000. The Properties had a combined net book value of $35,600,000. The 21 properties sold in the first quarter of 2020, which included 2,411 beds in Arizona, Colorado, Iowa, Kansas and Texas, were sold through multiple transactions and generated net proceeds of approximately $72,100,000. These 21 properties had a combined net book value of $29,100,000 and resulted in total gain on sale of $44,073,000.

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 in December 2018. Senior Care did not pay us December 2018 rent and accordingly, in December 2018, we placed Senior Care on a cash basis. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of the straight-line rent receivable and lease incentive balance related to Senior Care and determined 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 of January 1, 2019, as required by the ASC 842 transition guidance. During 2019, we received a court ordered reimbursement from Senior Care for the December 2018 unpaid rent, late fees and legal costs totaling $1,596,000. In March 2020, Senior Care emerged from bankruptcy and affirmed our master lease. We continue to evaluate the collectibility of our Senior Care master lease on a quarterly basis. Senior Care is current on all its rent, real estate property tax escrow and maintenance deposits through October 2020.

During the third quarter of 2020, we consolidated our 4 leases with Brookdale Senior Living Communities, Inc (“Brookdale”) into one master lease and extended the term by one year to December 31, 2021. The master lease provides 3 renewal options consisting of a four-year renewal option, a five-year renewal option and a 10-year renewal option. The notice period for the first renewal option is January 1, 2021 to April 30, 2021. The economic terms of rent remain the same as the consolidated rent terms under the previous 4 separate lease agreements.

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(Unaudited)

The following table summarizes components of our rental income for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended

Nine Months Ended

September 30, 

September 30,

Rental Income

2020

2019

2020

2019

Base cash rental income

$

32,006

(1)

$

33,754

$

98,357

(1)

$

100,687

Variable cash rental income

3,356

(2)

3,926

(2)

11,793

(2)

12,488

(2)

Straight-line rent

228

1,085

1,701

3,598

Adjustment for collectability of rental income and lease incentives

(5,472)

(3)

(23,214)

(4)

(1,926)

Amortization of lease incentives

(108)

(100)

(317)

(281)

Total

$

30,010

$

38,665

$

88,320

$

114,566

(1)Decreased primarily due to reduction of rent from Preferred Care portfolio sale and Senior Lifestyle rent shortfall and abated and deferred rent partially offset by increase in rent from acquisitions and completion of development projects and contractual rent increases.

(2)The variable rental income for the three and nine months ended September 30, 2020, includes contingent rental income of $4 and $108, respectively, and reimbursement of real estate taxes by our lessees of $3,352 and $11,685, respectively. The variable rental income for the three and nine months ended September 30, 2019 includes contingent rental income of $77 and $394, respectively, and reimbursement of real estate taxes by our lessees of $3,849 and $12,094, respectively.

(3)Represents the write-off of the Genesis and another operator straight-line rent receivable balances.

(4)Represents the write-off of the Senior Lifestyle straight-line rent receivable and lease incentive balances and (3) 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

$

35,836

2024-2029

California

ALF

2

30,609

17,088

2021-TBD

(1)

Florida

MC

1

14,340

12,631

2028-2029

Kentucky and Ohio

MC

2

30,152

27,320

2028-2029

Texas

MC

2

25,265

23,870

2025-2027

South Carolina

ALF/MC

1

11,680

10,358

2028-2029

Total

$

150,941

$

127,103

(1)The option window ending date will be either 24 months or 48 months after the option window commences, based on certain contingencies.

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, and on March 13, 2020, the United States declared a national emergency with regard to COVID-19. As required by ASC 842, we assess the collectibility of our lease payments through maturity on a quarterly basis. At September 30, 2020, in conjunction with the continued levels of uncertainty related to the adverse effects of COVID-19, we assessed the probability of collecting substantially all of our lease payments through maturity and concluded that we did not have sufficient information available to evaluate the impact of COVID-19 on the collectibility of our lease payments. The extent to which COVID-19 could impact our operators and the collectibility of our future lease payments will depend on the future developments including the financial impact significance and the duration of the pandemic. We will continue to evaluate the collectibility of our lease payments through maturity on a quarterly basis, including the financial impact of COVID-19. If we determine that we do not have the level of collectibility certainty required by ASC 842 related to certain operators, all or a portion of our straight-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

line rent receivable and other lease receivables will be written-off. In recognition of the unique conditions affecting our operators, we have agreed to rent deferrals for certain operators totaling $1,176,000, or 1.5% of contractual rent, for April through September 2020. Additionally, we granted rent deferrals of $566,000 for October 2020. Through October 2020, we have received $553,000 of rent deferral payments. The remaining $1,189,000 balance of deferred rent is due to LTC over the next 24 months or upon the operators’ receipt of government funds from the U.S. Coronavirus Aid, Relief, and Economic Security ACT (the “CARES Act”).

Acquisitions and Developments: The following table summarizes our acquisitions for the nine months ended September 30, 2020 and 2019 (dollar amounts in thousands):

Total

Number

Number

Purchase

Transaction

Acquisition

of

of

Year

Type of Property

Price

Costs (1)

Costs

Properties

Beds/Units

2020

Skilled Nursing (2)

$

13,500

$

81

$

13,581

 

1

140

2019

Assisted Living (3)

$

16,719

$

176

$

16,895

1

74

Skilled Nursing (4)

19,500

77

19,577

1

90

Land (5)

2,732

49

2,781

Total

$

38,951

$

302

$

39,253

2

164

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

(2)We acquired a SNF located in Texas.

(3)We entered into a joint venture (“JV”) (consolidated on our financial statements) 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%.

(4)We acquired a newly constructed 90-bed SNF located in Missouri.

(5)We acquired a parcel of land adjacent to an existing SNF in California. Additionally, we acquired a parcel of land and developed a 90-bed SNF in Missouri. The commitment totals approximately $17,400.

During the nine months ended September 30, 2020 and 2019, we invested the following in development and improvement projects (in thousands):

Nine Months Ended September 30,

2020

2019

Type of Property

Developments

Improvements

Developments

Improvements

Assisted Living Communities

$

4,491

$

3,941

$

10,266

$

1,826

Skilled Nursing Centers

8,893

14

4,786

Other

295

Total

$

13,384

$

3,955

$

15,052

$

2,121

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(Unaudited)

Completed Developments. The following table summarizes our completed developments during the nine months ended September 30, 2020 and 2019 (dollar amounts in thousands):

Number

Type

Number

of

of

of

Total

Year

Type of Project

Properties

Property

Beds/Units

State

Investment

2020

Development

1

ALF/MC

78

Oregon

(1)

$

18,447

Development

1

SNF

90

Missouri

13,272

Total

2

168

$

31,719

2019

Development

1

SNF

143

Kentucky

$

24,496

Development

1

ILF/ALF/MC

110

Wisconsin

21,893

Total

2

253

$

46,389

(1)Certificate of occupancy was received in March 2020, however, due to the COVID-19 pandemic, we consented to delay the opening of this community to September 2020.

Properties Sold. The following table summarizes property sales during the nine months ended September 30, 2020 and 2019 (dollar amounts in thousands):

Type

Number

Number

of

of

of

Sales

Carrying

Net

Year

State

Properties

Properties

Beds/Units

Price

Value

Gain

2020

N/A

N/A

$

$

$

108

(1)

Arizona

SNF

1

194

12,550

2,229

10,292

Colorado

SNF

3

275

15,000

4,271

10,364

Iowa

SNF

(2)

7

544

14,500

4,886

9,029

Kansas

SNF

3

250

9,750

7,438

1,993

Texas

SNF

7

1,148

23,000

10,260

12,287

Total 2020 (3)

21

2,411

$

74,800

$

29,084

$

44,073

(3)

2019

N/A

N/A

$

$

$

500

(4)

Georgia

SNF

1

148

7,920

1,639

6,236

Total 2019

1

148

$

7,920

$

1,639

$

6,736

(

(1)Gain recognized from the $90 repayment of a holdback related to a property sold during the fourth quarter of 2019 and the reassessment adjustment of $18 from the holdback under the expected value model per ASC Topic 606, Contracts with Customers (“ASC 606”).

(2)This transaction includes a holdback of $838 which is held in an interest-bearing account with an escrow holder on behalf of the buyer for potential specific losses. Using the expected value model per ASC 606, we estimated and recorded the holdback value of $471. During the nine months ended September 30, 2020, we received $150 of the holdback. We reassessed the holdback under the expected value model and recorded an additional gain of $115.

(3)Properties sold within the Preferred Care portfolio.

(4)Gain recognized from the repayment of a holdback related to a portfolio of 6 ALFs sold during the second quarter of 2018.

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(Unaudited)

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at September 30, 2020 (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

9.9%

2043

$

186,865

SNF

71.8

%

1

15

1,941

$

96.27

9.2%

2045

38,853

SNF

14.9

%

1

4

501

$

77.55

9.4%

2045

 

19,624

SNF

7.6

%

1

2

205

$

95.73

9.6%

2045

14,925

SNF

5.7

%

1

1

157

$

95.06

Total

$

260,267

100.0

%

4

22

2,804

$

92.82

(1)The majority of the mortgage loans provide for annual increases in the interest rate after a certain time period increasing by 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 1 state and are operated by 1 operator.

The following table summarizes our mortgage loan activity for the nine months ended September 30, 2020 and 2019 (in thousands):

Nine Months Ended September 30,

2020

2019

Amounts

Origination/Funding

Originations and funding under mortgage loans receivable

$

4,176

(1)

$

10,919

(2)

Scheduled principal payments received

(565)

(565)

Mortgage loan premium amortization

(3)

(3)

Provision for loan loss reserve

(36)

(104)

Net increase in mortgage loans receivable

$

3,572

$

10,247

(1)During 2020, we funded an additional $2,000 under and existing mortgage loan. The incremental funding bears interest at 8.89% and escalating by 2.25% thereafter.

(2)During 2019, we funded an additional $7,500 under an existing mortgage loan. The incremental funding bears interest at 9.41% fixed for two years and escalating by 2.25% thereafter.

3.

Investment in Unconsolidated Joint Ventures

We had a preferred equity investment in an unconsolidated joint venture that owned 4 communities located in Arizona, providing independent living, assisted living and memory care services. During the fourth quarter of 2019, the JV signed a contract to sell the 4 properties comprising the JV (“Properties”). The contract was subject to standard due diligence and other contingencies to close, all of which were met in January 2020. Accordingly, based on the information available to us regarding alternatives and courses of action, we performed a recoverability test on the carrying value of our preferred equity investment and concluded that a portion of our preferred equity investment will not be recoverable. Therefore, we recorded an other than temporary impairment loss from investment in unconsolidated joint ventures of $5,500,000 and wrote our preferred equity investment down to its estimated fair value at December 31, 2019. Upon sale of the Properties, we received partial liquidation proceeds totaling $17,758,000 during the second and third quarters of 2020. During the nine months ended September 30, 2020, we incurred an additional $620,000 of loss. We anticipate receiving additional proceeds of $729,000 through March 31, 2021.

During the nine months ended September 30, 2020, we provided preferred capital contribution

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

commitments to 2 joint ventures. We determined that each of these JVs meets the accounting criteria to be considered a variable interest entity (“VIE”). We are not the primary beneficiary of the VIEs as we do not have both: 1) the power to direct the activities that most significantly affect the VIE’s economic performance, and 2) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. However, we do have significant influence over the JVs. Therefore, we accounted for the joint venture investments using the equity method of accounting. The following table provides information regarding these preferred equity investments:

Type

Type

Total

Contractual

Number

of

of

Preferred

Cash

of

Investment

Carrying

State

Properties

Investment

Return

Portion

Beds/ Units

Commitment

Value

Washington

UDP

Preferred Equity

(1)

12

%

7

%

$

(1)

$

6,340

(1)

Washington

UDP

Preferred Equity

(2)

12

%

8

%

13,000

(2)

-

(2)

Total

$

13,000

$

6,340

(1)Invested $6,340 of preferred equity in an entity that will develop a 95-unit ALF/MC in Washington. Our investment represents 15.5% of the estimated total investment. The preferred equity investment earns an initial cash rate of 7% increasing to 9% in year four until the internal rate of return (“IRR”) is 8%. After achieving an 8% IRR, the cash rate drops to 8% with an IRR ranging between 12% to 14%.

(2)Entered into a preferred equity agreement in an entity that will develop and own a 267-unit ILF/ALF in Washington. Our investment represents 11.6% of the estimated total investment. Upon the satisfaction of certain conditions which are projected to be met by year-end, LTC will invest $13,000 into the entity. The preferred equity investment will earn an initial cash rate of 8% and a 12% IRR.

The following table summarizes our capital contributions, income recognized, and cash interest received related to our investments in unconsolidated joint ventures for the nine months ended September 30, 2020 and 2019 (in thousands):

Type

of

Capital

Income

Cash Interest

Year

Properties

Contribution

Recognized

Received

2020

ALF/MC/ILF

(1)

$

58

(1)

$

231

(1)

$

231

(1)

UDP

6,340

(2)

56

(2)

18

(2)

Total

$

6,398

$

287

$

249

2019

ALF/MC/ILF

$

394

(1)

$

614

(1)

$

1,166

(1)

ALF/ILF/MC

(3)

(3)

955

(3)

979

(3)

ALF/MC

(4)

(4)

404

(4)

432

(4)

Total

$

394

$

1,973

$

2,577

(1)Relates to our preferred equity investment in Arizona discussed above with a total preferred return of 15%. During the nine months ended September 30, 2020, the properties comprising the JV were sold.

(2)During the third quarter of 2020, we provided a total preferred equity investment of $6,340 to a JV for the development of a 95-unit ALF and MC.

(3)We had a $2,900 mezzanine loan commitment for a 99-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. 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. During the third quarter of 2019, the mezzanine loan was paid off.

(4)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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

4.

Notes Receivable

Notes receivable consists of mezzanine loans and other loan arrangements. The following table is a summary of our notes receivable components as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020

December 31, 2019

 

Mezzanine loans

$

8,566

$

13,284

Other loans

5,875

4,824

Notes receivable reserve

(144)

(181)

Total

$

14,297

$

17,927

The following table summarizes our notes receivable activity for the nine months ended September 30, 2020 and 2019 (in thousands):

Nine Months Ended September 30,

2020

2019

Advances under notes receivable

$

1,366

(1)

$

8,531

(2)

Principal payments received under notes receivable

(4,732)

(3,446)

Reclassified to lease incentives

(300)

(3)

(200)

(3)

Notes receivable reserve

36

(48)

Total

$

(3,630)

$

4,837

(1)We originated a $1,250 note agreement, funding $1,000 with a commitment to fund $250. The note bears interest at 5.0%.

(2)We originated a $6,800 mezzanine loan commitment for the development of a 204-unit ILF/ALF/MC in Georgia. The mezzanine loan has a five-year term and a 12.0% return, a portion of which is paid in cash, and the remaining portion of which is deferred during the first 46 months. Additionally, we originated a $1,400 note agreement, funding $1,124 with a commitment to fund $276. The note bears interest at 7.0%. Further, we originated a $550 note agreement, funding $400 with a commitment to fund $150. The note bears interest at 7.5%.

(3)Represents interim working capital loans related to development projects which matured upon completion of the development projects and commencement of the master leases.

5.

Lease Incentives

Our lease incentive balances at September 30, 2020 and December 31, 2019 are as follows (in thousands):

September 30, 2020

December 31, 2019

Non-contingent lease incentives

$

2,401

$

2,552

The following table summarizes our lease incentives activity for the nine months ended September 30, 2020 and 2019 (in thousands):

2020

2019

Funding

Amortization

Adjustment

Funding

Amortization

Adjustment

Non-contingent lease incentives

$

50

$

(317)

$

115

(1)

$

322

$

(281)

$

(11,893)

(2)

(1)We reclassified a $300 interim working capital loan as lease incentive. See Note 4. Notes Receivable for further discussion. Additionally, we wrote-off $185 of lease incentive related to a master lease for which we determined it was not probable we will collect substantially all of the contractual lease obligations through maturity. See Note 2. Real Estate Investments for further discussion.

(2)In accordance with ASC 842 lease standard adopted on January 1, 2019, we wrote-off $12,093 of 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. Additionally, we reclassified a $200 interim working capital loan as lease incentive. See Note 4. Notes Receivable for further discussion.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

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. We have an unsecured credit agreement that provides for a revolving aggregate commitment of the lenders of up to $600,000,000 with the opportunity to increase the commitment size of the credit agreement up to a total of $1,000,000,000. 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 September 30, 2020, the facility provides for interest annually at LIBOR plus 115 basis points and a facility fee of 20 basis points. At September 30, 2020, we were in compliance with all covenants.

Senior Unsecured Notes. We have senior unsecured notes held by institutional investors with interest rates ranging from 3.85% to 5.03%. The senior unsecured notes mature between 2021 and 2032.

The debt obligations by component as of September 30, 2020 and December 31, 2019 are as follows (dollar amounts in thousands):

At September 30, 2020

At December 31, 2019

Applicable

Available

Available

Interest

Outstanding

for

Outstanding

for

Debt Obligations

Rate (1)

Balance

Borrowing

Balance

Borrowing

Bank borrowings

1.33%

$

89,900

$

510,100

$

93,900

$

506,100

Senior unsecured notes, net of debt issue costs

4.36%

574,444

599,488

21,500

Total

3.95%

$

664,344

$

510,100

$

693,388

$

527,600

(1)Represents weighted average of interest rate as of September 30, 2020.

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

Nine Months Ended September 30,

2020

2019

Debt Obligations

Borrowings

Repayments

Borrowings

Repayments

Bank borrowings

$

24,000

$

(28,000)

$

73,400

$

(20,000)

Senior unsecured notes

(25,160)

(14,667)

Total

$

24,000

$

(53,160)

$

73,400

$

(34,667)

7.

Equity

Common Stock. We have separate equity distribution agreements (collectively, “Equity Distribution Agreements”) 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 September 30, 2020, 0 shares had been issued under the Equity Distribution Agreements. Accordingly, at September 30, 2020, we had $200,000,000 available under the Equity Distribution Agreements.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

During the nine months ended September 30, 2020 and 2019, we acquired 76,574 shares and 45,030 shares, respectively, of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.

Stock Repurchase Plan. During the first quarter of 2020, our Board of Directors authorized the repurchase of up to 5,000,000 outstanding shares of common stock. Due to the rising level of uncertainty in financial markets and the adverse effects of COVID-19 on the public health and our operators, our Board of Directors terminated the stock repurchase plan on March 25, 2020. During the nine months ended September 30, 2020, we purchased 615,827 shares at an average price of $29.25 per share, including commissions, for a total purchase price of $18,012,000.

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 on the consolidated financial statements.

As of September 30, 2020, we have the following consolidated VIEs (in thousands):

Gross

Investment

Property

Consolidated

Non-Controlling

Year

Purpose

Type

State

Assets

Interests

2019

Owned real estate

ALF/MC

VA

$

16,895

$

919

2018

Owned real estate

ILF

OR

14,400

2,858

2018

Owned real estate and development

ALF/MC

OR

18,447

1,081

2017

Owned real estate and development

ILF/ALF/MC

WI

22,007

2,305

2017

Owned real estate

ALF/MC

SC

11,680

1,241

Total

$

83,429

$

8,404

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. Our shelf registration statement expires on February 28, 2022.

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

Nine Months Ended September 30,

2020

2019

Declared

Paid

Declared

Paid

Common Stock (1)

$

67,894

(2)

$

67,894

(2)

$

68,241

(3)

$

68,241

(3)

(1)Represents $0.19 per share per month for the nine months ended September 30, 2020 and 2019.

(2)Includes $586 related to the vesting of performance-based stock units.

(3)Includes $300 related to the vesting of performance-based stock units.

In October 2020, we declared a monthly cash dividend of $0.19 per share on our common stock

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

for the months of October, November and December 2020, payable on October 30, November 30, and December 31, 2020, respectively, to stockholders of record on October 22, November 20, and December 23, 2020, 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.

At September 30, 2020, we had 15,000 stock options outstanding and exercisable. During the nine months ended September 30, 2020 and 2019, 0 stock options were granted. The stock options exercised during the nine months ended September 30, 2020 and 2019 were as follows:

Weighted

 

Average

 

Options

Exercise

Option

Market

 

Exercised

Price

Value

Value (1)

 

2020

$

$

$

2019

5,000

$

24.65

$

123,000

$

233,000

(1)

(1)As of exercise date.

The following table summarizes our restricted stock and performance-based stock units activity for the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30,

2020

2019

Outstanding, January 1

345,633

325,750

Granted

167,375

147,608

Vested

(166,051)

(1)

(127,725)

(2)

Outstanding, September 30

346,957

345,633

(1)Includes 81,574 performance-based stock units.

(2)Includes 48,225 performance-based stock units.

During the nine months ended September 30, 2020 and 2019, 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

2020

76,464

$

48.95

ratably over 3 years

66,027

$

49.98

TSR targets (1)

9,884

$

38.45

May 27, 2021

15,000

$

38.45

ratably over 3 years

167,375

2019

78,276

$

46.54

ratably over 3 years

60,836

$

46.54

TSR targets (1)

8,496

$

44.73

May 29, 2020

147,608

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

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

Compensation expense recognized related to the vesting of restricted common stock and performance-based stock units for the nine months ended September 30, 2020 and 2019 were $5,231,000 and $4,938,000, respectively. At September 30, 2020, 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

2020

$

1,781

2021

5,201

2022

2,729

2023

367

Total

$

10,078

8.

Commitments and Contingencies

At September 30, 2020, we had commitments as follows (in thousands):

Total

Investment

2020

Commitment

Remaining

Commitment

Funding

Funded

Commitment

Real estate properties (Note 2. Real Estate Investments)

$

28,713

(1)

$

12,487

$

17,459

$

11,254

Accrued incentives and earn-out liabilities (Note 5. Lease Incentives)

9,000

9,000

Mortgage loans (Note 2. Real Estate Investments)

27,200

(2)

2,928

8,873

18,327

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

13,000

13,000

Notes receivable (Note 4. Notes Receivable)

1,854

1,275

1,275

579

Total

$

79,767

$

16,690

$

27,607

$

52,160

(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 $9,200 of commitments to expand and renovate the seniors housing and health care properties securing the mortgage loans and $18,000 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 2 operators that derive 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

22

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

of September 30, 2020:

Number of

Number of

Percentage of

SNF

ALF

Total

Total

Operator

SNF

ALF

Beds

Units

Revenue (1)

Assets (2)

Prestige Healthcare

24

2,922

93

19.8

%

18.0

%

Senior Lifestyle Corporation (3)

23

1,457

10.4

%

10.2

%

Total

24

23

2,922

1,550

30.2

%

28.2

%

(1)Includes rental income from owned properties and interest income from mortgage loans as of September 30, 2020 and excludes rental income from lessee reimbursement and sold properties.

(2)Represents the net carrying value of the properties divided by the Total assets on the Consolidated Balance Sheets.

(3)See Note 2. Real Estate Investments for further information regarding Senior Lifestyle.

23

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

Our financial position and ability to make distributions may be adversely affected if Prestige Healthcare, Senior Lifestyle Corporation, or any of our lessees and borrowers face financial difficulties, including any bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, impact upon services or occupancy levels due to COVID-19, or in the event any such operator does not renew and/or extend its relationship with us.

10.

Earnings per Share

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2020

2019

2020

2019

Net income

$

12,338

$

27,280

$

78,012

$

68,241

Less income allocated to non-controlling interests

 

(121)

 

(88)

 

(292)

 

(257)

Less income allocated to participating securities:

Non-forfeitable dividends on participating securities

(103)

(93)

(294)

(279)

Income allocated to participating securities

(19)

(45)

(19)

Total net income allocated to participating securities (1)

(103)

(112)

(339)

(298)

Net income available to common stockholders

12,114

27,080

77,381

67,686

Effect of dilutive securities:

Participating securities (2)

Net income for diluted net income per share

$

12,114

$

27,080

$

77,381

$

67,686

Shares for basic net income per share

39,061

39,586

39,218

39,565

Effect of dilutive securities:

Stock options

4

4

Performance-based stock units

51

375

51

375

Participating securities (2)

Total effect of dilutive securities

51

379

51

379

Shares for diluted net income per share

39,112

39,965

39,269

39,944

Basic net income per share

$

0.31

$

0.68

$

1.97

$

1.71

Diluted net income per share

$

0.31

$

0.68

$

1.97

$

1.69

(1)Under the two-class method of computing earnings per share in accordance with GAAP, income (loss) allocated to participating securities is calculated independently for each quarter and year-to-date period. Therefore, the sum of the amounts for the quarter may not agree with the amounts for the year. 

(2)For the three and nine months ended September 30, 2020, and 2019, the participating securities have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.

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.

24

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments. We do not invest our cash in auction rate securities. The carrying value and fair value of our financial instruments as of September 30, 2020 and December 31, 2019 assuming election of fair value for our financial assets and financial liabilities were as follows (in thousands):

At September 30, 2020

At December 31, 2019

Carrying

Fair

Carrying

Fair 

Value

Value

Value

Value

Mortgage loans receivable

$

257,671

$

299,151

(1)

$

254,099

$

312,824

(1)

Bank borrowings

 

89,900

89,900

(2)

93,900

93,900

(2)

Senior unsecured notes, net of debt issue costs

 

574,444

582,480

(3)

599,488

612,375

(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 September 30, 2020 and December 31, 2019 was 10.0% and 9.0%, respectively.

(2)Our bank borrowings bear interest at a variable interest rate. The estimated fair value of our bank borrowings approximated their carrying values at September 30, 2020 and December 31, 2019 based upon prevailing market interest rates for similar debt arrangements.

(3)Our obligation under our senior unsecured notes is classified as Level 3 and thus the fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows. The discount rate is measured based upon management’s estimates of rates currently prevailing for comparable loans available to us, and instruments of comparable maturities. At September 30, 2020, the discount rate used to value our future cash outflow of our senior unsecured notes was 3.75% for those maturing before year 2026 and 4.00% for those maturing at or beyond year 2026. At December 31, 2019, the discount rate used to value our future cash outflow of our senior unsecured notes was 3.70% for those maturing before year 2026 and 3.90% for those maturing at or beyond year 2026.

12.

Subsequent Events

Subsequent to September 30, 2020 the following events occurred:

Equity: We declared a monthly cash dividend of $0.19 per share on our common stock for the months of October, November and December 2020, payable on October 30, November 30, and December 31, 2020, respectively to stockholders of record on October 22, November 20, and December 23, 2020, respectively.

25

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, public health epidemics such as coronavirus (COVID-19); 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, 2019 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.

26

The following graph summarizes our gross investments as of September 30, 2020:

Graphic

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 classification. As of September 30, 2020, 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 and 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-

27

defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates.

COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of coronavirus (“COVID-19”) as a pandemic, and on March 13, 2020, the United States declared a national emergency with regard to COVID-19. The COVID-19 pandemic has had repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries, including the United States, has significantly and adversely impacted public health and economic activity, and has contributed to significant volatility and negative pressure in financial markets.

The operations and occupancy levels at our properties will be adversely affected if COVID-19 or another pandemic results in infections on a large scale at our properties, early resident move-outs, our operators delay accepting new residents due to quarantines, and/or potential occupants postpone moving to a senior housing facility. Additionally, as our operators have responded to the pandemic, operating costs have begun to rise. A decrease in occupancy, ability to collect rents from residents and/or increase in operating costs could have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, including the payment of rent. In recognition of the pandemic impact affecting our operators, we have agreed to rent deferrals for certain operators totaling $1.2 million, or 1.5% of contractual rent, for April through September 2020. Additionally, we granted rent deferrals of $0.6 million for October 2020. Through October 2020, we have received $0.6 million of rent deferral payments. The remaining balance of deferred rent is due to LTC over the next 24 months or upon receipt of government funds from the U.S. Coronavirus Aid, Relief, and Economic Security (the “CARES Act”).

The extent to which COVID-19 could impact our operations and those of our operators will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, spread and severity of the outbreak and the actions taken to contain the virus or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures.

28

Real Estate Portfolio Overview

The following tables summarize our real estate investment portfolio by owned properties and mortgage loans and by type, as of September 30, 2020 (dollar amounts in thousands):

Nine Months Ended

Percentage

September 30, 2020

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

$

880,307

51.5

%

$

52,599

$

42.7

%

107

6,164

Skilled Nursing

557,097

32.6

%

46,226

37.6

%

51

6,277

212

Other (4)

11,360

0.7

%

727

0.6

%

1

118

Total Owned Properties

1,448,764

84.8

%

99,552

80.9

%

159

6,395

6,376

Mortgage Loans

Skilled Nursing

260,267

15.2

%

23,487

19.1

%

22

2,804

Total Mortgage Loans

260,267

15.2

%

23,487

19.1

%

22

2,804

Total Portfolio

$

1,709,031

100.0

%

$

99,552

$

23,487

100.0

%

181

9,199

6,376

Nine Months Ended

Percentage

September 30, 2020

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)

Assisted Living

$

880,307

51.5

%

$

52,599

$

42.7

%

107

6,164

Skilled Nursing

817,364

47.8

%

46,226

23,487

56.7

%

73

9,081

212

Other (4)

11,360

0.7

%

727

0.6

%

1

118

Total Portfolio

$

1,709,031

100.0

%

$

99,552

$

23,487

100.0

%

181

9,199

6,376

(1)Excludes variable rental income from lessee reimbursement and sold properties.

(2)We have investments in 27 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)Includes three parcels of land held-for-use and one behavioral health care hospital.

As of September 30, 2020, we had $1.4 billion in net carrying value of real estate investments, consisting of $1.1 billion or 81.1% invested in owned and leased properties and $0.3 billion or 18.9% invested in mortgage loans secured by first mortgages. Our investment in mortgage loans mature in 2043 and beyond and contain interest rates between 9.2% and 9.9%.

For the nine months ended September 30, 2020, rental income and interest income from mortgage loans represented 78.1% and 20.8%, respectively, of total gross revenues. In most instances, our lease structure contains fixed annual rental escalations and/or annual rental escalations that are contingent upon changes in the Consumer Price Index, 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 gross operating revenues of the property. This revenue is not recognized until the appropriate contingencies have been resolved.

During the nine months ended September 30, 2020, there were no lease renewals. During the nine months ended September 30, 2020, we consolidated our four leases with Brookdale Senior Living Communities, Inc (“Brookdale”) into one master lease and extended the term by one year to December 31, 2021. The master lease provides three renewal options consisting of a four-year renewal option, a five-year renewal option and a 10-year renewal option. Also, during the nine months ended September 30, 2020, we consolidated our two master leases with an operator into one combined master lease. Under the new combined master lease, we agreed to abate $0.6 million of third quarter rent along with $0.1 million that had been deferred in second quarter of 2020 totaling $0.7 million. Additionally, the new combined master lease allows the operator to defer rent as needed through March 31, 2021.

29

For the nine months ended September 30, 2020, we recorded $1.7 million in straight-line rental income and amortization of lease incentive cost of $0.5 million. During the nine months ended September 30, 2020, we received $110.2 million of cash rental income, which includes $11.7 million of operator reimbursements for our real estate taxes. At September 30, 2020, the straight-line rent receivable balance, net of reserves, on the balance sheet was $24.4 million.

Update on Certain Operators

An affiliate of Senior Lifestyle Corporation (“Senior Lifestyle”) operates 23 properties under a master lease with a combination of independent living, assisted living and memory care units. Senior Lifestyle was provided partial deferred rent in April 2020 and failed to pay full rent during the second quarter of 2020. In accordance with ASC 842, we evaluated the collectibility of receiving substantially all of our lease payments from the Senior Lifestyle master lease through maturity and determined that we did not have the level of certainty required by the standard. Accordingly, we wrote-off a total $17.7 million of straight-line rent receivable and lease incentives related to this master lease during the second quarter of 2020 and accounted for the Senior Lifestyle master lease on a cash basis effective July 2020. Contractual rent for the quarter was $9.1 million of which we collected $5.3 million. In October 2020, we received $1.3 million of their contractual rent of $1.6 million. The outstanding accounts receivable balance on our Consolidated Balance Sheets of $2.7 million is covered by a letter of credit and security deposit totaling $3.6 million. We continue to evaluate the collectibility of our Senior Lifestyle master lease quarterly. Additionally, we are evaluating our options for the portfolio which may include a combination of re-leasing and selling some or all of the properties.

During the third quarter of 2020, an operator paid $0.5 million of its contractual rent of $1.3 million. Additionally, during the three months ended September 30, 2020, we consolidated our two master leases with the operator into one combined master lease. Under the new combined master lease, we agreed to abate $0.6 million of third quarter rent along with $0.1 million that had been deferred in second quarter of 2020, totaling $0.7 million. Additionally, the new combined master lease allows the operator to defer rent as needed through March 31, 2021. In September 2020, the operator deferred $0.2 million of its $0.4 million contractual rent. During the three months ended September 30, 2020, we recorded an impairment charge of $0.9 million related to an assisted living community that was operated by the operator. The community was closed in October 2020 and we are evaluating our options for this community. In accordance with ASC 842, we evaluated the collectibility of receiving substantially all of our lease payments form the operator master lease through maturity and determined that we did not have the level of certainty required by the standard. Accordingly, we wrote-off $1.2 million of straight-line rent receivable related to this master lease during the third quarter of 2020.

On August 10, 2020, in the Quarterly Report on Form 10-Q, Genesis Healthcare, Inc. (“Genesis”) reported doubt regarding its ability to continue as a going concern. Accordingly, in accordance with ASC 842, we evaluated the collectibility of receiving substantially all of our lease payments from the Genesis master lease through maturity and determined that we did not have the level of certainty required by the standard. Accordingly, we wrote-off $4.3 million of straight-line rent receivable related to this master lease during the third quarter of 2020. Genesis is current on rent payments through October 2020.

Anthem Memory Care (“Anthem”) operates 11 operational memory care communities under a master lease and was placed in default in 2017 resulting from Anthem’s partial payment of its minimum rent. However, we did not enforce our rights and remedies pertaining to the event of default, under the stipulation that Anthem achieves sufficient performance and pays agreed upon rent. In accordance with 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,

30

we wrote-off the balances to equity as of January 1, 2019, as required by the ASC 842 transition guidance. We continue to evaluate the collectibility of our Anthem master lease on a quarterly basis. We currently anticipate that Anthem will pay $9.9 million of annual cash rent during 2020. However, COVID-19 may adversely impact Anthem’s operating cash flow and ability to pay rent. Anthem is current on rent payments through October 2020. Anthem is current on 2020 rent payments through October 2020.

Preferred Care, Inc. (“Preferred Care”) and affiliated entities filed for Chapter 11 bankruptcy in 2017 as a result of a multi-million-dollar judgment in a lawsuit in Kentucky against Preferred Care and certain affiliated entities. Preferred Care leased 24 properties (“Properties”) under two master leases from us and the Preferred Care operating entities that sublease those Properties did not file for bankruptcy. In accordance with 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 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 of January 1, 2019, as required by the ASC 842 transition guidance. Preferred Care did not affirm our master leases and subsequently filed for Chapter 7 bankruptcy in 2019.

During the fourth quarter of 2019, we entered into multiple contracts to sell the Properties, all of which were completed during the first quarter of 2020. The combined net proceeds from the sales, including the 2019 transactions, was approximately $77.9 million resulting in a total gain of approximately $44.0 million. The Properties had a combined net book value of $35.6 million. The 21 properties sold in the first quarter of 2020, which included 2,411 beds in Arizona, Colorado, Iowa, Kansas and Texas, were sold through multiple transactions and generated net proceeds of $72.1 million. These 21 properties had a combined net book value of $29.1 million and resulted in total gain on sale of $44.1 million.

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 in December 2018. Senior Care did not pay us December 2018 rent and accordingly, in December 2018, we placed Senior Care on a cash basis. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of the straight-line rent receivable and lease incentive balance related to Senior Care and determined 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 of January 1, 2019, as required by the ASC 842 transition guidance. During 2019, we received a court ordered reimbursement from Senior Care for the December 2018 unpaid rent, late fees and legal costs totaling $1.6 million. In March 2020, Senior Care emerged from bankruptcy and affirmed our master lease. We continue to evaluate the collectibility of our Senior Care master lease on a quarterly basis. Senior Care is current on all its rent, real estate property tax escrow and maintenance deposits through October 2020.

During the third quarter of 2020, we consolidated our four leases with Brookdale into one master lease and extended the term by one year to December 31, 2021. The master lease provides three renewal options consisting of a four-year renewal option, a five-year renewal option and a 10-year renewal option. The notice period for the first renewal option is January 1, 2021 to April 30, 2021. The economic terms of rent remain the same as the consolidated rent terms under the previous four separate lease agreements.

31

2020 Activities Overview

The following tables summarize our transactions during the nine months ended September 30, 2020 (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

Texas

1

SNF

140

8.5

%

$

13,500

$

81

$

13,581

Investment in Development and Improvement projects

Developments

Improvements

Assisted Living Communities

$

4,491

$

3,941

Skilled Nursing Centers

8,893

14

Total

$

13,384

$

3,955

Completed Developments

Number

Type

Number

of

of

of

Total

Properties

Property

Beds/Units

State

Investment

1

ALF/MC

78

Oregon

(1)

$

18,447

1

SNF

90

Missouri

13,272

2

168

$

31,719

(1)Certificate of occupancy was received in March 2020, however, due to the COVID-19 pandemic, we consented to delay the opening of this community to a later date. As of September 2020, this community is open and taking residents.

Properties Sold

Type

Number

Number

of

of

of

Sales

Carrying

Net

State

Properties

Properties

Beds/Units

Price

Value

Gain

N/A

N/A

$

$

$

108

(1)

Arizona

SNF

1

194

12,550

2,229

10,292

Colorado

SNF

3

275

15,000

4,271

10,364

Iowa

SNF

(2)

7

544

14,500

4,886

9,029

Kansas

SNF

3

250

9,750

7,438

1,993

Texas

SNF

7

1,148

23,000

10,260

12,287

21

2,411

$

74,800

$

29,084

$

44,073

(3)

(1)Gain recognized from the $90 repayment of a holdback related to a property sold during the fourth quarter of 2019 and the reassessment adjustment of $18 from the holdback under the expected value model per ASC Topic 606, Contracts with Customers (“ASC 606”).

(2)This transaction includes a holdback of $838 which is held in an interest-bearing account with an escrow holder on behalf of the buyer for potential specific losses. Using the expected value model per ASC 606, we estimated and recorded the holdback value of $471. During the nine months ended September 30, 2020, we received $150 of the holdback. We reassessed the holdback under the expected value model and recorded an additional gain of $115.

(3)Properties sold within the Preferred Care portfolio.

32

Investment in Mortgage Loans

Originations and funding under mortgage loans receivable

$

4,176

Scheduled principal payments received

(565)

Mortgage loan premium amortization

(3)

Provision for loan loss reserve

(36)

Net increase in mortgage loans receivable

$

3,572

Investment in Unconsolidated Joint Ventures

Type

Type

Total

Contractual

Number

Cash

of

of

Preferred

Cash

of

Investment

Carrying

Capital

Income

Interest

State

Properties

Investment

Return

Portion

Beds/ Units

Commitment

Value

Contribution

Recognized

Received

Arizona

ALF/MC/ILF

Preferred Equity

N/A

%

N/A

%

(1)

$

$

729

(1)

$

58

$

231

$

231

Washington (2)

UDP

Preferred Equity

(2)

12

%

7

%

6,340

6,340

56

18

Washington (3)

UDP

Preferred Equity

(3)

12

%

8

%

13,000

$

13,000

$

7,069

$

6,398

$

287

$

249

(1)We had a preferred equity investment in an unconsolidated joint venture that owned four communities providing independent living, assisted living ad memory care services. During 2020, the four properties comprising the joint venture were sold. Accordingly, we received partial liquidation proceeds of $17,758 and recorded additional $620 loss. We anticipate receiving remaining proceeds of $729.

(2)Invested $6,340 of preferred equity in an entity that will develop a 95-unit ALF/MC in Washington. Our investment represents 15.5% of the estimated total investment. The preferred equity investment earns an initial cash rate of 7% increasing to 9% in year four until the internal rate of return (“IRR”) is 8%. After achieving an 8% IRR, the cash rate drops to 8% with an IRR ranging between 12% to 14%.

(3)Entered into a preferred equity agreement in an entity that will develop and own a 267-unit ILF/ALF in Washington. Our investment represents 11.6% of the estimated total investment. Upon the satisfaction of certain conditions which are projected to be met by year-end, LTC will invest $13,000 into the entity. The preferred equity investment will earn an initial cash rate of 8% and a 12% IRR.

Notes Receivable

Advances under notes receivable

    

$

1,366

(1)

 

Principal payments received under notes receivable

(4,732)

Reclassed to real estate under development

(300)

(2)

Notes receivable reserve

36

Net increase in notes receivable

$

(3,630)

(1)We originated a $1,250 note agreement, funding $1,000 with a commitment to fund $250. The note bears interest at 5.0%.

(2)Represents an interim working capital loan related to a development project which matured upon completion of the development project and commencement of the lease.

Health Care Regulatory Climate

The Centers for Medicare & Medicaid Services (“CMS”) annually updates Medicare skilled nursing facility (“SNF”) prospective payment system rates and other policies. On July 30, 2019, CMS issued its final fiscal year 2020 Medicare skilled nursing facility update. Under the final rule, CMS projects aggregate payments to SNFs will increase by $851 million, or 2.4%, for fiscal year 2020 compared with fiscal year 2019. The final rule also addresses implementation of the new Patient-Driven Payment Model case mix classification system that became effective on October 1, 2019, changes to the group therapy definition in the skilled nursing facility setting, and various SNF Value-Based Purchasing and quality reporting program policies. On April 10, 2020, CMS issued a proposed rule to update SNF rates and policies for fiscal year 2021, which started October 1, 2020, and issued the final rule on July 31, 2020. CMS estimates that payments to SNFs would increase by $750 million, or 2.2%, for fiscal year 2021 compared to fiscal year 2020. CMS also adopted revised geographic delineations to identify a provider’s status as an urban or rural facility and to calculate the wage index, applying a 5% cap on any decreases in a provider’s wage index from fiscal year 2020 to fiscal year 2021. Finally, CMS also

33

finalized updates to the SNF value-based purchasing program to reflect previously finalized policies, updated the 30-day phase one review and correction deadline for the baseline period quality measure quarterly report, and announced performance periods and performance standards for the fiscal year 2023 program year.

Since the announcement of the COVID-19 pandemic and beginning as of March 13, 2020, CMS has issued numerous temporary regulatory waivers and new rules to assist health care providers, including SNFs, respond to the COVID-19 pandemic. These include, waiving the SNFs 3-day qualifying inpatient hospital stay requirement, flexibility in calculating a new Medicare benefit period, waiving timing for completing functional assessments, waiving requirements for health care professional licensure, survey and certification, provider enrollment, and reimbursement for services performed by telehealth, among many others. CMS also announced a temporary expansion of its Accelerated and Advance Payment Program to allow SNFs and certain other Medicare providers to request accelerated or advance payments in an amount up to 100% of the Medicare Part A payments they received from October–December 2019; this expansion was suspended April 26, 2020 in light of other CARES Act funding relief. The Continuing Appropriations Acts, 2021 and Other Extensions Act, enacted on October 1, 2020, amended the repayment terms for all providers and suppliers that requested and received accelerated and advance payments during the COVID-19 public health emergency. Specifically, Congress gave providers and suppliers that received Medicare accelerated and advance payment(s) one year from when the first loan payment was made to begin making repayments. In addition, CMS has also enhanced requirements for nursing facilities to report COVID-19 infections to local, state and federal authorities. On October 2, 2020, HHS Secretary Azar announced that he had renewed, effective October 23, 2020, the declared public health emergency for an additional 90-day period.

On March 26, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), sweeping legislation intended to bolster the nation’s response to the COVID-19 pandemic. In addition to offering economic relief to individuals and impacted businesses, the law expands coverage of COVID-19 testing and preventative services, addresses health care workforce needs, eases restrictions on telehealth services during the crisis, and increases Medicare regulatory flexibility, among many other provisions. Notably, the CARES Act temporarily suspends the 2% across-the-board “sequestration” reduction during the period May 1, 2020 through December 31, 2020, and extends the current Medicare sequester requirement through fiscal year 2030. In addition, the law provides $100 billion in grants to eligible health care providers for health care related expenses or lost revenues that are attributable to COVID-19. On April 10, 2020, CMS announced the distribution of $30 billion in funds to Medicare providers based upon their 2019 Medicare fee for service revenues. Eligible providers were required to agree to certain terms and conditions in receiving these grants. In addition, the Department of Health and Human Services (“HHS”) authorized $20 billion of additional funding for providers that have already received funds from the initial distribution of $30 billion. Unlike the first round of funds, which came automatically, providers were required to apply for these additional funds and submit the required supporting documentation, using the online portal provided by HHS. Providers were required to attest to and agree to specific terms and conditions for the use of such funds. HHS expressed a goal of allocating the whole $50 billion proportionally across all providers based on those providers’ proportional share of 2018 net Medicare fee-for-service revenue, so that some providers will not be eligible for additional funds. On May 22, 2020, HHS announced that it had begun distributing $4.9 billion in additional relief funds to SNFs to offset revenue losses and assist nursing homes with additional costs related to responding to the COVID-19 public health emergency and the shipments of personal protective equipment provided to nursing homes by the Federal Emergency Management Agency. On June 9, 2020, HHS announced that it expects to distribute approximately $15 billion to eligible providers that participate in state Medicaid and Children’s Health Insurance Program (“CHIP”) programs and have not received a payment from the Provider Relief Fund General Allocation. On July 22, 2020, President Trump announced that HHS would devote $5 billion in Provider Relief Funds to Medicare-certified long-

34

term care facilities and state veterans’ homes to build nursing home skills and enhance nursing homes’ response to COVID-19, including enhanced infection control. Nursing homes must participate in the Nursing Home COVID-19 training to be qualified to receive this funding. On August 27, 2020, HHS announced that it had distributed almost $2.5 billion to nursing homes to support increased testing, staffing, and personal protective equipment needs. On September 3, 2020, HHS announced a $2 billion performance-based incentive payment distribution to nursing homes and SNFs. Finally, on October 1, 2020, the Trump Administration announced $20 billion in new funding for several types of providers, including those who previously received, rejected, or accepted a general distribution provider relief fund payment. The application deadline for these Phase 3 funds is November 6, 2020.

On July 18, 2019, CMS published a final rule that eliminates the prohibition on pre-dispute binding arbitration agreements between long-term care facilities and their residents. The rule also strengthens the transparency of arbitration agreements and makes other changes to arbitration requirements for long-term care facilities. 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 SNFs 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. Congress continues to consider further legislative action in response to the COVID-19 pandemic. There can be no assurances that enacted or future legislation will not have an adverse impact on the financial condition of our lessees and borrowers, 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. State Medicaid budgets may experience shortfalls due to increased costs in addressing the COVID-19 pandemic. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodologies may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third-party payors.

Key Performance Indicators, Trends and Uncertainties

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

Concentration Risk. We evaluate by gross investment our concentration risk in terms of asset mix, 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

35

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.

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

9/30/20

6/30/20

3/31/20

12/31/19

9/30/19

 

Asset mix:

    

    

    

    

    

Real property

$

1,448,764

$

1,445,691

$

1,438,177

$

1,484,571

$

1,474,692

Loans receivable

260,267

258,649

256,959

256,659

255,737

Real estate investment mix:

Skilled nursing centers (1)

$

817,364

$

812,637

$

807,457

$

857,187

$

864,447

Assisted living communities

880,307

880,343

876,319

872,683

854,622

Under development (1)

Other (2)

11,360

11,360

11,360

11,360

11,360

Operator mix:

Prestige Healthcare (2)

$

273,399

$

271,781

$

270,091

$

269,792

$

268,869

Senior Lifestyle Corporation

191,622

191,622

191,622

191,283

191,283

Senior Care Centers

138,109

138,109

138,109

138,109

138,109

Anthem Memory Care

136,483

136,483

136,483

136,484

136,483

Carespring Health Care Management

102,520

102,520

102,520

102,520

102,042

Remaining operators

866,898

863,825

856,311

903,042

893,643

Geographic mix:

Michigan (2)

$

282,103

$

279,821

$

277,063

$

276,742

$

256,680

Texas

273,075

273,075

273,075

284,697

292,238

Wisconsin

149,403

149,403

149,405

149,290

149,184

Colorado

106,879

106,879

106,879

114,923

114,923

California

104,924

104,687

103,970

103,240

102,561

Remaining states

792,647

790,475

784,744

812,338

814,843

(1)During the three months ended September 30, 2020, we completed the construction of a 90-bed SNF located in Missouri. Accordingly, this property was reclassified from “Under development” to “Skilled Nursing centers” for all periods presented.

(2)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 Sheets 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 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:

36

Balance Sheet Metrics

Year to Date

Quarter Ended

9/30/20

9/30/20

6/30/20

3/31/20

12/31/19

9/30/19

Debt to gross asset value

36.5

36.5

%

(1)

37.4

%

37.3

%

37.2

%

(4)

36.8

%

Debt to market capitalization ratio

32.7

32.7

%

(2)

31.8

%

(3)

36.3

%

(2)

28.0

%

(5)

25.1

%

Interest coverage ratio (6)

4.8

x

4.8

x

4.9

x

4.7

x

4.9

x

4.9

x

Fixed charge coverage ratio (6)

4.8

x

4.8

x

4.9

x

4.7

x

4.9

x

4.9

x

(1)Decreased due to decrease in outstanding debt partially offset by decrease in gross value.

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

(3)Decreased due to increase in market capitalization.

(4)Increased due to increase in outstanding debt partially offset by increase in gross asset value. The increase in asset value was primarily due to acquisitions, developments and capital improvement funding partially offset by property sales.

(5)Increased due to decrease in market capitalization and increase in outstanding debt.

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

Year to Date

Quarter Ended

9/30/20

9/30/20

6/30/20

3/31/20

12/31/19

9/30/19

Net income

$

78,012

$

12,338

$

1,952

$

63,722

$

12,631

$

27,280

Less: (Gain)/ loss on sale

(44,073)

(30)

(189)

(43,854)

4,630

(6,236)

Add: Loss on unconsolidated joint ventures

620

620

Add: Impairment loss

941

941

5,500

Add: Interest expense

22,617

7,361

7,546

7,710

7,578

7,827

Add: Depreciation and amortization

29,232

9,766

9,797

9,669

9,817

9,932

EBITDAre

$

87,349

$

30,376

$

19,726

$

37,247

$

40,156

$

38,803

Add (less): Non-recurring one-time items

22,841

5,099

17,742

(2,111)

Adjusted EBITDAre

$

110,190

$

35,475

$

37,468

$

37,247

$

38,045

$

38,803

Interest expense

$

22,617

$

7,361

$

7,546

$

7,710

$

7,578

$

7,827

Add: Capitalized interest

354

77

86

191

167

108

Interest incurred

$

22,971

$

7,438

$

7,632

$

7,901

$

7,745

$

7,935

Interest coverage ratio

4.8

x

4.8

x

4.9

x

4.7

x

4.9

x

4.9

x

Interest incurred

$

22,971

$

7,438

$

7,632

$

7,901

$

7,745

$

7,935

Total fixed charges

$

22,971

$

7,438

$

7,632

$

7,901

$

7,745

$

7,935

Fixed charge coverage ratio

4.8

x

4.8

x

4.9

x

4.7

x

4.9

x

4.9

x

37

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.

Additionally, as described in the Executive Overview above, COVID-19 is adversely affecting and is expected to continue to adversely affect our business, results of operations, cash flows and financial condition. Depending on the future developments regarding COVID-19, the duration, spread and severity of the outbreak, historical trends reflected in our balance sheet metrics may not be achieved in the future.

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.

38

Operating Results (unaudited, in thousands)

Three Months Ended

 

September 30, 

 

2020

2019

Difference

 

Revenues:

Rental income

$

30,010

$

38,665

$

(8,655)

(1)

Interest income from mortgage loans

7,890

7,646

244

Interest and other income

273

808

(535)

(2)

Total revenues

38,173

47,119

(8,946)

Expenses:

Interest expense

7,361

7,827

466

(3)

Depreciation and amortization

9,766

9,932

166

Impairment charges

941

(941)

(4)

Recovery for doubtful accounts

(2)

(14)

(12)

Transaction costs

63

75

12

Property tax expense

3,351

4,270

919

(5)

General and administrative expenses

4,814

4,745

(69)

Total expenses

26,294

26,835

541

Other operating income:

Gain on sale of real estate, net

30

(6)

6,236

(7)

(6,206)

Operating income

11,909

26,520

(14,611)

Gain from property insurance proceeds

373

(8)

373

Income from unconsolidated joint ventures

56

760

(704)

(9)

Net income

12,338

27,280

(14,942)

Income allocated to non-controlling interests

(121)

(88)

(33)

Net income attributable to LTC Properties, Inc.

12,217

27,192

(14,975)

Income allocated to participating securities

(103)

(112)

9

Net income available to common stockholders

$

12,114

$

27,080

$

(14,966)

(1)Decreased primarily due to write-off of the Genesis and another operator straight-line rent receivable totaling $5,472, reduction in rent related to the sale of the Preferred Care portfolio, abated and deferred rent and short-payment of rent and property tax escrow from Senior Lifestyle master lease, partially offset by increased rent from acquisitions and completed development projects and contractual rent increase.

(2)Decreased primarily due to the partial paydown of a mezzanine loan.

(3)Decreased primarily due to lower outstanding balance and interest rates on our line of credit in 2020, partially offset by increased interest from sale of $100,000 senior unsecured notes during the fourth quarter of 2019.

(4)Represents an impairment loss related to a 61-unit ALF in Florida.

(5)Decreased primarily due to no allocation of Senior Lifestyle cash receipts to Senior Lifestyle’s property tax escrow since it is fully funded for 2020.
(6)Represents recognition of additional gain due to quarterly collectibility evaluation of funds held in escrow from previously sold properties.

(7)Represents the net gain on sale of $6,236 related to a 148-bed SNF in Georgia. Additionally, we recognized an additional $500 gain on sale due to receipt of funds held in escrow related to a portfolio of six ALFs sold in 2018.

(8)Represents gain on insurance proceeds related to roof damage at a 114-bed SNF in Texas sold during the first quarter of 2020.

(9)Decrease due to the sale of properties comprising a joint venture in which we had a preferred equity investment in 2020 and payoff of a mezzanine in 2019.

39

Nine Months Ended

September 30, 

2020

2019

Difference

Revenues:

Rental income

$

88,320

$

114,566

$

(26,246)

(1)

Interest income from mortgage loans

23,487

22,308

1,179

(2)

Interest and other income

1,257

1,967

(710)

(3)

Total revenues

113,064

138,841

(25,777)

Expenses:

Interest expense

22,617

23,004

387

(4)

Depreciation and amortization

29,232

29,399

167

Impairment charges

941

(941)

(5)

(Recovery) provision for doubtful accounts

(1)

153

154

Transaction costs

197

275

78

Property tax expense

11,685

12,566

881

(6)

General and administrative expenses

14,494

13,912

(582)

(7)

Total expenses

79,165

79,309

144

Other operating income:

Gain on sale of real estate, net

44,073

(8)

6,736

(9)

37,337

Operating income

77,972

66,268

11,704

Gain from property insurance proceeds

373

(10)

373

Loss on unconsolidated joint ventures

(620)

(11)

(620)

Income from unconsolidated joint ventures

287

1,973

(1,686)

(12)

Net income

78,012

68,241

9,771

Income allocated to non-controlling interests

(292)

(257)

(35)

Net income attributable to LTC Properties, Inc.

77,720

67,984

9,736

Income allocated to participating securities

(339)

(298)

(41)

Net income available to common stockholders

$

77,381

$

67,686

$

9,695

(1)Decreased primarily due to the $23,029 write-off of straight-line rent receivable and lease incentives balances during the second and third quarter of 2020, reduction in rent related to the sale of the Preferred Care portfolio and short-payment of rent and property tax escrow from Senior Lifestyle master lease, partially offset by increased rent from acquisitions and lease transitions.

(2)Increased primarily due to additional mortgage and capital improvement funding.

(3)Decreased primarily due to the partial paydown of a mezzanine loan.

(4)Decreased primarily due to lower outstanding balance and interest rates on our line of credit in 2020, partially offset by increased interest from sale of $100,000 senior unsecured notes during the fourth quarter of 2019.

(5)Represents an impairment loss related to a 61-unit ALF in Florida.

(6)Decreased primarily due to no allocation of Senior Lifestyle cash receipts to Senior Lifestyle’s property tax escrow since it is fully funded for 2020.

(7)Increased primarily due to higher incentive compensation expense in 2020.

(8)Represents gain on sale of 21 SNFs within the Preferred Care portfolio and recognition of additional gain due to quarterly evaluation of funds held in escrow from previously sold properties.

(9)Represents the net gain on sale of $6,236 related to a 148-bed SNF in Georgia. Additionally, we recognized an additional $500 net gain on sale due to receipt of funds held in escrow related to a portfolio of six ALFs sold in 2018.

(10)Represents gain on insurance proceeds related to roof damage at a 114-bed SNF in Texas sold during the first quarter of 2020.

(11)Relates to the sale of properties comprising a joint venture in which we had a preferred equity investment.

(12)Decreased due to (11) above and payoff of a mezzanine loan in 2019.

Funds From Operations Available to Common Stockholders

Funds from Operations (“FFO”) attributable to common stockholders, basic FFO attributable to common stockholders per share and diluted FFO attributable to common stockholders per share are supplemental measures of a REIT’s financial performance that are not defined by GAAP. Real estate

40

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

Nine Months Ended

September 30, 

September 30, 

2020

2019

2020

2019

GAAP net income available to common stockholders

$

12,114

$

27,080

$

77,381

$

67,686

Add: Depreciation and amortization

9,766

9,932

29,232

29,399

Add: Impairment charges

941

941

Add: Loss on unconsolidated joint ventures

620

Less: Gain on sale of real estate, net

(30)

(6,236)

(44,073)

(6,736)

NAREIT FFO attributable to common stockholders

$

22,791

$

30,776

$

64,101

$

90,349

NAREIT FFO attributable to common stockholders per share:

Basic

$

0.58

$

0.78

$

1.63

$

2.28

Diluted

$

0.58

(1)

$

0.77

(1)  

$

1.63

$

2.26

(1)

Weighted average shares used to calculate NAREIT FFO per share:

Basic

39,061

39,586

39,218

39,565

Diluted

39,293

(2)

40,129

(3)

39,269

(4)

40,106

(3)

(1)Includes the effect of participating securities.

(2)Includes the effect of performance-based stock units and participating securities.

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

(4)Includes the effect of performance-based stock units.

Liquidity and Capital Resources

Sources and Uses of Cash

As of September 30, 2020, we had a total of $22.8 million of cash and cash equivalents, $510.1 million available under our unsecured revolving line of credit and the potential ability to access the capital markets through the issuance of $200.0 million of common stock under our Equity Distribution Agreements. 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.

41

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. In addition, as described in “Item 1A. Risk Factors”, COVID-19 has adversely affected and is expected to continue to adversely affect our operators’ business, results of operations, cash flows and financial condition which could, in turn, adversely affect our financial position.

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, th