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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, 2015

 

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, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

(Do not check if a
smaller reporting company)

 

 

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

 

The number of shares of common stock outstanding on April 23, 2015 was 35,540,762.

 


 

 

LTC PROPERTIES, INC.

 

FORM 10-Q

 

March 31, 2015

 

 

INDEX

 

 

 

 

 


 

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share)

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

ASSETS

 

 

(unaudited)

 

 

 (audited)

 

Investments:

 

 

 

 

 

 

 

Land

 

$

83,858 

 

$

80,024 

 

Buildings and improvements

 

 

899,727 

 

 

869,814 

 

Accumulated depreciation and amortization

 

 

(230,071)

 

 

(223,315)

 

Net operating real estate property

 

 

753,514 

 

 

726,523 

 

Mortgage loans receivable, net of loan loss reserve: 2015—$1,653; 2014—$1,673

 

 

163,647 

 

 

165,656 

 

Real estate investments, net

 

 

917,161 

 

 

892,179 

 

Investment in unconsolidated joint venture

 

 

20,220 

 

 

 —

 

Investments, net

 

 

937,381 

 

 

892,179 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

3,417 

 

 

25,237 

 

Debt issue costs, net

 

 

3,561 

 

 

3,782 

 

Interest receivable

 

 

1,167 

 

 

597 

 

Straight-line rent receivable, net of allowance for doubtful accounts: 2015—$754; 2014$731

 

 

34,903 

 

 

32,651 

 

Prepaid expenses and other assets

 

 

12,657 

 

 

9,931 

 

Notes receivable

 

 

2,334 

 

 

1,442 

 

Total assets

 

$

995,420 

 

$

965,819 

 

LIABILITIES

 

 

 

 

 

 

 

Bank borrowings

 

$

36,500 

 

$

 —

 

Senior unsecured notes

 

 

277,467 

 

 

281,633 

 

Accrued interest

 

 

2,472 

 

 

3,556 

 

Earn-out liabilities

 

 

3,313 

 

 

3,258 

 

Accrued expenses and other liabilities

 

 

16,284 

 

 

17,251 

 

Total liabilities

 

 

336,036 

 

 

305,698 

 

EQUITY

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock $0.01 par value; 15,000 shares authorized; shares issued and outstanding: 2015—2,000; 2014—2,000

 

 

38,500 

 

 

38,500 

 

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding: 2015—35,541; 2014—35,480

 

 

355 

 

 

355 

 

Capital in excess of par value

 

 

718,050 

 

 

717,396 

 

Cumulative net income

 

 

872,799 

 

 

855,247 

 

Accumulated other comprehensive income

 

 

73 

 

 

82 

 

Cumulative distributions

 

 

(970,393)

 

 

(951,459)

 

Total equity

 

 

659,384 

 

 

660,121 

 

Total liabilities and equity

 

$

995,420 

 

$

965,819 

 

 

See accompanying notes.

 

 

3


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Revenues:

    

 

 

 

 

 

 

Rental income

 

$

26,678 

 

$

25,252 

 

Interest income from mortgage loans

 

 

4,607 

 

 

4,093 

 

Interest and other income

 

 

195 

 

 

93 

 

Total revenues

 

 

31,480 

 

 

29,438 

 

Expenses:

 

 

 

 

 

 

 

Interest expense

 

 

3,766 

 

 

3,187 

 

Depreciation and amortization

 

 

6,779 

 

 

6,298 

 

General and administrative expenses

 

 

3,499 

 

 

2,949 

 

Total expenses

 

 

14,044 

 

 

12,434 

 

Operating income

 

 

17,436 

 

 

17,004 

 

Income from unconsolidated joint venture

 

 

116 

 

 

 —

 

Net income

 

 

17,552 

 

 

17,004 

 

Income allocated to participating securities

 

 

(123)

 

 

(103)

 

Income allocated to preferred stockholders

 

 

(818)

 

 

(818)

 

Net income available to common stockholders

 

$

16,611 

 

$

16,083 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.47 

 

$

0.47 

 

Diluted

 

$

0.47 

 

$

0.46 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

Basic

 

 

35,277 

 

 

34,586 

 

Diluted

 

 

37,292 

 

 

36,611 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.510 

 

$

0.510 

 

 

See accompanying notes.

 

 

4


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Net income

    

$

17,552 

 

$

17,004 

    

Reclassification adjustment (Note 6)

 

 

(9)

 

 

(9)

 

Comprehensive income

 

$

17,543 

 

$

16,995 

 

 

See accompanying notes.

5


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

OPERATING ACTIVITIES:

    

 

    

    

 

    

 

Net income

 

$

17,552 

 

$

17,004 

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,779 

 

 

6,298 

 

Stock-based compensation expense

 

 

982 

 

 

666 

 

Income from unconsolidated joint venture

 

 

(116)

 

 

 —

 

Straight-line rental income

 

 

(2,275)

 

 

(639)

 

Amortization of lease inducement

 

 

352 

 

 

165 

 

Provision for doubtful accounts

 

 

 

 

27 

 

Non-cash interest related to earn-out liabilities

 

 

55 

 

 

 —

 

Other non-cash items, net

 

 

215 

 

 

204 

 

(Increase) decrease in interest receivable

 

 

(570)

 

 

 

Decrease in accrued interest payable

 

 

(1,084)

 

 

(1,074)

 

Net change in other assets and liabilities

 

 

(4,029)

 

 

(2,827)

 

Net cash provided by operating activities

 

 

17,864 

 

 

19,829 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in real estate properties, net

 

 

(13,031)

 

 

 —

 

Investment in real estate developments, net

 

 

(5,041)

 

 

(6,157)

 

Investment in real estate capital improvements, net

 

 

(4,928)

 

 

(7,410)

 

Capitalized interest

 

 

(147)

 

 

(307)

 

Advances under mortgage loans receivable

 

 

(1,858)

 

 

(2,568)

 

Investment in real estate mortgages

 

 

(9,500)

 

 

 —

 

Principal payments received on mortgage loans receivable

 

 

2,786 

 

 

519 

 

Investment in unconsolidated joint ventures

 

 

(20,143)

 

 

 —

 

Advances under notes receivable

 

 

(892)

 

 

 —

 

Net cash used in investing activities

 

 

(52,754)

 

 

(15,923)

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Bank borrowings

 

 

36,500 

 

 

20,000 

 

Principal payments on senior unsecured notes

 

 

(4,167)

 

 

(4,167)

 

Principal payments on bonds payable

 

 

 —

 

 

(635)

 

Stock option exercises

 

 

 —

 

 

238 

 

Distributions paid to stockholders

 

 

(18,934)

 

 

(18,560)

 

Other

 

 

(329)

 

 

(18)

 

Net cash provided by (used in) financing activities

 

 

13,070 

 

 

(3,142)

 

(Decrease) increase in cash and cash equivalents

 

 

(21,820)

 

 

764 

 

Cash and cash equivalents, beginning of year

 

 

25,237 

 

 

6,778 

 

Cash and cash equivalents, end of year

 

$

3,417 

 

$

7,542 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

4,774 

 

$

4,375 

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

Mortgage loan receivable applied against purchase price to acquire real estate (Note 2)

 

$

10,600 

 

$

 —

 

 

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 senior housing and long-term health care properties through acquisitions, development, mortgage loans and other investments. We conduct and manage our business as one operating segment, rather than multiple operating segments, for internal reporting and internal decision making purposes.   Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in senior housing and long-term health care properties managed by experienced operators.  Our primary senior housing and long-term health care property types include skilled nursing properties (or SNF), assisted living properties (or ALF), independent living properties (or ILF), memory care properties (or MC) and combinations thereof. To meet these objectives, we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders and diversify our investment portfolio by geographic location, operator, property type and form of investment.

 

We have prepared consolidated financial statements included herein without audit and in the opinion of management have included all adjustments necessary for a fair presentation of the 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, 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, 2015 and 2014 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.

 

Investments in unconsolidated joint ventures

From time to time, the Company may make investments in unconsolidated entities, which may be in the form of common equity, preferred equity, or debt (in the form of an acquisition, development or construction or ADC loan, or similar arrangement). The Company evaluates each investment pursuant to ASC 805, Consolidation, to determine whether it meets the definition of a variable interest entity (or VIE) and whether the Company is the primary beneficiary. If the entity is deemed to be a VIE but the Company is not the primary beneficiary, or if the entity is deemed to be a voting interest entity but the Company does not have a controlling financial interest, it accounts for its investment using the equity method. Under the equity method, the Company initially records its investment at cost and subsequently recognizes the Company’s share of net earnings or losses and other comprehensive income or loss, cash contributions made and distributions received, and other adjustments, as appropriate.  Allocations of net income or loss may be subject to preferred returns or allocation formulas defined in operating agreements and may not be according to percentage interests of the members. In certain circumstances where the Company has a substantive profit-sharing arrangement which provides a priority return on its investment, a portion of its equity in earnings may consist of a change in its claim on the net assets of the underlying

7


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

joint venture. Distributions of operating profit from the joint ventures are reported as part of operating cash flows, while distributions related to a capital transaction, such as a refinancing transaction or sale, are reported as investing activities.

 

The Company performs a quarterly evaluation of its investments in unconsolidated joint ventures to determine whether the fair value of each investment is less than the carrying value, and, if such decrease in value is deemed to be other-than-temporary, writes the investment down to its estimated fair value as of the measurement date.

 

Impact of New Accounting Pronouncements.

In May 2014, the FASB issued Accounting Standards Update (or ASU) No. 2014-09 (or ASU 2014-09), Revenue from Contracts with Customers: Topic 606. ASU 2014-09 provides for a single comprehensive principles based standard for the recognition of revenue across all industries. ASU 2014-09 requires expanded disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. On April 1, 2015, FASB voted for a one-year deferral of the effective date to December 15, 2017. Also, FASB will permit public companies to adopt the amendment as of the original effective date. We are currently evaluating the effects of this adoption on our consolidated financial statements.

 

In January 2015, FASB issued ASU No. 2015-01 (or ASU 2015-01), Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates the separate classification, presentation and disclosure of extraordinary events and transactions. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We elected early adoption of ASU 2015-01 as of January 1, 2015. The adoption did not have a material impact on our consolidated financial statements.

 

In February 2015, FASB issued ASU No. 2015-02 (or ASU 2015-02), Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 amends the consolidation guidance for variable interest entities and voting interest entities, among other items, by eliminating the consolidation model previously applied to limited partnerships, emphasizing the risk of loss when determining a controlling financial interest and reducing the frequency of the application of related-party guidance when determining a controlling financial interest. ASU 2015-02 is effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the effects of this adoption on our consolidated financial statements.

 

In April 2015, FASB issued ASU No. 2015-03 (ASU 2015-03), Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the effects of this adoption on our consolidated financial statements.

8


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

 

2.Real Estate Investments

 

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

 

Any reference to the number of properties, number of 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, 2015 (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

 

Skilled Nursing

    

$

499,580 

 

50.8 

69 

    

8,513 

    

 —

    

$

58.68 

 

Assisted Living

 

 

416,079 

 

42.3 

85 

 

 —

 

4,236 

 

$

98.22 

 

Range of Care

 

 

43,907 

 

4.5 

 

634 

 

274 

 

$

48.36 

 

Under Development(2)

 

 

13,136 

 

1.3 

 —

 

 —

 

 —

 

 

 —

 

Other(3)

 

 

10,883 

 

1.1 

 

 —

 

 —

 

 

 —

 

Totals

 

$

983,585 

 

100.0 

162 

 

9,147 

 

4,510 

 

 

 

 


(1)

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

 

(2)

Includes two MC developments with a total of 122 units and a combination ALF and MC development with 89 units.

 

(3)

Includes one school property and five parcels of land held-for-use.

 

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.

 

During the three months ended March 31, 2015, we funded $7,195,000 under a $12,182,000 development commitment to purchase the land and existing improvements and then complete the related development of a 56-unit memory care property currently under construction in Texas. In conjunction with this commitment, we entered into a master lease agreement for an initial term of 15 years with three 

9


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

5-year renewal options at an initial cash yield of 8.75%. The master lease provides for our payment of a lease inducement of up to $1,589,000. Also, the master lease gives us a right to provide similar financing for certain future development opportunities.

 

During the three months ended March 31, 2015, we elected to exercise our right to provide financing for one such opportunity, adding to the master lease a parcel of land purchased in South Carolina for $2,490,000 as part of our commitment to provide the operator with up to $16,535,000, including the land purchase, for the development of an 89-unit combination assisted living and memory care property. In conjunction with this new development commitment, the master lease provides for an additional $2,363,000 lease inducement payment. See Note 7. Commitments and Contingencies for further discussion of the lease inducement commitments. 

 

During the quarter ended March 31, 2015, we purchased and equipped a 106-bed skilled nursing property in Wisconsin for a total of $13,946,000 by exercising our purchase option under a $10,600,000 mortgage and construction loan. The property was added to an existing master lease at a lease rate equivalent to the interest rate in effect on the loan at the time the purchase option was exercised. Additionally, we paid the lessee a $1,054,000 lease inducement which will be amortized as a yield adjustment over the life of the lease term. See Mortgage Loans below for further discussion of the loan agreement.

 

The following table summarizes our completed development and improvement projects and amounts funded during the three months ended March 31, 2015 (dollar amounts in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Number

    

 

    

Number

    

 

    

 

 

    

 

 

 

 

 

of

 

Type of

 

of

 

 

 

 

 

 

 

 

 

Type of Project

 

Properties

 

Property

 

Beds/Units

 

State

 

2015 Funding

 

Total Funding

 

Development

 

1

 

ALF

 

60

 

Colorado

 

$

1,360 

 

$

10,541 

(1)

Renovation

 

1

 

SNF

 

121

 

California

 

 

1,481 

 

 

1,481 

 

Renovation

 

2

 

SNF

 

141

 

Tennessee

 

 

40 

 

 

2,200 

 

 

 

4

 

 

 

322

 

 

 

$

2,881 

(2)

$

14,222 

 


(1)

Completed a MC property in February 2015.

 

(2)

Excludes $5,692 of funding on projects that were completed during 2014.

 

The following table summarizes our investment commitments as of March 31, 2015, and amounts funded under these projects (excludes capitalized interest, dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Number

    

Number

 

 

 

Investment

 

2015

 

Commitment

 

Remaining

 

of

 

of

 

Type of Property

 

Commitment

 

Funding(2)

 

Funded

 

Commitment

 

Properties

 

Beds/Units

 

Skilled Nursing

 

$

6,600 

 

$

25 

 

$

25 

 

$

6,575 

 

 

510 

 

Assisted Living(1)

 

 

45,765 

 

 

11,056 

 

 

13,144 

 

 

32,621 

 

27 

 

1,240 

 

Totals

 

$

52,365 

 

$

11,081 

 

$

13,169 

 

$

39,196 

 

30 

 

1,750 

 


(1)

Includes the development of two MC properties for a total commitment of $24,430 and one ALF/MC property for a total commitment of $16,535. Also, includes three commitments for renovation projects on 24 ALFs totaling $4,800. 

 

(2)

Excludes funding for completed development and improvement projects discussed above. Includes $7,195 of land and improvements acquired for the development of a 56-unit MC property and $2,490 of land acquired for the development of an 89-unit ALF/MC property, as previously discussed.

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Our construction in progress (or CIP) activity during the three months ended March 31, 2015 for our development, redevelopment, renovation, and expansion projects is as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

CIP

    

 

 

    

 

 

    

 

 

    

CIP

 

 

 

Balance at

 

 

 

 

Capitalized

 

Conversions

 

Balance at

 

Properties

 

12/31/2014

 

Funded(1)

 

Interest

 

out of CIP

 

3/31/2015

 

Development projects:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assisted living

 

$

8,671 

 

$

8,961 

 

$

147 

 

$

(9,413)

 

$

8,366 

 

Subtotal

 

 

8,671 

 

 

8,961 

 

 

147 

 

 

(9,413)

 

 

8,366 

 

Redevelopment, renovation and expansion projects:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing

 

 

 —

 

 

25 

 

 

 —

 

 

 —

 

 

25 

 

Subtotal

 

 

 —

 

 

25 

 

 

 —

 

 

 —

 

 

25 

 

Total

 

$

8,671 

 

$

8,986 

 

$

147 

 

$

(9,413)

 

$

8,391 

 


(1)

Excludes $7,298 of funding on development and renovations projects which was capitalized directly into building and includes the acquisition of the existing improvements of the 56-unit MC property for $6,315, as previously discussed. 

 

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at March 31, 2015 (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

    

$

151,352 

    

91.6 

%  

15 

    

29 

    

3,701 

    

 —

    

$

40.89 

 

Assisted Living

 

 

13,948 

 

8.4 

%  

 

 

 —

 

270 

 

$

51.66 

 

Totals

 

$

165,300 

 

100.0 

%  

18 

 

37 

 

3,701 

 

270 

 

 

 

 


(1)

We have investments in properties located in 7 states that include mortgages to 10 different operators.

 

 

At March 31, 2015, the mortgage loans had interest rates ranging from 7.1% to 13.9% and maturities ranging from 2016 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. During the three months ended March 31, 2015, we received $2,285,000 plus accrued interest related to the payoff of a mortgage loan secured by a  range of care property located in California. During the three months ended March 31, 2015 and 2014, we received $501,000 and $519,000, respectively, in regularly scheduled principal payments.

 

During 2013, we funded the initial amount of $124,387,000 under a mortgage loan with a third‑party borrower secured by 15 skilled nursing properties with a total of 2,058 beds in Michigan. The loan agreement provides for additional commitments of $12,000,000 for capital improvements and up to $40,000,000 of additional proceeds, for a total loan commitment of up to $176,387,000. See Note 7. Commitments and Contingencies for further discussion of the additional $40,000,000 loan commitment. During the three months ended March 31, 2015, we funded $1,858,000 under the $12,000,000 capital improvement commitment with $6,804,000 remaining as of March 31, 2015.

 

In addition, this mortgage loan provided the borrower a one‑time option to prepay up to 50% of the then outstanding loan balance without penalty. During the three months ended March 31, 2015, we amended this mortgage loan to provide up to an additional $20,000,000 in loan proceeds for the

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expansion of two properties securing the loan (increasing the total capital improvement commitment to $32,000,000 and the total loan commitment to $196,387,000) and agreed to convey, to the borrower,  two parcels of land held-for-use adjacent to these properties to facilitate the projects. As partial consideration for the increased commitment and associated conveyance, the borrower forfeited their prepayment option.

 

Additionally, during the quarter ended March 31, 2015, we originated an $11,000,000 mortgage loan with the borrower concurrently funding $9,500,000 with a commitment to fund the balance for approved capital improvement projects. The loan is secured by a 157-bed skilled nursing property in Michigan and bears interest at 9.41% for five years, escalating annually thereafter by 2.25%. The term is 30 years with interest-only payments for the initial three years. Additionally, we have the option to purchase the property under certain circumstances, including a change in regulatory environment.

 

We had a $10,600,000 mortgage and construction loan that afforded the borrower to develop a new 106-bed skilled nursing property in Wisconsin to replace an old existing skilled nursing property. Upon completion of construction and relocation of the residents from the old property to the replacement property in 2014, the old property was sold and released as collateral. During the three months ended March 31, 2015, we purchased and equipped the replacement property for a total of $13,946,000 by exercising our right under the agreement including applying amounts otherwise due to us under the underlying loan as a closing adjustment. See Owned Properties above for further discussion of the property purchase.  

 

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3.Investment in Unconsolidated Joint Ventures

During the three months ended March 31, 2015, we made a preferred equity investment in an entity (the JV) that owns four properties providing independent, assisted living and memory care services. These properties are located in Arizona. At closing, we provided an initial preferred capital contribution of $20,143,000 and have committed to contribute an additional preferred capital contribution of $5,507,000 for a total preferred capital contribution of $25,650,000. As the preferred member of the JV, we are not entitled to share in the JV’s earnings or losses. Rather, we are entitled to receive a 15% preferred return, a portion of which is paid in cash and a portion of which is deferred if the cash flow of the JV is insufficient to pay all of the accrued preferred return. The unpaid accrued preferred return will be added to the balance of the preferred equity investment and will be repaid upon redemption. In addition, we have the option to purchase either the properties owned by the JV or 100% of the common membership interest in the JV, which is exercisable between the 37th month and the 54th month from the commencement of the JV. If we elect not to exercise our purchase option, we have the right to put our preferred equity interest to the common member after the 54th month for an amount equal to the unpaid preferred equity investment balance and accrued preferred return thereon. The common equity member has the right to call our preferred interest at any time for an amount equal to the preferred equity investment balance and accrued preferred return thereon that would be due for the first 36 months, less amounts paid to us prior to the redemption date.

The JV is intended to be self-financing, other than our preferred capital contributions, no direct support will be provided by us. As a result, we believe our maximum exposure to loss due to our investment in the JV would be limited to our preferred capital contributions. We have concluded that the JV meets the accounting criteria to be considered as a variable interest entity (or VIE). However, because we do not control the entity, nor do we have any role in the day-to-day management, we are not the primary beneficiary of the JV. Therefore, we account for our JV investment using the equity method. During the three months ended March 31, 2015, we recognized $116,000 in income from our preferred equity investment in the JV. 

 

4.Notes Receivable

Notes receivable consists of various loans and line of credit agreements with certain operators. During the three months ended March 31, 2015, we funded $892,000 in principal under these notes. In the comparable 2014 period, we did not receive or fund any principal under these notes. At March 31, 2015, we had twelve loans and line of credit agreements with commitments totaling $4,288,000 and weighted average interest rate of 10.8%.  As of March 31, 2015, we funded $2,334,000 under these commitments and we have a remaining commitment of $1,954,000. 

5.Debt Obligations

 

Bank Borrowings. We have an Unsecured Credit Agreement that provides for a revolving line of credit up to $400,000,000 with the opportunity to increase the credit amount up to a total of $600,000,000The 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, 2015, the facility provides for interest annually at LIBOR plus 125 basis points and an unused commitment fee of 30 basis points. During the three months ended March 31, 2015 and 2014 we borrowed $36,500,000 and $20,000,000, respectively, under our Unsecured Credit Agreement. At March 31, 2015, we

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had $36,500,000 outstanding and $363,500,000 available for borrowing. At March 31, 2015, we were in compliance with all covenants.

 

Senior Unsecured Notes.  At March 31, 2015 and December 31, 2014, we had $277,467,000 and $281,633,000, respectively, outstanding under our Senior Unsecured Notes with a weighted average interest rate of 4.8%. During each of the three months ended March 31, 2015 and 2014, we paid $4,167,000 in regular scheduled principal payments.

 

Subsequent to March 31, 2015, we entered into a third amended and restated $200,000,000 private shelf agreement with Prudential Investment Management, Inc. (or Prudential) for a three year term. The agreement provides for the possible issuance of up to an additional $102,000,000 of senior unsecured fixed interest rate term notes.  After July 14, 2015 and for the balance of the term, the agreement provides for the possible issuance of additional senior unsecured fixed interest rate term notes up to the maximum availability upon us making our scheduled principal payments on existing notes then outstanding. Interest rates on any issuance under the shelf agreement will be set at a spread over applicable Treasury rates. Maturities of each issuance are at our election for up to 15 years from the date of issuance with a maximum average life of 12 years from the date of original issuance.     

 

Bonds Payable.  We had a multifamily tax-exempt revenue bonds that was secured by five assisted living properties in Washington which were paid off during 2014. For the three months ended March 31, 2014, we paid $635,000 in regularly scheduled principal payments.

 

6.Equity

 

Equity activity was as follows (in thousands):

 

 

 

 

 

 

 

 

Total

 

 

 

Equity

 

Balance at December 31, 2014

    

$

660,121 

 

Net income

 

 

17,552 

 

Vesting of stock option and restricted common stock

 

 

982 

 

Reclassification adjustment

 

 

(9)

 

Preferred stock dividends

 

 

(818)

 

Common stock dividends

 

 

(18,116)

 

Other

 

 

(328)

 

Balance at March 31, 2015

 

$

659,384 

 

 

Preferred Stock.  At March 31, 2015, we had 2,000,000 shares of our 8.5% Series C Cumulative Convertible Preferred Stock (or Series C preferred stock) outstanding.  Our Series C preferred stock is convertible into 2,000,000 shares of our common stock at $19.25 per share.  Total shares reserved for issuance of common stock related to the conversion of Series C preferred stock were 2,000,000 shares at March 31, 2015.

 

Common Stock.  During the three months ended March 31, 2015 and 2014, we acquired 4,609 shares and 200 shares respectively, of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.

 

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Available Shelf Registrations.  Our shelf registration statement provides us with the capacity to offer up to $800,000,000 in common stock, preferred stock, warrants, debt, depositary shares, or units.  We may from time to time raise capital under this current shelf registration in amounts, at prices, and on terms to be announced when and if the securities are offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering. At March 31, 2015, we had availability of $775,100,000 under our effective shelf registration which expires on July 19, 2016.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

Three Months Ended March 31, 2014

 

 

 

Declared

 

Paid

 

Declared

 

Paid

 

Preferred Stock Series C

    

$

818 

    

$

818 

    

$

818 

    

$

818 

 

Common Stock(1) 

 

 

18,116 

 

 

18,116 

 

 

17,742 

 

 

17,742 

 

Total

 

$

18,934 

 

$

18,934 

 

$

18,560 

 

$

18,560 

 


(1)

Represents $0.17 per share per month for each of the three months ended March 31, 2015 and 2014, respectively.

 

In April 2015, we declared a monthly cash dividend of $0.17 per share on our common stock for the months of April, May and June, payable on April 30, May 29, and June 30, 2015, respectively, to stockholders of record on April 22, May 21, and June 22, 2015, respectively.

 

Accumulated Other Comprehensive Income.    At March 31, 2015 and December 31, 2014, accumulated comprehensive income of $73,000 and $82,000, respectively, represents the net unrealized holding gains on available-for-sale REMIC Certificates recorded in 2005 when we repurchased the loans in the underlying loan pool.  This amount is being amortized to increase interest income over the remaining life of the loans that we repurchased from the REMIC Pool.

 

Stock-Based Compensation.  During the three months ended March 31, 2015, no stock options were granted or exercised. In the comparable 2014 period, we granted 15,000 options to purchase common stock at an exercise price of $38.43 per share.  These stock options vest ratably over a three-year period from the grant date. Additionally, during the three months ended March 31, 2014, a total of 10,000 stock options were exercised at a total option value of $238,000 and a total market value on the date of exercise of $390,000. At March 31, 2015, we had 43,334 stock options outstanding and 33,334 stock options are exercisable.

 

At March 31, 2015, the total number of stock options that are scheduled to vest through December 31, 2015, 2016 and 2017 is 0; 5,000 and 5,000, respectively.  We have no stock options outstanding that are scheduled to vest beyond 2017. Compensation expense related to the vesting of stock options for the three months ended March 31, 2015 and 2014, was $4,000 and $1,000, respectively. The remaining compensation expense to be recognized related to the future service period of unvested outstanding stock options for 2015, 2016 and 2017 is $11,000; $15,000 and $2,000, respectively.

 

During the first quarter of March 31, 2015, we cancelled 640 shares of restricted stock. During the three months ended March 31, 2015 and 2014, we granted 65,750 and 62,000 shares of restricted common stock, respectively, as follows:

 

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Price per

 

 

Year

 

No. of Shares

 

Share

 

Vesting Period

2015

    

 

    

 

 

    

 

 

 

65,750 

 

$

44.45 

 

ratably over 3 years

 

 

65,750 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

59,000 

 

$

36.81 

 

ratably over 3 years

 

 

3,000 

 

$

38.43 

 

ratably over 3 years

 

 

62,000 

 

 

 

 

 

 

At March 31, 2015, we had 255,815 restricted common shares outstanding. The total number of restricted common shares that are scheduled to vest through December 31, 2015, 2016, 2017 and 2018 is 94,168; 88,360; 51,367 and 21,920, respectively.  We have no restricted common stock that is scheduled to vest beyond 2018. During the three months ended March 31, 2015 and 2014, we recognized $978,000 and $665,000, respectively, of compensation expense related to the vesting of restricted common stock. The remaining compensation expense to be recognized related to the future service period of unvested outstanding restricted common stock for 2015, 2016, 2017, and 2018 is $2,648,000; $2,227,000; $1,162,000 and $81,000, respectively.

 

7.Commitments and Contingencies

 

As part of an acquisition in December 2014, we committed to provide two contingent payments totaling up to $4,000,000 payable in increments of $2,000,000 upon the property achieving a sustainable stipulated rent coverage ratio. We estimated the fair value of the contingent payment using a discounted cash flow analysis. This fair value measurement is based on significant input not observable in the market and thus represents a Level 3 measurement. These contingent payments were recorded at the date of the acquisition in the amount of $3,240,000 and we are accreting the contingent liability up to the estimated settlement amount as of the estimated payment dates. The fair value of these contingent liabilities are evaluated on a quarterly basis based on changes in estimates of future operating results and changes in market discount rates. During the three months ended March 31, 2015, we recorded non‑cash interest expense of $55,000 related to these contingent liabilities and the fair value of these contingent payments was $3,313,000 at March 31, 2015.

 

During the three months ended March 31, 2015, we entered into two development commitments totaling $28,717,000 to acquire two parcels of land and an existing improvement and to construct a 56-unit memory care property and an 89-unit combination assisted living and memory care property. Concurrent with these commitments, we entered into a master lease agreement which provides for two lease inducement payments totaling $3,952,000, which will be amortized as a yield adjustment over the lease term. Up to 25% of the fee is currently available for funding with the remaining balance available following the issuance of a certificate of occupancy and receipt of regulatory approval required for the operation of the newly constructed properties. As of March 31, 2015, we have funded $44,000 and have a remaining commitment of $944,000 under the available lease inducement commitment. See Note 2. Real Estate Investments for further discussion of the acquisition and master lease terms.

 

At March 31, 2015, we had a commitment to provide a borrower an additional $40,000,000 of loan proceeds under a mortgage loan secured by 15 skilled nursing properties in Michigan. The additional proceeds are contingent on certain conditions and are based on certain operating metrics and valuation thresholds. Also, the additional proceeds are limited to $10,000,000 in any twelve month period. See Note

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2. Real Estate Investments for further discussion of this mortgage loan.

 

At March 31, 2015, we had additional commitments as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

2015

 

Commitment

 

Remaining

 

 

 

Commitment

 

Funding

 

Funded

 

Commitment

 

Real estate properties (See Note 2)

 

$

52,365 

(1)

$

11,081 

 

$

13,169 

 

$

39,196 

 

Mortgage loans (See Note 2)

 

 

33,990 

(1)

 

1,858 

 

 

5,196 

 

 

28,794 

 

Notes receivable (See Note 4)

 

 

4,288 

(2)

 

892 

 

 

2,334 

 

 

1,954 

 

Totals

 

$

90,643 

 

$

13,831 

 

$

20,699 

 

$

69,944 

 


(1)

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

(2)

Represents loan and line of credit commitments.

 

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

8.Major Operators

 

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

 

Prestige Healthcare (or Prestige) is a privately held company and operates 16 skilled nursing properties and two range of care properties that we own or on which we hold mortgages secured by first trust deeds. These properties consist of a total of 2,333 skilled nursing beds and 93 assisted living units. Additionally, Prestige manages five parcels of land that we own. These assets represent 15.0% of our total assets at March 31, 2015 and generated 13.2% of our combined rental revenue and interest income from mortgage loans recognized for the three months ended March 31, 2015.   

In July 2014, Brookdale Senior Living, Inc. (or Brookdale), parent company of Brookdale Senior Living Communities, Inc. (or Brookdale Communities), merged with Emeritus Corporation. Brookdale Communities leases 37 assisted living properties with a total of 1,704 units owned by us representing approximately 8.2% of our total assets at March 31, 2015 and 12.4% of our combined rental revenue and interest income from mortgage loans recognized for the three months ended March 31, 2015.

Senior Care Centers, LLC (or Senior Care) is a privately held company. Senior Care leases nine skilled nursing properties with a total of 1,190 beds owned by us representing approximately 10.1% of our total assets at March 31, 2015 and generated 9.9% of our combined rental revenue and interest income from mortgage loans recognized for the three months ended March 31, 2015.

Our financial position and ability to make distributions may be adversely affected by financial difficulties experienced by Brookdale Communities, Prestige Healthcare, Senior Care, or any of our

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lessees and borrowers, including any bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with us or our borrowers when it expires.

 

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):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Net income

    

$

17,552 

 

$

17,004 

 

Less net income allocated to participating securities:

 

 

 

 

 

 

 

Non-forfeitable dividends on participating securities

 

 

(123)

 

 

(103)

 

Total net income allocated to participating securities

 

 

(123)

 

 

(103)

 

Less net income allocated to preferred stockholders:

 

 

 

 

 

 

 

Preferred stock dividends

 

 

(818)

 

 

(818)

 

Total net income allocated to preferred stockholders

 

 

(818)

 

 

(818)

 

Net income available to common stockholders

 

 

16,611 

 

 

16,083 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Convertible preferred securities

 

 

818 

 

 

818 

 

Total effect of dilutive securities

 

 

818 

 

 

818 

 

Net income for diluted net income per share

 

$

17,429 

 

$

16,901 

 

 

 

 

 

 

 

 

 

Shares for basic net income per share

 

 

35,277 

 

 

34,586 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options

 

 

15 

 

 

25 

 

Convertible preferred securities

 

 

2,000 

 

 

2,000 

 

Total effect of dilutive securities

 

 

2,015 

 

 

2,025 

 

Shares for diluted net income per share

 

 

37,292 

 

 

36,611 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.47 

 

$

0.47 

 

Diluted net income per share

 

$

0.47 

 

$

0.46 

 

 

 

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 adopt the elective fair value option for our financial assets and financial liabilities.

 

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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, 2015 and December 31, 2014 assuming election of fair value for our financial assets and financial liabilities were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2015

 

At December 31, 2014

 

 

 

 

Carrying

 

 

 

 

Carrying

 

 

 

 

 

 

 

Value

 

Fair Value

 

Value

 

Fair Value

 

Mortgage loans receivable

    

 

$

163,647 

    

$

196,024 

(1)

$

165,656 

    

$

198,977 

(1)

Bank borrowings

 

 

 

36,500 

 

 

36,500 

(2)

 

 —

 

 

 —

(2)

Senior unsecured notes

 

 

 

277,467 

 

 

286,181 

(3)

 

281,633 

 

 

283,933 

(3)

Contingent liabilities

 

 

 

3,313 

 

 

3,313 

(4)

 

3,258 

 

 

3,258 

(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, 2015 and December 31, 2014 was 8.7% and 8.6%, respectively.

 

(2)

Our bank borrowings are at a variable interest rate.  The estimated fair value of our bank borrowings approximated their carrying values at March 31, 2015 and December 31, 2014 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, 2015,  the discount rate used to value our future cash outflow of our senior unsecured notes was 3.75% for those maturing before year 2020 and 4.0% for those maturing beyond year 2020. At December 31, 2014, the discount rate used to value our future cash outflow of our senior unsecured notes was 3.8% for those maturing before year 2020 and 4.55% for those maturing beyond year 2020.

 

(4)

Our contingent obligation under the earn‑out liabilities is classified as Level 3. We estimated the fair value of the contingent earn‑out payments using a discounted cash flow analysis. The discount rate that we use consists of a risk‑free U.S. Treasury rate plus a company specific credit spread which we believe is acceptable by willing market participants. At March 31, 2015 and December 31, 2014, the discount rate used to value our future cash outflow of the earn-out liability was 6.1% and 6.2%, respectively.

 

11.Subsequent Events

 

Subsequent to March 31, 2015 the following events occurred.

 

Debt Obligations:    We amended and restated our note purchase and private shelf agreement with Prudential which provides for the possible issuance of up to $102,000,000 of senior unsecured fixed interest rate term notes. See Note 5. Debt Obligations for further discussion.

Equity: We declared a monthly cash dividend of $0.17 per share on our common stock for the months of April,  May and June, payable on April 30,  May 29, and June 30, 2015, respectively, to stockholders of record on April 22,  May 21, and June 22, 2015, 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 (including as a result of the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010); changes in Medicare and Medicaid reimbursement amounts (including due to federal and state budget constraints); compliance with and changes to regulations and payment policies within the health care industry; debt that we may incur and changes in financing terms; our ability to continue to qualify as a real estate investment trust; the relative illiquidity of our real estate investments; potential limitations on our remedies when mortgage loans default; and risks and liabilities in connection with properties owned through limited liability companies and partnerships.  For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and in our publicly available filings with the Securities and Exchange Commission.  We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise.

 

Executive Overview

 

Business

 

We are a self-administered health care real estate investment trust (or REIT) that invests primarily in senior housing and long-term health care properties through acquisitions, development, mortgage loans and other investments. We conduct and manage our business as one operating segment, rather than multiple operating segments, for internal reporting and internal decision making purposes. Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in senior housing and long-term health care properties managed by experienced operators. Our primary senior housing and long-term health care property types include skilled nursing properties (or SNF), assisted living properties (or ALF), independent living properties (or ILF), memory care properties (or MC) and combinations thereof. ALF, ILF, MC, and combinations thereof are included in the ALF property type. Range of care properties (or ROC) property type consists of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services.  As of March 31, 2015, senior housing and long-

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term health care properties comprised approximately 99% of our real estate investment portfolio.  We have been operating since August 1992.

 

The following table summarizes our real estate investment portfolio as of March 31, 2015 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

March 31, 2015

 

Percentage

 

Number

 

Number of 

 

 

    

Gross

    

of 

    

Rental

    

Interest

    

of 

    

of

    

SNF

    

ALF

 

Type of Property

 

Investments

 

Investments

 

Income

 

Income(1)

 

Revenues(2)

 

Properties(3)

 

Beds(3)

 

Units(3)

 

Skilled Nursing

 

$

650,932 

 

56.7 

%

$

14,021 

 

$

4,334 

 

58.7 

%

98 

 

12,214 

 

 

Assisted Living

 

 

430,027 

 

37.4 

%

 

10,870 

 

 

244 

 

35.6 

%

93 

 

 

4,506 

 

Range of Care

 

 

43,907 

 

3.8 

%

 

1,459 

 

 

 —

 

4.7 

%

 

634 

 

274 

 

Under Development(4)

 

 

13,136 

 

1.1 

%