10-Q 1 ltc-20170331x10q.htm 10-Q ltc_Current folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2017

 

OR

 

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

 

For the Transition period from ____ to ____

 

Commission file number 1-11314

 

LTC PROPERTIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

 

 

 

Maryland

 

 

 

71-0720518

(State or other jurisdiction of

 

 

 

(I.R.S. Employer

incorporation or organization)

 

 

 

Identification No.)

 

2829 Townsgate Road, Suite 350

Westlake Village, California  91361

(Address of principal executive offices, including zip code)

 

(805) 981-8655

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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  ☑  No  ☐

 

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

 

 

 

 

 

 

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

 

(Do not check if a
smaller reporting company)

 

 

 

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

 

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

 

The number of shares of common stock outstanding on April 28, 2017 was 39,573,448.

 

 


 


 

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share)

 

 

 

 

 

 

 

 

 

 

    

March 31, 2017

    

December 31, 2016

 

 

 

(unaudited)

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Land

 

$

115,793

 

$

116,096

 

Buildings and improvements

 

 

1,187,897

 

 

1,185,467

 

Accumulated depreciation and amortization

 

 

(284,134)

 

 

(275,861)

 

Operating real estate property, net

 

 

1,019,556

 

 

1,025,702

 

Properties held-for-sale, net of accumulated depreciation: 2017—$1,058; 2016—$0

 

 

1,170

 

 

 —

 

Real property investments, net

 

 

1,020,726

 

 

1,025,702

 

 

 

 

 

 

 

 

 

Mortgage loans receivable, net of loan loss reserve: 2017—$2,249; 2016—$2,315

 

 

223,292

 

 

229,801

 

Real estate investments, net

 

 

1,244,018

 

 

1,255,503

 

Notes receivable, net of loan loss reserve: 2017—$166; 2016—$166

 

 

16,402

 

 

16,427

 

Investments in unconsolidated joint ventures

 

 

26,181

 

 

25,221

 

Investments, net

 

 

1,286,601

 

 

1,297,151

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

8,732

 

 

7,991

 

Debt issue costs related to bank borrowings

 

 

1,584

 

 

1,847

 

Interest receivable

 

 

10,868

 

 

9,683

 

Straight-line rent receivable, net of allowance for doubtful accounts: 2017—$988; 2016—$960

 

 

58,115

 

 

55,276

 

Prepaid expenses and other assets

 

 

25,690

 

 

22,948

 

Total assets

 

$

1,391,590

 

$

1,394,896

 

LIABILITIES

 

 

 

 

 

 

 

Bank borrowings

 

$

 —

 

$

107,100

 

Senior unsecured notes, net of debt issue costs: 2017—$1,260; 2016—$1,009

 

 

597,873

 

 

502,291

 

Accrued interest

 

 

4,259

 

 

4,675

 

Accrued incentives and earn-outs

 

 

12,015

 

 

12,229

 

Accrued expenses and other liabilities

 

 

24,303

 

 

28,553

 

Total liabilities

 

 

638,450

 

 

654,848

 

EQUITY

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding:   2017—39,573; 2016—39,221

 

 

396

 

 

392

 

Capital in excess of par value

 

 

853,132

 

 

839,005

 

Cumulative net income

 

 

1,034,956

 

 

1,013,443

 

Cumulative distributions

 

 

(1,135,344)

 

 

(1,112,792)

 

Total equity

 

 

753,140

 

 

740,048

 

Total liabilities and equity

 

$

1,391,590

 

$

1,394,896

 

 

See accompanying notes.

 

 

3


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

  

2017

  

2016

 

Revenues:

 

 

 

 

 

 

 

Rental income

 

$

35,035

 

$

31,880

 

Interest income from mortgage loans

 

 

6,748

 

 

6,578

 

Interest and other income

 

 

839

 

 

146

 

Total revenues

 

 

42,622

 

 

38,604

 

Expenses:

 

 

 

 

 

 

 

Interest expense

 

 

7,471

 

 

6,000

 

Depreciation and amortization

 

 

9,359

 

 

8,561

 

(Recovery) provision for doubtful accounts

 

 

(38)

 

 

84

 

Transaction costs

 

 

22

 

 

90

 

General and administrative expenses

 

 

4,740

 

 

4,283

 

Total expenses

 

 

21,554

 

 

19,018

 

Operating income

 

 

21,068

 

 

19,586

 

Income from unconsolidated joint ventures

 

 

445

 

 

272

 

Net income

 

 

21,513

 

 

19,858

 

Income allocated to participating securities

 

 

(97)

 

 

(101)

 

Net income available to common stockholders

 

$

21,416

 

$

19,757

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.54

 

$

0.53

 

Diluted

 

$

0.54

 

$

0.53

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

Basic

 

 

39,366

 

 

37,446

 

Diluted

 

 

39,612

 

 

37,459

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.57

 

$

0.54

 

 

See accompanying notes.

 

 

4


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

March 31, 

 

 

  

2017

  

2016

 

Net income

 

$

21,513

 

$

19,858

 

Reclassification adjustment

 

 

 —

 

 

(28)

 

Comprehensive income

 

$

21,513

 

$

19,830

 

 

See accompanying notes.

5


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

  

2017

  

2016

 

OPERATING ACTIVITIES:

 

 

    

 

 

    

 

Net income

 

$

21,513

 

$

19,858

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,359

 

 

8,561

 

Stock-based compensation expense

 

 

1,259

 

 

990

 

Income from unconsolidated joint ventures

 

 

(445)

 

 

(272)

 

Income distributions from unconsolidated joint ventures

 

 

356

 

 

268

 

Straight-line rental income

 

 

(2,867)

 

 

(2,835)

 

Amortization of lease incentive

 

 

527

 

 

518

 

Provision for doubtful accounts

 

 

(38)

 

 

84

 

Non-cash interest related to contingent liabilities

 

 

226

 

 

149

 

Other non-cash items, net

 

 

314

 

 

291

 

Increase in interest receivable

 

 

(1,185)

 

 

(1,279)

 

Decrease in accrued interest payable

 

 

(416)

 

 

(1,122)

 

Net change in other assets and liabilities

 

 

(7,553)

 

 

(5,606)

 

Net cash provided by operating activities

 

 

21,050

 

 

19,605

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in real estate properties

 

 

 —

 

 

(16,000)

 

Investment in real estate developments

 

 

(3,443)

 

 

(13,439)

 

Investment in real estate capital improvements

 

 

(742)

 

 

(3,253)

 

Capitalized interest

 

 

(170)

 

 

(686)

 

Proceeds from sale of real estate, net

 

 

 —

 

 

1,750

 

Investment in real estate mortgage loans receivable

 

 

(4,384)

 

 

(6,599)

 

Principal payments received on mortgage loans receivable

 

 

10,958

 

 

1,015

 

Investments in unconsolidated joint ventures

 

 

(914)

 

 

 —

 

Payment of working capital reserve

 

 

(439)

 

 

(299)

 

Advances and originations under notes receivable

 

 

 —

 

 

(93)

 

Principal payments received on notes receivable

 

 

25

 

 

30

 

Net cash provided by (used in) investing activities

 

 

891

 

 

(37,574)

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Bank borrowings

 

 

3,500

 

 

40,500

 

Repayment of bank borrowings

 

 

(110,600)

 

 

 —

 

Proceeds from issuance of senior unsecured notes

 

 

100,000

 

 

 —

 

Principal payments on senior unsecured notes

 

 

(4,167)

 

 

(4,167)

 

Proceeds from common stock issued

 

 

14,578

 

 

14,637

 

Distributions paid to stockholders

 

 

(22,552)

 

 

(20,347)

 

Financing costs paid

 

 

(301)

 

 

 —

 

Other

 

 

(1,658)

 

 

(1,316)

 

Net cash (used in) provided by financing activities

 

 

(21,200)

 

 

29,307

 

Increase in cash and cash equivalents

 

 

741

 

 

11,338

 

Cash and cash equivalents, beginning of period

 

 

7,991

 

 

12,942

 

Cash and cash equivalents, end of period

 

$

8,732

 

$

24,280

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

7,574

 

$

6,807

 

 

See accompanying notes.

 

 

6


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(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 seniors housing and health care properties primarily through sale-leaseback transactions, mortgage financing and structured finance solutions including mezzanine lending.  We conduct and manage our business as one operating segment, rather than multiple operating segments, for internal reporting and internal decision making purposes. Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in seniors housing and health care properties managed by experienced operators. Our primary seniors housing and health care property classifications include skilled nursing centers (or SNF), assisted living communities (or ALF), independent living communities (or ILF), memory care communities (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 classification and form of investment.

We have prepared consolidated financial statements included herein without audit and in the opinion of management have included all adjustments necessary for a fair presentation of the consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (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 and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended March 31, 2017 and 2016 are not necessarily indicative of the results for a full year.

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

New Accounting Pronouncements.

In May 2014, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update (or ASU) 2014-09, Revenue from Contracts with Customers, which requires revenue to be based upon the consideration expected from customers for promised goods or services.  The new standard, effective on January 1, 2018, permits either the retrospective or cumulative effects transition method and allows for early adoption on January 1, 2017.  We expect to adopt this standard using the modified retrospective adoption method on January 1, 2018. We are currently evaluating the impact of this ASU but we do not believe this standard will have a material impact on our results of operations or financial condition, as a substantial portion of our revenues consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09.

In February 2016, the FASB issued ASU No. 2016-02 (or ASU 2016-02), Leases (Topic 842). ASU 2016-02 modifies existing guidance for off-balance sheet treatment of a lessees’ operating leases by requiring lessees to recognize lease assets and lease liabilities. Under ASU 2016-02, lessor accounting is largely unchanged. Consistent with present standards, we will continue to account for lease revenue on a

7


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

straight-line basis for most leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We have begun our process for implementing this guidance, including identifying any non-lease components in our lease arrangements. We are continuing to evaluate this guidance and the impact to us, as both lessor and lessee, on our consolidated financial statements.

In March 2016, FASB issued ASU No. 2016-07 (or ASU 2016-07), Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU 2016-07 eliminates retroactive adjustment of an investment upon an investment qualifying for the equity method of accounting and requires the equity method investor to adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. ASU 2016-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this ASU did not have a material impact on our consolidated financial statements.  

In March 2016, FASB issued ASU No. 2016-09 (or ASU 2016-09), Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. ASU 2016-09 is effective for public companies for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this ASU did not have a material impact on our consolidated financial statements.

In August 2016, FASB issued ASU No. 2016-15 (or ASU 2016-15), Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the Emerging Issues Task Force). ASU 2016-15 provides guidance that reduces the diversity in practice of the classification of certain cash receipts and cash payments within the statement of cash flows. This guidance is effective for fiscal periods beginning after December 15, 2017 and allows for early adoption. The anticipated impact of the adoption of this guidance on the Company’s financial statements is still being evaluated.

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

8


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

2.Real Estate Investments

Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (or collectively ALF). Historically, we had a property classification identified as range of care communities (or ROC) which consisted of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services. Since we only have seven ROC remaining and given that these properties derive materially all of their revenue from skilled nursing services, we elected to reclassify them into the SNF property classification.

Any reference to the number of properties, 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 March 31, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Percentage

 

Number

 

Number of

 

Investment

 

 

 

Gross

 

of

 

of

 

SNF

 

ALF

 

per

 

Type of Property

    

Investments

    

Investments

    

Properties(1)

    

Beds

    

Units

    

Bed/Unit

 

Assisted Living

 

$

699,004

 

53.5

104

 

 —

 

5,707

 

$

122.48

 

Skilled Nursing(2)

 

 

579,627

 

44.4

%  

76

 

9,245

 

274

 

$

60.89

 

Under Development(3)

 

 

17,071

 

1.3

 —

 

 —

 

 —

 

 

 —

 

Other(4)

 

 

10,216

 

0.8

 1

 

118

 

 —

 

 

 —

 

Totals

 

$

1,305,918

 

100.0

181

 

9,363

 

5,981

 

 

 

 


(1)

We own properties in 28 states that are leased to 27 different operators.

 

(2)

Includes seven SNFs with ALF units.

 

(3)

Represents three development projects consisting of two MC with a total of 132 units and a 143-bed SNF.

 

(4)

Includes three parcels of land held-for-use, and one behavioral health care hospital. The behavioral health care hospital has two licensed skilled nursing beds and 116 acute care licensed hospital beds which represents an investment of $78.39 per bed.

 

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

(i)

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

(ii)

a calculation based on the Consumer Price Index;

(iii)

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

(iv)

specific dollar increases.

 

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Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

During the three months ended March 31, 2017 and 2016, we invested the following in development and improvement projects (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 2017

 

Three months ended  March 31, 2016

 

    

Development

    

Improvements

    

Development

    

Improvements

Assisted Living Communities

 

$

2,941

 

$

41

 

$

13,439

 

$

1,135

Skilled Nursing Centers

 

 

502

 

 

701

 

 

 -

 

 

2,118

 

 

$

3,443

 

$

742

 

$

13,439

 

$

3,253

 

During the three months ended March 31, 2016, we sold a 48-unit assisted living community located in Florida for $1,750,000 and we acquired a newly constructed 126-bed skilled nursing center in Texas for $16,000,000.  

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at March 31, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

Number

 

Number

 

Number of

 

Investment

 

 

 

Gross

 

of

 

of

 

of

 

SNF

 

ALF

 

per

 

Type of Property

 

Investments

 

Investments

 

Loans

 

Properties(1)

 

Beds

 

Units

 

Bed/Unit

 

Skilled Nursing

  

$

219,671

  

97.4

%  

 5

  

21

  

2,828

  

 —

  

$

77.68

 

Assisted Living(2)

 

 

4,664

 

2.1

%  

 1

 

 1

 

 —

 

70

 

$

66.63

 

Other(3)

 

 

1,206

 

0.5

%  

 1

 

 —

 

 —

 

 —

 

 

 —

 

Totals

 

$

225,541

 

100.0

%  

 7

 

22

 

2,828

 

70

 

 

 

 


(1)

We have investments in properties located in four states that include mortgages to four different operators.

 

(2)

Represents a first mortgage on a 70-unit assisted living community. Subsequent to March 31, 2017, we received the payoff from this mortgage loan.

 

(3)

Includes a parcel of land secured under a short-term mortgage loan. Subsequent to March 31, 2017, we received the payoff from this mortgage loan. 

At March 31, 2017, the mortgage loans had interest rates ranging from 7.4% to 11.2% and maturities ranging from 2017 to 2045. In addition, some loans contain certain guarantees, provide for certain facility fees and generally have 20-year to 30-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.

The following table summarizes our mortgage loan activity for the three months ended March 31, 2017 and 2016 (in thousands):

 

 

 

 

 

 

 

 

 

    

2017

    

2016

 

Origination/Funding 

 

$

4,384

 

$

6,599

 

Pay-offs

 

 

10,796

 

 

513

 

Scheduled principal payments received

 

 

162

 

 

502

 

 

 

 

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Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

3.Investment in Unconsolidated Joint Ventures 

 

Our investment in unconsolidated joint ventures consist of a preferred equity investment and two mezzanine loans which are accounted for as an unconsolidated joint venture in accordance with GAAP.

Preferred Equity Investment: We provided a total preferred capital contribution commitment of $25,650,000 to an entity (or the JV) that owns four properties in Arizona that provides independent, assisted living and memory care services. As the preferred member of the JV, we are entitled to receive a 15% preferred return, a portion of which is paid in cash and a portion of which is deferred. The unpaid preferred return will be accrued to the extent of the common member’s capital account balance in the underlying JV. Since the common member’s capital account balance is $0, we did not record the deferred portion of the preferred return during the quarter ended March 31, 2017.

During the three months ended March 31, 2017, we funded $914,000 of the preferred capital contribution. Accordingly, we have a remaining preferred capital contribution commitment of $2,823,000.  At March 31, 2017 and December 31, 2016, our preferred equity investment was $23,234,000 and $22,321,000, respectively. During the three months ended March 31, 2017 and 2016, we recognized $317,000 and $272,000, respectively, in income and received $302,000 and $268,000, respectively, of cash interest from our preferred equity investment in the JV. 

Mezzanine Loans: During 2016, we entered into a $3,400,000 seven-year term mezzanine loan commitment for the development of a 127-unit senior housing community in Florida which will provide a combination of assisted living, memory care and independent living services. The loan agreement provides us a 15% preferred return, a portion of which is paid in cash and the remaining unpaid portion is deferred and subsequently paid to us at times set forth in the loan agreement. As of March 31, 2017 and December 31, 2016, no payments were funded under this mezzanine loan.

We also have a $2,900,000 mezzanine loan to develop a 99-unit senior housing community in Florida which will provide a combination of assisted living, memory care and independent living services. The loan bears interest at 10% and will escalate to 15%.  Interest payments were deferred and no interest was recorded between the time of the commencement of the loan and February 1, 2017, the first payment date per the terms of the loan agreement. In accordance with GAAP, we used the effective interest method to recognize interest income and recorded the difference between the effective interest income and cash interest income to the loan principal balance. During the three months ended March 31, 2017, we recognized $128,000 in income and received $54,000 of cash interest. At March 31, 2017 and December 31, 2016, the outstanding balance under this loan was $2,947,000 and $2,900,000, respectively.

4.Notes Receivable

Notes receivable consists of mezzanine loans and other loan arrangements. The following table summarizes our notes receivable activities for the three months ended March 31, 2017 and 2016 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

2017

 

2016

 

Advances and originations under notes receivable

$

 -

 

$

93

 

Principal payments received under notes receivable

 

(25)

 

 

(30)

 

Net (decrease) increase in notes receivable

$

(25)

 

$

63

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

 

 

5.Debt Obligations

 

The following table sets forth information regarding debt obligations by component as of March 31, 2017 and December 31, 2016  (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2017

 

At December 31, 2016

 

 

 

Applicable

 

 

 

Available

 

 

 

Available

 

 

 

Interest

 

Outstanding

 

for

 

Outstanding

 

for

 

Debt Obligations

    

Rate(1)

    

Balance

    

Borrowing

    

Balance

    

Borrowing

 

Bank borrowings

 

n.a

 

$

 -

 

$

600,000

 

$

107,100

 

$

492,900

 

Senior unsecured notes, net of debt issue costs

 

4.50%

 

 

597,873

 

 

36,667

 

 

502,291

 

 

22,500

 

Total

 

4.50%

 

$

597,873

 

 

 

 

$

609,391

 

 

 

 


(1)

Represents weighted average of interest rate as of March 31, 2017.  

 

 

 

Bank Borrowings. We have an Unsecured Credit Agreement that provides for a revolving line of credit up to $600,000,000.  The Unsecured Credit Agreement matures on October 14, 2018 and provides for a one-year extension option at our discretion, subject to customary conditions. Based on our leverage at March 31, 2017, the facility provides for interest annually at LIBOR plus 150 basis points and an unused commitment fee of 35 basis points. During the three months ended March 31, 2017, we borrowed $3,500,000 and repaid $110,600,000, respectively under our unsecured revolving line of credit.  During the three months ended March 31, 2016, we borrowed $40,500,000  under our unsecured revolving line of credit. At March 31, 2017, we were in compliance with all covenants.

Senior Unsecured Notes. During the three months ended March 31, 2017, we amended our shelf agreement with affiliates and managed accounts of Prudential Investment Management, Inc. (or Prudential) to increase our shelf commitment to $337,500,000. Additionally, we sold 15-year senior unsecured notes in the aggregate amount of $100,000,000 to a group of institutional investors, which included Prudential, in a private placement transaction. The notes bear interest at an annual fixed rate of 4.5%, have scheduled principal payments and mature on February 16, 2032. During each of the three months ended March 31, 2017 and 2016, we paid $4,167,000 in regular scheduled principal payments to Prudential.

6.Equity

 

Equity activity was as follows (in thousands):

 

 

 

 

 

 

 

Total

 

 

 

Equity

 

Balance at December 31, 2016

    

$

740,048

 

Net income

 

 

21,513

 

Proceeds from common stock issued, net of issuance costs

 

 

14,529

 

Stock-based compensation expense

 

 

1,259

 

Performance based stock units

 

 

(6)

 

Common stock dividends

 

 

(22,552)

 

Other

 

 

(1,651)

 

Balance at March 31, 2017

 

$

753,140

 

 

Common Stock. We have an equity distribution agreement to issue and sell, from time to time, up to $200,000,000 in aggregate offering price of our company common share. During the three months ended March 31, 2017, we sold 312,881 shares of common stock for $14,578,000 in net proceeds under our equity distribution agreement. The proceeds were used to pay down our unsecured revolving line of

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

credit. In conjunction with the sale of common stock, we reclassified $49,000 of accumulated costs associated with this agreement to additional paid in capital. Accordingly, at March 31, 2017, we had $185,162,000 available under our Equity Distribution Agreements.

Also, during the three months ended March 31, 2017 and 2016, we acquired 35,563 shares and 30,910 shares respectively, of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.

Available Shelf Registrations. In 2016, we filed a new automatic shelf registration statement to provide us with additional capacity to publicly offer an indeterminate amount of common stock, preferred stock, warrants, debt, depositary shares, or units. We may from time to time raise capital under the automatic registration statement we filed in 2016 (until its expiration on January 29, 2019) in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 2017

 

March 31, 2016

 

 

 

 

Declared

 

Paid

 

Declared

 

Paid

 

 

Common Stock

 

$

22,552

(1)

$

22,552

(1)

$

20,347

(2)

$

20,347

(2)

 


(1)

Represents $0.19 per share per month for the three months ended March 31, 2017.

 

(2)

Represents $0.18 per share per month for the three months ended March 31, 2016.

In April 2017, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of April,  May and June, payable on April 28,  May 31, and June 30, 2017, respectively, to stockholders of record on April 20,  May 23, and June 22, 2017, respectively.

Stock-Based Compensation.  During 2015, we adopted and our shareholders approved the 2015 Equity Participation Plan (or the 2015 Plan) which replaces the 2008 Equity Participation Plan (or the 2008 Plan). Under the 2015 Plan, 1,400,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2015 Plan are set by our compensation committee at its discretion.

During the three months ended March 31, 2017 and 2016,  no stock options were granted or exercised. At March 31, 2017, we had 33,334 stock options outstanding and exercisable. Compensation expense related to the vesting of stock options was $2,000 and $4,000 for the three months ended March 31, 2017 and 2016, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

During the three months ended March 31, 2017 and 2016, we granted restricted stock and performance-based stock units under the 2015 Plan as follows:

 

 

 

 

 

 

 

 

 

 

 

No. of 

 

Price per

 

 

 

Year

 

Shares/Units

 

Share

 

Vesting Period

 

2017

 

74,760

 

$

45.76

 

ratably over 3 years

 

 

 

57,881

 

$

45.76

 

TSR targets (1)

 

 

 

132,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

65,300

 

$

43.24

 

ratably over 3 years

 


(1)

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

Compensation expense recognized related to the vesting of restricted common stock for the three months ended March 31, 2017 was $1,257,000, compared to $986,000 for the same period in 2016. At March 31, 2017, the remaining compensation expense to be recognized related to the future service period of unvested outstanding restricted common stock and performance-based stock units are as follows:

 

 

 

 

 

 

 

 

 

Remaining 

 

 

Compensation

Vesting Date

    

Expense

2017

 

$

3,997,000

2018

 

 

4,147,000

2019

 

 

2,312,000

2020

 

 

251,000

 

 

$

10,707,000

 

 

7.Commitments and Contingencies

At March 31, 2017, we had commitments as follows (in thousands):

September 30, 2016, we had commitments as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Total

    

 

 

    

 

 

Investment

 

2017

 

Commitment

 

Remaining

 

 

    

Commitment

    

Funding

    

Funded

    

Commitment

 

Real estate properties (See Note 2)

 

$

66,224

(1)

$

3,501

 

$

20,905

 

$

45,319

 

Accrued incentives and earn-out liabilities (2)

 

 

14,600

 

 

 —

 

 

 —

 

 

14,600

 

Lease incentives

 

 

8,808

 

 

3,035

 

 

5,817

 

 

2,991

 

Mortgage loans (See Note 2)

 

 

51,000

(1)

 

4,384

 

 

9,722

 

 

41,278

 

Joint venture investments (See Note 3)

 

 

29,050

 

 

914

 

 

22,827

 

 

6,223

 

Notes receivable (See Note 4)

 

 

200

 

 

 —

 

 

 —

 

 

200

 

Totals

 

$

169,882

 

$

11,834

 

$

59,271

 

$

110,611

 


(1)

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

 

(2)

During the three months ended March 31, 2017, we recorded non‑cash interest expense of $226 related to these contingent liabilities and the fair value of our contingent payments was $12,015 at March 31, 2017.

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

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

believe that these matters are the responsibility of our lessees and borrowers pursuant to general legal principles and pursuant to insurance and indemnification provisions in the applicable leases or mortgages. We intend to continue to vigorously defend such claims.

 

8.Major Operators

 

We have three operators from each of which we derive approximately 10% or more of our combined rental revenue and interest income from mortgage loans. The following table sets forth information regarding our major operators as of March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Number of

 

Percentage of

 

 

 

 

 

 

 

SNF

 

ALF

 

Total

 

 

Total

 

 

Operator

 

SNF

 

ALF

 

Beds

 

Units

 

Revenue (1)

 

 

Assets

 

 

Prestige Healthcare

    

22

    

 —

    

2,862

    

93

    

16.3

%  

    

16.2

%

 

Senior Lifestyle Corporation

 

 —

 

27

 

 —

 

1,632

 

12.0

%

 

12.6

%

 

Brookdale Senior Living 

 

 —

 

37

 

 —

 

1,702

 

9.6

%  

 

5.4

%

 

Totals

 

22

 

64

 

2,862

 

3,427

 

37.9

%  

 

34.2

%

 


(1)

Includes rental income and interest income from mortgage loans.

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

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

9.Earnings per Share

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

 

 

2017

 

2016

 

 

Net income

  

$

21,513

  

$

19,858

  

 

Less net income allocated to participating securities:

 

 

 

 

 

 

 

 

Non-forfeitable dividends on participating securities

 

 

(97)

 

 

(101)

 

 

Total net income allocated to participating securities

 

 

(97)

 

 

(101)

 

 

Net income available to common stockholders

 

 

21,416

 

 

19,757

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Participating securities

 

 

97

 

 

 —

(1)

 

Total effect of dilutive securities

 

 

97

 

 

 —

 

 

Net income for diluted net income per share

 

$

21,513

 

$

19,757

 

 

 

 

 

 

 

 

 

 

 

Shares for basic net income per share

 

 

39,366

 

 

37,446

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Stock options

 

 

11

 

 

13

 

 

Performance-based stock units

 

 

75

 

 

 —

 

 

Participating securities

 

 

160

 

 

 —

(1)

 

Total effect of dilutive securities

 

 

246

 

 

13

 

 

Shares for diluted net income per share

 

 

39,612

 

 

37,459

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.54

 

$

0.53

 

 

Diluted net income per share

 

$

0.54

 

$

0.53

(1)

 


(1)

For the three months ended March 31, 2016, the participating securities have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.

 

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

10.Fair Value Measurements

 

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

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments. We do not invest our cash in auction rate securities. The carrying value and fair value of our financial instruments as of March 31, 2017 and December 31, 2016 assuming election of fair value for our financial assets and financial liabilities were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2017

 

At December 31, 2016

 

 

 

Carrying

 

Fair 

 

Carrying

 

Fair 

 

 

 

Value

 

Value

 

Value

 

Value

 

Mortgage loans receivable

    

$

223,292

    

$

274,756

(1)   

$

229,801

    

$

294,319

(1)

Bank borrowings

 

 

 —

 

 

 —

 

 

107,100

 

 

107,100

(2)

Senior unsecured notes, net of debt issue costs

 

 

597,873

 

 

591,621

(3)

 

502,291

 

 

498,915

(3)

Accrued incentives and earn-outs

 

 

12,015

 

 

12,015

(4)

 

12,229

 

 

12,229

(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 March 31, 2017 and December 31, 2016 was 8.7% and 8.2%, respectively.

 

(2)

Our bank borrowings bear interest at a variable interest rate. The estimated fair value of our bank borrowings approximated their carrying values at December 31, 2016 based upon prevailing market interest rates for similar debt arrangements.

 

(3)

Our obligation under our senior unsecured notes is classified as Level 3 and thus the fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows. The discount rate is measured based upon management’s estimates of rates currently prevailing for comparable loans available to us, and instruments of comparable maturities. At March 31, 2017, the discount rate used to value our future cash outflow of our senior unsecured notes was 4.48% for those maturing before year 2026 and 4.68% for those maturing at or beyond year 2026. At December 31, 2016, the discount rate used to value our future cash outflow of our senior unsecured notes was 4.47% for those maturing before year 2026 and 4.60% for those maturing at or beyond year 2026.

 

(4)

Our accrued incentives and earn-outs are classified as Level 3. We estimated the fair value of the 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 March 31, 2017 and December 31, 2016, the discount rate used to value our accrued incentives and earn-outs was 5.9%.

 

 

 

 

11.Subsequent Events

 

Subsequent to March 31, 2017, the following events occurred:

Mortgage Loan Receivables: We received $5,870,000 plus accrued interest related to the payoff of two mortgage loans secured by a 70-unit assisted living community and a parcel of land.

 

Equity: We declared a monthly cash dividend of $0.19 per share on our common stock for the months of April,  May and June, payable on April 28, May 31, and June 30, 2017, respectively to stockholders of record on April 20, May 23, and June 22, 2017, respectively.

 

 

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

 

Statement Regarding Forward Looking Disclosure

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some of the forward-looking statements by their use of forward-looking words, such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or the negative of those words or similar words. Forward- looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, the status of the economy; the status of capital markets (including prevailing interest rates) and our access to capital; the income and returns available from investments in health care related real estate (including our ability to re-lease properties upon expiration of a lease term); the ability of our borrowers and lessees to meet their obligations to us; our reliance on a few major operators; competition faced by our borrowers and lessees within the health care industry; regulation of the health care industry by federal, state and local governments; changes in Medicare and Medicaid reimbursement amounts (including due to federal and state budget constraints); compliance with and changes to regulations and payment policies within the health care industry; debt that we may incur and changes in financing terms; our ability to continue to qualify as a real estate investment trust; the relative illiquidity of our real estate investments; potential limitations on our remedies when mortgage loans default; and risks and liabilities in connection with properties owned through limited liability companies and partnerships. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in our publicly available filings with the Securities and Exchange Commission. We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

Business and Investment Strategy

We are a self-administered health care real estate investment trust (or REIT) that invests primarily in seniors housing and health care properties primarily through sale-leaseback transactions, mortgage financing and structured finance solutions including mezzanine lending. We conduct and manage our business as one operating segment, rather than multiple operating segments, for internal reporting and internal decision making purposes. Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in seniors housing and health care properties managed by experienced operators. Our primary seniors housing and health care property classifications include skilled nursing centers (or SNF), assisted living communities (or ALF), independent living communities (or ILF), memory care communities (or MC) and combinations thereof. ALF, ILF, MC, and combinations thereof are included in the ALF property classification. Historically, we had a property classification identified as range of care communities (or ROC) which consisted of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services. Since we only have seven ROC remaining and given that these properties derive materially all of their revenue from skilled nursing services, we elected to

18


 

reclassify them into the SNF property classification. As of March 31, 2017, seniors housing and long-term health care properties comprised approximately 99.3% of our real estate investment portfolio.  We have been operating since August 1992.

Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable. Our investments in owned properties and mortgage loans represent our primary source of liquidity to fund distributions and are dependent upon the performance of the operators on their lease and loan obligations and the rates earned thereon. To the extent that the operators experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by 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 secure multiple properties.

Portfolio Overview

The following table summarizes our real estate investment portfolio as of March 31, 2017  (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

March 31, 2017

 

Percentage

 

Number

 

Number of 

 

 

  

Gross

  

of 

    

Rental

  

Interest

  

of 

    

of

  

SNF

  

ALF

 

Type of Property

 

Investments

 

Investments

 

Income

 

Income(1)

 

Revenues

 

Properties(2)

 

Beds(3)

 

Units(3)

 

Skilled Nursing(4)

 

$

799,298

 

52.2

%  

$

17,098

 

$

6,535

 

56.7

%

97

 

12,073

 

274

 

Assisted Living

 

 

703,668

 

46.0

%

 

17,721

 

 

88

 

42.7

%

105

 

 

5,777

 

Under Development(5)

 

 

17,071

 

1.1

%

 

 —

 

 

 —

 

 —

%

 

 

 

Other(6)

 

 

11,422

 

0.7

%

 

216

 

 

27

 

0.6

%

 1

 

118

 

 

Totals

 

$

1,531,459

 

100.0

%

$

35,035

 

$

6,650

 

100.0

%

203

 

12,191

 

6,051

 


(1)

Excludes interest income from mortgage loans paid off during 2017.

 

(2)

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

 

(3)

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

 

(4)

Includes seven SNFs with ALF units.

 

(5)

Represents three development projects consisting of two MC with a total of 132 units and a 143-bed SNF.

 

(6)

Includes four parcels of land held-for-use and one behavioral health care hospital. The behavioral health care hospital has two licensed skilled nursing beds and 116 acute care licensed hospital beds.

As of March 31, 2017 we had $1.2 billion in carrying value of net real estate investments, consisting of $1.0 billion or 82.1% invested in owned and leased properties and $0.2 billion or 17.9% invested in mortgage loans secured by first mortgages.

For the three months ended March 31, 2017, rental income and interest income from mortgage loans represented 82.2% and 15.8%, respectively, of total gross revenues. In most instances, our lease structure contains fixed annual rental escalations, which are generally recognized on a straight-line basis over the minimum lease period. Certain leases have annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property.  For those certain leases, the revenue is not recognized until the appropriate contingencies have been resolved.

19


 

For the three months ended March 31, 2017, we recorded $2.9 million in straight-line rental income and $28,000 of straight-line rent receivable reserve. During the three months ended March 31, 2017, we received $32.7 million of cash rental revenue and recorded amortization of lease incentive cost of $0.5 million.  During the three months ended March 31, 2017,  an existing lease was amended to extend the term for an additional five years and increase rent by 2%. At March 31, 2017, the straight-line rent receivable balance, net of reserves, on the balance sheet was $58.1 million.

2017 Activities Overview

Development Projects

During the three months ended March 31, 2017, we invested the following in development and improvement projects (in thousands):

 

 

 

 

 

 

 

 

    

Development

    

Improvements

Assisted Living Communities

 

$

2,941

 

$

41

Skilled Nursing Centers

 

 

502

 

 

701

 

 

$

3,443

 

$

742

Investment in Mortgage Loans

A summary of our mortgage loan origination and funding for the three months ended March 31, 2017, is as follows (in thousands):

 

 

 

 

 

 

    

2017

 

Origination/Funding 

 

$

4,384

 

Pay-offs

 

 

10,796

 

Scheduled principal payments received

 

 

162

 

Subsequent to March 31, 2017, we received $5.9 million plus accrued interest related to the payoff of two mortgage loans secured by a 70-unit assisted living community and a parcel of land.

Investment in Unconsolidated Joint Ventures

Our investment in unconsolidated joint ventures consist of a preferred equity investment and two mezzanine loans which are accounted for as an unconsolidated joint venture in accordance with GAAP.

Preferred Equity Investment: We provided a total preferred capital contribution commitment of $25.7 million to an entity (or the JV) that owns four properties in Arizona that provides independent, assisted living and memory care services. During the three months ended March 31, 2017, we funded $0.9 million of the preferred capital contribution with a remaining preferred capital contribution commitment of $2.8 million.  At March 31, 2017, our preferred equity investment was $23.2 million. During the three months ended March 31, 2017, we recognized $0.3 million in income and received $0.3 million of cash interest from our preferred equity investment in the JV. 

Mezzanine Loans: We provided two mezzanine loan commitments for the development of two senior housing communities with a total of 226 units in Florida which will provide a combination of assisted living, memory care and independent living services. Per the terms of the loan agreements, a portion of the interest is deferred for a fixed period of time and repaid based on schedule dates. In accordance with GAAP, we used the effective interest method to recognize interest income and recorded the difference between the effective interest income and cash interest income to the loan principal balance. During the three months ended March 31, 2017, we recognized $0.1 million in income and

20


 

received $0.1 million of cash interest. At March 31, 2017, the outstanding balance under these loans was $2.9 million.

 Notes Receivable

Notes receivable consists of mezzanine loans and other loan arrangements. The following table summarizes our notes receivable activities for the three months ended March 31, 2017 (dollar amounts in thousands):

 

 

 

 

 

Advances under notes receivable

    

$

 -

 

Principal payments received under notes receivable

 

 

(25)

 

Net decrease in notes receivable

 

$

(25)

 

Health Care Regulatory Climate

The Centers for Medicare & Medicaid Services (or CMS) annually updates Medicare skilled nursing facility prospective payment system rates and other policies. On July 29, 2016, CMS released a final rule updating fiscal year 2017 Medicare payment rates and quality programs for skilled nursing facilities. The final rule provides for a net market basket increase of 2.4 %, beginning October 1, 2016.  This reflects a 2.7% market basket increase, reduced by a 0.3 percentage point multifactor productivity adjustment. CMS estimates that aggregate payments to skilled nursing facilities under the final rule will increase by approximately $920 million.  CMS also adopted new measures and policies for the Skilled Nursing Facility Quality Reporting Program and the Value-Based Purchasing Program. On April 27, 2017, CMS released a proposed rule updating Medicare skilled nursing facility rates and policies for fiscal year 2018, which begins on October 1, 2017.  CMS expects the proposed rule to increase overall payments to SNFs by $390 million in fiscal year 2018, or 1.0%, compared to fiscal year 2017 levels.  The 1% update for fiscal year 2018 was set by Congress in 2015 legislation.  In addition, CMS proposes to update quality measures, and the agency continues to propose policies to implement the Value-Based Purchasing Program in fiscal year 2019.  Also on April 27, 2017, CMS released an advance notice of proposed rulemaking or pre-rule, to request comments on the possibility of replacing the skilled nursing facility prospective payment system’s existing case-mix classification model, the Resource Utilization Groups, Version 4 (RUG-IV), with a new model, the Resident Classification System, Version I (RCS-I). Among other features of this proposal, CMS anticipates that this model would more closely link facility payment to objective resident characteristics, rather than minutes of therapy provided. CMS intends to propose case-mix refinements in the fiscal year 2019 skilled nursing facility prospective payment system proposed rule; additional details regarding the potential reforms will be available at that time.

On September 28, 2016, CMS released a final rule revising the requirements that long-term care facilities must meet to participate in the Medicare and Medicaid programs. This major rule addresses requirements for improving quality of care and patient safety, nursing facility staffing, care planning, infection control, residents’ rights and compliance and ethics programs, and bans pre-dispute arbitration agreements (currently not in effect due to litigation challenging the requirement), among other key provisions. CMS estimates that the rule will impose an average cost of $62,900 per facility in the first year and $55,000 per facility per year in subsequent years. There can be no assurance that these rules or future regulations modifying Medicare skilled nursing facility payment rates or other requirements for Medicare and/or Medicaid participation will not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.

Congress periodically considers legislation revising Medicare policies, including legislation that could have the impact of reducing Medicare reimbursement for skilled nursing facilities and other Medicare providers, encouraging home and community-based long term care services as an alternative to

21


 

institutional settings, or otherwise reforming payment policy for post-acute care services. There can be no assurances that enacted or future legislation will not have an adverse impact on the financial condition of our borrowers and lessees, which subsequently could materially adversely impact our company.

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

 

Key Transactions During the Quarter

During the three months ended March 31, 2017, we amended our shelf agreement with affiliates and managed accounts of Prudential Investment Management, Inc. (or Prudential) to increase our shelf commitment to $337.5 million. Additionally, we sold 15-year senior unsecured notes in the aggregate amount of $100.0 million to a group of institutional investors, which included Prudential, in a private placement transaction. The notes bear interest at an annual fixed rate of 4.5%, have scheduled principal payments and mature on February 16, 2032. The proceeds were used to pay down our unsecured revolving line of credit.

During the first quarter, we sold 312,881 shares of common stock for $14.6 million in net proceeds under our equity distribution agreement. The proceeds were used to pay down our unsecured revolving line of credit. In conjunction with the sale of common stock, we reclassified $49,000 of accumulated costs associated with this agreement to additional paid in capital.

Key Performance Indicators, Trends and Uncertainties

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

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

22


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3/31/17

    

12/31/16

    

9/30/16

    

6/30/16

    

3/31/16

 

Asset mix:

  

 

    

  

 

    

  

 

    

  

 

    

  

 

    

 

Real property

 

$

1,305,918

 

$

1,301,563

 

$

1,292,459

 

$

1,291,386

 

$

1,229,756

 

Loans receivable

 

 

225,541

 

 

232,116

 

 

236,707

 

 

235,243

 

 

225,299

 

Investment mix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing centers(1)

 

$

799,298

 

$

796,468

 

$

801,397

 

$

799,194

 

$

794,570

 

Assisted living communities

 

 

703,668

(3)

 

711,645

 

 

706,279

 

 

702,386

 

 

636,059

 

Under development

 

 

17,071

 

 

14,142

 

 

10,065

 

 

4,354

 

 

3,731

 

Other(2)

 

 

11,422

 

 

11,424

 

 

11,425

 

 

20,695

 

 

20,695

 

Operator mix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prestige Healthcare(2)

 

$

231,657

 

$

227,274

 

$

226,204

 

$

224,220

 

$

213,690

 

Senior Lifestyle Corporation

 

 

201,862

 

 

201,862

 

 

201,227

 

 

200,515

 

 

200,357

 

Senior Care Centers

 

 

138,109

 

 

138,109

 

 

138,109

 

 

138,109

 

 

138,109

 

Brookdale Senior Living

 

 

126,991

 

 

126,991

 

 

126,991

 

 

126,991

 

 

126,991

 

Anthem Memory Care

 

 

113,978

 

 

111,620

 

 

106,637

 

 

102,714

 

 

71,655

 

Remaining operators

 

 

718,862

 

 

727,823

 

 

729,998

 

 

734,080

 

 

704,253

 

Geographic mix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

$

269,067

 

$

274,547

 

$

280,486

 

$

281,795

 

$

287,187

 

Michigan

 

 

219,467

 

 

215,085

 

 

214,014

 

 

212,029

 

 

201,501

 

Wisconsin

 

 

126,133

 

 

126,133

 

 

125,990

 

 

125,680

 

 

125,680

 

Colorado

 

 

114,923

 

 

114,923

 

 

114,924

 

 

114,924

 

 

114,924

 

Ohio

 

 

99,300

 

 

99,300

 

 

99,133

 

 

98,997

 

 

98,957

 

Remaining states

 

 

702,569

 

 

703,691

 

 

694,619

 

 

693,204

 

 

626,806

 


(1)

Historically, we had a property classification identified as range of care communities (or ROC) which consisted of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services. Since we only have seven ROC remaining and given that these properties derive materially all of their revenue from skilled nursing services, we elected to reclassify them into the SNF property classification.

 

(2)

We have four parcels of land as of March 31, 2017. Three parcels of land are located adjacent to properties securing the Prestige Healthcare mortgage loan and are managed by Prestige.

 

(3)

Decrease due to loans paid off partially offset by funding on existing mortgage loan commitments.

 

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:

23


 

Balance Sheet Metrics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

3/31/17

    

 

12/31/16

    

 

9/30/16

    

 

6/30/16

    

 

3/31/16

 

Debt to gross asset value

 

35.6

%

(1)

36.4

%

(4)

35.9

%

(7)

36.8

%

(8)

38.5

%

Debt to market capitalization ratio

 

24.0

%

(2)

24.9

%

(5)

22.4

%

(2)

23.1

%

(7)

26.2

%

Interest coverage ratio(9)

 

5.0

x   

(3)

5.3

x   

(6)

5.2

(6)

5.1

 

5.1

Fixed charge coverage ratio(9)

 

5.0

x   

(3)

5.3

x   

(6)

5.2

(6)

5.1

 

5.1


(1)

Decreased due to decrease in outstanding debt as well as increase in gross asset value from additional developments and capital improvements.

 

(2)

Decreased primarily due to increase in market capitalization resulting from increase in stock price and the sale of common stock under our equity distribution agreement as well as decrease in outstanding debt.

 

(3)

Decreased primarily due to increase in interest expense resulting from the sale of senior unsecured notes in 2017 and 2016.

 

(4)

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

 

(5)

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

 

(6)

Increased primarily due to increase in revenue from new investments.

 

(7)

Decreased primarily due to decrease in outstanding debt.

 

(8)

Decreased due to increase in gross asset value from acquisitions, additional developments, mortgage loan originations and capital improvements and decrease in outstanding debt.

 

(9)

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 (or GAAP) (non-GAAP financial measure). Adjusted EBITDA is not an alternative to net income, operating income or cash flows from operating activities as calculated and presented in accordance with GAAP. You should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measures or consider it in isolation, for the purpose of analyzing our financial performance, financial position or cash flows. Net income is the most directly comparable GAAP measure to Adjusted EBITDA.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

3/31/17

 

12/31/16

 

9/30/16

 

6/30/16

 

3/31/16

 

Net income

  

$

21,513

  

$

20,666

  

$

22,411

  

$

22,180

  

$

19,858

 

Less: Gain on sale

 

 

 —

 

 

 —

 

 

(1,780)

 

 

(1,802)

 

 

 —

 

Add: Impairment on real estate for sale

 

 

 —

 

 

766

 

 

 —

 

 

 —

 

 

 —

 

Add: Interest expense

 

 

7,471

 

 

6,856

 

 

6,836

 

 

6,750

 

 

6,000

 

Add: Depreciation and amortization

 

 

9,359

 

 

9,309

 

 

9,155

 

 

8,907

 

 

8,561

 

Total adjusted EBITDA

 

$

38,343

 

$

37,597

 

$

36,622

 

$

36,035

 

$

34,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

7,471

 

$

6,856

 

$

6,836

 

$

6,750

 

$

6,000

 

Add: Capitalized interest

 

 

170

 

 

215

 

 

251

 

 

256

 

 

686

 

Interest incurred

 

$

7,641

 

$

7,071

 

$

7,087

 

$

7,006

 

$

6,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

 

5.0

x

 

5.3

x

 

5.2

x

 

5.1

x

 

5.1

x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest incurred

 

$

7,641

 

$

7,071

 

$

7,087

 

$

7,006

 

$

6,686

 

Total fixed charges

 

$

7,641

 

$

7,071

 

$

7,087

 

$

7,006

 

$

6,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed charge coverage ratio

 

 

5.0

x

 

5.3

x

 

5.2

x

 

5.1

x

 

5.1

x

 

24


 

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

 

·

The status of the economy;

·

The status of capital markets, including prevailing interest rates;

·

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

·

Changes in financing terms;

·

Competition within the health care and seniors housing industries; and

·

Changes in federal, state and local legislation.

 

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

 

Operating Results (unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

 

 

 

    

2017

    

2016

    

Difference

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

35,035

 

$

31,880

 

$

3,155

(1)

Interest income from mortgage loans

 

 

6,748

 

 

6,578

 

 

170

(2)

Interest and other income

 

 

839

 

 

146

 

 

693

(3)

Total revenues

 

 

42,622

 

 

38,604

 

 

4,018

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

7,471

 

 

6,000

 

 

(1,471)

(4)

Depreciation and amortization

 

 

9,359

 

 

8,561

 

 

(798)

(1)

(Recovery) provision for doubtful accounts

 

 

(38)

 

 

84

 

 

122

(2)

Transaction costs

 

 

22

 

 

90

 

 

68

(5)

General and administrative expenses

 

 

4,740

 

 

4,283

 

 

(457)

(6)

Total expenses

 

 

21,554

 

 

19,018

 

 

(2,536)

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

21,068

 

 

19,586

 

 

1,482

 

Income from unconsolidated joint ventures

 

 

445

 

 

272

 

 

173

(7)

Net income

 

 

21,513

 

 

19,858

 

 

1,655

 

Income allocated to participating securities

 

 

(97)

 

 

(101)

 

 

 4

 

Net income available to common stockholders

 

$

21,416

 

$

19,757

 

$

1,659

 


(1)

Increased due to acquisitions, development and capital improvement investments.

 

(2)

Increased in interest income from mortgage loans and decrease in provisions for doubtful accounts primarily due to mortgage originations, capital improvement funding and increase in effective interest income on certain mortgage loans partially offset by payoffs.

 

(3)

Increased primarily due to mezzanine loan originations and prepayment premiums received under certain loans.

 

(4)

Increased primarily due to sales of senior unsecured notes and decrease in capitalized interest related to development projects partially offset by decrease in borrowing under our unsecured revolving line of credit.

 

(5)

Decreased primarily due to decreased investment activity during the three months ended March 31, 2017.

 

(6)

Increased primarily due to the implementation of performance-based stock awards.

 

(7)

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

25


 

 

 

Funds From Operations Available to Common Stockholders

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 GAAP. Real estate values historically rise and fall with market conditions, but cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time.  We believe that by excluding the effect of historical cost depreciation, which may be of limited relevance in evaluating current performance, FFO facilitates comparisons of operating performance between periods.

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

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

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

 

2017

 

2016

 

GAAP net income available to common stockholders

    

$

21,416

    

$

19,757

 

Add: Depreciation and amortization

 

 

9,359

 

 

8,561

 

NAREIT FFO attributable to common stockholders

 

$

30,775

 

$

28,318

 

NAREIT FFO attributable to common stockholders per share:

 

 

 

 

 

 

 

Basic

 

$

0.78

 

$

0.76

 

Diluted

 

$

0.78

(1)

$

0.76

(1)

Weighted average shares used to calculate NAREIT FFO per share:

 

 

 

 

 

 

 

Basic

 

 

39,366

 

 

37,446

 

Diluted

 

 

39,612

(2)

 

37,640

(3)


(1)

Includes the effect of the participating securities.

 

(2)

Diluted weighted average shares used to calculate FFO per share for the three months ended March 31, 2017 includes the effect of stock option equivalents, participating securities and performance based stock units.

 

(3)

Diluted weighted average shares used to calculate FFO per share for the three months ended March 31, 2016 includes the effect of stock option equivalents and participating securities.

26


 

Liquidity and Capital Resources

Sources and Uses of Cash

As of March 31, 2017, we had a total of $8.7 million of cash and cash equivalents, $600.0 million available under our unsecured revolving line of credit, $36.7 million available under our senior unsecured note shelf agreement and the potential ability to access the capital markets through the issuance of $185.2 million of common stock under our equity distribution agreements. Furthermore, we have the ability to access the capital markets through the issuance of debt and/ or equity securities under our effective shelf registration.

We believe that our current cash balance, cash flow from operations available for distribution or reinvestment, our borrowing capacity and our potential ability to access the capital markets are sufficient to provide for payment of our current operating costs, meet debt obligations and pay common dividends at least sufficient to maintain our REIT status and repay borrowings at, or prior to, their maturity. The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. We continuously evaluate the availability of cost-effective capital and believe we have sufficient liquidity for additional capital investments in 2017.

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

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

Our primary sources of cash include rent and interest receipts, borrowings under our primary unsecured credit facility, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures and construction advances), loan advances and general and

27


 

administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows as summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

Change

 

Cash provided by (used in):

    

2017

  

2016

 

 

$

 

 

%

 

Operating activities

 

$

21,050

 

$

19,605

 

$

1,445

 

 

7.4

%

Investing activities

 

 

891

 

 

(37,574)

 

 

38,465

 

 

(102.4)

%

Financing activities

 

 

(21,200)

 

 

29,307

 

 

(50,507)

 

 

(172.3)

%

Increase in cash and cash equivalents

 

 

741

 

 

11,338

 

 

(10,597)

 

 

93.5

%

Cash and cash equivalents, beginning of period

 

 

7,991

 

 

12,942

 

 

(4,951)

 

 

(38.3)

%

Cash and cash equivalents, end of period

 

$

8,732

 

$

24,280

 

$

(15,548)

 

 

(64.0)

%

 

Operating Activities. Cash provided by operating activities for the three months ended March 31, 2017 increased to $21.1 million compared to $19.6 million for the three months ended March 31, 2016 due to increased operating cash flow from acquisitions and completed developments and capital improvement projects in 2016.

Investing Activities. Cash provided by investing activities decreased to $0.9 million for the three months ended March 31, 2017, compared to the cash used in investing activities of $37.6 million for the comparable 2016 period primarily due to decreased acquisitions and loan originations 2017.

Financing Activities. Cash used in financing activities increased to $21.2 million for the three months ended March 31, 2017, compared to the cash provided by financing activities of $29.3 million for the comparable 2016 period primarily due to decreased net borrowings during first quarter of 2017. 

Debt Obligations

The following table summarizes information regarding debt obligations by component as of March 31, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

Applicable

 

 

 

 

Available

 

 

Interest

 

Outstanding

 

for

Debt Obligations

    

Rate(1)

    

Balance

    

Borrowing

Bank borrowings

 

n.a

 

$

 -

 

$

600,000

Senior unsecured notes, net of debt issue costs

 

4.50%

 

 

597,873

 

 

36,667

Total

 

4.50%

 

$

597,873

 

 

 


(1)

Represents weighted average of interest rate as of March 31, 2017.

 

Bank Borrowings. We have an Unsecured Credit Agreement that provides for a revolving line of credit up to $600.0 million. The Unsecured Credit Agreement matures on October 14, 2018 and provides for a one-year extension option at our discretion, subject to customary conditions. Based on our leverage at March 31, 2017, the facility provides for interest annually at LIBOR plus 150 basis points and an unused commitment fee of 35 basis points. During the three months ended March 31, 2017, we borrowed $3.5 million and repaid $110.6 million under our Unsecured Credit Agreement. At March 31, 2017, we were in compliance with all covenants.

Senior Unsecured Notes. During the three months ended March 31, 2017, we amended our shelf agreement with affiliates and managed accounts of Prudential to increase our shelf commitment to $337.5 million. Additionally, we sold 15-year senior unsecured notes in the aggregate amount of $100.0 million to a group of institutional investors, which included Prudential, in a private placement transaction. The notes bear interest at an annual fixed rate of 4.5%, have scheduled principal payments and mature on

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February 16, 2032. During the three months ended March 31, 2017, we paid $4.2 million in regular scheduled principal payments to Prudential.

Equity

At March 31, 2017, we had 39,573,448 shares of common stock outstanding, equity on our balance sheet totaled $753.1 million and our equity securities had a market value of $1.9 billion. During the three months ended March 31, 2017, we declared and paid $22.6 million of cash dividends. Subsequent to March 31, 2017, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of April,  May and June, payable on April 28,  May 31, and June 30, 2017, respectively, to stockholders of record on April 20,  May 23, and June 22, 2017, respectively.

At-The-Market Program. We have an equity distribution agreement to issue and sell, from time to time, up to $200.0 million in aggregate offering price of our common shares. Sales of common shares are made by means of ordinary brokers’ transactions, which may include block trades, or transactions that are deemed to be “at the market” offerings. During the three months ended March 31, 2017, we sold 312,881 shares of common stock for $14.6 million in net proceeds under our equity distribution agreement. The proceeds were used to pay down our unsecured revolving line of credit. At March 31, 2017, we had $185.2 million available under our equity distribution agreement.

Available Shelf Registrations. We have an automatic shelf registration statement which provides us with additional capacity to publicly offer an indeterminate amount of common stock, preferred stock, warrants, debt, depositary shares, or units. We may from time to time raise capital under the automatic registration statement (until its expiration on January 29, 2019) 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.

Critical Accounting Policies

There have been no material changes from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in our market risk during the three months ended March 31, 2017. For additional information, refer to Item 7A as presented in our Annual Report on Form 10-K for the year ended December 31, 2016.

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Item 4. CONTROLS AND PROCEDURES

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

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

30


 

PART II

 

OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

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

 

Item 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended March 31, 2017, we did not make any unregistered sales of equity securities.

 

During the three months ended March 31, 2017, we acquired shares of common stock held by employees who tendered shares to satisfy tax withholding obligations.  Specifically, the number of shares of common stock acquired from employees and the average prices paid per share for each month in the quarter ended March 31, 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number

    

 

 

 

 

 

 

 

 

 

of Shares

 

Maximum

 

 

 

 

 

 

 

 

Purchased as

 

Number of

 

 

 

 

 

Average

 

Part of

 

Shares that May

 

 

 

Total Number

 

Price

 

Publicly

 

Yet Be

 

 

 

of Shares

 

Paid per

 

Announced

 

Purchased

 

Period

 

Purchased

 

Share

 

Plan

 

Under the Plan

 

January 1 - January 31, 2017

 

722

 

$

46.70

 

 —

 

 —

 

February 1 - February 28, 2017

 

34,841

 

$

46.44

 

 —

 

 —

 

March 1 - March 31, 2017

 

 —

 

$

 —

 

 —

 

 —

 

Total

 

35,563

 

 

 

 

 —

 

 

 

 

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Item 6. Exhibits

 

3.1

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

 

 

3.2

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

 

 

10.1

Second Amendment to Third Amended and Restated Note Purchase and Private Shelf Agreement between LTC Properties, Inc. and Prudential Investment Management, Inc. dated February 16, 2017 (incorporated by reference to Exhibit 10.6 to LTC Properties Inc.’s Annual Report on Form 10-K (File No. 1‑11314) filed February 22, 2017)

 

 

10.2

Note Purchase Agreement dated February 16, 2017 (incorporated by reference to Exhibit 10.7 to LTC Properties Inc.’s Annual Report on Form 10-K (File No. 1‑11314) filed February 22, 2017)

 

 

31.1

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

 

 

31.2

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

 

 

32

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

 

 

101

The following materials from LTC Properties, Inc.’s Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at March 31, 2017 and December 31, 2016; (ii) Consolidated Statements of Income for the three months ended March 31, 2017 and 2016; (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016; and (iv) Notes to Consolidated Financial Statements

 

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SIGNATURES

 

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

 

 

LTC PROPERTIES, INC.

 

Registrant

 

 

 

 

 

 

 

 

 

Dated:  May 8, 2017

             By:

/s/ Pamela Kessler

 

 

Pamela Kessler

 

 

Executive Vice President, Chief Financial
Officer and Corporate Secretary

 

 

(Principal Financial and Accounting Officer)

 

33