Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


FORM 10-Q

 

(Mark One)

 

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition period from          to        

 

Commission file number 1-11314

 

LTC PROPERTIES, INC.

(Exact name of Registrant as specified in its charter)

 

Maryland

 

71-0720518

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

2829 Townsgate Road, Suite 350

Westlake Village, California  91361

(Address of principal executive offices, including zip code)

 

(805) 981-8655

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  þ  No  ¨

 

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

 

Large accelerated filer þ

 

Accelerated filer ¨

 

Non-accelerated filer ¨

 

Smaller reporting company ¨

 

 

 

 

(Do not check if a

smaller reporting company)

 

 

 

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

 

The number of shares of common stock outstanding on July 27, 2012 was 30,448,068.

 

 



Table of Contents

 

LTC PROPERTIES, INC.

 

FORM 10-Q

 

June 30, 2012

 

 

INDEX

 

 

PART I -- Financial Information

Page

 

 

Item 1. Financial Statements

 

Consolidated Balance Sheets

3

Consolidated Statements of Income

4

Consolidated Statements of Comprehensive Income

5

Consolidated Statements of Cash Flows

6

Notes to Consolidated Financial Statements

7

 

 

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

23

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

36

 

 

Item 4. Controls and Procedures

37

 

 

 

 

PART II -- Other Information

 

 

 

Item 1. Legal Proceedings

38

 

 

Item 1A. Risk Factors

38

 

 

Item 6. Exhibits

39

 

2



Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

 

 

June 30, 2012

 

 

 

December 31, 2011

ASSETS

 

 

(unaudited)

 

 

 

(audited)

 

Real estate investments:

 

 

 

 

 

 

 

 

Land

 

 

$   60,362

 

 

 

$   57,059

 

Buildings and improvements

 

 

677,297

 

 

 

659,453

 

Accumulated depreciation and amortization

 

 

(186,394

)

 

 

(175,933

)

Net operating real estate property

 

 

551,265

 

 

 

540,579

 

Properties held-for-sale, net of accumulated depreciation and amortization: 2012 — $613; 2011 — $2,263

 

 

5,025

 

 

 

6,256

 

Net real estate property

 

 

556,290

 

 

 

546,835

 

Mortgage loans receivable, net of allowance for doubtful accounts: 2012 — $884; 2011 — $921

 

 

49,362

 

 

 

53,081

 

Real estate investments, net

 

 

605,652

 

 

 

599,916

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

10,313

 

 

 

4,408

 

Debt issue costs, net

 

 

2,698

 

 

 

2,301

 

Interest receivable

 

 

1,062

 

 

 

1,494

 

Straight-line rent receivable,(1) net of allowance for doubtful accounts: 2012 — $696; 2011 — $680

 

 

25,089

 

 

 

23,772

 

Prepaid expenses and other assets

 

 

7,341

 

 

 

7,851

 

Other assets related to properties held-for-sale, net of allowance for doubtful accounts: 2012 — $839; 2011 — $839

 

 

52

 

 

 

53

 

Notes receivable

 

 

2,647

 

 

 

817

 

Marketable securities (2)

 

 

 

 

 

6,485

 

Total assets

 

 

$654,854

 

 

 

$647,097

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Bank borrowings

 

 

$   68,000

 

 

 

$   56,000

 

Senior unsecured notes

 

 

100,000

 

 

 

100,000

 

Bonds payable

 

 

2,635

 

 

 

3,200

 

Accrued interest

 

 

1,156

 

 

 

1,356

 

Earn-out liabilities

 

 

6,524

 

 

 

6,305

 

Accrued expenses and other liabilities

 

 

10,938

 

 

 

11,314

 

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

 

 

139

 

 

 

212

 

Total liabilities

 

 

189,392

 

 

 

178,387

 

EQUITY

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

shares issued and outstanding: 2012 — 2,000; 2011 — 2,000

 

 

38,500

 

 

 

38,500

 

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding: 2012 —30,445; 2011 — 30,346

 

 

304

 

 

 

303

 

Capital in excess of par value

 

 

507,752

 

 

 

507,343

 

Cumulative net income

 

 

698,767

 

 

 

672,743

 

Other

 

 

169

 

 

 

199

 

Cumulative distributions

 

 

(780,436

)

 

 

(752,340

)

Total LTC Properties, Inc. stockholders’ equity

 

 

465,056

 

 

 

466,748

 

 

 

 

 

 

 

 

 

 

Non-controlling interests

 

 

406

 

 

 

1,962

 

Total equity

 

 

465,462

 

 

 

468,710

 

Total liabilities and equity

 

 

$654,854

 

 

 

$  647,097

 


(1)      On June 30, 2012 and December 31, 2011, we had $3,130 and $3,060 respectively, in straight-line rent receivable from a lessee that qualifies as a related party because the lessee’s Chief Executive Officer is on our Board of Directors.  See Note 9. Transactions with Related Party for further discussion.

 

(2)      At December 31, 2011, we had a $6,500 face value investment in marketable securities issued by an entity that qualifies as a related party because the entity’s Chief Executive Officer is on our Board of Directors.  See Note 9. Transactions with Related Party for further discussion.

 

See accompanying notes.

 

3



Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share, unaudited)

 

 

 

 

Three Months Ended
June 30,

 

 

 

Six Months Ended
June 30,

 

 

 

 

2012

 

 

 

2011

 

 

 

2012

 

 

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income (1)

 

 

$21,175

 

 

 

$19,337

 

 

 

$42,047

 

 

 

$37,519

 

Interest income from mortgage loans

 

 

1,431

 

 

 

1,613

 

 

 

2,963

 

 

 

3,269

 

Interest and other income (2)

 

 

484

 

 

 

230

 

 

 

720

 

 

 

645

 

Total revenues

 

 

23,090

 

 

 

21,180

 

 

 

45,730

 

 

 

41,433

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

2,004

 

 

 

1,543

 

 

 

4,037

 

 

 

2,647

 

Depreciation and amortization

 

 

5,369

 

 

 

4,918

 

 

 

10,536

 

 

 

9,350

 

Acquisition costs

 

 

141

 

 

 

35

 

 

 

182

 

 

 

165

 

Operating and other expenses

 

 

2,433

 

 

 

2,323

 

 

 

4,885

 

 

 

4,637

 

Total expenses

 

 

9,947

 

 

 

8,819

 

 

 

19,640

 

 

 

16,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

13,143

 

 

 

12,361

 

 

 

26,090

 

 

 

24,634

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

(30

)

 

 

(99

)

 

 

(61

)

 

 

(218

)

Gain on sale of assets, net

 

 

 

 

 

 

 

 

16

 

 

 

 

Net loss from discontinued operations

 

 

(30

)

 

 

(99

)

 

 

(45

)

 

 

(218

)

Net income

 

 

13,113

 

 

 

12,262

 

 

 

26,045

 

 

 

24,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income allocated to non-controlling interests

 

 

(10

)

 

 

(48

)

 

 

(21

)

 

 

(96

)

Net income attributable to LTC Properties, Inc.

 

 

13,103

 

 

 

12,214

 

 

 

26,024

 

 

 

24,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income allocated to participating securities

 

 

(91

)

 

 

(85

)

 

 

(185

)

 

 

(174

)

Income allocated to preferred stockholders

 

 

(818

)

 

 

(818

)

 

 

(1,636

)

 

 

(7,442

)

Net income available to common stockholders

 

 

$12,194

 

 

 

$11,311

 

 

 

$24,203

 

 

 

$16,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

$0.40

 

 

 

$0.38

 

 

 

$0.80

 

 

 

$0.60

 

Discontinued operations

 

 

$0.00

 

 

 

$0.00

 

 

 

$0.00

 

 

 

$(0.01

)

Net income available to common stockholders

 

 

$0.40

 

 

 

$0.38

 

 

 

$0.80

 

 

 

$0.59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

$0.40

 

 

 

$0.38

 

 

 

$0.80

 

 

 

$0.60

 

Discontinued operations

 

 

$0.00

 

 

 

$0.00

 

 

 

$0.00

 

 

 

$(0.01

)

Net income available to common stockholders

 

 

$0.40

 

 

 

$0.37

 

 

 

$0.80

 

 

 

$0.59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

30,213

 

 

 

30,135

 

 

 

30,201

 

 

 

28,233

 

Diluted

 

 

30,258

 

 

 

30,168

 

 

 

30,246

 

 

 

28,264

 

 


(1)         During the three and six months ended June 30, 2012, we received $1,095 and $2,181, respectively, in rental income and recorded $31 and $70, respectively, in straight-line rental income from a lessee that qualifies as a related party.  During the three and six months ended June 30, 2011, we received $1,068 and $2,127, respectively, in rental income and recorded $57 and $123, respectively, in straight-line rental income from a lessee that qualifies as a related party.  The lessee’s Chief Executive Officer is on our Board of Directors.  See Note 9. Transactions with Related Party for further discussion.

 

(2)         During the three and six months ended June 30, 2012, we recognized $55 and $235, respectively, of interest income from an entity that qualifies as a related party because the entity’s Chief Executive Officer is on our Board of Directors.  During three and six months ended June 30, 2011, we recognized $180 and $360, respectively, of interest income from an entity that qualifies as a related party because the entity’s Chief Executive Officer is on our Board of Directors.  See Note 9. Transactions with Related Party for further discussion.

 

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

 

See accompanying notes.

 

4



Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands, unaudited)

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

 

2012

 

 

 

2011

 

 

 

2012

 

 

 

2011

 

Net income

 

 

$13,113

 

 

 

$12,262

 

 

 

$26,045

 

 

 

$24,416

 

Reclassification adjustment

 

 

(16

)

 

 

(15

)

 

 

(30

)

 

 

(30

)

Comprehensive income

 

 

13,097

 

 

 

12,247

 

 

 

26,015

 

 

 

24,386

 

Comprehensive income allocated to non-controlling interests

 

 

(10

)

 

 

(48

)

 

 

(21

)

 

 

(96

)

Comprehensive income attributable to LTC Properties, Inc.

 

 

$13,087

 

 

 

$12,199

 

 

 

$25,994

 

 

 

$24,290

 

 

See accompanying notes.

 

5



Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

 

 

 

Six Months Ended June 30,

 

 

2012

 

2011

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$26,045

 

 

$24,416

 

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

 

 

 

 

 

 

Depreciation and amortization – continuing and discontinued operations

 

10,536

 

 

9,508

 

Stock-based compensation expense

 

910

 

 

721

 

Gain on sale of assets, net

 

(16

)

 

 

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

 

(1,333

)

 

(1,689

)

Recovery from doubtful accounts – continuing and discontinued operations

 

(21

)

 

(14

)

Non-cash interest related to earn-out liabilities

 

220

 

 

177

 

Other non-cash items, net

 

642

 

 

696

 

(Decrease) increase in accrued interest payable

 

(200

)

 

183

 

Decrease in interest receivable

 

391

 

 

33

 

Net change in other assets and liabilities

 

(344

)

 

363

 

Net cash provided by operating activities

 

36,830

 

 

34,394

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Investment in real estate properties, net

 

(20,482

)

 

(52,450

)

Investment in real estate capital improvements, net

 

(661

)

 

(1,804

)

Proceeds from sale of real estate investments, net

 

1,248

 

 

 

Principal payments received on mortgage loans receivable

 

3,752

 

 

3,620

 

Proceeds from redemption of marketable securities

 

6,500

 

 

 

Advances under notes receivable

 

(2,019

)

 

 

Principal payments received on notes receivable

 

191

 

 

359

 

Net cash used in investing activities

 

(11,471

)

 

(50,275

)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Bank borrowings

 

23,000

 

 

119,000

 

Repayment of bank borrowings

 

(11,000

)

 

(86,700

)

Principal payments on bonds payable

 

(565

)

 

(530

)

Proceeds from common stock offering

 

 

 

103,667

 

Distributions paid to stockholders

 

(28,096

)

 

(29,450

)

Redemption of non-controlling interests

 

(2,764

)

 

(88,413

)

Distributions paid to non-controlling interests

 

(59

)

 

(96

)

Debt issue costs

 

(716

)

 

(2,105

)

Stock option exercises

 

746

 

 

 

Net cash (used in) provided by financing activities

 

(19,454

)

 

15,373

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

5,905

 

 

(508

)

Cash and cash equivalents, beginning of period

 

4,408

 

 

6,903

 

Cash and cash equivalents, end of period

 

$   10,313

 

 

$   6,395

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

Interest paid

 

$  3,918

 

 

$  2,037

 

 


(1)          During the six months ended June 30, 2012 and 2011, we recorded $70 and $123, respectively, in straight-line rental income from a lessee that qualifies as a related party.  The lessee’s Chief Executive Officer is on our Board of Directors.  See Note 9. Transactions with Related Party for further discussion.

 

 

See accompanying notes.

 

6



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                    General

 

 

LTC Properties, Inc., a health care real estate investment trust (or REIT), was incorporated on May 12, 1992 in the State of Maryland and commenced operations on August 25, 1992.  We invest primarily in senior housing and long term care properties through property lease transactions, 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 sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in senior housing and long term care properties managed by experienced operators.  Our primary senior housing and long term healthcare property types include skilled nursing properties (or SNF), assisted living properties (or ALF), independent living properties (or ILF) and combinations thereof. We have begun an initiative to develop purpose built, free-standing memory care properties designed to attract private-pay residents requiring dementia care services. 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.

 

The unaudited consolidated interim financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (or SEC) and reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations for the three and six months ended June 30, 2012 and 2011.  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 results of operations for the three and six months ended June 30, 2012 and 2011 are not necessarily indicative of the results for a full year. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

The accompanying consolidated financial statements include the accounts of our company, its wholly-owned subsidiaries and a controlled partnership.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Control over the partnership is based on the provisions of the partnership agreement that provide us with a controlling financial interest in the partnership.

 

Under the terms of the partnership agreement, our company, as general partner, is responsible for the management of the partnership’s assets, business and affairs.  Certain of our rights and duties in management of the partnership include making all operating decisions, setting the capital budget, executing all contracts, making all employment decisions, and handling the purchase and disposition of assets.  We, as the general partner, are responsible for the ongoing, major, and central operations of the partnership and make all management decisions.  In addition, we, as the general partner, assume the risk for all operating losses, capital losses, and are entitled to substantially all capital gains (i.e. asset appreciation).  The limited partners have virtually no rights and are precluded from taking part in the operation, management or control of the partnership.  The limited partners are also precluded from transferring their partnership interests without the express permission of the general partner.  However, we can transfer our interest without consultation or permission of the limited partners.

 

Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation, including changes as a result of the application of accounting guidance for properties disposed or classified as held-for-sale. These adjustments are normal and

 

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Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

recurring in nature. During the six months ended June 30, 2012, we sold a 140-bed skilled nursing property located in Texas for $1,248,000.  Properties classified as held-for-sale include a 140-unit independent living property located in Texas that we acquired via foreclosure from Sunwest Management, Inc. (or Sunwest) in 2008. We are actively marketing to sell this property.

 

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.

 

2.                                    Real Estate Investments

 

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at June 30, 2012 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

Percentage

 

 

 

Number

 

Number of

 

Investment

 

 

Gross

 

of

 

Number

 

of

 

SNF

 

ALF

 

per

Type of Property

 

Investments

 

Investments

 

of Loans

 

Properties (1)

 

Beds

 

Units

 

Bed/Unit

Skilled Nursing

 

$24,712 

 

 

49.2%  

 

 

18  

 

 

19   

 

 

2,112

 

 

 

 

$11.70

 

Assisted Living

 

22,553 

 

 

44.9%  

 

 

9  

 

 

14   

 

 

 

 

424

 

 

53.19

 

Other Senior Housing (2)

 

2,981 

 

 

5.9%  

 

 

1  

 

 

1   

 

 

99

 

 

74

 

 

17.23

 

Totals

 

$50,246 

 

 

100.0%  

 

 

28  

 

 

34   

 

 

2,211

 

 

498

 

 

 

 

 


(1)          We have investments in 12 states that include mortgages to 12 different operators.

(2)          Other senior housing consists of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

 

At June 30, 2012, the mortgage loans had interest rates ranging from 10.0% to 14.2% and maturities ranging from 2012 to 2019.  In addition, some loans contain certain guarantees, provide for certain facility fees and generally have 20-year to 25-year amortization schedules.  The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points.

 

During the three months ended June 30, 2012, we received $671,000 in regularly scheduled principal payments and $2,363,000 plus accrued interest related to the early payoff of two mortgage loans secured by two skilled nursing properties. During the six months ended June 30, 2012, we received $1,389,000 in regularly scheduled principal payments. In August 2012, we received $493,000 plus accrued interest related to the early payoff of a mortgage loan secured by a skilled nursing property with 118 beds located in Texas. During the six months ended June 30, 2011, we received $1,712,000 in regularly scheduled principal payments and we received $1,908,000 plus accrued interest related to the payoff of two mortgage loans secured by one assisted living property and four skilled nursing properties.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Owned Properties. The following table summarizes our investments in owned properties at June 30, 2012 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Average

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

Investment

 

 

Gross

 

Percentage of

 

of

 

SNF

 

ALF

 

ILF

 

per

Type of Property

 

Investments

 

Investments

 

Properties (1)

 

Beds

 

Units

 

Units

 

Bed/Unit

Skilled Nursing

 

$377,381

 

 

50.8%

 

 

68   

 

 

8,025  

 

 

 

 

 

 

$47.03

 

Assisted Living

 

285,981

 

 

38.5%

 

 

88   

 

 

—  

 

 

3,941

 

 

 

 

72.57

 

Other Senior Housing (2)

 

64,704

 

 

8.7%

 

 

13   

 

 

814  

 

 

256

 

 

423

 

 

43.34

 

School

 

12,236

 

 

1.6%

 

 

2   

 

 

—  

 

 

 

 

 

 

N/A

 

Under Development (3)

 

2,995

 

 

0.4%

 

 

—   

 

 

—  

 

 

 

 

 

 

N/A

 

Totals

 

$743,297

 

 

100.0%

 

 

171   

 

 

8,839  

 

 

4,197

 

 

423

 

 

 

 

 


(1)          We have investments in 25 states leased to 31 different operators.

(2)          Other senior housing consists of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

(3)          We have two properties under development: 120-bed skilled nursing property in Texas which will replace an existing 90-bed skilled nursing property we own and 60-unit free-standing memory care property in Colorado.

 

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 and one contains a limited period option that permits the operator to purchase the property.  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 June 30, 2012, we purchased a vacant parcel of land in Colorado for $1,882,000. Simultaneous with the purchase, we entered into a lease agreement and development commitment in an amount not to exceed $7,935,000 to fund the construction of a 60-unit free-standing memory care property.  Rent under the lease will begin upon the earlier of project completion or the improvement deadline of August 1, 2013.  Initial rent at the rate of 9.25% will be calculated based on the land purchase price and construction costs funded plus 9.0% compounded on each advance under the commitment from the disbursement date until the earlier of project completion or the improvement deadline.  The lease has an 11-year initial term, four 5-year renewal options and annual escalations of 2.5%.

 

During the six months ended June 30, 2012, we acquired a 144-bed skilled nursing property located in Texas for an aggregate purchase price of $18,600,000.  Simultaneous with the purchase, we added the property to an existing master lease with a third party operator at an incremental GAAP yield of 10.7%. Additionally, we sold a 140-bed skilled nursing property located in Texas for $1,248,000 and recognized a gain, net of selling expenses, of $16,000. This property was leased under a master lease and the economic terms of this master lease did not change as a result of this sale.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Also during the six months ended June 30, 2012, we invested $519,000 at an average yield of 9.1%, under agreements to expand and renovate four existing properties with two operators and to construct two properties with two different operators.  We also invested $142,000 in capital improvements to two existing properties under two lease agreements whose rental rates already reflected these investments. See Note 7.Commitments and Contingencies for further discussion.

 

In July 2012, we acquired a 90-bed skilled nursing property located in Texas for an aggregate purchase price of $6,500,000.  Simultaneous with the purchase, we added the property to an existing master lease with an unrelated third-party operator at an incremental GAAP yield of 10.7%. Also, in July 2012, we acquired two 144-bed skilled nursing properties located in Ohio for an aggregate purchase price of $54,000,000.  Simultaneous with the purchase, we leased the properties to an unrelated third-party operator at a GAAP yield of 10.1%. The initial term of the lease is 15 years with two 5-year renewal options and annual rent escalations of the lesser of i) 2.25% for the first seven years and 2.50% for the remainder of the term or ii) a calculation based on the consumer price index.

 

During the six months ended June 30, 2011, we acquired two senior housing properties located in South Carolina with 118 skilled nursing beds, 40 assisted living units and 53 independent living units for $11,450,000.  Also during the six months ended June 30, 2011, we purchased four skilled nursing properties with 524-beds in Texas for $50,841,000 which consists of $41,000,000 in cash at closing with the remainder in the form of contingent earn-out payments.  The contingent earn-out payment arrangements require us to pay two earn-out payments totalling up to $11,000,000 upon the properties achieving a sustainable stipulated rent coverage ratio. During the third quarter of 2011, we paid $4,000,000 related to the first contingent earn-out payment. We estimated the fair value of the contingent earn-out 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.

 

During the six months ended June 30, 2011, we invested $1,791,000 at an average yield of 9.8%, under agreements to expand and renovate six existing properties operated by three different operators.

 

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

 

3.                                    Notes Receivable

 

During the three months ended June 30, 2012, we funded $53,000 on a 9.0% construction and term loan in which we committed to provide up to $667,000 for capital improvements at one skilled nursing property we own and lease to the borrower. Upon the earlier of the full funding of the $667,000 or December 31, 2012, construction distribution under this loan will cease and this loan will fully amortize to maturity in May 2018.

 

During the three and six months ended June 30, 2012, we funded $932,000 and $1,966,000, respectively, under an 8.5% construction and term loan in which we committed to provide up to $2,500,000 for capital improvements at two senior housing properties we own and lease to the borrower. Upon the earlier of the full funding of the $2,500,000 or December 31, 2012, construction distribution under this loan will cease and this loan will fully amortize to maturity in November 2017. During the six months ended June 30, 2012 and 2011, we received $191,000 and $359,000, respectively, in principal payments under various loans and line of credit agreements with certain operators.  At June 30, 2012 we had six loans outstanding with a carrying value of $2,647,000 at a weighted average interest rate of 8.6%.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

4.                                    Marketable Securities

 

During the six months ended June 30, 2012, Skilled Healthcare Group, Inc. (or SHG) redeemed all of its outstanding Senior Subordinated Notes at par value plus accrued and unpaid interest. The SHG Senior Subordinated Notes had a face rate of 11.0% and an effective yield of 11.1%.  At December 31, 2011, we had a $6,500,000 face value investment in SHG Senior Subordinated Notes. One of our board members is the chief executive officer of SHG. See Note 9. Transactions with Related Party for further discussion.

 

5.                                    Debt Obligations

 

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

 

During the six months ended June 30, 2012, we borrowed $23,000,000 and repaid $11,000,000 under our Unsecured Credit Agreement.  At June 30, 2012, we had $68,000,000 outstanding and $172,000,000 available for borrowing. At June 30, 2012, we were in compliance with all our covenants.  In July 2012, we repaid $62,000,000 and borrowed $29,500,000 under our Unsecured Credit Agreement.  Accordingly, we had $35,500,000 outstanding under our Unsecured Credit Agreement with $204,500,000 available for borrowing.

 

Senior Unsecured Notes.  At June 30, 2012 and December 31, 2011, we had $100,000,000 outstanding under our Senior Unsecured Notes with a weighted average interest rate of 5.2% and $100,000,000 available under an Amended and Restated Note Purchase and Private Shelf agreement which provides for the possible issuance of senior unsecured fixed-rate term notes through October 19, 2014.  During the six months ended June 30, 2012, we amended our Amended and Restated Note Purchase and Private Shelf agreement to conform to the covenants under our Unsecured Credit Agreement. In July 2012, we sold 12-year senior unsecured notes in the aggregate amount of $85,800,000 to a group of institutional investors in a private placement transaction. The notes bear interest at 5.03%, mature on July 19, 2024 and have scheduled annual principal pay downs of $17,160,000 in years 8 through 12. We used a portion of the proceeds to pay down our Unsecured Credit Agreement and used the remaining proceeds to fund acquisitions.

 

Bonds Payable.  At June 30, 2012 and December 31, 2011, we had outstanding principal of $2,635,000 and $3,200,000 respectively, on multifamily tax-exempt revenue bonds that are secured by five assisted living properties in Washington.  These bonds bear interest at a variable rate that is reset weekly and mature during 2015.  For the six months ended June 30, 2012, the weighted average interest rate, including letter of credit fees, on the outstanding bonds was 2.2%.  During the six months ended June 30, 2012 and 2011, we paid $565,000 and $530,000, respectively, in regularly scheduled principal payments.  As of June 30, 2012 and December 31, 2011, the aggregate carrying value of real estate properties securing our bonds payable was $6,783,000 and $6,915,000, respectively.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

6.                                    Equity

 

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

 

 

 

LTC
Properties, Inc.
Stockholders’
Equity

 

 

 

Non-controlling
Interest

 

 

Total
Equity

 

Balance at December 31, 2011

 

$466,748

 

 

 

$1,962

 

 

 

$468,710

 

Net income

 

26,024

 

 

 

21

 

 

 

26,045

 

Vested stock options and restricted stock

 

910

 

 

 

 

 

 

910

 

Stock option exercise

 

746

 

 

 

 

 

 

746

 

Reclassification adjustment

 

(30

)

 

 

 

 

 

(30

)

Redemption of non-controlling interest

 

(1,246

)

 

 

(1,518

)

 

 

(2,764

)

Non-controlling interest preferred return

 

 

 

 

(59

)

 

 

(59

)

Preferred stock dividends

 

(1,636

)

 

 

 

 

 

(1,636

)

Common stock dividends

 

(26,460

)

 

 

 

 

 

(26,460

)

Balance at June 30, 2012

 

$465,056

 

 

 

$406

 

 

 

$465,462

 

 

Preferred Stock.  At June 30, 2012, we had 2,000,000 shares of our 8.5% Series C Cumulative Convertible Preferred Stock (or Series C preferred stock) outstanding.  Our Series C preferred stock is convertible into 2,000,000 shares of our common stock at $19.25 per share.  Total shares reserved for issuance of common stock related to the conversion of Series C preferred stock were 2,000,000 shares at June 30, 2012.

 

During the six months ended June 30, 2011, we redeemed 3,536,530 shares of our 8.0% Series F Cumulative Preferred Stock (or Series F preferred stock), representing all of our outstanding shares.  The Series F preferred stock had a liquidation value of $25.00 per share. The redemption price was $25.1333 per share, including accrued and unpaid dividends up to the redemption date.  Accordingly, we recognized the $3,566,000 of original issue costs related to the Series F preferred stock as a preferred stock redemption charge in the consolidated income statement line item income allocated to preferred stockholders.

 

Common Stock.  We have an equity distribution agreement which allows us to issue and sell, from time to time, up to $85,686,000 in aggregate offering price of our common shares.  Sales of common shares are made by means of ordinary brokers’ transactions at market prices, in block transactions, or as otherwise agreed between us and our sales agents.  During the six months ended June 30, 2012 or 2011, we did not sell shares of our common stock under our equity distribution agreement. At June 30, 2012, we had $64,573,000 available under this amended equity distribution agreement.

 

During the six months ended June 30, 2011, we sold 3,990,000 shares of common stock at a price of $27.25 per share, before fees and costs, in an underwritten public offering.  The net proceeds of $103,667,000 were used to redeem all of our Series F preferred stock outstanding, as previously discussed, and the remaining net proceeds were used to partially repay amounts outstanding under our Unsecured Credit Agreement.

 

Our Board of Directors authorized a share repurchase program enabling us to repurchase up to 5,000,000 shares of our equity securities, including common and preferred stock in the open market.  This authorization does not expire until 5,000,000 shares of our equity securities have been repurchased or the Board of Directors terminates its authorization.  During the six months ended June 30, 2012 and 2011, we did not purchase shares of our equity securities.  At June 30, 2012, we had an open Board authorization to purchase an additional 3,360,237 shares in total of equity securities. Subsequent to June 30, 2012, our Board terminated this share repurchase program.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

 

Available Shelf Registrations.  Our shelf registration statement provides us with the capacity to offer up to $400,000,000 in common stock, preferred stock, warrants, debt, depositary shares, or units.  We may from time to time raise capital under our current shelf registration in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering. At June 30, 2012, we had availability of $167,614,000 under our effective shelf registration.

 

Non-controlling Interests. We have one limited partnership. The limited partnership agreement allows the limited partners to convert, on a one-for-one basis, their limited partnership units into shares of common stock or the cash equivalent, at our option. Since we exercise control, we consolidate the limited partnership and we carry the non-controlling interests at cost.

 

During the six months ended June 30, 2012, two of our limited partners exercised their conversion rights. One limited partner exchanged all of its 67,294 partnership units and the other limited partner exchanged 22,000 partnership units in the limited partnership.  Upon receipt of the redemption notification of 89,294 limited partnership units, we elected to satisfy the redemption in cash.  We paid the limited partners $2,764,000, which represents the closing price of our common stock on the redemption date plus $0.05 per share multiplied by the number of limited partnership units redeemed.  The amount we paid upon redemption exceeded the book value of the limited partnership interest redeemed by $1,246,000. We accounted for this exchange as an equity transaction because there was no change in control requiring consolidation or deconsolidation and remeasurement.  Accordingly, the $1,246,000 excess book value of the limited partners’ interest in the partnership was reclassified to stockholders’ equity. At June 30, 2012, we had reserved 23,294 shares of our common stock under this partnership agreement. At June 30, 2012, the carrying value and market value of the partnership conversion rights was $406,000 and $855,000, respectively.

 

The following table represents the effect of changes in our ownership interest in the limited partnership on equity attributable to LTC Properties, Inc. (in thousands):

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

Net income attributable to LTC Properties, Inc.

 

$13,103

 

 

$12,214

 

 

$26,024

 

 

$24,320

 

Transfers from the non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

Decrease in paid-in capital for limited partners conversion

 

(1,246

)

 

 

 

(1,246

)

 

 

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

 

$11,857

 

 

$12,214

 

 

$24,778

 

 

$24,320

 

 

In July 2012, our remaining limited partner exercised his conversion rights to exchange 3,294 partnership units in the limited partnership. At our discretion, we converted his partnership units into an equal number of our common shares.  The partnership conversion price is $17.00 per partnership unit.  We accounted for this exchange as an equity transaction because there was no change in control requiring consolidation or deconsolidation and remeasurement. After this conversion, we have reserved 20,000 shares of our common stock under this partnership agreement.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

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

 

 

 

Six months ended June 30, 2012

 

Six months ended June 30, 2011

 

 

 

Declared

 

Paid

 

Declared

 

Paid

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series C

 

 

$  1,636

 

 

 

$  1,636

 

 

 

$  1,636

 

 

 

$  1,636

 

Series F (1)

 

 

 

 

 

 

 

 

2,240

 (2)

 

 

4,008

 

 

 

 

1,636

 

 

 

1,636

 

 

 

3,876

 

 

 

5,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock (3)

 

 

26,460

 

 

 

26,460

 

 

 

23,806

 

 

 

23,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$28,096

 

 

 

$28,096

 

 

 

$27,682

 

 

 

$29,450

 


(1)          During 2011, we redeemed all of our remaining Series F preferred Stock.

(2)          Includes the accrued and unpaid dividends on the Series F preferred stock up to the redemption date.

(3)          Represents $0.145 per share per month and $0.14 per share per month for the six months ended June 30, 2012 and 2011, respectively.

 

In July 2012, we declared a monthly cash dividend of $0.145 per share on our common stock for the month of July 2012, payable on July 31, 2012, to stockholders of record on July 23, 2012. In August 2012, we increased the monthly dividend on our common stock to $0.155 per share which is a 6.9% increase from the previous monthly $0.145 per share dividend. We declared a $0.155 per share monthly dividend for the months of August and September 2012, payable on August 31 and September 28, 2012, to stockholders of record on August 23 and September 20, 2012.

 

Other Equity.  At June 30, 2012 and December 31, 2011, other equity consisted of accumulated comprehensive income of $169,000 and $199,000, respectively.  This balance represents the net unrealized holding gains on available-for-sale REMIC Certificates recorded in 2005 when we repurchased the loans in the underlying loan pool.  This amount is being amortized to increase interest income over the remaining life of the loans that we repurchased from the REMIC Pool.

 

Stock-Based Compensation.  During the three months ended June 30, 2012, a total of 25,000 stock options were exercised at a total option value of $595,000 and a total market value on the date of exercise of $831,000. During the six months ended June 30, 2012, including the options exercised above, a total of 35,000 stock options were exercised at a total option value of $746,000 and a total market value on the date of exercise of $1,136,000. No stock options were exercised during the six months ended June 30, 2011.

 

During the six months ended June 30, 2012 and 2011, no stock options were issued. At June 30, 2012, the total number of stock options that are scheduled to vest through December 31, 2012 is 5,000.  We have no stock options outstanding that are scheduled to vest beyond 2012.  Compensation expense related to the vesting of stock options for each of the three and six months ended June 30, 2012 and 2011 was $4,000 and $8,000, respectively.  The remaining compensation expense to be recognized related to the future service period of unvested outstanding stock options for 2012 is $1,000.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

During the three months ended June 30, 2012, we granted 8,000 shares of restricted common stock at $31.87 per share.  These shares vest ratably over a three-year period from the grant date. During the six months ended June 30, 2012, excluding the shares granted above, we granted 56,200 shares of restricted common stock at $31.77 per share.  The vesting of these shares are as follows: 14,000 shares vest ratably over a five-year period from the grant date, 30,000 shares all vest on June 15, 2015, and 12,200 shares all vest on January 10, 2016. During the six months ended June 30, 2011, we granted 6,000 shares of restricted common stock at $28.70 per share.  These shares vest ratably over a three-year period from the grant date.  During the three and six months ended June 30, 2012, we recognized $454,000 and $902,000, respectively, of compensation expense related to the vesting of restricted common stock. During the three and six months ended June 30, 2011, we recognized $359,000 and $713,000, respectively, of compensation expense related to the vesting of restricted common stock.

 

7.                                    Commitments and Contingencies

 

During 2011, we purchased four skilled nursing properties with a total of 524 beds. As part of the purchase agreement, we paid cash at closing and committed to provide contingent earn-out payments if certain operational thresholds are met.  The contingent earn-out payment arrangements require us to pay two earn-out payments totalling up to $11,000,000 upon the properties achieving a sustainable stipulated rent coverage ratio. We estimated the fair value of the contingent earn-out payments 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.  At June 30, 2012 and December 31, 2011, the remaining contingent earn-out payments had a fair value of $6,524,000 and $6,305,000, respectively. During the three and six months ended June 30, 2012, we recorded non-cash interest expense of $110,000 and $220,000, respectively, related to the earn-out liabilities which represents the accretion of the difference between the current fair value and estimated payment of the contingent earn-out liabilities. During the three and six months ended June 30, 2011, we recorded $177,000 of non-cash interest expense related to the earn-out liabilities.

 

At June 30, 2012, we committed to provide the following capital improvement commitments and investments (dollar amounts in thousands):

 

 Commitment

 

Expiration
Date

 

 

Used
Commitment

 

Open
Commitment

 

 

Estimated
Yield

 

Property
Type

 

Properties

 

$    100  

 

8/1/12

 

 

$  98  

 

$         2

 

 

 

(1)

SNF  

 

1

 

1,700  

 

3/31/13

 

 

238  

(8)(a)

1,462

 

 

9.00%  

(2)

SNF  

 

2

 

8,250  

 

10/11/13

 

 

115  

 

8,135

 

 

9.00%  

(2)

UDP  

(6)

 

7,935  

 

12/1/13

 

 

150  

(8)(b)

7,785

 

 

9.25%  

(2)

UDP  

(5)

 

5,000  

(4)

12/31/14

 

 

—  

 

5,000

 

 

 

(3)

ALF  

 

37

 

30  

 

8/31/15

 

 

—  

 

30

 

 

 

(1)

EDU  

 

1

 

$23,015  

(7)

 

 

 

$601  

 

$22,414

 

 

 

 

 

 

 

 

 


(1)          The yield is included in the initial lease rate.

(2)          Minimum rent will increase upon final funding and project completion or in some cases, the improvement deadline as defined in each lease agreement.

(3)          9.5% plus the positive difference, if any, between the average yields on the U.S. Treasury 10-year note for the five days prior to funding, minus 420 basis points (expressed as a percentage).

(4)          $5,000 per year for the life of the lease.

(5)          This commitment is to construct a 60-unit free-standing memory care property in Colorado.

(6)          This commitment is to construct a 120-bed skilled nursing property in Texas.

(7)          In July 2012, we committed to fund $1,700 expiring in July 2014 with an estimated yield of 9.00% for improvements to a SNF property not operated by a major operator.

(8)          In July 2012, we funded the following commitments: (a) $87 and (b) $145.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

The following table summarizes our loan commitments and investments as of June 30, 2012 (dollar amounts in thousands):

 

Commitment

 

 

Expiration
Date

 

Used
Commitment

 

 

Open
Commitment

 

Yield

 

$2,500 

(2)

 

12/31/12

 

$2,199 

(4)

 

$301

 

8.50%

 

667  

(3)

 

12/31/12

 

53 

 

 

614

 

9.00%

 

50 

 

 

3/31/13

 

20 

 

 

30

 

10.00%

 

750 

 

 

5/14/14

 

— 

 

 

750

 

12.00%

 

$ 3,967 

 

 

 

 

$2,272 

 

 

$1,695

 

 

 


(1)          This commitment is a construction and term loan for capital improvements at two senior housing properties we own and lease to the borrower. Upon the earlier of the full funding of the commitment or December 31, 2012, construction distribution under this loan will cease and this loan will fully amortize to maturity in November 2017.

(2)          This commitment is a construction and term loan for capital improvements at a skilled nursing property we own and lease to the borrower. Upon the earlier of the full funding of the commitment or December 31, 2012, construction distribution under this loan will cease and this loan will fully amortize to maturity in May 2018.

(3)          This commitment is a note agreement with our operator of a 60-unit free standing memory care property under development.

(4)          In July 2012, we funded an additional $232 under this commitment.

 

8.                                    Major Operators

 

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

 

In 2006, Extendicare Services, Inc. (or EHSI), one of our major operators, effected a reorganization whereby it completed a spin-off of Assisted Living Concepts, Inc. (or ALC).  ALC is now a NYSE traded public company operating assisted living centers. The remaining EHSI assets and operations were converted into a Canadian REIT (Extendicare REIT) listed on the Toronto Stock Exchange (or TSX).  Both Extendicare REIT and ALC continue to be parties to the leases with us.

 

Brookdale Senior Living Communities, Inc. (or Brookdale Communities) is a wholly owned subsidiary of a publicly traded company, Brookdale Senior Living, Inc. (or Brookdale).

 

16



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

The following table summarizes Extendicare REIT’s, ALC’s and Brookdale’s financial information as of and for the three months ended March 31, 2012 per the operators’ public filings (in thousands).  Our other operator is privately owned and thus no public financial information is available.

 

 

 

Extendicare REIT(1)

 

ALC

 

Brookdale

 

 

 

 

 

 

 

 

 

 

Current assets

 

$  369,848

 

 

$  20,683

 

 

$  297,541

 

Non-current assets

 

1,444,716

 

 

442,708

 

 

4,278,568

 

Current liabilities

 

347,660

 

 

36,267

 

 

687,513

 

Non-current liabilities

 

1,388,495

 

 

115,644

 

 

2,850,780

 

Stockholders’ equity

 

78,409

 

 

311,480

 

 

1,037,816

 

 

 

 

 

 

 

 

 

 

 

Gross revenue

 

517,188

 

 

58,978

 

 

683,525

 

Operating expenses

 

448,790

 

 

48,431

 

 

656,665

 

Income (loss) from continuing operations

 

14,476

 

 

5,649

 

 

(10,338

)

Net income (loss)

 

49,006

 

 

5,649

 

 

(10,338

)

 

 

 

 

 

 

 

 

 

 

Cash provided by operations

 

17,468

 

 

11,836

 

 

45,693

 

Cash provided by (used in) investing activities

 

43,368

 

 

(4,777

)

 

(141,392

)

Cash (used in) provided by financing activities

 

(46,209

)

 

(7,032

)

 

106,976

 

 


(1) The numbers shown for Extendicare REIT are in Canadian dollars and are prepared in accordance with Canadian GAAP.

 

* The financial information contained in the foregoing table for Extendicare REIT, ALC and Brookdale is based on information we obtained from such companies’ available public filings and, therefore, we have not independently verified the accuracy of such information.

 

Extendicare REIT and ALC collectively lease 37 assisted living properties with a total of 1,427 units owned by us representing approximately 8.3%, or $54,455,000, of our total assets at June 30, 2012 and 12.2% of rental revenue and interest income from mortgage loans recognized as of June 30, 2012.

 

Brookdale Communities leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 8.3%, or $54,501,000, of our total assets at June 30, 2012 and 11.9% of rental revenue and interest income from mortgage loans recognized as of June 30, 2012.

 

Preferred Care, Inc. (or Preferred Care), through various wholly owned subsidiaries, operates 29 skilled nursing properties and two other senior housing properties that we own or on which we hold mortgages secured by first trust deeds.  These properties consist of a total of 3,721 skilled nursing beds and 49 assisted living units. This represents approximately 8.3%, or $54,364,000, of our total assets at June 30, 2012 and 12.0% of rental revenue and interest income from mortgage loans recognized as of June 30, 2012. They also operate one skilled nursing property under a sub-lease with another lessee we have which is not included in the Preferred Care rental revenue and interest income from mortgage loans.

 

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

 

17



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

9.                                    Transactions with Related Party

 

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

 

In December 2005, we purchased, on the open market, $10,000,000 face value of SHG Senior Subordinated Notes with a face rate of 11.0% and an effective yield of 11.1%.  Our Board of Directors, with Mr. Hendrickson abstaining, ratified the purchase of SHG Senior Subordinated Notes.  As a result of an early redemption by SHG in 2007, we had a remaining investment in $6,500,000 face value of SHG Senior Subordinated Notes at December 31, 2011.  During the three months ended June 30, 2012, SHG redeemed all of their outstanding Senior Subordinated Notes at par value plus accrued and unpaid interest up to the redemption date. During the three and six months ended June 30, 2012 and 2011, we recognized $55,000 and $180,000, respectively, and $235,000 and $360,000, respectively, of interest income related to the SHG Senior Subordinated Notes.

 

In addition, during September 2007 SHG purchased the assets of Laurel Healthcare (or Laurel).  We were not a direct party to this transaction.  One of the assets SHG purchased was Laurel’s leasehold interests in the skilled nursing properties in New Mexico Laurel leased from us under a 15-year master lease agreement dated in February 2006.  Our Board of Directors, with Mr. Hendrickson abstaining, ratified our consent to the assignment of Laurel’s master lease to subsidiaries of SHG.  The economic terms of the master lease agreement did not change as a result of our assignment of the master lease to subsidiaries of SHG.  During the three and six months ended June 30, 2012, we received $1,095,000 and $2,181,000, respectively, in rental income and recorded $31,000 and $70,000, respectively, in straight-line rental income from subsidiaries of SHG.  During the three and six months ended June 30, 2011, we received $1,068,000 and $2,127,000, respectively, in rental income and recorded $57,000 and $123,000, respectively, in straight-line rental income from subsidiaries of SHG.  At June 30, 2012 and December 31, 2011, the straight-line rent receivable from subsidiaries of SHG was $3,130,000 and $3,060,000, respectively.

 

18



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

10.                            Earnings per Share

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$13,143

 

$12,361

 

$26,090

 

$24,634

 

 

 

 

 

 

 

 

 

 

 

Less net income allocated to non-controlling interests

 

(10

)

(48

)

(21

)

(96

)

 

 

 

 

 

 

 

 

 

 

Less net income allocated to participating securities:

 

 

 

 

 

 

 

 

 

Nonforfeitable dividends on participating securities

 

(91

)

(85

)

(185

)

(174

)

Total net income allocated to participating securities

 

(91

)

(85

)

(185

)

(174

)

 

 

 

 

 

 

 

 

 

 

Less net income allocated to preferred stockholders:

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

(818

)

(818

)

(1,636

)

(3,876

)

Preferred stock redemption charge

 

 

 

 

(3,566

)

Total net income allocated to preferred stockholders

 

(818

)

(818

)

(1,636

)

(7,442

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available to common stockholders

 

12,224

 

11,410

 

24,248

 

16,922

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

(30

)

(99

)

(61

)

(218

)

Gain on sale of assets, net

 

 

 

16

 

 

Total net loss from discontinued operations

 

(30

)

(99

)

(45

)

(218

)

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

12,194

 

11,311

 

24,203

 

16,704

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Convertible preferred securities

 

 

 

 

 

Net income for diluted net income per share

 

$12,194

 

$11,311

 

$24,203

 

$16,704

 

 

 

 

 

 

 

 

 

 

 

Shares for basic net income per share

 

30,213

 

30,135

 

30,201

 

28,233

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options

 

45

 

33

 

45

 

31

 

Convertible preferred securities

 

 

 

 

 

Shares for diluted net income per share

 

30,258

 

30,168

 

30,246

 

28,264

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$0.40

 

$0.38

 

$0.80

 

$0.59

 

Diluted net income per share (1)

 

$0.40

 

$0.37

 

$0.80

 

$0.59

 

 


(1)          For the three and six months ended June 30, 2012 and 2011, the Series C Cumulative Convertible Preferred Stock, the participating securities and the non-controlling interest have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.

 

19



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

11.       Fair Value Measurements

 

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

 

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.  We do not invest our cash in auction rate securities.  The carrying value and fair value of our financial instruments as of June 30, 2012 and December 31, 2011 assuming election of the fair market value option (in thousands):

 

 

 

At June 30, 2012

 

At December 31, 2011

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Mortgage loans receivable

 

$49,362

 

 

$56,859

(1)

 

$53,081

 

 

$61,844

(1)

 

Marketable debt securities

 

 

 

 

 

6,485

 

 

6,500

(2)

 

Bonds payable

 

2,635

 

 

2,635

(3)

 

3,200

 

 

3,200

(3)

 

Bank borrowings

 

68,000

 

 

68,000

(3)

 

56,000

 

 

56,000

(3)

 

Senior unsecured notes

 

100,000

 

 

104,291

(4)

 

100,000

 

 

101,223

(4)

 

Earn-out liabilities

 

6,524

 

 

6,524

(5)

 

6,305

 

 

6,305

(5)

 

 


(1)          Our investment in mortgage loans receivable is classified as Level 3.  The fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows.  The discount rate is determined using our assumption on market conditions adjusted for market and credit risk and current returns on our investments.  The discount rate used to value our future cash inflows of the mortgage loans receivable at June 30, 2012 and December 31, 2011 was 6.0%.

 

(2)          Our investment in marketable debt securities is classified as Level 2.  The fair value is measured using quoted market rates based on most recent transactions from an independent third party source.  The pricing of our marketable debt securities as of December 31, 2011 was 100.0%. During the six months ended June 30, 2012, these marketable debt securities were redeemed at par value. See Note 4. Marketable Securities for further discussion.

 

(3)          Our bonds payable and bank borrowings are at a variable interest rate.  The estimated fair value of our bonds payable and bank borrowings approximated their carrying values at June 30, 2012 and December 31, 2011 based upon prevailing market interest rates for similar debt arrangements.

 

(4)          Our obligation under our senior unsecured notes is classified as Level 3 and thus the fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows.  The discount rate is measured based upon management’s estimates of rates currently prevailing for comparable loans available to us, and instruments of comparable maturities.  At June 30, 2012 the discount rate used to value our future cash outflow of our senior unsecured notes was 3.8% for those maturing before year 2019 and 4.3% for those maturing in year 2021.  At December 31, 2011, the discount rate used to value our future cash outflow of our senior unsecured notes was 4.8% for all maturity dates.

 

(5)          Our contingent obligation under the earn-out liabilities is classified as Level 3. We estimated the fair value of the contingent earn-out payments using a discounted cash flow analysis. The discount rate that we use consists of a risk-free U.S. Treasury rate plus a company specific credit spread which we believe is acceptable by willing market participants.  At June 30, 2012 and December 31, 2011, the discount rate used to value our future cash outflow of the earn-out liability was 6.7% and 6.8%, respectively.

 

12.                            Subsequent Events

 

Subsequent to June 30, 2012 the following events occurred.

 

We purchased a 90-bed skilled nursing property located in Texas for an aggregate purchase price of $6,500,000.  Simultaneous with the purchase, we added the property to an existing master lease with an unrelated third-party operator at an incremental GAAP yield of 10.7%. Additionally, we purchased two

 

20



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

144-bed skilled nursing properties located in Ohio for an aggregate purchase price of $54,000,000.  Simultaneous with the purchase, we leased the properties to an unrelated third-party operator at a GAAP yield of 10.1%. The initial term of the lease is 15 years with two 5-year renewal options and annual rent escalations of the lesser of i) 2.25% for the first seven years and 2.50% for the remainder of the term or ii) a calculation based on the consumer price index.

 

We received $493,000 plus accrued interest related to the early payoff of a mortgage loan secured by a skilled nursing property with 118 beds located in Texas.

 

We entered into a new 10-year lease of an existing skilled nursing property in California whose lease term had expired.  The operator remained the same. The lease contains provisions for a 2.5% annual escalation of minimum rent and a capital improvement allowance in the amount of $1,700,000.  The capital allowance commitment expires in July 2014 and includes interest compounded at 9% on each disbursement made from the disbursement date until either the final distribution of the commitment or the commitment expiration date. Upon final distribution or expiration of the capital improvement commitment, minimum rent increases by the total commitment funded multiplied by 9%.

 

We funded the following capital improvement commitments and investments (dollar amounts in thousands):

 

Commitment

 

Expiration
Date

 

Funded in
July 2012

 

Used
Commitment

 

Open
Commitment

 

Estimated
Yield

 

 

Property
Type

 

Properties

 

Major
Operator

 

$1,700

 

 

3/31/13

 

$  87

 

 

$325

 

 

$1,375

 

 

9.00%

 

(1)

 

SNF

 

2

 

N/A

 

7,935

 

 

12/1/13

 

145

 

 

295

 

 

7,640

 

 

9.25%

 

(1)

 

UDP(2)

 

 

N/A

 

$9,635

 

 

 

 

$232

 

 

$620

 

 

$9,015

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)          Minimum rent will increase upon final funding and project completion or in some cases, the improvement deadline as defined in each lease agreement.

(2)          This commitment is to construct a 60-unit free-standing memory care property on a vacant parcel of land in Colorado.

 

We funded the following loan commitments and investments (dollar amounts in thousands):

 

Commitment

 

Expiration
Date

 

Funded in
July 2012

 

Used
Commitment

 

Open
Commitment

 

Yield

 

Property
Type

 

Properties

 

Major
Operator

 

$2,500 (1)   

 

  12/31/12

 

$232

 

 

$2,431

 

 

$69

 

 

   8.50%

 

   Other

 

2

 

N/A

 

 


(1)          This commitment is a construction and term loan for capital improvements at two senior housing properties we own and lease to the borrower. Upon the earlier of the full funding of the commitment or December 31, 2012, construction distribution under this loan will cease and this loan will fully amortize to maturity in November 2017.

 

We sold 12-year senior unsecured notes in the aggregate amount of $85,800,000 to a group of institutional investors in a private placement transaction. The notes bear interest at 5.03%, mature on July 19, 2024 and have scheduled annual principal pay downs of $17,160,000 in years 8 through 12. We used a portion of the proceeds to pay down our Unsecured Credit Agreement and used the remaining proceeds to fund acquisitions.

 

We repaid $62,000,000 and borrowed $29,500,000 under our Unsecured Credit Agreement.  Accordingly, we had $35,500,000 outstanding under our Unsecured Credit Agreement with $204,500,000 available for borrowing.

 

21



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

We declared a monthly cash dividend of $0.145 per share on our common stock for the month of July 2012, payable on July 31, 2012, to stockholders of record on July 23, 2012. We increased the monthly dividend on our common stock to $0.155 per share which is a 6.9% increase from the previous monthly $0.145 per share dividend. We declared a $0.155 per share monthly dividend for the months of August and September 2012, payable on August 31 and September 28, 2012, to stockholders of record on August 23 and September 20, 2012.

 

Our Board of Directors terminated our share repurchase program enabling us to repurchase up to 5,000,000 shares of our equity securities, including common and preferred stock in the open market.

 

Our remaining limited partner exercised his conversion rights to exchange 3,294 partnership units in the limited partnership. At our discretion, we converted his partnership units into an equal number of our common shares.  The partnership conversion price is $17.00 per partnership unit.  We accounted for this exchange as an equity transaction because there was no change in control requiring consolidation or deconsolidation and remeasurement. After this conversion, we have reserved 20,000 shares of our common stock under this partnership agreement.

 

22



Table of Contents

 

Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

Statement Regarding Forward Looking Disclosure

 

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995.  Statements that are not purely historical may be forward-looking.  You can identify some of the forward-looking statements by their use of forward-looking words, such as ‘‘believes,’’ ‘‘expects,’’ ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘seeks,’’ ‘‘approximately,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘estimates’’ or ‘‘anticipates,’’ or the negative of those words or similar words.  Forward- looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position.  A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, the status of the economy, the status of capital markets (including prevailing interest rates), and our access to capital; the income and returns available from investments in health care related real estate, the ability of our borrowers and lessees to meet their obligations to us, our reliance on a few major operators; competition faced by our borrowers and lessees within the health care industry, regulation of the health care industry by federal, state and local governments, (including as a result of the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010), changes in Medicare and Medicaid reimbursement amounts (including due to federal and state budget constraints), compliance with and changes to regulations and payment policies within the health care industry, debt that we may incur and changes in financing terms, our ability to continue to qualify as a real estate investment trust, the relative illiquidity of our real estate investments, potential limitations on our remedies when mortgage loans default, and risks and liabilities in connection with properties owned through limited liability companies and partnerships.  For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under ‘‘Risk Factors’’ contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in our publicly available filings with the Securities and Exchange Commission.  We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise.

 

Executive Overview

 

Business

 

We are a self-administered health care real estate investment trust (or REIT) that invests primarily in senior housing and long term healthcare properties through mortgage loans, property lease transactions and other investments.  Our primary senior housing and long term healthcare property types include skilled nursing properties (or SNF), assisted living properties (or ALF), independent living properties (or ILF) and combinations thereof.  We have begun an initiative to develop purpose built, free-standing memory care properties designed to attract private-pay residents requiring dementia care services. In the second quarter of 2012, senior housing and long term healthcare properties comprised approximately 98% of our investment portfolio.  We have been operating since August 1992.

 

23



Table of Contents

 

The following table summarizes our direct real estate investment portfolio which consists of properties that we own or on which we hold promissory notes secured by first mortgages as of June 30, 2012 (dollar amounts in thousands):

 

 

 

 

 

 

 

Six Months Ended
June 30, 2012

 

Percentage

 

Number

 

Number of

 

Type of
Property

 

Gross
Investments

 

Percentage of
Investments

 

Rental
Income
 (1)

 

Interest
Income
 (2)

 

of
Revenues
 (3)

 

of
Properties
 (4)

 

SNF
Beds
(5)

 

ALF
Units
(5)

 

ILF
Units
(5)

 

Skilled Nursing

 

$402,093

 

50.7%

 

$20,790

 

$1,511

 

49.5%

 

87

 

10,137

 

 

 

Assisted Living

 

308,534

 

38.9%

 

16,546

 

1,277

 

39.6%

 

102

 

 

4,365

 

 

Other Senior Housing (6)

 

67,685

 

8.5%

 

3,915

 

175

 

9.1%

 

14

 

913

 

330

 

423

 

Schools

 

12,236

 

1.5%

 

796

 

 

1.8%

 

2

 

 

 

 

Under Development(7)

 

2,995

 

0.4%

 

 

 

0.0%

 

 

 

 

 

Totals

 

$793,543

 

100.0%

 

$42,047

 

$2,963

 

100.0%

 

205

 

11,050

 

4,695

 

423

 

 


(1)          Includes rental income from properties classified as held-for-sale.

(2)          Includes interest income from mortgage loans.

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

(4)          We have investments in 30 states leased or mortgaged to 40 different operators.

(5)          See Item 2. Properties for discussion of bed/unit count.

(6)          Other senior housing properties consist of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

(7)          We have two properties under development: 120-bed skilled nursing property in Texas which will replace an existing 90-bed skilled nursing property we own and 60-unit free-standing memory care property in Colorado.

 

As of June 30, 2012 we had $605.7 million in carrying value of net real estate investments, consisting of $556.3 million or 91.8% invested in owned properties and properties under development and $49.4 million or 8.2% invested in mortgage loans secured by first mortgages.

 

Subsequent to June 30, 2012, we purchased a 90-bed skilled nursing property located in Texas for an aggregate purchase price of $6.5 million.  Simultaneous with the purchase, we added the property to an existing master lease with an unrelated third-party operator at an incremental GAAP yield of 10.7%. We also purchased two 144-bed skilled nursing properties located in Ohio for an aggregate purchase price of $54.0 million.  Simultaneous with the purchase, we leased the properties to an unrelated third-party operator at a GAAP yield of 10.1%. The initial term of the lease is 15 years with two 5-year renewal options and annual rent escalations of the lesser of i) 2.25% for the first seven years and 2.50% for the remainder of the term or ii) a calculation based on the consumer price index.

 

For the six months ended June 30, 2012, rental income and interest income from mortgage loans represented 91.9% and 6.5%, respectively, of total gross revenues. In most instances, our lease structure contains fixed annual rental escalations, which are generally recognized on a straight-line basis over the minimum lease period.  Certain leases have annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property.  This revenue is not recognized until the appropriate contingencies have been resolved. For the six months ended June 30, 2012, we recorded $1.3 million in straight-line rental income and $16,000 of straight-line rent receivable reserve. At June 30, 2012, the straight-line rent receivable balance, net of reserves, for continuing and discontinued operations on the balance sheet was $25.1 million.

 

For leases in place at June 30, 2012 and the new leases from the properties acquired subsequent to June 30, 2012, assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio, we currently expect that straight-line rental income will decrease from $3.1 million for projected annual 2012 to $2.4 million for projected annual 2013 and, conversely, our cash rental income is projected to increase from $84.6 million for projected annual 2012 to $89.8 million for projected annual 2013.  During the six months ended June 30, 2012, we received $41.0 million of cash rental revenue and recorded amortization of lease inducement cost of $0.3 million. Many of our existing leases contain renewal options that could renew above or below current rent rates. For the six months ended June 30, 2012, we had no lease renewals.

 

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Our primary objectives are to sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in senior housing and long term care properties managed by experienced operators.  To meet these objectives, we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders and diversify our investment portfolio by geographic location, operator and form of investment.  We opportunistically consider investments in health care facilities in related businesses where the business model is similar to our existing model and the opportunity provides an attractive expected return.  Consistent with this strategy, we pursue, from time to time, opportunities for potential acquisitions and investments, with due diligence and negotiations often at different stages of development at any particular time.

 

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

 

·                 For assisted living and independent living investments we have attempted to diversify our portfolio both geographically and across product levels.  Thus, we believe that although the majority of our investments are in affordably priced units, our portfolio also includes a significant number of upscale units in appropriate markets with certain operators.

 

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

 

Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable.  Our investments in mortgage loans and owned properties represent our primary source of liquidity to fund distributions and are dependent upon the performance of the operators on their lease and loan obligations and the rates earned thereon.  To the extent that the operators experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.  To mitigate this risk, we monitor our investments through a variety of methods determined by the type of health care facility and operator.  Our monitoring process includes periodic review of financial statements for each facility, periodic review of operator credit, scheduled property inspections and review of covenant compliance relating to real estate taxes and insurance.

 

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

 

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

 

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At June 30, 2012, we had $10.3 million of cash on hand, $172.0 million available under our $240.0 million Unsecured Credit Agreement and $100.0 million available under the uncommitted private shelf agreement. Subsequent to June 30, 2012, we sold $85.8 million aggregate principal amount of 5.03% senior unsecured term notes in a private placement transaction. The notes have a 12-year maturity and a 10-year average life. We used the proceeds to paydown our unsecured line of credit and to fund acquisitions. Additionally, we have the ability to access the capital markets through the issuance of $64.6 million of common stock under our equity distribution agreement and through the issuance of debt and/or equity securities under our $167.6 million effective shelf registration.  As a result, we believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance some future investments should we determine such future investments are financially feasible.

 

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

 

Healthcare Regulatory Climate

 

The Centers for Medicare & Medicaid Services (or CMS) annually updates Medicare skilled nursing facility prospective payment system rates and other policies. On July 29, 2011, CMS issued its final rule updating Medicare skilled nursing facility rates for fiscal year 2012, which began on October 1, 2011.  Under the final rule, average rates have been reduced by 11.1%, or $3.87 billion, compared to fiscal year 2011 levels. CMS has stated that the rate reduction is needed to recalibrate skilled nursing facility payment rates to correct what CMS characterizes as an “unintended spike” in payments in fiscal year 2011, when CMS implemented the Resource Utilization Groups, version four (or RUG-IV) patient classification system.  Although CMS intended implementation of RUG-IV to be budget-neutral, CMS has taken the position that claims under the updated system show a significant increase in Medicare expenditures, in part because the proportion of patients grouped in the highest-paying RUG therapy categories greatly exceeded CMS expectations.  CMS is applying a 12.6% recalibration reduction, which is partially offset by a 1.7% standard rate update (which represents a 2.7% market basket update reduced by a 1.0 percentage point “multifactor productivity adjustment” mandated by the Affordable Care Act). In addition, on July 11, 2012, CMS published a proposed rule that would, among other things, codify provisions of section 3201 of the Middle Class Tax Extension and Job Creation Act of 2012 that requires reductions in bad debt reimbursement to all providers, suppliers, and other entities eligible to receive bad debt reimbursement.  These reductions will gradually reduce the amount Medicare skilled nursing facilities can claim as bad debt to 65% of allowable bad debt by fiscal year 2015. There can be no assurance that this rule or any future reductions in Medicare skilled nursing facility payment rates would not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.

 

In March 2010, the President signed into law the Patient Protection and Affordable Care Act, which subsequently was amended by the Health Care and Education and Reconciliation Act of 2010 (collectively referred to as the “Affordable Care Act”).  The Affordable Care Act is designed to expand access to affordable health insurance, contain health care costs, and institute a variety of health policy reforms.  The provisions of the sweeping law may affect us directly, as well as impact our lessees and borrowers.  While certain provisions, such as expanding the insured population, may positively impact the revenues of our lessees and borrowers, other provisions, particularly those intended to reduce federal health care spending, could have a negative impact on our lessees and borrowers.  Among other things, the Affordable Care Act:  reduces Medicare skilled nursing facility reimbursement by a so-called “productivity adjustment” based on economy-wide productivity gains beginning in fiscal year 2012 (as noted above); requires the development of a value-based purchasing program for Medicare skilled nursing facility services; establishes a national voluntary pilot program to bundle Medicare payments for hospital and post-acute services that could lead to

 

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changes in the delivery of post-acute services; and provides incentives to state Medicaid programs to promote community-based care as an alternative to institutional long term care services.  The Affordable Care Act also includes provisions intended to expand public disclosure about nursing home ownership and operations, institute mandatory compliance and quality assurance programs, increase penalties for noncompliance, and expand fraud and abuse enforcement and penalty provisions that could impact our operators.  In addition, the Affordable Care Act impacts both us and our lessees and borrowers as employers, including new requirements related to the health insurance we offer to our respective employees.  Many aspects of the Affordable Care Act are being implemented through new regulations and subregulatory guidance. We cannot predict at this time what effect, if any, the various provisions of the Affordable Care Act will have on our lessees and borrowers or our business. There can be no assurances, however, that the Affordable Care Act will not adversely impact the operations, cash flows or financial condition of our lessees and borrowers, which subsequently could materially adversely impact our revenue and operations.

 

On August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which increased the nation’s debt ceiling while taking steps to reduce the federal deficit.  Under this law, a bipartisan Joint Select Committee on Deficit Reduction was responsible for identifying $1.5 trillion in deficit reduction, which could include cuts in Medicare, Medicaid, and other federal spending and/or revenue increases.  The Committee failed to achieve consensus on deficit reduction measures. As a result, because no legislation was adopted to achieve deficit reduction targets by the statutory deadline, absent additional legislation, an enforcement mechanism known as sequestration will trigger a total of $1.2 trillion in spending reductions in January 2013, divided between domestic and defense spending.  Medicare provider payments will also be subject to sequestration, although the reductions will be capped at 2%.  There can be no assurances that federal spending reductions resulting from the Budget Control Act or other budget control mechanisms will not have an adverse impact on the financial condition of our lessees and borrowers, which subsequently could materially adversely impact our company.

 

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

 

Key Transactions

 

During the three months ended June 30, 2012, we purchased a vacant parcel of land in Colorado for $1.9 million. Simultaneous with the purchase, we entered into a lease agreement and development commitment in an amount not to exceed $7.9 million to fund the construction of a 60-unit free-standing memory care property.  Rent under the lease will begin upon the earlier of project completion or the improvement deadline of August 1, 2013.  Initial rent at the rate of 9.25% will be calculated based on the land purchase price and construction costs funded plus 9.0% compounded on each advance under the commitment from the disbursement date until the earlier of project completion or the improvement deadline.  The lease has an 11-year initial term, four 5-year renewal options and annual escalations of 2.5%.

 

Additionally, during the three months ended June 30, 2012, we amended our Unsecured Credit Agreement increasing the commitment to $240.0 million with the opportunity to increase the credit amount up to a total of $350.0 million. Additionally, the drawn pricing was decreased by 25 basis points, the undrawn pricing was decreased by 10 basis points and the maturity of the facility was extended for one additional year to May 25, 2016. The amendment also provides for a one-year extension option at our discretion, subject to customary conditions.  Based on our leverage ratios at June 30, 2012, the amended facility provides for interest annually at LIBOR plus 125 basis points and an unused commitment fee of 25 basis points.

 

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Key Performance Indicators, Trends and Uncertainties

 

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

 

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

 

 

 

Period Ended

 

 

6/30/12

 

3/31/12

 

12/31/11

 

9/30/11

 

6/30/11

Asset mix:

 

 

 

 

 

 

 

 

 

 

 

Real property

 

$743,297

 

$740,951

 

$725,031

 

$690,458

 

$679,806

 

Loans receivable

 

50,246

 

53,282

 

54,002

 

54,987

 

56,355

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment asset mix:

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing properties

 

$402,093

 

$404,721

 

$389,458

 

$357,271

 

$348,195

 

Assisted living properties

 

308,534

 

308,647

 

308,757

 

308,680

 

308,785

 

Other senior housing properties (1)

 

67,685

 

67,742

 

67,732

 

67,302

 

67,011

 

Schools

 

12,236

 

12,229

 

12,192

 

12,192

 

12,170

 

Under Development (2)

 

2,995

 

894

 

894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operator asset mix:

 

 

 

 

 

 

 

 

 

 

 

Extendicare (ALC)

 

$ 88,034

 

$ 88,034

 

$ 88,034

 

$ 88,034

 

$ 88,034

 

Preferred Care, Inc. (3)

 

85,075

 

85,245

 

88,309

 

88,471

 

88,324

 

Brookdale Communities

 

84,210

 

84,210

 

84,210

 

84,210

 

84,210

 

Remaining operators

 

536,224

 

536,744

 

518,480

 

484,730

 

475,593

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic mix:

 

 

 

 

 

 

 

 

 

 

 

Texas

 

$222,964

 

$223,245

 

$207,760

 

$191,965

 

$182,317

 

Florida

 

67,859

 

70,150

 

70,217

 

70,282

 

70,345

 

Ohio

 

56,804

 

56,804

 

56,804

 

56,804

 

56,804

 

California

 

51,701

 

51,916

 

52,036

 

34,653

 

34,767

 

New Mexico

 

49,114

 

48,876

 

48,876

 

48,876

 

48,876

 

Remaining states

 

345,101

 

343,242

 

343,340

 

342,865

 

343,052

 

 

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