Table of Contents

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

__________

FORM 10-Q

 

(Mark One)

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition period from          to         

 

Commission file number 1-11314

 

LTC PROPERTIES, INC.

(Exact name of Registrant as specified in its charter)

 

Maryland

 

71-0720518

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

2829 Townsgate Road, Suite 350

Westlake Village, California  91361

(Address of principal executive offices, including zip code)

 

(805) 981-8655

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes  þ  No  ¨

 

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

 

Large accelerated filer þ

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

 

 

(Do not check if a

 

 

 

smaller reporting company)

 

 

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 August 1, 2013 was 34,751,910.

 

 

 



Table of Contents

 

LTC PROPERTIES, INC.

 

FORM 10-Q

 

June 30, 2013

 

INDEX

 

PART I -- Financial Information

Page

 

 

Item 1. Financial Statements

 

Consolidated Balance Sheets

3

Consolidated Statements of Income

4

Consolidated Statements of Comprehensive Income

5

Consolidated Statements of Cash Flows

6

Notes to Consolidated Financial Statements

7

 

 

 

 

Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations

20

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

34

 

 

Item 4. Controls and Procedures

34

 

 

 

 

PART II -- Other Information

 

 

 

Item 1. Legal Proceedings

35

 

 

Item 1A. Risk Factors

35

 

 

Item 6. Exhibits

36

 

2



Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

 

 

June 30, 2013

 

December 31, 2012

 

ASSETS

 

(unaudited)

 

(audited)

 

Real estate investments:

 

 

 

 

 

Land

 

$  75,094

 

 

$  75,094

 

Buildings and improvements

 

836,934

 

 

822,618

 

Accumulated depreciation and amortization

 

(209,581

)

 

(197,407

)

Net operating real estate property

 

702,447

 

 

700,305

 

Properties held-for-sale, net of accumulated depreciation and amortization: 2013 — $804; 2012 — $1,141

 

210

 

 

1,242

 

Net real estate property

 

702,657

 

 

701,547

 

Mortgage loans receivable, net of allowance for doubtful accounts: 2013 — $396; 2012 — $782

 

39,272

 

 

39,299

 

Real estate investments, net

 

741,929

 

 

740,846

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

Cash and cash equivalents

 

63,315

 

 

7,191

 

Debt issue costs, net

 

2,701

 

 

3,040

 

Interest receivable

 

741

 

 

789

 

Straight-line rent receivable,(1) net of allowance for doubtful accounts: 2013 — $1,532; 2012 — $1,557

 

28,839

 

 

26,998

 

Prepaid expenses and other assets

 

6,262

 

 

7,548

 

Notes receivable

 

1,277

 

 

3,180

 

Total assets

 

$845,064

 

 

$789,592

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Bank borrowings

 

$         —

 

 

$115,500

 

Senior unsecured notes

 

185,800

 

 

185,800

 

Bonds payable

 

2,035

 

 

2,635

 

Accrued interest

 

3,296

 

 

3,279

 

Earn-out liabilities

 

6,963

 

 

6,744

 

Accrued expenses and other liabilities

 

11,712

 

 

12,492

 

Accrued expenses and other liabilities related to properties held-for-sale

 

33

 

 

34

 

Total liabilities

 

209,839

 

 

326,484

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock $0.01 par value; 15,000 shares authorized;

 

 

 

 

 

 

shares issued and outstanding: 2013 — 2,000; 2012 — 2,000

 

38,500

 

 

38,500

 

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding: 2013 —34,752; 2012 — 30,544

 

348

 

 

305

 

Capital in excess of par value

 

687,841

 

 

510,236

 

Cumulative net income

 

749,912

 

 

724,033

 

Other

 

134

 

 

152

 

Cumulative distributions

 

(841,510

)

 

(810,125

)

Total LTC Properties, Inc. stockholders’ equity

 

635,225

 

 

463,101

 

 

 

 

 

 

 

 

Non-controlling interests

 

 

 

7

 

Total equity

 

635,225

 

 

463,108

 

Total liabilities and equity

 

$845,064

 

 

$789,592

 

 


(1)             On June 30, 2013 and December 31, 2012, we had $3,206 and $3,191 respectively, in straight-line rent receivable from a lessee that qualifies as a related party because the lessee’s Chief Executive Officer is on our Board of Directors.  See Note 9. Transactions with Related Party for further discussion.

 

See accompanying notes.

 

3



Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share, unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income (1)

 

$24,539

 

 

$21,139

 

 

$49,015

 

 

$41,975

 

Interest income from mortgage loans

 

1,050

 

 

1,431

 

 

2,109

 

 

2,963

 

Interest and other income (2)

 

92

 

 

485

 

 

185

 

 

722

 

Total revenues

 

25,681

 

 

23,055

 

 

51,309

 

 

45,660

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

2,798

 

 

2,004

 

 

5,931

 

 

4,037

 

Depreciation and amortization

 

6,124

 

 

5,355

 

 

12,250

 

 

10,509

 

General and administrative expenses

 

2,869

 

 

2,604

 

 

6,287

 

 

5,128

 

Total expenses

 

11,791

 

 

9,963

 

 

24,468

 

 

19,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

13,890

 

 

13,092

 

 

26,841

 

 

25,986

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net Income from discontinued operations

 

27

 

 

21

 

 

52

 

 

43

 

(Loss) gain on real estate assets, net

 

(1,014

)

 

 

 

(1,014

)

 

16

 

Net (loss) income from discontinued operations

 

(987

)

 

21

 

 

(962

)

 

59

 

Net income

 

12,903

 

 

13,113

 

 

25,879

 

 

26,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income allocated to non-controlling interests

 

 

 

(10

)

 

 

 

(21

)

Net income attributable to LTC Properties, Inc.

 

12,903

 

 

13,103

 

 

25,879

 

 

26,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income allocated to participating securities

 

(91

)

 

(91

)

 

(189

)

 

(185

)

Income allocated to preferred stockholders

 

(818

)

 

(818

)

 

(1,636

)

 

(1,636

)

Net income available to common stockholders

 

$11,994

 

 

$12,194

 

 

$24,054

 

 

$24,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$0.39

 

 

$0.40

 

 

$0.79

 

 

$0.80

 

Discontinued operations

 

($0.03

)

 

$0.00

 

 

($0.03

)

 

$0.00

 

Net income available to common stockholders

 

$0.36

 

 

$0.40

 

 

$0.76

 

 

$0.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$0.39

 

 

$0.40

 

 

$0.79

 

 

$0.80

 

Discontinued operations

 

($0.03

)

 

$0.00

 

 

($0.03

)

 

$0.00

 

Net income available to common stockholders

 

$0.36

 

 

$0.40

 

 

$0.76

 

 

$0.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

32,913

 

 

30,213

 

 

31,645

 

 

30,201

 

Diluted

 

32,946

 

 

30,258

 

 

31,679

 

 

30,246

 

 


(1)         During the three and six months ended June 30, 2013, we received $1,122 and $2,235, respectively, in rental income and recorded $3 and $16, respectively, in straight-line rental income from a lessee that qualifies as a related party.  During the three and six months ended June 30, 2012, we received $1,095 and $2,181, respectively, in rental income and recorded $31 and $70, respectively, in straight-line rental income from a lessee that qualifies as a related party.  The lessee’s Chief Executive Officer is on our Board of Directors.  See Note 9. Transactions with Related Party for further discussion.

 

(2)         During the three and six months ended June 30, 2013, we did not recognize interest income from any related parties.  During the three and six months ended June 30, 2012, we recognized $55 and $235, respectively, of interest income from an entity that qualifies as a related party because the entity’s Chief Executive Officer is on our Board of Directors.  See Note 9. Transactions with Related Party for further discussion.

 

NOTE: Computations of per share amounts from continuing operations, discontinued operations and net income are made independently.  Therefore, the sum of per share amounts from continuing operations and discontinued operations may not agree with the per share amounts from net income available to common stockholders.

 

See accompanying notes.

 

4



Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands, unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income

 

$12,903 

 

$13,113 

 

$25,879 

 

$26,045 

 

Reclassification adjustment

 

(8)

 

(16)

 

(17)

 

(30)

 

Comprehensive income

 

12,895 

 

13,097 

 

25,862 

 

26,015 

 

Comprehensive income allocated to non-controlling interests

 

— 

 

(10)

 

 

(21)

 

Comprehensive income attributable to LTC Properties, Inc.

 

$12,895 

 

$13,087 

 

$25,862 

 

$25,994 

 

 

 

See accompanying notes.

 

5



Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

 

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$25,879

 

 

$26,045

 

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

 

 

 

 

 

 

Depreciation and amortization—continuing and discontinued operations

 

12,267

 

 

10,536

 

Stock-based compensation expense

 

1,508

 

 

910

 

Loss (gain) on sale of assets, net

 

1,014

 

 

(16

)

Straight-line rental income—continuing and discontinued operations (1)

 

(1,860

)

 

(1,333

)

Provision (recovery) for doubtful accounts—continuing and discontinued operations

 

19

 

 

(21

)

Non-cash interest related to earn-out liabilities

 

220

 

 

220

 

Other non-cash items, net

 

212

 

 

642

 

Increase (decrease) in accrued interest payable

 

17

 

 

(200

)

Decrease in interest receivable

 

25

 

 

391

 

Net change in other assets and liabilities

 

(564

)

 

(344

)

Net cash provided by operating activities

 

38,737

 

 

36,830

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Investment in real estate properties, net

 

 

 

(20,482

)

Investment in real estate properties under development

 

(9,310

)

 

(215

)

Investment in real estate capital improvements

 

(4,506

)

 

(446

)

Proceeds from sale of real estate investments, net

 

1

 

 

1,248

 

Advances under mortgage loans receivable

 

(913

)

 

 

Principal payments received on mortgage loans receivable

 

938

 

 

3,752

 

Proceeds from redemption of marketable securities

 

 

 

6,500

 

Advances under notes receivable

 

(510

)

 

(2,019

)

Principal payments received on notes receivable

 

2,413

 

 

191

 

Net cash used in investing activities

 

(11,887

)

 

(11,471

)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Bank borrowings

 

2,000

 

 

23,000

 

Repayment of bank borrowings

 

(117,500

)

 

(11,000

)

Principal payments on bonds payable

 

(600

)

 

(565

)

Proceeds from common stock offering

 

176,301

 

 

 

Stock option exercises

 

523

 

 

746

 

Distributions paid to stockholders

 

(31,385

)

 

(28,096

)

Redemption of non-controlling interests

 

 

 

(2,764

)

Distributions paid to non-controlling interests

 

(7

)

 

(59

)

Financing costs paid

 

(35

)

 

(716

)

Other

 

(23

)

 

 

Net cash provided by (used in) financing activities

 

29,274

 

 

(19,454

)

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

56,124

 

 

5,905

 

Cash and cash equivalents, beginning of period

 

7,191

 

 

4,408

 

Cash and cash equivalents, end of period

 

$63,315

 

 

$10,313

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

Interest paid

 

$  6,040

 

 

$  3,918

 

 


(1)             During the six months ended June 30, 2013 and 2012, we recorded $15 and $70, respectively, in straight-line rental income from a lessee that qualifies as a related party.  The lessee’s Chief Executive Officer is on our Board of Directors.  See Note 9. Transactions with Related Party for further discussion.

 

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 (or REIT), was incorporated on May 12, 1992 in the State of Maryland and commenced operations on August 25, 1992.  We invest primarily in senior housing and long term care properties through acquisitions, development, mortgage loans and other investments. 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 senior housing and long term care properties managed by experienced operators.  Our primary senior housing and long term care property types include skilled nursing properties (or SNF), assisted living properties (or ALF), independent living properties (or ILF), memory care properties (or 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 type 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 results of operations for the three and six months ended June 30, 2013 and 2012 pursuant to the rules and regulations of the Securities and Exchange Commission (or SEC).  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (or 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, its wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The results of operations for the three and six months ended June 30, 2013 and 2012 are not necessarily indicative of the results for a full year.

 

Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation, including changes as a result of the application of accounting guidance for properties disposed or classified as held-for-sale. During the six months ended June 30, 2013, we sold a 47-bed skilled nursing property located in Colorado for $1,000.  At June 30, 2013, one of our lessees has a mandatory option to purchase one 30-bed skilled nursing property in Ohio.  The purchase option provides for a mandatory closing on or before October 31, 2013.  See Note 2. Real Estate Investments for further discussion of the purchase option. During the six months ended June 30, 2012, we sold a 140-bed skilled nursing property located in Texas for $1,248,000. Additionally, during the fourth quarter of 2012, we reclassified a 140-unit independent living property located in Texas from held-for-sale to held-for-use. Accordingly, this property has been reclassified from held-for-sale to held-for-use on the June 30, 2012 consolidated balance sheet and consolidated statement of income to conform to the current period presentation. Depreciation expense, which was not recognized during the held-for-sale period, was recognized at the date of reclassification. Due to the market conditions, the timing of the ultimate disposal of this property was uncertain. These adjustments are normal and recurring in nature. See Note 2. Real Estate Investments for further discussion of our property sales.

 

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

 

7



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

2.                                    Real Estate Investments

 

Assisted living properties, independent living properties, memory care properties, and combinations thereof are included in the assisted living property type. Range of care properties (or ROC) property type consists of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services.

 

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

 

Owned Properties. The following table summarizes our investments in owned properties at June 30, 2013 (dollar amounts in thousands):

 

 

 

 

 

 

 

Number

 

Number of

 

Investment

 

Type of Property

 

Gross
Investments

 

Percentage of
Investments

 

of
Properties 
(1)

 

SNF
Beds

 

ALF
Units

 

per
Bed/Unit

 

Skilled Nursing

 

$454,021

 

49.7%

 

73

 

8,418

 

 

$53.93

 

Assisted Living

 

379,913

 

41.6%

 

96

 

 

4,502

 

$84.39

 

Range of Care

 

43,907

 

4.8%

 

8

 

634

 

274

 

$48.36

 

Under Development (2)

 

22,757

 

2.5%

 

 

 

 

 

Schools

 

12,444

 

1.4%

 

2

 

 

 

 

Totals

 

$913,042

 

100.0%

 

179

 

9,052

 

4,776

 

 

 

 


(1)             We have investments in 26 states leased to 35 different operators.

(2)             Includes a MC development with 60 units, two combination ALF and MC developments with a total of 158 units, and a SNF development with 143 beds.

 

All of our owned properties are leased to our operators pursuant to non-cancelable operating leases generally with an initial term of 10 to 15 years.  Each lease is a triple net lease covering one or more properties which requires the operator/lessee to pay all costs necessary in the operations of the facilities.  Many of the leases contain renewal options and one master lease contains an option to purchase six skilled nursing properties with a total of 230 beds for an all cash purchase price of $11,000,000.  As of June 30, 2013, the net book value for these six properties was $8,156,000. If the lessee fails to exercise its option to purchase these six properties on or before September 30, 2013, the lessee is obligated to purchase a 30-bed skilled nursing property out of the six property portfolio for $1,000,000 on or before October 31, 2013. The 30-bed skilled nursing property has a net book value of $210,000 as of June 30, 2013.  The leases provide for fixed minimum base rent during the initial and renewal periods.  The majority of our leases contain provisions for specified annual increases over the rents of the prior year that are generally computed in one of four ways depending on specific provisions of each lease:

 

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

(ii)            a calculation based on the Consumer Price Index;

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

(iv)        specific dollar increases.

 

8



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

During the six months ended June 30, 2013, we completed the construction of a 120-bed skilled nursing property in Texas. This new property replaces a skilled nursing property in our existing portfolio.  In July 2013, all the residents were relocated from the old property to the new property.  The operator is responsible for closing and selling the old property.  During the six months ended June 30, 2013, we funded $3,405,000 under the $9,094,000 development commitment for the new property. In July 2013, we funded $1,008,000 under this development commitment and we anticipate funding the remaining balance in August 2013. Also, during the six months ended June 30, 2013, we sold a 47-bed skilled nursing property in Colorado for $1,000 and recognized a $1,014,000 loss on sale.

 

In July 2013, we completed the construction of a 60-unit memory care property in Colorado. The new memory care property opened in July 2013.  Total cost for the new property was approximately $9,817,000.

 

As of June 30, 2013, we have a commitment to provide, under certain conditions, up to $5,000,000 per year through December 2014 to an existing operator for expansion of the 37 properties they lease from us. The estimated yield of this commitment is 9.5% plus the positive difference, if any, between the average yields on the U.S. Treasury 10-year note for the five days prior to funding, minus 420 basis points as of June 30, 2013, no funds have been requested under this commitment. In addition, the following table summarizes our investment commitments as of June 30, 2013, excluding the $5,000,000 per year commitment, and year to date funding on our ongoing development, redevelopment, renovation and expansion projects (excludes capitalized interest, dollar amounts in thousands):

 

Type of Property

 

Investment
Commitment

 

2013
Funding 
(2)

 

Commitment
Funded

 

Remaining
Commitment

 

Number of
Properties

 

Number of
Beds/Units

 

Skilled Nursing

 

$29,550

 

$2,115

 

$7,651

 

$21,899

 

6

 

640

 

Assisted Living (1)

 

40,802

 

8,042

 

16,218

 

24,584

 

6

 

354

 

Totals

 

$70,352

 

$10,157 (3)

 

$23,869

 

$46,483

 

12

 

994

 

 


(1)             Includes the development of a 60-unit memory care property for $9,817 and two assisted living and memory care combination properties for a total of $16,385, and the expansion of three assisted living properties for a total $14,600.

(2)             Excludes $260 of capital improvement on three completed projects with no remaining commitments and includes $6 funded under the commitment as marketing expense.

(3)             In July of 2013, we funded $1,932 under investment commitments.

 

During the six months ended June 30, 2012, we purchased a 144-bed skilled nursing property located in Texas for an aggregate purchase price of $18,600,000.  We also purchased a vacant parcel of land in Colorado for $1,882,000 and simultaneously entered into a lease and development commitment agreement to fund the construction of a 60 unit memory care unit.  (See above for development commitment status.) Additionally, we sold a 140-bed skilled nursing property located in Texas for $1,248,000 and recognized a gain, net of selling expenses, of $16,000. This property was leased under a master lease and the economic terms of the master lease did not change as a result of this sale.

 

9



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at June 30, 2013 (dollar amounts in thousands):

 

 

 

 

 

Percentage

 

 

 

Number

 

Number of

 

Investment

 

Type of Property

 

Gross
Investments

 

of
Investments

 

Number
of Loans

 

of
Properties
(1)

 

SNF
Beds

 

ALF
Units

 

per
Bed/Unit

 

Skilled Nursing (2)

 

$24,730

 

62.3%

 

15

 

17

 

1,861

 

 

$13.29

 

Assisted Living

 

12,202

 

30.8%

 

3

 

8

 

 

211

 

$57.83

 

Range of Care

 

2,736

 

6.9%

 

1

 

1

 

99

 

74

 

$15.82

 

Totals

 

$39,668

 

100.0%

 

19

 

26

 

1,960

 

285

 

 

 

 


(1)             We have investments in 8 states that include mortgages to 11 different operators.

(2)             Includes a mortgage and construction loan secured by a currently operating skilled nursing property and parcel of land upon which a 106-bed replacement property is being constructed. The agreement gives us the right to purchase the replacement facility for $13,500 during an 18 month period beginning on the first anniversary of the issuance of the certificate of occupancy.

 

At June 30, 2013, the mortgage loans had interest rates ranging from 7.0% to 13.5% and maturities ranging from 2014 to 2022.  In addition, some loans contain certain guarantees, provide for certain facility fees and generally have 20-year to 25-year amortization schedules.  The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points. During the six months ended June 30, 2013, we funded $913,000 under a $10,600,000 mortgage and construction loan and we have a remaining commitment of $7,067,000. In July 2013, we funded $1,897,000 under the mortgage and construction loan and we have a remaining commitment of $5,170,000. During the six months ended June 30, 2013 and 2012, we received $938,000 and $1,389,000, respectively, in regularly scheduled principal payments. During the six months ended June 30, 2012, we received $2,363,000 plus accrued interest related to the early payoff of two mortgage loans secured by two skilled nursing properties.

 

In August 2013, we entered into a $141,000,000 mortgage loan agreement with affiliates of Prestige Healthcare and secured by 15 properties with a total of 2,092 skilled nursing beds and 24 independent living units in Michigan. The loan is for a term of 30 years and will bear interest at 9.41% for five years, escalating annually thereafter by 2.25%. Payments will be interest-only for a period of three years, after which the borrower will make interest payments along with annual principal payments of $1,000,000.

 

Of the aggregate loan amount, we anticipate funding approximately $126,000,000 during the fourth quarter of 2013 with additional forward commitments of $12,000,000 for capital improvements and up to $3,000,000 for short-term working capital. The loan agreement also provides, under certain conditions and based on certain operating metrics and valuation thresholds achieved and sustained within the first twelve years of the term, for additional loan proceeds of up to $40,000,000 with such proceeds limited to $10,000,000 per twelve months.

 

The borrower will have a one-time option between the third and twelfth years to prepay up to 50% of the then outstanding loan balance without penalty.  Exclusively for the purposes of this option, the properties collateralizing the loan have been separated by us into two pools of assets.  If and when the option is exercised, we will identify which of the two pools we will release for prepayment and removal from portfolio of properties securing the loan. If the prepayment option is exercised and timely concluded, the borrower forfeits its opportunity to access any additional loan proceeds.

 

Additionally, under certain circumstances, including a change in regulatory environment, we have the option to purchase the properties.

 

10



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

3.                                    Notes Receivable

 

Notes receivables consist of various loans and line of credit agreements with certain operators. During the six months ended June 30, 2013, we received $2,372,000 for the early repayment of an 8.5% term loan. At June 30, 2013, we had a 9.0% term loan outstanding with a carrying value of $622,000. Also at June 30, 2013, we committed to provide $1,850,000 under seven loans and line of credit agreements to certain operators. As of June 30, 2013, we funded $655,000 under these commitments and have a remaining commitment of $1,195,000. In July 2013, we funded $83,000 under these commitments. Accordingly, we have a remaining commitment of $1,112,000. These loans and line of credit commitments have interest ranging from 9.0% to 12.0% and maturities ranging from 2013 to 2014. During the six months ended June 30, 2013 and 2012, we received, including the repayment above, $2,413,000 and $191,000, respectively, in principal payments and we funded $510,000 and $2,019,000, respectively, under our notes receivable.

 

4.                                    Marketable Securities

 

During 2012, Skilled Healthcare Group, Inc. (or SHG) redeemed all of their outstanding Senior Subordinated Notes at par value plus accrued and unpaid interest up to the redemption date. The SHG Senior Subordinated Notes had a face rate of 11.0% and an effective yield of 11.1%. During the six months ended June 30, 2012, we recognized $235,000 of interest income from our $6,500,000 investment in SHG Senior Subordinated Notes. One of our board members is the chief executive officer of SHG. See Note 9. Transactions with Related Party for further discussion.

 

 

5.                                    Debt Obligations

 

Bank Borrowings. During 2012, we amended our Unsecured Credit Agreement increasing the commitment to $240,000,000 with the opportunity to increase the credit amount up to a total of $350,000,000. Additionally, the drawn pricing was decreased by 25 basis points, the undrawn pricing was decreased by 10 basis points and the maturity of the facility was extended for one additional year to May 25, 2016. The amendment also provides for a one-year extension option at our discretion, subject to customary conditions.  Based on our leverage at June 30, 2013, the amended facility provides for interest annually at LIBOR plus 125 basis points and the unused commitment fee was 25 basis points.

 

During the six months ended June 30, 2013, we borrowed $2,000,000 and repaid $117,500,000 under our Unsecured Credit Agreement.  At June 30, 2013, we had no outstanding balances under our Unsecured Credit Agreement and we were in compliance with all our covenants.

 

Senior Unsecured Notes.  At June 30, 2013 and December 31, 2012, we had $185,800,000 outstanding under our Senior Unsecured Notes with a weighted average interest rate of 5.2% and $100,000,000 available under an Amended and Restated Note Purchase and Private Shelf agreement which provides for the possible issuance of senior unsecured fixed-rate term notes through October 19, 2014.

 

Bonds Payable.  At June 30, 2013 and December 31, 2012, we had outstanding principal of $2,035,000 and $2,635,000 respectively, on multifamily tax-exempt revenue bonds that are secured by five assisted living properties in Washington.  These bonds bear interest at a variable rate that is reset weekly and mature during 2015.  For the six months ended June 30, 2013, the weighted average interest rate, including letter of credit fees, on the outstanding bonds was 2.9%.  During the six months ended June 30, 2013 and 2012, we paid $600,000 and $565,000, respectively, in regularly scheduled principal payments.  As of June 30, 2013 and December 31, 2012, the aggregate carrying value of real estate properties securing our bonds payable was $6,518,000 and $6,650,000, respectively.

 

11



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

6.                                    Equity

 

Equity is allocated between controlling and non-controlling interests as follows (in thousands):

 

 

 

LTC
Properties, Inc.
Stockholders’
Equity

 

Non-controlling
Interest

 

Total
Equity

 

Balance at December 31, 2012

 

$463,101

 

$    7

 

$463,108

 

Net income

 

25,879

 

 

25,879

 

Issue common stock

 

175,639

 

 

175,639

 

Vested restricted common stock

 

1,508

 

 

1,508

 

Stock option exercise

 

523

 

 

523

 

Reclassification adjustment

 

(17)

 

 

(17)

 

Non-controlling interest preferred return

 

 

(7)

 

(7)

 

Preferred stock dividends

 

(1,636)

 

 

(1,636)

 

Common stock dividends

 

(29,749)

 

 

(29,749)

 

Other

 

(23)

 

 

 

(23)

 

Balance at June 30, 2013

 

$635,225

 

$  —

 

$635,225

 

 

Preferred Stock.  At June 30, 2013, we had 2,000,000 shares of our 8.5% Series C Cumulative Convertible Preferred Stock (or Series C preferred stock) outstanding.  Our Series C preferred stock is convertible into 2,000,000 shares of our common stock at $19.25 per share.  Total shares reserved for issuance of common stock related to the conversion of Series C preferred stock were 2,000,000 shares at June 30, 2013.

 

Common Stock.  During the six months ended June 30, 2013, we acquired 600 shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations. During the three months ended June 30, 2013, we sold 4,025,000 shares of common stock in a public offering at a price of $44.50 per share, before fees and costs of $7,707,000.  The net proceeds of $171,406,000 were used to pay down amounts outstanding under our Unsecured Credit Agreement, to fund acquisitions and our current development commitments and general corporate purposes.

 

During the three months ended June 30, 2013, we terminated the equity distribution agreement which allowed us to issue and sell, from time to time, up to $85,686,000 in aggregate offering price of our common shares.  Sales of common shares were made by means of ordinary brokers’ transactions at market prices, in block transactions, or as otherwise agreed between us and our sales agents.  During the six months ended June 30, 2012, we did not sell shares of our common stock under our equity distribution agreement. During the six months ended June 30, 2013, we sold 126,742 shares of common stock for $4,895,000 in net proceeds under our equity distribution agreement. In conjunction with the sale of common stock, we reclassified $662,000 of accumulated costs associated with the equity distribution agreement to additional paid in capital.

 

Available Shelf Registrations.  On July 19, 2013, we filed a Form S-3ASR “shelf” registration statement to replace our prior shelf registration statement.  This current shelf registration statement provides us with the capacity to offer up to $800,000,000 in common stock, preferred stock, warrants, debt, depositary shares, or units.  We may from time to time raise capital under this current shelf registration 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.

 

12



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Non-controlling Interests. We currently have no limited partners. During 2012, we had one limited partnership. The limited partnership agreement allowed the limited partners to convert, on a one-for-one basis, their limited partnership units into shares of common stock or the cash equivalent, at our option. Since we exercised control, we consolidated the limited partnership and we carried the non-controlling interests at cost.

 

During 2012, two of our limited partners exercised their conversion rights to exchange all of their 112,588 partnership units. At our discretion, we converted 23,294 partnership units into an equal number of our common shares.  The partnership conversion price was $17.00 per partnership unit.  At our discretion, we elected to satisfy the conversion of 89,294 limited partnership units with cash.  We paid the limited partners $2,764,000, which represents the closing price of our common stock on the redemption date plus $0.05 per share multiplied by the number of limited partnership units redeemed.  The amount we paid upon redemption exceeded the book value of the limited partnership interest redeemed by $1,246,000. Accordingly, the $1,246,000 excess book value of the limited partners’ interest in the partnership was reclassified to stockholders’ equity. We accounted for these conversions as an equity transaction because there was no change in control requiring consolidation or deconsolidation and remeasurement. Subsequent to these partnership conversions, the assets held by the limited partnership were transferred to other subsidiaries of the Company and the limited partnership was terminated.

 

The following table represents the change from net income attributable to us and transfers from non-controlling interest (in thousands):

 

 

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

Net income attributable to LTC Properties, Inc.

 

$25,879

 

$26,024

 

Transfers from the non-controlling interest
Decrease in paid-in capital for limited partners conversion

 

 

(1,246)

 

Change from net income attributable to LTC Properties, Inc. and transfers from non-controlling interest

 

$25,879

 

$24,778

 

 

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

 

 

 

Six months ended June 30, 2013

 

Six months ended June 30, 2012

 

 

 

Declared

 

Paid

 

Declared

 

Paid

 

Preferred Stock

 

 

 

 

 

 

 

 

 

Series C

 

$   1,636

 

$   1,636

 

$   1,636

 

$   1,636

 

Total Preferred

 

1,636

 

1,636

 

1,636

 

1,636

 

 

 

 

 

 

 

 

 

 

 

Common Stock (1)

 

29,749

 

29,749

 

26,460

 

26,460

 

 

 

 

 

 

 

 

 

 

 

Total

 

$31,385

 

$31,385

 

$28,096

 

$28,096

 

 


(1)             Represents $0.155 per share per month and $0.145 per share per month for the six months ended June 30, 2013 and 2012, respectively.

 

In July 2013, we declared a monthly cash dividend of $0.155 per share on our common stock for the months of July, August and September 2013, payable on July 31, August 30 and September 30, 2013, respectively, to stockholders of record on July 23, August 22 and September 20, 2013, respectively.

 

13



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Other Equity.  At June 30, 2013 and December 31, 2012, other equity consisted of accumulated comprehensive income of $134,000 and $152,000, respectively.  This balance represents the net unrealized holding gains on available-for-sale REMIC Certificates recorded in 2005 when we repurchased the loans in the underlying loan pool.  This amount is being amortized to increase interest income over the remaining life of the loans that we repurchased from the REMIC Pool.

 

Stock-Based Compensation.  During the six months ended June 30, 2013, a total of 22,000 stock options were exercised at a total option value of $523,000 and a total market value on the date of exercise of $865,000. During the six months ended June 30, 2012, a total of 35,000 stock options were exercised at a total option value of $746,000 and a total market value on the date of exercise of $1,136,000. No stock options were issued during the six months ended June 30, 2013 and 2012. At June 30, 2013, we had 73,334 stock options outstanding and all stock options are exercisable.  Compensation expense related to the vesting of stock options for the three and six months ended June 30, 2012 was $4,000 and $8,000, respectively.

 

During the three months ended June 30, 2013, we granted 8,400 shares of restricted common stock at $46.54 per share and 6,000 shares of restricted common stock at $41.83 per share. These shares vest ratably over a three-year period from the grant date. During the six months ended June 30, 2013, excluding the shares granted above, we granted 20,000 shares of restricted common stock at $36.26 per share. These shares all vest on June 1, 2016. Also during the six months ended June 30, 2013, we accelerated the vesting of 18,180 shares of restricted common stock due to the retirement of our Senior Vice President, Marketing and Strategic Planning. Accordingly, we recorded $457,000 of compensation expense related to the accelerated vesting. During the three and six months ended June 30, 2013, we recognized $523,000 and $1,508,000, respectively, of compensation expense related to the vesting of restricted common stock.

 

During the six months ended June 30, 2012, we granted 8,000 shares of restricted common stock at $31.87 per share and 56,200 shares of restricted common stock at $31.77 per share. The vesting of these shares are as follows: 8,000 shares vest ratably over a three-year period from the grant date, 14,000 shares vest ratably over a five-year period from the grant date, 30,000 shares all vest on June 15, 2015, and 12,200 shares all vest on January 10, 2016. During the three and six months ended June 30, 2012, we recognized $454,000 and $902,000, respectively, of compensation expense related to the vesting of restricted common stock.

 

7.                                    Commitments and Contingencies

 

As part of an acquisition in 2011, we committed to provide a contingent payment if certain operational thresholds are met.  The contingent payment was recorded at fair value, which was estimated using a discounted cash flow analysis, and we are accreting the contingent liability to the estimated settlement amount as of the payment date.  The fair value of such contingent liability is re-evaluated on a quarterly basis based on changes in estimates of future operating results and changes in market discount rates. Any changes in estimated fair value are recognized in our results of operations. During each of the three and six months ended June 30, 2013 and 2012, we recorded non-cash interest expense of $110,000 and $220,000 related to the contingent liability. At June 30, 2013 and December 31, 2012, the contingent liability had a carrying value of $6,963,000 and $6,744,000, respectively.

 

At June 30, 2013, we made outstanding commitments totaling $70,352,000 to develop, re-develop, renovate or expand six skilled nursing properties with a total of 640 beds, a memory care property with 60 units, two assisted living and memory care combination properties with a total of 158 units, and three assisted living properties with a total of 136 units.  As of June 30, 2013, we have funded $23,869,000 under these commitments and have a remaining commitment of $46,483,000. We also have a commitment to provide, under certain conditions, up to $5,000,000 per year through December 2014 to an existing operator for expansion of the 37 properties they lease from us.  See Note 2. Real Estate

 

14



Table of Contents

 

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Investments for further discussion of these commitments. Additionally at June 30, 2013, we had a $10,600,000 mortgage and construction commitment. As of June 30, 2013, we funded $3,533,000 under this commitment and have a remaining commitment of $7,067,000. See Note 2. Real Estate Investments for further discussion of this mortgage and construction loan.  We also committed to provide $1,850,000 in loan and line of credit agreements to certain operators. As of June 30, 2013, we had funded $655,000 under these commitments and have a remaining commitment of $1,195,000. See Note 3. Notes Receivables for further discussion of these commitments.

 

8.                                    Major Operators

 

We have three operators from each of which we derive over 10% of our rental revenue and interest income from mortgage loans.

 

In 2006, Extendicare Services, Inc. (or EHSI), one of our major operators, effected a reorganization whereby it completed a spin-off of Assisted Living Concepts, Inc. (or ALC).  The remaining EHSI assets and operations were converted into a Canadian REIT (Extendicare REIT) listed on the Toronto Stock Exchange (or TSX).  During 2012, Extendicare REIT converted from an income trust structure to a corporate structure under a corporation named Extendicare, Inc. (or Extendicare). Both Extendicare and ALC continue to be parties to the leases with us.

 

On July 11, 2013, ALC merged with Aid Holdings, LLC, a Delaware limited liability company (or Aid Holdings), and Aid Merger Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of Aid Holdings (or Aid Merger Sub). Aid Holdings and Aid Merger Sub are affiliates of TPG Capital, L.P.

 

Extendicare and ALC collectively lease 37 assisted living properties with a total of 1,430 units owned by us representing approximately 6.2%, or $52,351,000, of our total assets at June 30, 2013 and 10.7% of rental revenue and interest income from mortgage loans recognized as of June 30, 2013.

 

Brookdale Senior Living Communities, Inc. (or Brookdale Communities) is a wholly owned subsidiary of a publicly traded company, Brookdale Senior Living, Inc. (or Brookdale). Brookdale Communities leases 35 assisted living properties with a total of 1,414 units owned by us representing approximately 6.2%, or $52,551,000, of our total assets at June 30, 2013 and 10.7% of rental revenue and interest income from mortgage loans recognized as of June 30, 2013.

 

Preferred Care, Inc. (or Preferred Care), through various wholly owned subsidiaries, operates 27 skilled nursing properties and two range of care properties that we own or on which we hold mortgages secured by first trust deeds.  These properties consist of a total of 3,354 skilled nursing beds and 49 assisted living units. This represents approximately 6.1%, or $51,339,000, of our total assets at June 30, 2013 and 10.5% of rental revenue and interest income from mortgage loans recognized as of June 30, 2013. They also operate one skilled nursing property under a sub-lease with another lessee we have which is not included in the Preferred Care rental revenue and interest income from mortgage loans.

 

Our financial position and ability to make distributions may be adversely affected by financial difficulties experienced by Brookdale Communities, Extendicare, ALC, Preferred Care, or any of our lessees and borrowers, including any bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with us or our borrowers when it expires.

 

15



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

9.                                    Transactions with Related Party

 

We have entered into transactions with Skilled Healthcare Group, Inc. (or SHG).  One of our directors, Boyd W. Hendrickson, serves as Chief Executive Officer of SHG.

 

In December 2005, we purchased, on the open market, $10,000,000 face value of SHG Senior Subordinated Notes with a face rate of 11.0% and an effective yield of 11.1%.  Our Board of Directors, with Mr. Hendrickson abstaining, ratified the purchase of SHG Senior Subordinated Notes.  As a result of an early redemption by SHG in 2007, we had a remaining investment in $6,500,000 face value of SHG Senior Subordinated Notes. During 2012, SHG redeemed all of their outstanding Senior Subordinated Notes at par value plus accrued and unpaid interest up to the redemption date. During the three and six months ended June 30, 2012, we recognized $55,000 and $235,000 of interest income related to the SHG Senior Subordinated Notes.

 

In addition, during September 2007 SHG purchased the assets of Laurel Healthcare (or Laurel).  We were not a direct party to this transaction.  One of the assets SHG purchased was Laurel’s leasehold interests in the skilled nursing properties in New Mexico Laurel leased from us under a 15-year master lease agreement dated in February 2006.  Our Board of Directors, with Mr. Hendrickson abstaining, ratified our consent to the assignment of Laurel’s master lease to subsidiaries of SHG.  The economic terms of the master lease agreement did not change as a result of our assignment of the master lease to subsidiaries of SHG.  During the three and six months ended June 30, 2013, we received $1,122,000 and $2,235,000, respectively, in rental income and recorded $3,000 and $16,000, respectively, in straight-line rental income from subsidiaries of SHG.  During the three and six months ended June 30, 2012, we received $1,095,000 and $2,181,000, respectively, in rental income and recorded $31,000 and $70,000, respectively, in straight-line rental income from subsidiaries of SHG.  At June 30, 2013 and December 31, 2012, the straight-line rent receivable from subsidiaries of SHG was $3,206,000 and $3,191,000, respectively.

 

16



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$13,890

 

$13,092

 

$26,841

 

$25,986

 

 

 

 

 

 

 

 

 

 

 

Less net income allocated to non-controlling interests

 

 

(10)

 

 

(21)

 

 

 

 

 

 

 

 

 

 

 

Less net income allocated to participating securities:

 

 

 

 

 

 

 

 

 

Nonforfeitable dividends on participating securities

 

(91)

 

(91)

 

(189)

 

(185)

 

Total net income allocated to participating securities

 

(91)

 

(91)

 

(189)

 

(185)

 

 

 

 

 

 

 

 

 

 

 

Less net income allocated to preferred stockholders:

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

(818)

 

(818)

 

(1,636)

 

(1,636)

 

Total net income allocated to preferred stockholders

 

(818)

 

(818)

 

(1,636)

 

(1,636)

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available to common stockholders

 

12,981

 

12,173

 

25,016

 

24,144

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Net Income from discontinued operations

 

27

 

21

 

52

 

43

 

(Loss) gain on sale of assets, net

 

(1,014)

 

 

(1,014)

 

16

 

Total net (loss) income from discontinued operations

 

(987)

 

21

 

(962)

 

59

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

11,994

 

12,194

 

24,054

 

24,203

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Convertible preferred securities

 

 

 

 

 

Net income for diluted net income per share

 

$11,994

 

$12,194

 

$24,054

 

$24,203

 

 

 

 

 

 

 

 

 

 

 

Shares for basic net income per share

 

32,913

 

30,213

 

31,645

 

30,201

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options

 

33

 

45

 

34

 

45

 

Convertible preferred securities

 

 

 

 

 

Shares for diluted net income per share

 

32,946

 

30,258

 

31,679

 

30,246

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$0.36

 

$0.40

 

$0.76

 

$0.80

 

Diluted net income per share (1)

 

$0.36

 

$0.40

 

$0.76

 

$0.80

 

 


(1)             For the three and six months ended June 30, 2013 and 2012, the Series C Cumulative Convertible Preferred Stock, the participating securities and the non-controlling interest have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.

 

17



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

11.                            Fair Value Measurements

 

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

 

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.  We do not invest our cash in auction rate securities.  The carrying value and fair value of our financial instruments as of June 30, 2013 and December 31, 2012 assuming election of fair value for our financial assets and financial liabilities were as follows (in thousands):

 

 

 

At June 30, 2013

 

At December 31, 2012

 

 

 

Carrying
 Value

 

Fair
Value

 

Carrying
 Value

 

Fair
Value

 

Mortgage loans receivable

 

$39,272

 

$44,741(1)

 

$39,299

 

$44,939(1)

 

Bonds payable

 

2,035

 

2,035(2)

 

2,635

 

2,635(2)

 

Bank borrowings

 

 

(2)

 

115,500

 

115,500(2)

 

Senior unsecured notes

 

185,800

 

190,841(3)

 

185,800

 

194,838(3)

 

Contingent liabilities

 

6,963

 

6,963(4)

 

6,744

 

6,744(4)

 


(1)              Our investment in mortgage loans receivable is classified as Level 3.  The fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows.  The discount rate is determined using our assumption on market conditions adjusted for market and credit risk and current returns on our investments.  The discount rate used to value our future cash inflows of the mortgage loans receivable at June 30, 2013 and December 31, 2012 was 5.5% and 6.0%, respectively.

(2)              Our bonds payable and bank borrowings are at a variable interest rate.  The estimated fair value of our bonds payable and bank borrowings approximated their carrying values at June 30, 2013 and December 31, 2012 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 June 30, 2013,  the discount rate used to value our future cash outflow of our senior unsecured notes was 3.9% for those maturing before year 2019 and 4.6% for those maturing through year 2021. At December 31, 2012,  the discount rate used to value our future cash outflow of our senior unsecured notes was 3.8% for those maturing before year 2019 and 4.3% for those maturing through year 2021.

(4)              Our contingent obligation under the earn-out liabilities is classified as Level 3. We estimated the fair value of the contingent earn-out payments using a discounted cash flow analysis. The discount rate that we use consists of a risk-free U.S. Treasury rate plus a company specific credit spread which we believe is acceptable by willing market participants.  At June 30, 2013 and December 31, 2012, the discount rate used to value our future cash outflow of the earn-out liability was 6.2% and 6.6%, respectively.

 

18



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

12.                            Subsequent Events

 

Subsequent to June 30, 2013 the following events occurred.

 

We entered into a $141,000,000 mortgage loan agreement secured by 15 skilled nursing properties with a total of 2,092 beds and one 24-unit independent living property in Michigan. See Note 2. Real Estate Investments for further discussion.

 

We completed the construction of a 60-unit memory care property in Colorado. The new memory care property opened in July 2013.  Development costs for the new property were approximately $9,817,000.  See Note 2. Real Estate Investments for further discussion.

 

We funded $1,932,000 under ongoing real estate investment commitments. Accordingly, we have a remaining commitment of $44,551,000. We also funded $1,008,000 under a $9,094,000 commitment to construct a replacement skilled nursing property which was completed in June 2013. Additionally, we funded $1,897,000 under a mortgage and construction loan commitment and we have a remaining commitment of $5,170,000.  See Note 2. Real Estate Investments for further discussion. We also funded $83,000 under loans and line of credit agreements to certain operators and have a remaining commitment of $1,112,000. See Note 3. Notes Receivable for further discussion.

 

We declared a monthly cash dividend of $0.155 per share on our common stock for the months of July, August and September 2013, payable on July 31, August 30 and September 30, 2013, respectively, to stockholders of record on July 23, August 22 and September 20, 2013, respectively.

 

19



Table of Contents

 

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

 

Statement Regarding Forward Looking Disclosure

 

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995.  Statements that are not purely historical may be forward-looking.  You can identify some of the forward-looking statements by their use of forward-looking words, such as ‘‘believes,’’ ‘‘expects,’’ ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘seeks,’’ ‘‘approximately,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘estimates’’ or ‘‘anticipates,’’ or the negative of those words or similar words.  Forward- looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position.  A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, the status of the economy, the status of capital markets (including prevailing interest rates), and our access to capital; the income and returns available from investments in health care related real estate, the ability of our borrowers and lessees to meet their obligations to us, our reliance on a few major operators; competition faced by our borrowers and lessees within the health care industry, regulation of the health care industry by federal, state and local governments (including as a result of the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010), changes in Medicare and Medicaid reimbursement amounts (including due to federal and state budget constraints), compliance with and changes to regulations and payment policies within the health care industry, debt that we may incur and changes in financing terms, our ability to continue to qualify as a real estate investment trust, the relative illiquidity of our real estate investments, potential limitations on our remedies when mortgage loans default, and risks and liabilities in connection with properties owned through limited liability companies and partnerships.  For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under ‘‘Risk Factors’’ contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 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

 

We are a self-administered health care real estate investment trust (or REIT) that invests primarily in senior housing and long term healthcare properties through acquisitions, development, mortgage loans and other investments. 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 senior housing and long term healthcare property types include skilled nursing properties (or SNF), assisted living properties (or ALF), independent living properties (or ILF), memory care properties (or MC) and combinations thereof. ALF, ILF, MC, and combinations thereof are included in the ALF property type. Range of care properties (or ROC) property type consists of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services.  As of June 30, 2013, senior housing and long term healthcare properties comprised approximately 99% of our investment portfolio.  We have been operating since August 1992.

 

20



Table of Contents

 

The following table summarizes our real estate investment portfolio as of June 30, 2013 (dollar amounts in thousands):

 

 

 

 

 

 

 

Six Months Ended
June 30, 2013

 

Percentage

 

Number

 

Number of

 

Type of
Property

 

Gross
Investments

 

Percentage of
Investments

 

Rental
 Income
(1)

 

Interest
Income 
(2)

 

of
Revenues 
(3)

 

of
Properties 
(4)

 

SNF
Beds
(5)

 

ALF
Units
(5)

 

Skilled Nursing(6)

 

$478,751

 

50.2%

 

$25,180

 

$  1,395

 

51.9%

 

90

 

10,279

 

 

Assisted Living

 

392,115

 

41.2%

 

20,463

 

553

 

41.1%

 

104

 

 

4,713

 

Range of Care

 

46,643

 

4.9%

 

2,653

 

161

 

5.5%

 

9

 

733

 

348

 

Under Development(7)

 

22,757

 

2.4%

 

788

 

 

1.5%

 

 

 

 

Schools

 

12,444

 

1.3%

 

 

 

0.0%

 

2

 

 

 

Totals

 

$952,710

 

100.0%

 

$49,084

 

$2,109

 

100.0%

 

205

 

11,012

 

5,061

 

 


(1)                Includes rental income from continuing and discontinued operations.

(2)                Includes interest income from mortgage loans.

(3)                Includes rental income from continuing and discontinued operations and interest income from mortgage loans.

(4)                We have investments in 29 states leased or mortgaged to 42 different operators.

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

(6)                Includes a mortgage and construction loan secured by a currently operating skilled nursing property and parcel of land upon which a 106-bed replacement property is being constructed. The agreement gives us the right to purchase the replacement facility for $13,500 during an 18 month period beginning on the first anniversary of the issuance of the certificate of occupancy.

(7)                Includes a MC development with 60 units, two combination ALF and MC developments with a total of 158 units and a 143-bed SNF development.

 

As of June 30, 2013 we had $741.9 million in carrying value of net real estate investments, consisting of $702.6 million or 94.7% invested in owned and leased properties and $39.3 million or 5.3% invested in mortgage loans secured by first mortgages.

 

For the six months ended June 30, 2013, rental income and interest income from mortgage loans represented 95.5% and 4.1%, respectively, of total gross revenues.   In most instances, our lease structure contains fixed annual rental escalations, which are generally recognized on a straight-line basis over the minimum lease period.  Certain leases have annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property.  This revenue is not recognized until the appropriate contingencies have been resolved.  For the six months ended June 30, 2013, we recorded $1.9 million in straight-line rental income and $18,000 of straight-line rent receivable reserve. For leases in place at June 30, 2013, assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio, we currently expect that straight-line rental income will decrease from $3.6 million for projected annual 2013 to $1.9 million for projected annual 2014 and, conversely, our cash rental income is projected to increase from $95.9 million for projected annual 2013 to $98.3 million for projected annual 2014.  During the six months ended June 30, 2013, we received $47.6 million of cash rental revenue and recorded amortization of lease inducement cost of $0.3 million.  For the six months ended June 30, 2013, no leases were renewed.  At June 30, 2013 and December 31, 2012, the straight-line rent receivable balance, net of reserves, on the balance sheet was $28.8 million and $27.0 million, respectively.

 

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 senior housing and long term care properties managed by experienced operators.  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 type and form of investment.  We opportunistically consider investments in health care facilities in related businesses where the business model is similar to our existing model and the opportunity provides an attractive expected return.  Consistent with this strategy, we pursue, from time to time, opportunities for potential acquisitions and investments, with due diligence and negotiations often at different stages of development at any particular time.

 

·                 With respect to skilled nursing properties, we attempt to invest in properties that do not have to rely on a high percentage of private-pay patients.  We prefer to invest in a property that has significant market presence in its community and where state certificate of need and/or licensing procedures limit the entry of competing properties.

 

·                 For assisted living and independent living investments we have attempted to diversify our portfolio both geographically and across product levels.

 

21



Table of Contents

 

·                 Memory care facilities offer specialized options for seniors with Alzheimer’s disease and other forms of dementia.  Purpose built, free-standing memory care facilities offer an attractive alternative for private-pay residents affected by memory loss in comparison to other accommodations that typically have been provided within a secured unit of an assisted living or skilled nursing facility. These facilities offer dedicated care and specialized programming for various conditions relating to memory loss in a secured environment that is typically smaller in scale and more residential in nature than traditional assisted living facilities.  Residents require a higher level of care and more assistance with activities of daily living than in assisted living facilities.  Therefore, these facilities have staff available 24 hours a day to respond to the unique needs of their residents.

 

Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable.  Our investments in mortgage loans and owned properties 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 the type of health care facility and operator.  Our monitoring process includes periodic review of financial statements for each facility, periodic review of operator credit, scheduled property inspections and review of covenant compliance.

 

In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk.  Some operating leases and loans are credit enhanced by guaranties and/or letters of credit.  In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates.

 

Depending upon the availability and cost of external capital, we anticipate making additional investments in health care related properties.  New investments are generally funded from cash on hand, temporary borrowings under our unsecured line of credit and internally generated cash flows.  Our investments generate internal cash from rent and interest receipts and principal payments on mortgage loans receivable.  Permanent financing for future investments, which replaces funds drawn under our unsecured line of credit, is expected to be provided through a combination of public and private offerings of debt and equity securities and secured and unsecured debt financing.  The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, especially to changes in interest rates.  Changes in the capital markets’ environment may impact the availability of cost-effective capital.

 

We believe our business model has enabled and will continue to enable us to maintain the integrity of our property investments, including in response to financial difficulties that may be experienced by operators.  Traditionally, we have taken a conservative approach to managing our business, choosing to maintain liquidity and exercise patience until favorable investment opportunities arise.

 

At June 30, 2013, we had $63.3 million of cash on hand, $240.0 million available under our unsecured line of credit, and $100.0 million available under the uncommitted private shelf agreement for our senior unsecured notes.  Also, our potential ability to access the capital markets through the issuance of debt and/or equity securities under our $800.0 million effective shelf registration.  As a result, we believe our liquidity and various sources of available capital are sufficient to fund operations and development commitments, meet debt service obligations (both principal and interest), make dividend distributions and finance some future investments should we determine such future investments are financially feasible.

 

22



Table of Contents

 

Healthcare Regulatory Climate

 

The Centers for Medicare & Medicaid Services (or CMS) annually updates Medicare skilled nursing facility prospective payment system rates and other policies.   On August 2, 2012, CMS published a notice updating Medicare skilled nursing facility payment rates for fiscal year 2013, which began on October 1, 2012.  The notice calls for a 1.8 percent update in rates (consisting of a 2.5 % market basket update, reduced by a 0.7 percentage point multifactor productivity adjustment mandated by the Affordable Care Act, as discussed below).  CMS estimates that overall Medicare payments to skilled nursing facilities in fiscal year 2013 would increase by $670 million compared to fiscal year 2012.  On May 6, 2013, CMS published its proposed Medicare skilled nursing facility payment rate update for fiscal year 2014, which begins on October 1, 2013.  CMS estimates that the proposed rule would increase aggregate Medicare skilled nursing facility payments by $500 million, or 1.4%, compared to fiscal year 2013 levels.  Specifically, under the proposed rule, Medicare rates would be updated to reflect a 2.3% market basket increase that is reduced by a 0.4 percentage point multifactor productivity adjustment, and that is further reduced by a proposed 0.5 percentage point forecast error correction.  CMS also proposes to rebase the SNF market basket to reflect fiscal year 2010 data and make other policy changes.  The final fiscal year 2014 rule has not yet been released.  There can be no assurance that future regulations modifying Medicare skilled nursing facility payment rates 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.

 

In March 2010, the President signed into law the Patient Protection and Affordable Care Act, which subsequently was amended by the Health Care and Education and Reconciliation Act of 2010 (collectively referred to as the “Affordable Care Act”).  The Affordable Care Act is designed to expand access to affordable health insurance, contain health care costs, and institute a variety of health policy reforms.  The provisions of the sweeping law may affect us directly, as well as impact our lessees and borrowers.  While certain provisions, such as expanding the insured population, may positively impact the revenues of our lessees and borrowers, other provisions, particularly those intended to reduce federal health care spending, could have a negative impact on our lessees and borrowers.  Among other things, the Affordable Care Act:  reduces Medicare skilled nursing facility reimbursement by a so-called “productivity adjustment” based on economy-wide productivity gains beginning in fiscal year 2012; requires the development of a value-based purchasing program for Medicare skilled nursing facility services; establishes a national voluntary pilot program to bundle Medicare payments for hospital and post-acute services that could lead to changes in the delivery of post-acute services; and provides incentives to state Medicaid programs to promote community-based care as an alternative to institutional long term care services.  The Affordable Care Act also includes provisions intended to expand public disclosure about nursing home ownership and operations, institute mandatory compliance and quality assurance programs, increase penalties for noncompliance, and expand fraud and abuse enforcement and penalty provisions that could impact our operators.  In addition, the Affordable Care Act impacts both us and our lessees and borrowers as employers, including new requirements related to the health insurance we offer to our respective employees.  Many aspects of the Affordable Care Act are being implemented through new regulations and subregulatory guidance. We cannot predict at this time what effect, if any, the various provisions of the Affordable Care Act will have on our lessees and borrowers or our business when fully implemented. There can be no assurances, however, that the Affordable Care Act will not adversely impact the operations, cash flows or financial condition of our lessees and borrowers, which subsequently could materially adversely impact our revenue and operations.

 

Under the terms of the Budget Control Act of 2011, as modified by the American Taxpayer Relief Act, President Obama issued a sequestration order on March 1, 2013 that mandates a 2% cut to Medicare payments to providers and health plans. The cuts generally apply to Medicare fee-for-service claims with dates-of-service or dates-of-discharge on or after April 1, 2013.  Under current law, sequestration will last through fiscal year 2021, although Congress and the Administration could enact legislation to end or modify sequestration at any time.  Congress and the Administration also could consider other legislation that would have the impact of reducing Medicare reimbursement for skilled nursing facilities and other Medicare providers or otherwise reforming payment policy for post-acute care services.  There can be no assurances that enacted or future budget control mechanisms will not have an adverse impact on the financial condition of our borrowers and lessees, which subsequently could materially adversely impact our company.

 

23



Table of Contents

 

In addition, comprehensive reforms affecting the payment for and availability of health care services have been proposed at the state level and adopted by certain states.   Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodologies may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third party payors.

 

Key Performance Indicators, Trends and Uncertainties

 

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

 

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

 

24



Table of Contents

 

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

 

 

 

Period Ended

 

 

 

6/30/13

 

3/31/13

 

12/31/12

 

9/30/12

 

6/30/12

 

Asset mix:

 

 

 

 

 

 

 

 

 

 

 

Real property

 

$913,042

 

$906,582

 

$900,095

 

$805,759

 

$743,297

 

Loans receivable

 

39,668

 

40,142

 

40,081

 

49,141

 

50,246

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment mix:

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing properties

 

$478,751

 

$478,311

 

$475,873

 

$472,220

 

$412,018

 

Assisted living properties

 

392,115

 

392,119

 

392,157

 

320,253

 

320,368

 

Range of care properties

 

46,643

 

46,707

 

46,769

 

46,830

 

46,888

 

Under development

 

22,757

 

17,143

 

13,051

 

3,329

 

2,033

 

Schools

 

12,444

 

12,444

 

12,326

 

12,268

 

12,236

 

 

 

 

 

 

 

 

 

 

 

 

 

Operator mix:

 

 

 

 

 

 

 

 

 

 

 

Extendicare & ALC

 

$88,034

 

$88,034

 

$88,034

 

$88,034

 

$ 88,034

 

Juniper Communities, LLC

 

87,088

 

87,088

 

87,088

 

 

 

Preferred Care (1)

 

84,089

 

84,192

 

84,292

 

84,425

 

85,075

 

Brookdale Communities

 

84,212

 

84,211

 

84,210

 

84,210

 

84,210

 

Senior Care Centers, LLC (2)

 

63,698

 

63,698

 

63,698

 

63,698

 

63,698

 

Remaining operators

 

545,589

 

539,501

 

532,854

 

534,533

 

472,526

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic mix:

 

 

 

 

 

 

 

 

 

 

 

Texas

 

$236,100

 

$233,865

 

$232,106

 

$229,062

 

$222,989

 

Ohio

 

110,804

 

110,804

 

110,804

 

110,804

 

56,804

 

New Jersey

 

70,667

 

70,667

 

70,667

 

12,195

 

12,195

 

Florida

 

67,742

 

67,772

 

67,802

 

67,830

 

67,859

 

Colorado

 

59,725

 

59,009

 

56,960

 

31,145

 

29,849

 

Remaining states

 

407,672

 

404,607

 

401,837

 

403,864

 

403,847

 

 


(1)                Preferred Care, Inc. (or Preferred Care) leases 22 skilled nursing and two range of care properties under two master leases and one skilled nursing property under a separate lease agreement.  In addition, they operate four skilled nursing properties securing four mortgage loans receivable that we have with unrelated third parties.  They also operate one skilled nursing facility under a sub-lease with another lessee we have which is not included in the Preferred Care operator mix.

 

(2)                Senior Care Centers, LLC (or Senior Care) also operates four skilled nursing properties under a sub-lease with another lessee which is not included in the Senior Care operator mix.

 

Credit Strength.  We measure our credit strength both in terms of leverage ratios and coverage ratios.  Our leverage ratios include debt to gross asset value and debt to market capitalization.  The leverage ratios indicate how much of our consolidated balance sheet capitalization is related to long term obligations.  Our coverage ratios include interest coverage ratio and fixed charge coverage ratio.  The coverage ratios indicate our ability to service interest and fixed charges (interest plus preferred dividends).  The coverage ratios are based on adjusted earnings before gain on sale of real estate, interest, taxes, depreciation and amortization (or Adjusted EBITDA).  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:

 

25



Table of Contents

 

Balance Sheet Metrics

 

 

 

Year to Date

 

Quarter Ended

 

 

 

6/30/13

 

6/30/13

 

3/31/13

 

12/31/12

 

9/30/12

 

6/30/12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt to gross asset value

 

17.8%

 

17.8% (1)

 

30.6% (4)

 

30.8% (7)

 

24.8% (7)

 

20.3%

 

Debt & preferred stock to gross asset value

 

21.4%

 

21.4% (1)

 

34.5% (4)

 

34.7% (7)

 

29.1% (7)

 

24.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt to market capitalization ratio

 

11.9%

 

11.9% (2)

 

19.1% (5)

 

21.4% (8)

 

18.1% (7)

 

13.0%

 

Debt & preferred stock to market capitalization ratio

 

14.3%

 

14.3% (2)

 

21.6% (5)

 

24.2% (8)

 

21.3% (7)

 

15.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio(12)

 

7.6x

 

8.2x (3)

 

7.1x (6)

 

7.4x (9)

 

7.2x (11)

 

10.2x

 

Fixed charge coverage ratio(12)

 

6.0x

 

6.3x (3)

 

5.6x (6)

 

5.7x (10)

 

5.6x (11)

 

7.3x

 

 


(1)              Decrease primarily due to the decrease in outstanding debt offset by the increase in gross asset value from additional development and capital improvement funding.

 

(2)              Decrease primarily due to the decrease in outstanding debt offset by the sale of 4,025,000 shares of common stock in a public offering and the decrease in market capitalization.

 

(3)              Increase primarily due to the decrease in interest expense due to the decrease in outstanding debt.

 

(4)              Decrease primarily due to increase in gross asset value from additional development and capital improvement funding.

 

(5)              Decrease primarily due to the increase in market capitalization.

 

(6)              Decrease primarily due to increase in interest expense resulting from increased pricing levels under our unsecured line of credit.

 

(7)              Increase primarily due to the increase in outstanding debt due to acquisitions.

 

(8)              Increase primarily due to the increase in bank borrowings due to acquisitions offset by the increase in market capitalization.

 

(9)              Increase primarily due to the decrease in interest expense caused by recording capitalized interest on the funding of construction projects partially offset by increased income due to rental income from acquisitions.

 

(10)          Increase due to the decrease in interest expense caused by recording capitalized interest on the funding of properties under development.

 

(11)          Decrease primarily due to the increase in interest expense due to increased bank borrowing and the new senior unsecured term notes, the increase in debt issue costs and the non-cash interest related to the contingent earn-out liabilities.

 

(12)          In calculating our interest coverage and fixed charge coverage ratios above, we use Adjusted EBITDA, which is a financial measure not derived in accordance with U.S. generally accepted accounting principles (non-GAAP financial measure).  Adjusted EBITDA is not an alternative to net income, operating income, income from continuing operations or cash flows from operating activities as calculated and presented in accordance with U.S. GAAP.  You should not rely on Adjusted EBITDA as a substitute for any such U.S. 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 Adjusted EBITDA.

 

 

 

Year to
Date

 

Quarter Ended

 

 

 

6/30/13

 

6/30/13

 

3/31/13

 

12/31/12

 

9/30/12

 

6/30/12

 

Net income

 

$25,879

 

$12,903

 

$12,976

 

$12,778

 

$12,504

 

$13,113

 

Add: Loss on Sale

 

1,014

 

1,014

 

 

 

 

 

Add: Interest expense

 

5,931

 

2,798

 

3,133

 

2,907

 

2,988

 

2,004

 

Add: Depreciation and amortization—continuing and discontinued operations

 

12,267

 

6,131

 

6,136

 

5,692

 

5,925

 

5,369

 

Total adjusted EBITDA

 

$45,091

 

$22,846

 

$22,245

 

$21,377

 

$21,417

 

$20,486

 

Interest expense

 

$5,931

 

$2,798

 

$3,133

 

$2,907

 

$2,988

 

$2,004

 

Interest coverage ratio

 

7.6x

 

8.2x

 

7.1x

 

7.4x

 

7.2x

 

10.2x

 

Interest expense

 

$5,931

 

$2,798

 

$3,133

 

$2,907

 

$2,988

 

$2,004

 

Preferred stock dividends

 

1,636

 

818

 

818

 

819

 

818

 

818

 

Total fixed charges

 

$7,567

 

$3,616

 

$3,951

 

$3,726

 

$3,806

 

$2,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed charge coverage ratio

 

6.0x

 

6.3x

 

5.6x

 

5.7x

 

5.6x

 

7.3x

 

 

26



Table of Contents

 

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 senior housing industries; and

·                 Changes in federal, state and local legislation.

 

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

 

27



Table of Contents

 

Operating Results

 

Three months ended June 30, 2013 compared to three months ended June 30, 2012 (amounts in thousands)

 

 

 

Three months ended
June 30,

 

Increase/

 

 

 

2013

 

2012

 

(Decrease)

 

Revenues:

 

 

 

 

 

 

 

Rental income

 

$24,539

 

$21,139

 

$3,400

(1)

Interest income from mortgage loans

 

1,050

 

1,431

 

(381)

(2)

Interest and other income

 

92

 

485

 

(393)

(3)

Total revenues

 

25,681

 

23,055

 

2,626

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Interest expense

 

2,798

 

2,004

 

794

(4)

Depreciation and amortization

 

6,124

 

5,355

 

769

(1)

General and administrative expenses

 

2,869

 

2,604

 

265

(5)

Total expenses

 

11,791

 

9,963

 

1,828

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

13,890

 

13,092

 

798

 

Discontinued operations:

 

 

 

 

 

 

 

Net Income from discontinued operations

 

27

 

21

 

6

 

(Loss) on real estate assets, net

 

(1,014)

 

 

(1,014)

(6)

Net (loss) income from discontinued operations

 

(987)

 

21

 

(1,008)

 

Net income

 

12,903

 

13,113

 

(210)

 

 

 

 

 

 

 

 

 

Income allocated to non-controlling interests

 

 

(10)

 

10

(7)

Net income attributable to LTC Properties, Inc.

 

12,903

 

13,103

 

(200)

 

 

 

 

 

 

 

 

 

Income allocated to participating securities

 

(91)

 

(91)

 

 

Income allocated to preferred stockholders

 

(818)

 

(818)

 

 

Net income available to common stockholders

 

$11,994

 

$12,194

 

$  (200)

 

 


(1)             Increased due to acquisitions, developments and capital improvement investments.

 

(2)             Decreased primarily due to payoffs and normal amortization of existing mortgage loans partially offset by origination of two loans totaling $7,719 in 2012 and construction funding of $914 during 2013.

 

(3)             Decreased primarily due to the bankruptcy settlement distribution related to Sunwest Management, Inc. (or Sunwest) and the redemption of the Skilled Healthcare Group bond.

 

(4)             Increase primarily due to increase in sale of senior unsecured notes, higher average bank borrowing outstanding, and an increase in interest rates on our unsecured line of credit resulting from a change in pricing levels offset by increase in capitalized interest due to development investments.

 

(5)             Increased primarily due to increased salaries and benefits reflective of increased staffing levels.

 

(6)             Sale of a 47-bed skilled nursing property sold during 2013.

 

(7)             Decreased due to the conversion of all 112,588 limited partnership units during 2012.

 

28



Table of Contents

 

Six months ended June 30, 2013 compared to six months ended June 30, 2012 (amounts in thousands)

 

 

 

Six months ended
June 30,

 

Increase/

 

 

 

2013

 

2012

 

(Decrease)

 

Revenues:

 

 

 

 

 

 

 

Rental income

 

$49,015

 

$41,975

 

$7,040

(1)

Interest income from mortgage loans

 

2,109

 

2,963

 

(854)

(2)

Interest and other income

 

185

 

722

 

(537)

(3)

Total revenues

 

51,309

 

45,660

 

5,649

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Interest expense

 

5,931

 

4,037

 

1,894

(4)

Depreciation and amortization

 

12,250

 

10,509

 

1,741

(1)

General and administrative expenses

 

6,287

 

5,128

 

1,159

(5)

Total expenses

 

24,468

 

19,674

 

4,794

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

26,841

 

25,986

 

855

 

Discontinued operations:

 

 

 

 

 

 

 

Net Income from discontinued operations

 

52

 

43

 

9

 

(Loss) gain on real estate assets, net

 

(1,014)

 

16

 

(1,030)

(6)

Net (loss) income from discontinued operations

 

(962)

 

59

 

(1,021)

 

Net income

 

25,879

 

26,045

 

(166)

 

Income allocated to non-controlling interests

 

 

(21)

 

21

(7)

Net income attributable to LTC Properties, Inc.

 

25,879

 

26,024

 

(145)

 

 

 

 

 

 

 

 

 

Income allocated to participating securities

 

(189)

 

(185)

 

(4)

 

Income allocated to preferred stockholders

 

(1,636)

 

(1,636)

 

 

Net income available to common stockholders

 

$24,054

 

$24,203

 

$(149)

 

 


(1)             Increased due to acquisitions, developments and capital improvement investments.

 

(2)             Decreased primarily due to payoffs and normal amortization of existing mortgage loans partially offset by origination of two loans totaling $7,719 in 2012 and construction funding of $914 during 2013.

 

(3)             Decreased primarily due to the bankruptcy settlement distribution related to Sunwest and the redemption of the Skilled Healthcare Group bond.

 

(4)             Increase primarily due to increase in sale of senior unsecured notes, higher average bank borrowing outstanding, and an increase in interest rates on our unsecured line of credit resulting from a change in pricing levels offset by increase in capitalized interest due to development investments.

 

(5)             Increased primarily due to a one-time $707 charge related to the retirement of our Senior Vice President, Marketing and Strategic Planning. The one-time charge included a severance payment of $250 and vesting expense of $457 related to the acceleration of 18,180 shares of restricted common stock. Additionally, the increase is due to increased salaried and benefits reflective of increased staffing levels.

 

(6)             Includes the loss on sale of a 47-bed skilled nursing property sold during 2013 and the gain on sale of a 140-bed skilled nursing property sold during 2012.

 

(7)             Decreased due to the conversion of all 112,588 limited partnership units during 2012.

 

29



Table of Contents

 

Funds From Operations

 

Funds from Operations (or FFO) available to common stockholders, basic FFO available to common stockholders per share and diluted FFO available to common stockholders per share are supplemental measures of a REIT’s financial performance that are not defined by U.S. GAAP. Real estate values historically rise and fall with market conditions, but cost accounting for real estate assets in accordance with U.S. 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 U.S. 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 the National Association of Real Estate Investment Trusts (or NAREIT). FFO, as defined by NAREIT, means net income available to common stockholders (computed in accordance with U.S. 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 net income available to common stockholders to FFO available to common stockholders (unaudited, amounts in thousands, except per share amounts):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income available to common stockholders

 

$11,994

 

$12,194

 

$24,054

 

$24,203

 

Add: Depreciation and amortization (continuing and discontinued operations)

 

6,131

 

5,369

 

12,267

 

10,536

 

Add (less): Loss (gain) on sale of real estate, net

 

1,014

 

 

1,014

 

(16)

 

FFO available to common stockholders

 

$19,139

 

$17,563

 

$37,335

 

$34,723

 

 

 

 

 

 

 

 

 

 

 

FFO available to common stockholders per share:

 

 

 

 

 

 

 

 

 

Basic

 

$0.58

 

$0.58

 

$1.18

 

$1.15

 

Diluted

 

$0.57

 

$0.57

 

$1.16

 

$1.13

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate FFO per share:

 

 

 

 

 

 

 

 

 

Basic

 

32,913

 

30,213

 

31,645

 

30,201

 

Diluted

 

35,139

 

32,488

 

33,881

 

32,479

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity and Capital Resources

 

Operating Activities.  At June 30, 2013, our real estate investment portfolio (before accumulated depreciation and amortization) consisted of $913.0 million invested primarily in owned long-term healthcare properties and mortgage loans of approximately $39.7 million (prior to deducting a $0.4 million reserve).  Our portfolio consists of direct investments (properties that we either own or on which we hold promissory notes secured by first mortgages) in 90 skilled nursing properties, 104 assisted living properties, 9 range of care properties, two schools and five parcels of land under development.  These properties are located in 29 states.  Assisted living properties, independent living properties, memory care properties and combinations thereof are included in the assisted living property type. Range of care properties consist of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services.  For the six months ended June 30, 2013, we had net cash provided by operating activities of $38.7 million.

 

 

30



Table of Contents

 

For the six months ended June 30, 2013, we recorded $1.9 million in straight-line rental income and a reserve of $18,000 on our straight-line rent receivable.  For leases in place at June 30, 2013, assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio, we currently expect that straight-line rental income will decrease from $3.6 million for projected annual 2013 to $1.9 million for projected annual 2014 and, conversely, our cash rental income is projected to increase from $95.9 million for projected annual 2013 to $98.3 million for projected annual 2014.  During the six months ended June 30, 2013, we received $47.6 million of cash rental revenue and recorded amortization of lease inducement cost of $0.3 million.  For the six months ended June 30, 2013, no leases were renewed.

 

Investing and Financing Activities.  For the six months ended June 30, 2013, we used $11.9 million of cash for investing activities.  During the six months ended June 30, 2013, we received $0.9 million in regularly scheduled principal payments on our mortgage loans. Additionally, we funded $0.9 million under a $10.6 million mortgage and construction loan and we have a remaining commitment of $7.1