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EX-32 - EX-32 - LTC PROPERTIES INCltc-20170930xex32.htm
EX-31.2 - EX-31.2 - LTC PROPERTIES INCltc-20170930ex312fa6c36.htm
EX-31.1 - EX-31.1 - LTC PROPERTIES INCltc-20170930ex311b11690.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 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  November 3, 2017 was 39,570,769.

 

 


 


 

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share)

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

 

 

(unaudited)

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Land

 

$

121,897

 

$

116,096

 

Buildings and improvements

 

 

1,227,044

 

 

1,185,467

 

Accumulated depreciation and amortization

 

 

(294,725)

 

 

(275,861)

 

Operating real estate property, net

 

 

1,054,216

 

 

1,025,702

 

Properties held-for-sale, net of accumulated depreciation: 2017—$4,264; 2016—$0

 

 

6,381

 

 

 —

 

Real property investments, net

 

 

1,060,597

 

 

1,025,702

 

 

 

 

 

 

 

 

 

Mortgage loans receivable, net of loan loss reserve: 2017—$2,234; 2016—$2,315

 

 

221,861

 

 

229,801

 

Real estate investments, net

 

 

1,282,458

 

 

1,255,503

 

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

 

 

16,402

 

 

16,427

 

Investments in unconsolidated joint ventures

 

 

29,862

 

 

25,221

 

Investments, net

 

 

1,328,722

 

 

1,297,151

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

3,842

 

 

7,991

 

Debt issue costs related to bank borrowings

 

 

1,080

 

 

1,847

 

Interest receivable

 

 

13,650

 

 

9,683

 

Straight-line rent receivable, net of allowance for doubtful accounts: 2017—$901; 2016—$960

 

 

61,070

 

 

55,276

 

Prepaid expenses and other assets

 

 

22,829

 

 

22,948

 

Total assets

 

$

1,431,193

 

$

1,394,896

 

LIABILITIES

 

 

 

 

 

 

 

Bank borrowings

 

$

55,000

 

$

107,100

 

Senior unsecured notes, net of debt issue costs: 2017—$1,183; 2016—$1,009

 

 

582,950

 

 

502,291

 

Accrued interest

 

 

4,108

 

 

4,675

 

Accrued incentives and earn-outs

 

 

8,790

 

 

12,229

 

Accrued expenses and other liabilities

 

 

23,710

 

 

28,553

 

Total liabilities

 

 

674,558

 

 

654,848

 

EQUITY

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding:   2017—39,571; 2016—39,221

 

 

396

 

 

392

 

Capital in excess of par value

 

 

855,746

 

 

839,005

 

Cumulative net income

 

 

1,080,949

 

 

1,013,443

 

Cumulative distributions

 

 

(1,180,456)

 

 

(1,112,792)

 

Total equity

 

 

756,635

 

 

740,048

 

Total liabilities and equity

 

$

1,431,193

 

$

1,394,896

 

 

See accompanying notes.

 

 

3


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

  

2017

  

2016

  

2017

  

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

33,233

 

$

33,753

 

$

103,533

 

$

98,705

 

Interest income from mortgage loans

 

 

6,677

 

 

6,958

 

 

20,050

 

 

20,347

 

Interest and other income

 

 

1,336

 

 

131

 

 

2,753

 

 

390

 

Total revenues

 

 

41,246

 

 

40,842

 

 

126,336

 

 

119,442

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

7,644

 

 

6,836

 

 

22,266

 

 

19,586

 

Depreciation and amortization

 

 

9,519

 

 

9,155

 

 

28,186

 

 

26,623

 

Impairment on receivables

 

 

 —

 

 

 —

 

 

1,880

 

 

 —

 

(Recovery) provision for doubtful accounts

 

 

(96)

 

 

43

 

 

(139)

 

 

245

 

Transaction costs

 

 

34

 

 

 2

 

 

56

 

 

96

 

General and administrative expenses

 

 

4,144

 

 

4,464

 

 

13,270

 

 

12,864

 

Total expenses

 

 

21,245

 

 

20,500

 

 

65,519

 

 

59,414

 

Operating income

 

 

20,001

 

 

20,342

 

 

60,817

 

 

60,028

 

Income from unconsolidated joint ventures

 

 

615

 

 

289

 

 

1,635

 

 

839

 

Gain on sale of real estate, net

 

 

 —

 

 

1,780

 

 

5,054

 

 

3,582

 

Net income

 

 

20,616

 

 

22,411

 

 

67,506

 

 

64,449

 

Income allocated to participating securities

 

 

(80)

 

 

(90)

 

 

(281)

 

 

(296)

 

Net income available to common stockholders

 

$

20,536

 

$

22,321

 

$

67,225

 

$

64,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.52

 

$

0.57

 

$

1.71

 

$

1.68

 

Diluted

 

$

0.52

 

$

0.57

 

$

1.70

 

$

1.68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

39,428

 

 

39,057

 

 

39,403

 

 

38,161

 

Diluted

 

 

39,748

 

 

39,335

 

 

39,738

 

 

38,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.57

 

$

0.54

 

$

1.71

 

$

1.62

 

 

See accompanying notes.

 

 

4


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

 

September 30, 

 

September 30, 

 

 

  

2017

  

2016

  

2017

  

2016

 

Net income

 

$

20,616

 

$

22,411

 

$

67,506

 

$

64,449

 

Reclassification adjustment (Note 6)

 

 

 —

 

 

(6)

 

 

 —

 

 

(39)

 

Comprehensive income

 

$

20,616

 

$

22,405

 

$

67,506

 

$

64,410

 

 

See accompanying notes.

5


 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

  

2017

  

2016

 

OPERATING ACTIVITIES:

 

 

    

 

 

    

 

Net income

 

$

67,506

 

$

64,449

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

28,186

 

 

26,623

 

Stock-based compensation expense

 

 

3,967

 

 

3,149

 

Impairment on receivables

 

 

1,880

 

 

 —

 

Gain on sale of real estate, net

 

 

(5,054)

 

 

(3,582)

 

Income from unconsolidated joint ventures

 

 

(1,635)

 

 

(839)

 

Income distributions from unconsolidated joint ventures

 

 

1,236

 

 

1,409

 

Straight-line rental income

 

 

(7,362)

 

 

(8,201)

 

Amortization of lease incentives

 

 

1,681

 

 

1,446

 

Provision for doubtful accounts

 

 

(139)

 

 

245

 

Non-cash interest related to contingent liabilities

 

 

476

 

 

538

 

Effect of earn-out and related lease inducement write-off

 

 

(842)

 

 

 —

 

Other non-cash items, net

 

 

958

 

 

909

 

Increase in interest receivable

 

 

(3,967)

 

 

(3,898)

 

Decrease in accrued interest payable

 

 

(567)

 

 

(358)

 

Net change in other assets and liabilities

 

 

(10,190)

 

 

(2,245)

 

Net cash provided by operating activities

 

 

76,134

 

 

79,645

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in real estate properties

 

 

(54,804)

 

 

(73,449)

 

Investment in real estate developments

 

 

(13,939)

 

 

(35,623)

 

Investment in real estate capital improvements

 

 

(2,308)

 

 

(5,566)

 

Capitalized interest

 

 

(627)

 

 

(1,193)

 

Proceeds from sale of real estate, net

 

 

14,106

 

 

17,369

 

Investment in real estate mortgage loans receivable

 

 

(9,333)

 

 

(19,113)

 

Principal payments received on mortgage loans receivable

 

 

17,351

 

 

2,117

 

Investments in unconsolidated joint ventures

 

 

(3,847)

 

 

(481)

 

Payment of working capital reserve

 

 

(439)

 

 

(2,325)

 

Advances and originations under notes receivable

 

 

 —

 

 

(2,328)

 

Principal payments received on notes receivable

 

 

25

 

 

90

 

Net cash used in investing activities

 

 

(53,815)

 

 

(120,502)

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Bank borrowings

 

 

64,500

 

 

83,500

 

Repayment of bank borrowings

 

 

(116,600)

 

 

(127,000)

 

Proceeds from issuance of senior unsecured notes

 

 

100,000

 

 

77,500

 

Principal payments on senior unsecured notes

 

 

(19,167)

 

 

(16,667)

 

Proceeds from common stock issued

 

 

14,578

 

 

78,592

 

Stock option exercises

 

 

202

 

 

159

 

Distributions paid to stockholders

 

 

(67,664)

 

 

(62,211)

 

Financing costs paid

 

 

(363)

 

 

(130)

 

Other

 

 

(1,954)

 

 

(2,215)

 

Net cash (used in) provided by financing activities

 

 

(26,468)

 

 

31,528

 

Decrease in cash and cash equivalents

 

 

(4,149)

 

 

(9,329)

 

Cash and cash equivalents, beginning of period

 

 

7,991

 

 

12,942

 

Cash and cash equivalents, end of period

 

$

3,842

 

$

3,613

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

21,877

 

$

19,004

 

Contingent Liabilities related to real estate investments

 

$

 —

 

$

2,000

 

 

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 and nine months ended September 30, 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 outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In doing so, companies may need to use more judgement and make more estimates than under today’s guidance. While this ASU specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate. Additionally, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and Licensing, and ASU 2016-12, Narrow-Scope Improvements and Practical Expedients. The new standard and its amendments are effective on January 1, 2018, and permit reporting entities to apply the standard using either a modified retrospective approach, by

7


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or full retrospective approach. We have assessed our revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. We are currently evaluating the provisions of ASU 2014-09 and its related updates and will be closely monitoring developments and additional guidance to determine the potential impact of the new standard. We expect to complete our evaluation of the impact during the fourth quarter of 2017 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 and interest income from loan arrangements, both of which are specifically excluded from ASU 2014-09.  We expect to adopt this standard using the modified retrospective adoption method on January 1, 2018.

In February 2016, the FASB issued ASU No. 2016-02 (or ASU 2016-02), Leases (Topic 842). The objective of this ASU is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. ASU 2016-02 modifies existing guidance by requiring lessees to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance of operating leases. Consistent with present standards, we will continue to account for lease revenue on a 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. Entities are required to use a modified retrospective approach for leases that exist or are entered into after beginning of the earliest comparative period in the financial statements. In conjunction with evaluating the impact of the new revenue recognition standard, we have begun our process for implementing this guidance, including identifying any non-lease components in our lease arrangements. We will continue 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. 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. 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.

8


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

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. We adopted ASU 2017-01 during the 2017 second quarter. Historically, our acquisitions qualified as either a business combination or asset acquisition. The adoption of this ASU did not have a material impact on the company’s results of operations or financial condition as most of our acquisitions of investment properties will continue to qualify as asset acquisitions.

In February 2017, the FASB issued ASU No. 2017-05 (or ASU 2017-05), Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets. ASU 2017-05 defines an in-substance nonfinancial asset and clarifies guidance related to partial sales of nonfinancial assets. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We don’t expect a material impact on the Consolidated Financial Statements and related notes from the adoption of this standard.

.

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.

9


 

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Owned Properties. The following table summarizes our investments in owned properties at September 30, 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

 

$

743,015

 

54.6

103

 

 —

 

5,772

 

$

128.73

 

Skilled Nursing(2)

 

 

579,758

 

42.6

%  

76

 

9,276

 

274

 

$

60.71

 

Under Development(3)

 

 

26,597

 

2.0

 —

 

 —

 

 —

 

 

 —

 

Other(4)

 

 

10,216

 

0.8

 1

 

118

 

 —

 

 

 —

 

Totals

 

$

1,359,586

 

100.0

180

 

9,394

 

6,046

 

 

 

 


(1)

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

 

(2)

Includes seven communities previously classified as ROC 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.

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 nine months ended September 30, 2017, we purchased a newly constructed 60-unit memory care community in Ohio for $15,650,000, as discussed below, and transitioned two memory care communities in our portfolio to a different operator. These three communities were added to a master lease with the same operator who took over the management of the two memory care communities previously mentioned. Annual rental income under the amended and restated master lease is approximately $6,400,000.     

During the nine months ended September 30, 2017, we issued a notice of default on the master lease covering two properties under development and nine additional operational memory care communities resulting from lessee’s partial payment of minimum rent. We are currently negotiating the transition of two of the operational properties to another operator in our portfolio. Additionally, we wrote off $1,880,000 of straight-line rent and other receivables related to these two properties.  Subsequent to September 30, 2017, we entered into a forbearance agreement with our lessee whereby we have agreed not to pursue enforcement of our rights and remedies pertaining to known events of default under the master lease and our guarantees through December 31, 2017, with the stipulation that the lessee pay $400,000 per month toward their obligations of the master lease through December 31, 2017.

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Acquisitions and Developments: The following table summarizes our acquisitions for the nine months ended September 30, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Total

    

Number

    

Number

 

 

Purchase

 

Transaction

 

Acquisition

 

of

 

of

Type of Property

 

Price

 

Costs(1)

 

Costs

 

Properties

 

Beds/Units

Assisted Living(2)

 

$

54,463

 

$

341

 

$

54,804

 

 3

 

240


(1)

Represents cost associated with our acquisitions; however, depending on the accounting treatment of our acquisitions, transaction costs may be capitalized to the properties’ basis and, for our land purchases with forward development commitments, transaction costs are capitalized as part of construction in progress. Additionally, we expense transaction costs related to the prior year due to timing and terminated transactions.

 

(2)

We acquired a 107-unit assisted living community and a 73-unit memory care community for an aggregate purchase price of $38,813. Additionally, we acquired a 60-unit memory care community for $15,650.

Subsequent to September 30, 2017, we acquired a newly constructed 73-unit assisted living and memory care community in Missouri for $16,555,000. The property was added to an existing master lease agreement at an initial cash yield of 7%.

The following table summarizes our acquisitions for the nine months ended September 30, 2016 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Total

    

Number

    

Number

 

 

Purchase

 

Transaction

 

Acquisition

 

of

 

of

Type of Property

 

Price

 

Costs(1)

 

Costs

 

Properties

 

Beds/Units

Skilled Nursing(2)

 

$

16,000

 

$

45

 

$

16,045

 

 1

 

126

Assisted Living(3)

 

 

53,550

 

 

411

 

 

53,961

 

 4

 

250

Land(4)

 

 

5,425

 

 

63

 

 

5,488

 

 —

 

 —

Totals

 

$

74,975

 

$

519

 

$

75,494

 

 5

 

376


(1)

Represents cost associated with our acquisitions; however, depending on the accounting treatment of our acquisitions, transaction costs may be capitalized to the properties’ basis and, for our land purchases with forward development commitments, transaction costs are capitalized as part of construction in progress. Additionally, we expense transaction costs related to the prior year due to timing and terminated transactions.

 

(2)

We acquired a newly constructed 126-bed skilled nursing center in Texas.

 

(3)

We acquired a newly constructed memory care community in Kentucky for $14,250 including a $2,000 holdback, a newly constructed assisted living and memory care community in Georgia for $14,300 and two memory care communities in Kansas for an aggregate purchase price of $25,000.

 

(4)

We acquired a parcel of land and improvements and entered into a development commitment of up to $24,325, including the land and bed rights purchase, for the development of a 143-bed skilled nursing center in Kentucky.

During the nine months ended September 30, 2017 and 2016, we invested the following in development and improvement projects (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

Nine months ended September 30, 2016

 

    

Development

    

Improvements

    

Development

    

Improvements

Assisted Living Communities

 

$

10,366

 

$

951

 

$

35,623

 

$

2,134

Skilled Nursing Centers

 

 

3,573

 

 

1,357

 

 

 -

 

 

3,432

 

 

$

13,939

 

$

2,308

 

$

35,623

 

$

5,566

 

 

During the nine months ended September 30, 2017, we sold four assisted living communities with a carrying value of $8,726,000 for an aggregate price of $14,250,000. These properties are located in

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Indiana and Iowa with a total of 175 units. As a result of this sale, we recognized a net gain on sale of $5,054,000.

During the nine months ended September 30, 2016, we sold two assisted living communities located in Florida and two skilled nursing centers in Texas with an aggregate carrying value of $9,791,000 for an aggregate price of $13,600,000. As a result of these sales, we recognized a net gain on sale of $3,775,000. Also, we sold a school in New Jersey for $3,850,000 with a carrying value of $3,997,000 and recorded a loss on sale of $193,000.

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at September 30, 2017 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Investment

 

 

 

Gross

 

 

 

 

 

SNF

 

per

 

Type of Property

 

Investments

 

Loans

 

Properties(1)

 

Beds

 

Bed/Unit

 

Skilled Nursing

  

$

224,095

  

 5

  

21

  

2,764

  

$

81.08

 


(1)

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

 

At September 30, 2017, the mortgage loans had interest rates ranging from 9.4% to 11.2% and maturities ranging from 2019 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 nine months ended September 30, 2017 and 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

 

 

 

Origination/Funding

 

Origination/Funding

 

Originations and fundings under mortgage loans receivable

 

$

9,333

 

$

19,113

 

Pay-offs received

 

 

(16,665)

 

 

(746)

 

Scheduled principal payments received

 

 

(686)

 

 

(1,371)

 

Net (decrease) increase in mortgage loans receivable

 

$

(8,018)

 

$

16,996

 

 

3.Investment in Unconsolidated Joint Ventures 

Our investment in unconsolidated joint ventures consists 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. The JV is intended to be self-financing and other than our preferred capital contributions, we are not required to provide any direct support and we are not entitled to share in the JV’s earnings or losses. As a result, we believe our maximum exposure to loss related to our investment in the JV would be limited to our preferred capital contributions plus any unpaid accrued preferred return. We have concluded that the JV meets the accounting criteria to be considered a variable

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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.

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 currently $0, we did not record the deferred portion of the preferred return during the nine months ended September 30, 2017. During the nine months ended September 30, 2017 and 2016, we funded $1,100,000 and $481,000, respectively, of the preferred capital contribution. Accordingly, we have a remaining preferred capital contribution commitment of $2,636,000. At September 30, 2017 and December 31, 2016, our preferred equity investment was $23,421,000 and $22,321,000, respectively. During the nine months ended September 30, 2017 and 2016, we recognized $1,134,000 and $839,000, respectively, in income and received $1,020,000 and $1,409,000, 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. During 2017, we funded $2,747,000 under this mezzanine loan and withheld $653,000 which will be applied to interest. During the nine months ended September 30, 2017, we recognized $118,000 in income from unconsolidated joint ventures related to this 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. 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 nine months ended September 30, 2017, we recognized $383,000 in income from unconsolidated joint ventures and received $216,000 of cash interest related to this loan. At September 30, 2017 and December 31, 2016, the outstanding balance under this loan was $3,041,000 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 nine months ended September 30, 2017 and 2016 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

2017

 

2016

 

Advances and originations under notes receivable

$

 -

 

$

2,328

 

Principal payments received under notes receivable

 

(25)

 

 

(90)

 

Net (decrease) increase in notes receivable

$

(25)

 

$

2,238

 

 

 

 

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5.Debt Obligations

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 September 30, 2017, the facility provides for interest annually at LIBOR plus 150 basis points and an unused commitment fee of 35 basis points. At September 30, 2017, we were in compliance with all covenants.

Senior Unsecured Notes. During the nine months ended September 30, 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.

The debt obligations by component as of September 30, 2017 and December 31, 2016 are as follows (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2017

 

At December 31, 2016

 

 

 

Applicable

 

 

 

Available

 

 

 

Available

 

 

 

Interest

 

Outstanding

 

for

 

Outstanding

 

for

 

Debt Obligations

    

Rate(1)

    

Balance

    

Borrowing

    

Balance

    

Borrowing

 

Bank borrowings (2)

 

2.98%

 

$

55,000

 

$

545,000

 

$

107,100

 

$

492,900

 

Senior unsecured notes, net of debt issue costs

 

4.49%

 

 

582,950

 

 

51,667

 

 

502,291

 

 

22,500

 

Total

 

4.36%

 

$

637,950

 

$

596,667

 

$

609,391

 

$

515,400

 


(1)

Represents weighted average of interest rate as of September 30, 2017.

 

(2)

Subsequent to September 30, 2017, we had an additional net borrowing of $15,000 under our unsecured revolving line of credit. Accordingly, we have $70,000 outstanding under our unsecured revolving line of credit with $530,000 available for borrowing.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2017

 

2016

 

 

 

Borrowings

 

Repayments

 

Borrowings

 

Repayments

 

Bank borrowings

 

$

64,500

 

$

(116,600)

 

$

83,500

 

$

(127,000)

 

Senior unsecured notes

 

 

100,000

(1)

 

(19,167)

 

 

77,500

(2)

 

(16,667)

 

Total

 

$

164,500

 

$

(135,767)

 

$

161,000

 

$

(143,667)

 


(1)

During the nine months ended September 30, 2017, we sold 15-year senior unsecured notes in the aggregate amount of $100,000 to a group of investors, which included Prudential, in a private placement transaction. The notes bear interest at an annual rate of 4.5%, have scheduled principal payments and mature on February 16, 2032.

 

(2)

During the nine months ended September 30, 2016, we sold 10-year senior unsecured term notes in the amount of $37,500 to Prudential. The notes bear interest at an annual fixed rate of 4.15%, have scheduled principal payments and will mature in 2028. Additionally, we sold 10-year senior unsecured notes in the amount of $40,000 to affiliated insurance company investment advisory clients of AIG Asset Management (U.S.) LLC. The notes bear interest at a coupon of 3.99%, have scheduled principal payments and will mature in 2031.

 

 

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6.Equity

 

Equity activity was as follows (in thousands):

 

 

 

 

 

 

 

Total

 

 

 

Equity

 

Balance at December 31, 2016

    

$

740,048

 

Net income

 

 

67,506

 

Proceeds from common stock issued, net of issuance costs

 

 

14,529

 

Stock-based compensation expense

 

 

3,967

 

Performance based stock units

 

 

(6)

 

Stock option exercise

 

 

202

 

Common stock dividends

 

 

(67,664)

 

Other

 

 

(1,947)

 

Balance at September 30, 2017

 

$

756,635

 

 

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 nine months ended September 30, 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 credit. In conjunction with the sale of common stock, we paid $260,000 as compensation to our sales agents and we reclassified $49,000 of accumulated costs associated with this agreement to additional paid in capital. Accordingly, at September 30, 2017, we had $185,162,000 available under our Equity Distribution Agreements. 

Also, during the nine months ended September 30, 2017 and 2016, we acquired 41,592 shares and 49,094 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

September 30, 2017

 

September 30, 2016

 

 

 

 

Declared

 

Paid

 

Declared

 

Paid

 

 

Common Stock

 

$

67,664

(1)

$

67,664

(1)

$

62,211

(2)

$

62,211

(2)

 


(1)

Represents $0.19 per share per month for the nine months ended September 30, 2017.

 

(2)

Represents $0.18 per share per month for the nine months ended September 30, 2016.

In October 2017, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of October, November and December, payable on October 31, November 30, and December 29, 2017, respectively, to stockholders of record on October 23, November 22, and December 21, 2017, respectively.

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Stock-Based Compensation.  During 2015, we adopted and our shareholders approved the 2015 Equity Participation Plan (or the 2015 Plan) which replaced 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 nine months ended September 30, 2017 and 2016,  no stock options were granted. The stock options exercised during the nine months ended September 30, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

    

 

 

    

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Options

 

Exercise

 

Option

 

Market

 

 

 

Exercised

 

Price

 

Value

 

Value(1)

 

2017

 

8,334

 

$

24.31

 

$

202,566

 

$

410,797

 

2016

 

6,667

 

$

23.79

 

$

159,000

 

$

311,000

 


(1)

As of exercise date.

At September 30, 2017, we had 25,000 stock options outstanding and exercisable. Compensation expense related to the vesting of stock options was $2,000 and $11,000 for the nine months ended September 30, 2017 and 2016, respectively. 

During the nine months ended September 30, 2017 and 2016, we cancelled 15,400 and 640 shares of restricted stock, respectively, under the 2015 Plan and 2008 Plan.  Additionally, during the nine months ended September 30, 2017, we cancelled 8,706 performance-based stock units. During the nine months ended September 30, 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