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, 2014

 

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 30, 2014 was 34,844,551.

 

 

 



Table of Contents

 

LTC PROPERTIES, INC.

 

FORM 10-Q

 

June 30, 2014

 

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

18

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

32

 

 

Item 4. Controls and Procedures

32

 

 

 

 

PART II -- Other Information

 

 

 

Item 1. Legal Proceedings

33

 

 

Item 1A. Risk Factors

33

 

 

Item 6. Exhibits

34

 

2



Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, unaudited)

 

 

 

 

June 30, 2014

 

December 31, 2013

ASSETS

 

 

 

 

Real estate investments:

 

 

 

 

Land

 

$ 79,211

 

$ 80,993

Buildings and improvements

 

877,305

 

856,624

Accumulated depreciation and amortization

 

(228,323)

 

(218,700)

Net operating real estate property

 

728,193

 

718,917

Mortgage loans receivable, net of allowance for doubtful accounts: 2014 — $1,698; 2013 — $1,671

 

168,068

 

165,444

Real estate investments, net

 

896,261

 

884,361

 

 

 

 

 

Other assets:

 

 

 

 

Cash and cash equivalents

 

8,064

 

6,778

Debt issue costs, net

 

2,114

 

2,458

Interest receivable

 

655

 

702

Straight-line rent receivable, net of allowance for doubtful accounts: 2014 — $714; 2013 — $1,541

 

30,913

 

29,760

Prepaid expenses and other assets

 

6,569

 

6,756

Notes receivable

 

612

 

595

Total assets

 

$945,188

 

$931,410

 

 

 

 

 

LIABILITIES

 

 

 

 

Bank borrowings

 

$ 42,000

 

$ 21,000

Senior unsecured notes

 

251,633

 

255,800

Bonds payable

 

1,400

 

2,035

Accrued interest

 

3,450

 

3,424

Accrued expenses and other liabilities

 

14,429

 

16,713

Total liabilities

 

312,912

 

298,972

 

 

 

 

 

EQUITY

 

 

 

 

Stockholders’ equity:

 

 

 

 

Preferred stock $0.01 par value; 15,000 shares authorized; shares issued and outstanding: 2014 — 2,000; 2013 — 2,000

 

38,500

 

38,500

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding: 2014 —34,845; 2013 — 34,746

 

348

 

347

Capital in excess of par value

 

690,373

 

688,654

Cumulative net income

 

817,125

 

781,848

Accumulated other comprehensive income

 

99

 

117

Cumulative distributions

 

(914,169)

 

(877,028)

Total equity

 

632,276

 

632,438

Total liabilities and equity

 

$945,188

 

$931,410

 

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,

 

 

2014

 

2013

 

2014

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income

 

$25,025

 

$24,539

 

$50,277

 

$49,015

 

Interest income from mortgage loans

 

4,139

 

1,050

 

8,232

 

2,109

 

Interest and other income

 

63

 

92

 

156

 

185

 

Total revenues

 

29,227

 

25,681

 

58,665

 

51,309

 

Expenses:

 

 

 

 

 

 

 

 

 

Interest expense

 

3,088

 

2,798

 

6,275

 

5,931

 

Depreciation and amortization

 

6,302

 

6,124

 

12,600

 

12,250

 

General and administrative expenses

 

2,704

 

2,869

 

5,653

 

6,287

 

Total expenses

 

12,094

 

11,791

 

24,528

 

24,468

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

17,133

 

13,890

 

34,137

 

26,841

 

Gain on sale of real estate, net

 

1,140

 

 

1,140

 

 

Income from continuing operations

 

18,273

 

13,890

 

35,277

 

26,841

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

27

 

 

52

 

Loss on sale of real estate, net

 

 

(1,014)

 

 

(1,014

)

Net loss from discontinued operations

 

 

(987)

 

 

(962

)

 

 

 

 

 

 

 

 

 

 

Net income

 

18,273

 

12,903

 

35,277

 

25,879

 

 

 

 

 

 

 

 

 

 

 

Income allocated to participating securities

 

(117)

 

(91)

 

(220)

 

(189

)

Income allocated to preferred stockholders

 

(818)

 

(818)

 

(1,636)

 

(1,636

)

Net income available to common stockholders

 

$17,338

 

$11,994

 

$33,421

 

$24,054

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$0.50

 

$0.39

 

$0.97

 

$0.79

 

Discontinued operations

 

$0.00

 

($0.03)

 

$0.00

 

($0.03

)

Net income available to common stockholders

 

$0.50

 

$0.36

 

$0.97

 

$0.76

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$0.50

 

$0.39

 

$0.96

 

$0.79

 

Discontinued operations

 

$0.00

 

($0.03)

 

$0.00

 

($0.03

)

Net income available to common stockholders

 

$0.50

 

$0.36

 

$0.96

 

$0.76

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share

 

 

 

 

 

 

 

 

 

Basic

 

34,597

 

32,913

 

34,592

 

31,645

 

Diluted

 

36,621

 

32,946

 

36,617

 

31,679

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$0.510

 

$0.465

 

$1.020

 

$0.930

 

 

 

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,

 

 

2014

 

2013

 

2014

 

2013

Net income

 

$18,273

 

$12,903

 

$35,277

 

$25,879

Reclassification adjustment

 

(9)

 

(8)

 

(18)

 

(17)

Comprehensive income

 

$18,264

 

$12,895

 

$35,259

 

$25,862

 

 

See accompanying notes.

 

5



Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

 

 

 

 

Six Months Ended June 30,

 

 

2014

 

2013

OPERATING ACTIVITIES:

 

 

 

 

Net income

 

$35,277

 

$25,879

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

 

 

 

 

Depreciation and amortization (continuing and discontinued operations)

 

12,600

 

12,267

Stock-based compensation expense

 

1,449

 

1,508

(Gain) loss on sale of real estate, net

 

(1,140)

 

1,014

Straight-line rental income

 

(1,247)

 

(1,860)

Provision for doubtful accounts

 

38

 

19

Non-cash interest related to earn-out liabilities

 

 

220

Other non-cash items, net

 

745

 

712

Decrease in interest receivable

 

7

 

25

Increase in accrued interest payable

 

26

 

17

Net change in other assets and liabilities

 

(2,518)

 

(564)

Net cash provided by operating activities

 

45,237

 

39,237

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

Investment in real estate properties under development

 

(16,080)

 

(9,310)

Investment in real estate capital improvements

 

(11,448)

 

(4,506)

Capitalized interest

 

(742)

 

(500)

Proceeds from sale of real estate investments, net

 

7,707

 

1

Advances under mortgage loans receivable

 

(3,707)

 

(913)

Principal payments received on mortgage loans receivable

 

1,054

 

938

Advances under notes receivable

 

(89)

 

(510)

Principal payments received on notes receivable

 

72

 

2,413

Net cash used in investing activities

 

(23,233)

 

(12,387)

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

Bank borrowings

 

21,000

 

2,000

Repayment of bank borrowings

 

 

(117,500)

Principal payments on senior unsecured notes

 

(4,167)

 

Principal payments on bonds payable

 

(635)

 

(600)

Proceeds from common stock offering

 

 

176,301

Stock option exercises

 

277

 

523

Distributions paid to stockholders

 

(37,140)

 

(31,385)

Distributions paid to non-controlling interests

 

 

(7)

Financing costs paid

 

(46)

 

(35)

Other

 

(7)

 

(23)

Net cash (used in) provided by financing activities

 

(20,718)

 

29,274

 

 

 

 

 

Increase in cash and cash equivalents

 

1,286

 

56,124

Cash and cash equivalents, beginning of period

 

6,778

 

7,191

Cash and cash equivalents, end of period

 

$8,064

 

$63,315

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

Interest paid

 

$6,601

 

$6,040

 

 

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

 

We have prepared consolidated financial statements included herein without audit and in the opinion of management have included all adjustments necessary for a fair presentation of the consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (or SEC).  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (or GAAP) have been condensed or omitted pursuant to rules and regulations governing the presentation of interim financial statements.  The accompanying consolidated financial statements include the accounts of our company, its wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The results of operations for the six months ended June 30, 2014 and 2013 are not necessarily indicative of the results for a full year.

 

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

 

Impact of New Accounting Pronouncement.

 

In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (or ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in ASU 2014-08 change the criteria for reporting discontinued operations. Under ASU 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. ASU 2014-08 is effective in the first quarter of 2015 with early adoption permitted. We elected early adoption of ASU 2014-08 and have not reclassified results of operations for properties disposed subsequent to January 1, 2014 as discontinued operations as these disposals do not represent strategic shifts in our operations.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (or ASU 2014-09), Revenue from Contracts with Customers: Topic 606. ASU 2014-09 provides for a single comprehensive principles based standard for the recognition of revenue across all industries through the application of the following five-step process:

 

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

This GAAP update also requires expanded disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

 

7



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

2.                                    Real Estate Investments

 

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

 

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

 

Owned Properties. The following table summarizes our investments in owned properties at June 30, 2014 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Number

 

Number of

 

Investment

 

Type of Property

 

Gross
Investments

 

Percentage of
Investments

 

of
Properties 
(1)

 

SNF
Beds

 

ALF
Units

 

per
Bed/Unit

 

Skilled Nursing

 

$459,470

 

48.0%

 

68

 

8,264

 

 

$55.60

 

Assisted Living

 

405,048

 

42.4%

 

96

 

 

4,496

 

$90.09

 

Range of Care

 

43,906

 

4.6%

 

8

 

634

 

274

 

$48.35

 

Under Development (2)

 

37,659

 

3.9%

 

 

 

 

 

Other (3)

 

10,433

 

1.1%

 

1

 

 

 

 

Totals

 

$956,516

 

100.0%

 

173

 

8,898

 

4,770

 

 

 

 

 

 

(1)          We own properties in 26 states that are leased to 31 different operators.

(2)          Includes three MC developments with a total of 168 units, a combination ALF and MC development with 81 units, and a SNF development with 143 beds.

(3)          Includes one school property and four parcels of land held-for-use.

 

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

 

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

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

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

(iv)        specific dollar increases.

 

During the three months ended June 30, 2014, we sold two assisted living properties located in Florida and Georgia with a total of 133 units and one school property located in Minnesota for a combined sales price of $7,850,000, resulting in net sales proceeds of $7,707,000, and a net gain on sale of $1,140,000. During the six months ended June 30, 2013, we sold a 47-bed skilled nursing property in Colorado for $1,000 and recognized a $1,014,000 loss on sale.

 

We have a commitment to provide, under certain conditions, up to $5,000,000 per year through December 2014 to an existing operator for expansion of the 37 properties they lease from us. The estimated yield of this commitment is 9.5% plus the positive difference, if any, between the average yields on the U.S. Treasury 10-year note for the five days prior to funding, minus 420 basis points. As of June 30, 2014, no funds have been requested under this commitment and it is highly unlikely any funds will be expended based on the lease termination date.

 

8



Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Excluding the $5,000,000 per year commitment above, the following table summarizes our investment commitments as of June 30, 2014 and year-to-date funding on our development, redevelopment, renovation, and expansion projects (excludes capitalized interest, dollar amounts in thousands):

 

Type of Property

 

Investment
Commitment

 

2014
Funding 
(2)

 

Commitment
Funded

 

Remaining
Commitment

 

Number of
Properties

 

Number of
Beds/Units

 

 

Skilled

 

$30,150

 

$  4,290

 

$17,047

 

$13,103

 

7

 

760

 

 

Assisted Living (1)

 

50,656

 

22,788

 

33,449

 

17,207

 

7

 

385

 

 

Totals

 

$80,806

 

$27,078(3)

 

$50,496(4)

 

$30,310(3)

 

14

 

1,145

 

 

 

 

(1)          Includes the development of three MC properties for a total commitment of $30,256, one ALF/MC property for a total commitment of $5,800, and the expansion of three ALFs for a total commitment of $14,600.

(2)          Excludes funding for a completed development of $450.

(3)          In July 2014, we funded $2,794 under investment commitments. Accordingly, we have a remaining commitment of $27,516.

(4)          Includes land purchase and completed projects with remaining commitment funding and excludes capitalized interest.

 

Our construction in progress (or CIP) activity during the six months ended June 30, 2014 for our development, redevelopment, renovation, and expansion projects is as follows (dollar amounts in thousands):

 

Properties

 

Projects

 

CIP
Balance at
12/31/13

 

Funded(1)

 

Capitalized
Interest

 

Conversions
out of CIP

 

CIP
Balance at
6/30/14

 

Development projects:

 

 

 

 

 

 

 

 

 

 

 

 

 

Assisted living

 

5

 

$  6,334

 

$12,051

 

$335

 

$     (8)

 

$18,712

 

Skilled nursing

 

1

 

5,893

 

3,579

 

261

 

 

9,733

 

Subtotal

 

6

 

12,227

 

15,630

 

596

 

(8)

 

28,445

 

Redevelopment, renovation and expansion projects:

 

 

 

 

 

 

 

 

 

Assisted living

 

3

 

8

 

10,737

 

146

 

 

10,891

 

Skilled nursing

 

5

 

2,433

 

711

 

 

(1,433)

 

1,711

 

Subtotal

 

8

 

2,441

 

11,448

 

146

 

(1,433)

 

12,602

 

Total

 

14

 

$14,668

 

$27,078

 

$742

 

$(1,441)

 

$41,047(2)

 

 


(1)          Excludes $450 of capital improvement commitment funding on a completed project which was capitalized directly into building.

(2)          Includes capitalized interest and excludes completed projects.

 

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at June 30, 2014 (dollar amounts in thousands):

 

 

 

 

 

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(2)

 

$155,287

 

91.5%

 

16

 

33

 

3,919

 

 

$39.62

 

Assisted Living

 

12,018

 

7.1%

 

3

 

8

 

 

211

 

$56.96

 

Range of Care

 

2,461

 

1.4%

 

1

 

1

 

99

 

74

 

$14.23

 

Totals

 

$169,766

 

100.0%

 

20

 

42

 

4,018

 

285

 

 

 

 


(1)          We have investments in properties located in 9 states that include mortgages to 12 different operators.

(2)          Includes a mortgage and construction loan secured by a closed skilled nursing property and a newly constructed 106-bed replacement property.

 

At June 30, 2014, the mortgage loans had interest rates ranging from 7.1% to 13.6% and maturities ranging from 2014 to 2043.  In addition, some loans contain certain guarantees, provide for certain facility fees and generally have 20-year to 30-year amortization schedules.  The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points.

 

During the six months ended June 30, 2014 and 2013, we received $1,054,000 and $938,000, respectively, in regularly scheduled principal payments. Additionally, during the six months ended June 30, 2014 and 2013, we funded $3,010,000 and $913,000, respectively, under a $10,600,000 mortgage and construction loan. This mortgage and construction loan has been fully funded with no remaining commitments and is secured by a skilled nursing property and a newly constructed 106-bed replacement skilled nursing property. The residents of the old skilled nursing property were relocated to the newly

 

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(Unaudited)

 

constructed 106-bed replacement skilled nursing property. The borrower closed the old skilled nursing property and is responsible for marketing and selling it. In July 2014, we funded a $3,027,000 mortgage loan secured by a 100-unit independent living property in Arizona. The loan is for a term of five years and bears interest at 7.0%, escalating 0.25% annually. During the six months ended June 30, 2014, we funded $697,000 under a $12,000,000 capital improvement commitment to an existing borrower and we have a remaining commitment of $11,303,000 at June 30, 2014.

 

3.                                    Notes Receivable

 

Notes receivable consists of various loans and line of credit agreements with certain operators. During the six months ended June 30, 2014, we received $72,000 and funded $89,000 in principal under these notes. In the comparable 2013 period, we received $2,413,000 in principal payments which included $2,372,000 for the early repayment of an 8.5% term loan. Also, during the six months ended June 30, 2013, we funded $510,000 under these notes.

 

At June 30, 2014, we had eight loans and line of credit agreements with a total commitment to fund $2,678,000. As of June 30, 2014, we funded $612,000 under these commitments and we have a remaining commitment of $2,066,000. The weighted average interest rate of these loans is 11.8%. In July 2014, we funded an additional $182,000 under these commitments and we have a remaining commitment of $1,884,000.

 

4.                                    Debt Obligations

 

Bank Borrowings. We have an Unsecured Credit Agreement that provides for a revolving line of credit up to $240,000,000 with the opportunity to increase the credit amount up to a total of $350,000,000. The Unsecured Credit Agreement matures on May 25, 2016 and provides for a one-year extension option at our discretion, subject to customary conditions. Based on our leverage at June 30, 2014, the 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, 2014, we borrowed $21,000,000 under our Unsecured Credit Agreement. At June 30, 2014, we had $42,000,000 outstanding and $198,000,000 available for borrowing. In July 2014, we borrowed $5,000,000 under our Unsecured Credit Agreement. Accordingly we have $47,000,000 outstanding and $193,000,000 available for borrowing. At June 30, 2014, we were in compliance with all covenants.

 

Senior Unsecured Notes.  At June 30, 2014 and December 31, 2013, we had $251,633,000 and $255,800,000, respectively, outstanding under our Senior Unsecured Notes with a weighted average interest rate of 4.8%. During the six months ended June 30, 2014, we paid $4,167,000 in regularly scheduled principal payments. At June 30, 2014, we had $30,000,000 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.

 

In July 2014, we locked rate on the sale of $30,000,000 senior unsecured term notes to affiliates and managed accounts of Prudential Investment Management, Inc. under our Amended and Restated Note Purchase and Private Shelf agreement. These notes will bear interest at 4.5% and mature on July 31, 2026. We anticipate funding to occur during the third quarter of 2014 and expect to use proceeds to pay down our unsecured revolving line of credit.

 

Bonds Payable.  At June 30, 2014 and December 31, 2013, we had outstanding principal of $1,400,000 and $2,035,000 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 will mature during 2015.  For the six months ended June 30, 2014, the weighted average interest rate, including letter of credit

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

fees, on the outstanding bonds was 3.3%.  During the six months ended June 30, 2014 and 2013, we paid $635,000 and $600,000, respectively, in regularly scheduled principal payments.  As of June 30, 2014 and December 31, 2013, the aggregate carrying value of real estate properties securing our bonds payable was $6,254,000 and $6,386,000, respectively.

 

5.                                    Equity

 

Equity activity was as follows (in thousands):

 

 

 

Total
Equity

Balance at December 31, 2013

 

$632,438

 

Net income

 

35,277

 

Vested Stock option and restricted common stock vesting

 

1,449

 

Stock option exercise

 

277

 

Reclassification adjustment

 

(18

)

Preferred stock dividends

 

(1,636

)

Common stock dividends

 

(35,504

)

Other

 

(7

)

Balance at June 30, 2014

 

$632,276

 

 

Preferred Stock.  At June 30, 2014, 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, 2014.

 

Common Stock.  During the six months ended June 30, 2014 and 2013, we acquired 200 shares and 600 shares, respectively, of common stock held by employees who tendered owned shares to satisfy tax withholding obligations. During the six months ended June 30, 2013, we sold 4,025,000 shares of common stock at a price of $44.50 per share, before fees and costs of $7,707,000, in a public offering.  The net proceeds of $171,406,000 were used to pay down amounts outstanding under our Unsecured Credit Agreement, to fund our current development commitments and general corporate purposes.

 

We had an equity distribution agreement which allowed us to issue and sell, from time to time, up to $85,686,000 in aggregate offering price of our common shares.  Sales of common shares were made by means of ordinary brokers’ transactions at market prices, in block transactions, or as otherwise agreed between us and our sales agents. During the six months ended June 31, 2013, we sold 126,742 shares of common stock for $4,895,000 in net proceeds under our equity distribution agreement. In conjunction with the sale of common stock, during 2013, we reclassified $662,000 of accumulated costs associated with the equity distribution agreement to additional paid in capital.

 

Available Shelf Registrations.  On July 19, 2013, we filed a Form S-3ASR “shelf” registration statement to replace our prior shelf registration statement.  This current shelf registration statement provides us with the capacity to offer up to $800,000,000 in common stock, preferred stock, warrants, debt, depositary shares, or units.  We may from time to time raise capital under this current shelf registration in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering.

 

Non-controlling Interests. We currently have no limited partners. During 2012, we had one limited partnership. The limited partnership agreement allowed the limited partners to convert, on a one-for-one basis, their limited partnership units into shares of common stock or the cash equivalent, at our option. Since we exercised control, we consolidated the limited partnership and we carried the non-controlling interests at cost. During the six months ended June 30, 2013, we paid $7,000 of accrued distributions to our former limited partners.

 

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(Unaudited)

 

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

 

 

 

 

Six months ended June 30, 2014

 

Six months ended June 30, 2013

 

 

 

 

 

Declared

 

Paid

 

Declared

 

Paid

 

 

 

Preferred Stock Series C

 

$     1,636

 

$     1,636

 

$   1,636

 

$   1,636

 

 

 

Common Stock(1)

 

35,504

 

35,504

 

29,749

 

29,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$37,140

 

$37,140

 

$31,385

 

$31,385

 

 

 

 

(1)          Represents $0.17 per share per month and $0.155 per share per month for the six months ended June 30, 2014 and 2013, respectively.

 

In July 2014, we declared a monthly cash dividend of $0.17 per share on our common stock for the months of July, August and September, payable on July 31, August 29, and September 30, 2014, respectively, to stockholders of record on July 23, August 21, and September 22, 2014, respectively.

 

Accumulated Other Comprehensive Income.  At June 30, 2014 and December 31, 2013, accumulated comprehensive income of $99,000 and $117,000, respectively, represents the net unrealized holding gains on available-for-sale REMIC Certificates recorded in 2005 when we repurchased the loans in the underlying loan pool.  This amount is being amortized to increase interest income over the remaining life of the loans that we repurchased from the REMIC Pool.

 

Stock-Based Compensation.  During the six months ended June 30, 2014, a total of 11,666 stock options were exercised at a total option value of $277,000 and a total market value on the date of exercise of $455,000. In the comparable 2013 period, a total of 22,000 stock options were exercised at a total option value of $523,000 and a total market value on the date of exercise of $865,000. During the six months ended June 30, 2014, we granted 15,000 options to purchase common stock at an exercise price of $38.43 per share.  These stock options vest ratably over a three-year period from the grant date.  No stock options were granted during the six months ended June 30, 2013. At June 30, 2014, we had 76,668 stock options outstanding and 61,668 stock options are exercisable.

 

At June 30, 2014, the total number of stock options that are scheduled to vest through December 31, 2014, 2015, 2016 and 2017 is 0; 5,000; 5,000 and 5,000, respectively.  We have no stock options outstanding that are scheduled to vest beyond 2017. Compensation expense related to the vesting of stock options for the three and six months ended June 30, 2014 was $4,000 and $5,000. We did not record compensation expense related to the vesting of stock options for the six months ended June 30, 2013. The remaining compensation expense to be recognized related to the future service period of unvested outstanding stock options for 2014, 2015, 2016 and 2017 is $7,000; $15,000; $15,000 and $2,000, respectively.

 

During the three months ended June 30, 2014, we granted 25,500 shares of restricted common stock at $40.05 per share. Of these restricted common shares, 15,000 vest ratably from the grant date over a three-year period and 10,500 vest over a one-year period from the grant date. During the six months ended June 30, 2014, excluding the shares granted above, we granted 59,000 shares of restricted common stock at $36.81 per share and 3,000 shares of restricted common stock at $38.43 per share. These shares vest ratably over a three-year period from the grant date.

 

At June 30, 2014, we had 240,381 restricted common shares outstanding. The total number of restricted common shares that are scheduled to vest through December 31, 2014, 2015, 2016 and 2017 is 33,713; 110,211; 66,726 and 29,731, respectively.  We have no restricted common stock that are scheduled to vest beyond 2017. During the three and six months ended June 30, 2014, we recognized $779,000 and $1,444,000 respectively, of compensation expense related to the vesting of restricted common stock. The remaining compensation expense to be recognized related to the future service period of unvested outstanding restricted common stock for 2014, 2015, 2016, and 2017 is $1,745,000; $2,484,000; $1,262,000 and $190,000, respectively.

 

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(Unaudited)

 

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

 

6.                                    Commitments and Contingencies

 

At June 30, 2014, we had outstanding commitments totaling $80,806,000 to develop, re-develop, renovate or expand senior housing and long-term health care properties. As of June 30, 2014, we have funded $50,496,000 under these commitments and we have a remaining commitment of $30,310,000. In July 2014, we funded $2,794,000 under investment commitments. Accordingly, we have a remaining commitment of $27,516,000. We also have a commitment to provide, under certain conditions, up to $5,000,000 per year through December 2014 to an existing operator for expansion of the 37 properties they lease from us. See Note 2. Real Estate Investments for further discussion of these commitments.

 

Additionally at June 30, 2014, we have a commitment to provide an existing borrower $12,000,000 for capital improvements. As of June 30, 2014, we funded $697,000 under the capital improvement commitment and we have a remaining commitment of $11,303,000. We also provided this borrower a commitment to borrow up to an additional $40,000,000 of loan proceeds under certain conditions and based on certain operating metrics and valuation thresholds. Since these conditions have not been met, no funding has been made under this additional loan commitment.

 

At June 30, 2014, we committed to provide $2,678,000 in loans and line of credit agreements. As of June 30, 2014, we had funded $612,000 under these commitments and we have a remaining commitment of $2,066,000. In July 2014, we funded an additional $182,000 under these commitments and we have a remaining commitment of $1,884,000. See Note 3. Notes Receivable for further discussion of these commitments.

 

As part of an acquisition in 2011, we committed to provide a contingent payment if certain operational thresholds are met.  The contingent payment was recorded at fair value, which was estimated using a discounted cash flow analysis, and we were accreting the contingent liability to the settlement amount as of the payment date. During the third quarter of 2013, we paid $7,000,000 related to the contingent liability. Accordingly, we have no remaining contingent liability as of June 30, 2014. During the three and six months ended June 30, 2013, we recorded non-cash interest expense of $110,000 and $220,000, respectively, related to the contingent liability.

 

7.                                    Major Operators

 

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

 

Prestige Healthcare (or Prestige) is a privately held company and operates 15 skilled nursing properties and two range of care properties that we own or on which we hold a mortgage secured by first trust deeds. These properties consist of a total of 2,176 skilled nursing beds and 93 assisted living units. Additionally, Prestige manages four parcels of land that we own. These assets represent 14.4% or $135,732,000, of our total assets at June 30, 2014 and generated 11.2% of our combined rental revenue and interest income from mortgage loans recognized for the six months ended June 30, 2014.

 

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(Unaudited)

 

Senior Care Centers, LLC (or Senior Care) is a privately held company. Senior Care leases nine skilled nursing properties with a total of 1,190 beds owned by us representing approximately 10.9%, or $103,188,000, of our total assets at June 30, 2014 and generated 10.5% of our combined rental revenue and interest income from mortgage loans recognized for the six months ended June 30, 2014.

 

Our master lease with Extendicare, Inc. (or Extendicare) and Enlivant (formerly known as Assisted Living Concepts, LLC) covering 37 assisted living properties with a total of 1,429 units will expire on December 31, 2014. In 2013, Enlivant merged with Aid Holdings, LLC, a Delaware limited liability company (or Aid Holdings), and Aid Merger Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of Aid Holdings (or Aid Merger Sub). Aid Holdings and Aid Merger Sub are affiliates of TPG Capital, L.P. For the six months ended June 30, 2014, this portfolio generated approximately $5,482,000 or 9.4% of our combined rental revenue and interest income from mortgage loans. There can be no assurance that we will be able to re-lease these communities on a timely basis, if at all, or that the new rents will be the same as the current rents. In January 2014, we retained CS Capital Advisors, LLC, as our advisors, to assist in repositioning these properties through new leases with other operators or strategically offering certain properties for sale.

 

Our financial position and ability to make distributions may be adversely affected by financial difficulties experienced by Prestige Healthcare, Senior 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

8.                                    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,

 

 

 

 

2014

 

 

 

2013

 

 

 

2014

 

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

$18,273

 

 

 

$13,890

 

 

 

$35,277

 

 

 

$26,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less net income allocated to participating securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonforfeitable dividends on participating securities

 

 

(117)

 

 

 

(91)

 

 

 

(220)

 

 

 

(189)

 

Total net income allocated to participating securities

 

 

(117)

 

 

 

(91)

 

 

 

(220)

 

 

 

(189)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less net income allocated to preferred stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

(818)

 

 

 

(818)

 

 

 

(1,636)

 

 

 

(1,636)

 

Total net income allocated to preferred stockholders

 

 

(818)

 

 

 

(818)

 

 

 

(1,636)

 

 

 

(1,636)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available to common stockholders

 

 

17,338

 

 

 

12,981

 

 

 

33,421

 

 

 

25,016

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

 

 

27

 

 

 

 

 

 

52

 

Loss on sale of real estate, net

 

 

 

 

 

(1,014)

 

 

 

 

 

 

(1,014)

 

Total net loss from discontinued operations

 

 

 

 

 

(987)

 

 

 

 

 

 

(962)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

 

17,338

 

 

 

11,994

 

 

 

33,421

 

 

 

24,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred securities

 

 

818

 

 

 

 

 

 

1,636

 

 

 

 

Net income for diluted net income per share

 

 

$18,156

 

 

 

$11,994

 

 

 

$35,057

 

 

 

$24,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares for basic net income per share

 

 

34,597

 

 

 

32,913

 

 

 

34,592

 

 

 

31,645

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

24

 

 

 

33

 

 

 

25

 

 

 

34

 

Convertible preferred securities

 

 

2,000

 

 

 

 

 

 

2,000

 

 

 

 

Shares for diluted net income per share

 

 

36,621

 

 

 

32,946

 

 

 

36,617

 

 

 

31,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

 

$0.50

 

 

 

$0.36

 

 

 

$0.97

 

 

 

$0.76

 

Diluted net income per share (1)

 

 

$0.50

 

 

 

$0.36

 

 

 

$0.96

 

 

 

$0.76

 

 


(1)          For the three and six months ended June 30, 2014, the participating securities have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.  For the three and six months ended June 30, 2013, the Series C Cumulative Convertible Preferred Stock and the participating securities have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

9.                                   Fair Value Measurements

 

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

 

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.  We do not invest our cash in auction rate securities.  The carrying value and fair value of our financial instruments as of June 30, 2014 and December 31, 2013 assuming election of fair value for our financial assets and financial liabilities were as follows (in thousands):

 

 

 

 

At June 30, 2014

 

At December 31, 2013

 

 

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 

Mortgage loans receivable

 

$168,068

 

$196,275(1)

 

$165,444

 

$200,248(1)

 

 

 

Bonds payable

 

1,400

 

1,400 (2)

 

2,035

 

2,035(2)

 

 

 

Bank borrowings

 

42,000

 

42,000 (2)

 

21,000

 

21,000 (2)

 

 

 

Senior unsecured notes

 

251,633

 

260,980(3)

 

255,800

 

262,351(3)

 

 

 

 

(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, 2014 and December 31, 2013 was 8.5% and 8.4%, respectively.

 

(2)          Our bonds payable and bank borrowings are at a variable interest rate.  The estimated fair value of our bonds payable and bank borrowings approximated their carrying values at June 30, 2014 and December 31, 2013 based upon prevailing market interest rates for similar debt arrangements.

 

(3)          Our obligation under our senior unsecured notes is classified as Level 3 and thus the fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows.  The discount rate is measured based upon management’s estimates of rates currently prevailing for comparable loans available to us, and instruments of comparable maturities.  At June 30, 2014, the discount rate used to value our future cash outflow of our senior unsecured notes was 3.80% for those maturing before year 2020 and 3.95% for those maturing beyond year 2020. At December 31, 2013, the discount rate used to value our future cash outflow of our senior unsecured notes was 3.95% for those maturing before year 2020 and 4.25% for those maturing beyond year 2020.

 

10.                            Subsequent Events

 

Subsequent to June 30, 2014 the following events occurred.

 

Real Estate – Owned Properties: We funded $2,794,000 under ongoing real estate investment commitments. Accordingly, we have a remaining commitment of $27,516,000. See Note 2. Real Estate Investments for further discussion on the commitments.

 

Real Estate – Mortgage Loans:  We funded a $3,027,000 mortgage loan secured by a 100-unit independent living property in Arizona.  See Note 2. Real Estate Investments for further discussion of the mortgage loan funding.

 

Notes Receivable:  We funded $182,000 under loans and line of credit agreements with a remaining commitment of $1,884,000. See Note 3. Notes Receivable for further discussion of these commitments.

 

Debt Obligations:  We locked rate on the sale of $30,000,000 senior unsecured term notes to affiliates and managed accounts of Prudential Investment Management, Inc. under our Amended and Restated Note Purchase and Private Shelf agreement. These notes will bear interest at 4.5% and will mature on July 31, 2026. We anticipate funding to occur during the third quarter of 2014 and expect to use proceeds to pay down our unsecured revolving line of credit. See Note 4. Debt Obligations for further discussion.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

Equity:  We declared a monthly cash dividend of $0.17 per share on our common stock for the months of July, August and September, payable on July 31, August 29, and September 30, 2014, respectively, to stockholders of record on July 23, August 21, and September 22, 2014, respectively.

 

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

 

Statement Regarding Forward Looking Disclosure

 

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995.  Statements that are not purely historical may be forward-looking.  You can identify some of the forward-looking statements by their use of forward-looking words, such as ‘‘believes,’’ ‘‘expects,’’ ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘seeks,’’ ‘‘approximately,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘estimates’’ or ‘‘anticipates,’’ or the negative of those words or similar words.  Forward- looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position.  A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, the status of the economy; the status of capital markets (including prevailing interest rates) and our access to capital; the income and returns available from investments in health care related real estate (including our ability to re-lease properties upon expiration of a lease term); the ability of our borrowers and lessees to meet their obligations to us; our reliance on a few major operators; competition faced by our borrowers and lessees within the health care industry; regulation of the health care industry by federal, state and local governments (including as a result of the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010); changes in Medicare and Medicaid reimbursement amounts (including due to federal and state budget constraints); compliance with and changes to regulations and payment policies within the health care industry; debt that we may incur and changes in financing terms; our ability to continue to qualify as a real estate investment trust; the relative illiquidity of our real estate investments; potential limitations on our remedies when mortgage loans default; and risks and liabilities in connection with properties owned through limited liability companies and partnerships.  For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under ‘‘Risk Factors’’ contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and in our publicly available filings with the Securities and Exchange Commission.  We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise.

 

Executive Overview

 

Business

 

We are a self-administered health care real estate investment trust (or REIT) that invests primarily in senior housing and long-term health care properties through acquisitions, development, mortgage loans and other investments. We conduct and manage our business as one operating segment, rather than multiple operating segments, for internal reporting and internal decision making purposes. Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in senior housing and long-term health care properties managed by experienced operators. Our primary senior housing and long-term health care property types include skilled nursing properties (or SNF), assisted living properties (or ALF), independent living properties (or ILF), memory care properties (or MC) and combinations thereof. ALF, ILF, MC, and combinations thereof are included in the ALF property type. Range of care properties (or ROC) property type consists of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services.  As of June 30, 2014, senior housing and long-term health care properties comprised approximately 99% of our investment portfolio.  We have been operating since August 1992.

 

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The following table summarizes our real estate investment portfolio as of June 30, 2014 (dollar amounts in thousands):

 

 

 

 

 

 

 

Six Months Ended
June 30, 2014

 

Percentage

 

Number

 

Number of

Type of Property

 

Gross
Investments

 

Percentage of
Investments

 

Rental
Income
(1)

 

Interest
Income
(2)

 

of
Revenues
(3)

 

of
Properties
(4)

 

SNF
Beds
(5)

 

ALF
Units
(5)

 

Skilled Nursing(6)

 

$614,757

 

54.6%

 

$25,674

 

$7,539

 

57.1%

 

101

 

12,183

 

 

Assisted Living

 

417,066

 

37.0%

 

21,050

 

547

 

37.2%

 

104

 

 

4,707

 

Range of Care

 

46,367

 

4.1%

 

2,506

 

146

 

4.6%

 

9

 

733

 

348

 

Under Development(7)

 

37,659

 

3.4%

 

 

 

0.0%

 

 

 

 

Other(8)

 

10,433

 

0.9%

 

647

 

 

1.1%

 

1

 

 

 

Totals

 

$1,126,282

 

100.0%

 

$49,877

 

$8,232

 

100.0%

 

215

 

12,916

 

5,055

 

 

 

 

(1)          Excludes rental income from properties sold during the six months ended June 30, 2014.

(2)          Includes interest income from mortgage loans.

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

(4)          We have investments in 29 states leased or mortgaged to 38 different operators.

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

(6)          Includes a mortgage and construction loan secured by a closed skilled nursing property and a newly constructed 106-bed replacement property.

(7)          Includes three MC developments with a total of 168 units, a combination ALF and MC development with 81 units, and a SNF development with 143 beds.

(8)          Includes one school property and four parcels of land held-for-use.

 

As of June 30, 2014 we had $896.3 million in carrying value of net real estate investments, consisting of $728.2 million or 81.2% invested in owned and leased properties and $168.1 million or 18.8% invested in mortgage loans secured by first mortgages.

 

For the six months ended June 30, 2014, rental income and interest income from mortgage loans represented 85.7% and 14.0%, 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, 2014, we recorded $1.2 million in straight-line rental income and $12,000 of straight-line rent receivable reserve. We currently expect that straight-line rental income will decrease from a projected $2.2 million in 2014 to a projected $1.8 million in 2015 and our cash rental income is projected to decrease from a projected $97.3 million in 2014 to a projected $84.6 million in 2015 for leases in place at June 30, 2014, excluding leases on non-accrual status and no modification or replacement of existing leases, no lease renewals including the Extendicare/ Enlivant lease, and no new leased investments are added to our portfolio. During the six months ended June 30, 2014, we received $49.4 million of cash rental revenue and recorded amortization of lease inducement cost of $0.3 million.  For the six months ended June 30, 2014, no leases were renewed.  At June 30, 2014, the straight-line rent receivable balance, net of reserves, on the balance sheet was $30.9 million.

 

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

 

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·                 With respect to skilled nursing properties, a primary component of our strategy is to invest in new or modernized properties operated by experienced, regionally-based operators demonstrating established relationships with local health care systems and managed care provider networks.  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.

 

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

 

In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk.  Some operating leases and loans are credit enhanced by guaranties and/or letters of credit.  In addition, operating leases are typically structured as master leases and loans 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 revolving 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 revolving line of credit, is expected to be provided through a combination of public and private offerings of debt and equity securities and secured and unsecured debt financing.  The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, especially to changes in interest rates.  Changes in the capital markets’ environment may impact the availability of cost-effective capital.

 

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

 

At June 30, 2014, we had $8.1 million of cash on hand, $198.0 million available under our unsecured revolving line of credit, and $30.0 million available under the uncommitted private shelf

 

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Table of Contents

 

agreement for our senior unsecured notes. Subsequent to June 30, 2014, we borrowed $5.0 million under our unsecured revolving line of credit. Accordingly we have $47.0 million outstanding and $193.0 million available for borrowing. Additionally, subsequent to June 30, 2014, we locked rate on the sale of $30.0 million senior unsecured term notes to affiliates and managed accounts of Prudential Investment Management, Inc. under our private shelf agreement which is now exhausted. We also have the potential ability to access the capital markets through the issuance of debt and/or equity securities under our $800.0 million effective shelf registration.  As a result, we believe our liquidity and various sources of available capital are sufficient to fund operations and development commitments, meet debt service obligations (both principal and interest), make dividend distributions and finance some future investments should we determine such future investments are financially feasible.

 

Health Care Regulatory Climate

 

The Centers for Medicare & Medicaid Services (or CMS) annually updates Medicare skilled nursing facility prospective payment system rates and other policies.  On August 6, 2013, CMS published its final Medicare skilled nursing facility payment rate update for fiscal year 2014, which began on October 1, 2013.  CMS estimates that the final rule will increase aggregate Medicare skilled nursing facility payments by $470 million, or 1.3%, compared to fiscal year 2013 levels.  Specifically, under the final rule, Medicare rates are updated to reflect a 2.3% market basket increase that is reduced by a 0.5 percentage point “multifactor productivity adjustment” (described below), and that is further reduced by a 0.5 percentage point forecast error correction.  CMS also rebased the skilled nursing facility market basket to reflect fiscal year 2010 data and made other policy changes. CMS released the final fiscal year 2015 Medicare skilled nursing facility payment update on July 31, 2014.  Under the final rule, Medicare rates will be updated by 2%, based on a 2.5% market basket increase that is reduced by a 0.5 percentage point multifactor productivity adjustment.  CMS estimates that the final rule will increase aggregate Medicare payments to skilled nursing facilities by $750 million. There can be no assurance that future regulations modifying Medicare skilled nursing facility payment rates will not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.

 

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

 

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Table of Contents

 

Under the terms of the Budget Control Act of 2011, as modified by the American Taxpayer Relief Act, President Obama issued a sequestration order on March 1, 2013 that mandates a 2% cut to Medicare payments to providers and health plans. The cuts generally apply to Medicare fee-for-service claims with dates-of-service or dates-of-discharge on or after April 1, 2013. As amended by subsequent legislation, the Medicare sequestration cuts are currently scheduled to be applied through fiscal year 2024, although Congress and the Administration could enact legislation to end or modify sequestration at any time. On April 1, 2014, President Obama signed into law H.R. 4302, the “Protecting Access to Medicare Act of 2014.”  Among other things, the Protecting Access to Medicare Act requires the Secretary of the Department of Health and Human Services to develop a skilled nursing facility “value-based purchasing program,” which will tie Medicare payments to skilled nursing facilities to their performance on certain new readmissions measures, applicable to services furnished beginning October 1, 2018. Congress and the Administration also could consider other legislation that would have the impact of reducing Medicare reimbursement for skilled nursing facilities and other Medicare providers, encouraging home and community-based long term care services as an alternative to institutional settings, or otherwise reforming payment policy for post-acute care services.  There can be no assurances that enacted or future budget control mechanisms will not have an adverse impact on the financial condition of our borrowers and lessees, which subsequently could materially adversely impact our company.

 

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

 

Key Performance Indicators, Trends and Uncertainties

 

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

 

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

 

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Table of Contents

 

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

 

 

 

 

6/30/14

 

3/31/14

 

12/31/13

 

9/30/13

 

6/30/13

 

Asset mix:

 

 

 

 

 

 

 

 

 

 

 

Real property

 

$956,516

 

$951,491

 

$937,617

 

$911,096

 

$913,042

 

Loans receivable(2)

 

  169,766

 

  169,163

 

  167,115

 

    41,079

 

    39,668

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment mix:

 

 

 

 

 

 

 

 

 

 

 

Skilled nursing properties

 

$614,757

 

$613,915

 

$611,160

 

$470,008

 

$478,751

 

Assisted living properties

 

  417,066

 

  419,298

 

  412,024

 

  409,285

 

  406,785

 

Range of care properties

 

    46,367

 

    46,439

 

    46,509

 

    46,577

 

    46,643

 

Under development

 

    37,659

 

    27,395

 

    21,432

 

    13,861

 

      8,087

 

Other(1)(2)

 

    10,433

 

    13,607

 

    13,607

 

    12,444

 

    12,444

 

 

 

 

 

 

 

 

 

 

 

 

 

Operator mix:

 

 

 

 

 

 

 

 

 

 

 

Prestige Healthcare(2)

 

$138,437

 

$137,739

 

$137,739

 

$  12,189

 

$  12,189

 

Senior Care Centers, LLC

 

  114,539

 

  114,539

 

  114,539

 

  114,539

 

  114,539

 

Brookdale Communities(3)

 

    95,101

 

    91,089

 

    84,219

 

    84,216

 

    84,212

 

Extendicare & Enlivant

 

    88,034

 

    88,034

 

    88,034

 

    88,034

 

    88,034

 

Juniper Communities, LLC

 

    87,088

 

    87,088

 

    87,088

 

    87,088

 

    87,088

 

Remaining operators

 

  603,083

 

  602,165

 

  593,113

 

  566,109

 

  566,648

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic mix:

 

 

 

 

 

 

 

 

 

 

 

Texas

 

$239,809

 

$239,158

 

$238,750

 

$238,036

 

$236,100

 

Michigan(2)

 

  126,247

 

  125,550

 

  125,550

 

          —

 

           —

 

Ohio

 

    98,647

 

    98,647

 

    98,647

 

    98,647(4)

 

  110,804

 

Colorado

 

    89,019

 

    78,258

 

    67,416

 

    63,416

 

    59,725

 

Florida(5)

 

    77,555

 

    82,046

 

    82,079

 

    67,710

 

    67,742

 

Remaining states

 

  495,005

 

  496,995

 

  492,290

 

  484,366

 

  478,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)          During the second quarter of 2014, we sold a school property. Accordingly, we had one school property and four parcels of land located adjacent to properties securing the Prestige Healthcare mortgage loan and are managed by Prestige Healthcare as of June 30, 2014.

 

(2)          During the fourth quarter of 2013, we funded a $124,387 mortgage loan with Prestige Healthcare secured by 15 skilled nursing properties with a total of 2,092 beds in Michigan. Additionally, we purchased four parcels of land located adjacent to properties securing this mortgage loan. These land parcels are managed by Prestige Healthcare.

 

(3)          On February 20, 2014, Brookdale Senior Living, Inc. (or Brookdale), parent company of Brookdale Senior Living Communities, Inc. (or Brookdale Communities), and Emeritus Corporation (or Emeritus) announced the signing of a definitive merger agreement to expand Brookdale’s unit capacity to a total of 112,700 units in 1,161 communities in 46 states. This transaction is expected to close in the third quarter of 2014.

 

(4)          Decrease due to the sale of six skilled nursing properties with a total of 230 beds.

 

(5)          During the second quarter of 2014, we sold two assisted living properties located in Florida and Georgia.

 

Our master lease with Extendicare and Enlivant covering 37 assisted living properties will expire on December 31, 2014.  For the six months ended June 30, 2014, this portfolio generated approximately $5.5 million or 9.4% of our combined rental revenue and interest income from mortgage loans. There can be no assurance that we will be able to re-lease these communities on a timely basis, if at all, or that the new rents will be the same as the current rents. In January 2014, we retained CS Capital Advisors, LLC, as our advisors, to assist in repositioning these properties through new leases with other operators or strategically offering certain properties for sale.

 

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Table of Contents

 

Credit Strength.  We measure our credit strength both in terms of leverage ratios and coverage ratios.  Our leverage ratios include debt to gross asset value and debt to market capitalization.  The leverage ratios indicate how much of our consolidated balance sheet capitalization is related to long term obligations.  Our coverage ratios include interest coverage ratio and fixed charge coverage ratio.  The coverage ratios indicate our ability to service interest and fixed charges (interest plus preferred dividends).  The coverage ratios are based on adjusted earnings before gain on sale of real estate, interest, taxes, depreciation and amortization (or Adjusted EBITDA).  Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies.  The following table reflects the recent historical trends for our credit strength measures:

 

Balance Sheet Metrics

 

 

 

Year to Date

 

Quarter Ended

 

 

 

6/30/14

 

6/30/14

 

3/31/14

 

12/31/13

 

9/30/13

 

6/30/13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt to gross asset value

 

25.1%

 

25.1%

 

25.2%

(2)

24.2%

(3)

17.8%

 

17.8%

 

Debt & preferred stock to gross asset value

 

28.4%

 

28.4%

 

28.5%

(2)

27.6%

(3)

21.5%

 

21.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt to market capitalization ratio

 

17.4%

 

17.4%

(1)

17.9%

 

18.0%

(4)

12.1%

 

11.9%

 

Debt & preferred stock to market capitalization ratio

 

19.7%

 

19.7%

(1)

20.2%

 

20.5%

(4)

14.6%

 

14.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio(7)

 

7.6x

 

7.5x

 

7.6x

 

7.7x

(5)

8.4x

(6)

7.3x

 

Fixed charge coverage ratio(7)

 

6.1x

 

6.1x

 

6.1x

 

6.1x

(5)

6.5x

(6)

5.8x

 

 

 

 

 

 

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

(2)         Increase primarily due to the increase of our unsecured revolving line of credit partially offset by the increase in gross asset value from additional development and capital improvement funding.

(3)         Increase primarily due to the increase in outstanding debt due to the sale of senior unsecured notes partially offset by the increase in gross asset value from origination of a $124.4 million mortgage loan and additional development and capital improvement funding.

(4)         Increase due to the increase in outstanding debt due to the sale of senior unsecured notes.

(5)         Decrease primarily due to the increase in interest expense resulting from the sale of senior unsecured notes.

(6)         Increase primarily due to the increased rental income from completed construction projects and the decrease in interest expense resulting from lower outstanding debt.

(7)          In calculating our interest coverage and fixed charge coverage ratios above, we use Adjusted EBITDA, which is a financial measure not derived in accordance with U.S. generally accepted accounting principles (non-GAAP financial measure). Adjusted EBITDA is not an alternative to net income, operating income or cash flows from operating activities as calculated and presented in accordance with U.S. GAAP. You should not rely on Adjusted EBITDA as a substitute for any such U.S. GAAP financial measures or consider it in isolation, for the purpose of analyzing our financial performance, financial position or cash flows.  Net income is the most directly comparable GAAP measure to Adjusted EBITDA.

 

 

 

Year to
Date

 

Quarter Ended

 

 

 

6/30/14

 

6/30/14

 

3/31/14

 

12/31/13

 

9/30/13

 

6/30/13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$35,277

 

$18,273

 

$17,004

 

$14,650

 

$17,286

 

$12,903

 

(Less) add: (Gain) loss on sale of real estate, net

 

  (1,140)

 

  (1,140)

 

        —

 

        —

 

   (2,619)

 

    1,014

 

Add: Interest expense

 

   6,275

 

   3,088

 

   3,187

 

    2,852

 

    2,581

 

    2,798

 

Add: Depreciation and amortization (continuing and discontinued operations)

 

 12,600

 

   6,302

 

   6,298

 

    6,237

 

    6,202

 

    6,131

 

Total adjusted EBITDA

 

$53,012

 

$26,523

 

$26,489

 

$23,739

 

$23,450

 

$22,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 $ 6,275

 

$  3,088

 

$  3,187

 

$  2,852

 

$  2,581

 

$  2,798

 

Add: Capitalized interest

 

       742

 

       435

 

       307

 

       214

 

       218

 

       323

 

Interest incurred

 

 $ 7,017

 

$  3,523

 

 $ 3,494

 

 $ 3,066

 

 $ 2,799

 

 $ 3,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

      7.6x

 

      7.5x

 

      7.6x

 

      7.7x

 

      8.4x

 

      7.3x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest incurred

 

 $ 7,017

 

$  3,523

 

$  3,494

 

$  3,066

 

$  2,799

 

$  3,121

 

Preferred stock dividends

 

    1,636

 

      818

 

      818

 

       819

 

       818

 

         818

 

Total fixed charges

 

 $ 8,653

 

$  4,341

 

$  4,312

 

$  3,885

 

$  3,617

 

$  3,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed charge coverage ratio

 

      6.1x

 

     6.1x

 

     6.1x

 

    6.1x

 

     6.5x

 

        5.8x

 

 

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

 

·                 The status of the economy;

·                 The status of capital markets, including prevailing interest rates;

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

·                 Changes in financing terms;

·                 Competition within the health care and senior housing industries; and

·                 Changes in federal, state and local legislation.

 

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

 

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Operating Results

 

Three months ended June 30, 2014 compared to three months ended June 30, 2013 (amounts in thousands)

 

 

 

Three months ended
June 30,

 

Increase/

 

 

 

2014

 

2013

 

(Decrease)

 

Revenues:

 

 

 

 

 

 

 

Rental income

 

$25,025

 

$24,539

 

$  486

(1)

Interest income from mortgage loans

 

4,139

 

1,050

 

3,089

(2)

Interest and other income

 

63

 

92

 

(29)

 

Total revenues

 

29,227

 

25,681

 

3,546

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Interest expense

 

3,088

 

2,798

 

290

(3)

Depreciation and amortization

 

6,302

 

6,124

 

178

(1)

General and administrative expenses

 

2,704

 

2,869

 

(165)

(4)

Total expenses

 

12,094

 

11,791

 

303

 

 

 

 

 

 

 

 

 

Operating income

 

17,133

 

13,890

 

3,243

 

Gain on sale of real estate, net

 

1,140

(5)

 

1,140

 

Income from continuing operations

 

18,273

 

13,890

 

4,383

 

Discontinued operations:

 

 

 

 

 

 

 

Income from discontinued operations

 

 

27

(6)

(27)

 

Loss on sale of real estate, net

 

 

(1,014)

(6)

1,014

 

Net loss from discontinued operations

 

 

(987)

 

987

 

 

 

 

 

 

 

 

 

Net income

 

18,273

 

12,903

 

5,370

 

 

 

 

 

 

 

 

 

Income allocated to participating securities

 

(117)

 

(91)

 

(26)

 

Income allocated to preferred stockholders

 

(818)

 

(818)

 

 

Net income available to common stockholders

 

$17,338

 

$11,994

 

$5,344

 

 

 

 

 

 

(1)         Increase due to acquisitions, development and capital improvement investments partially offset by the sale of two assisted living properties with a total of 133 units and one school during 2014 and seven skilled nursing properties with a total of 277 beds during 2013.

(2)         Increase due to the origination of a $124,387 mortgage loan during the fourth quarter of 2013 and additional funding for capital improvement commitments under certain mortgage loans partially offset by normal amortization of existing mortgage loans.

(3)         Increase primarily due to higher average bank borrowings outstanding and the sale of senior unsecured notes in 2013 partially offset by an increase in capitalized interest related to development projects.

(4)         Decrease primarily due to timing of expenditures relating to marketing sponsorships.

(5)         Represents the gain on sale of two assisted living properties partially offset by the loss on sale of a school. During 2014, we adopted a new accounting principle which only requires the presentation of discontinued operations if a disposal represents a strategic shift in operations. The new accounting principle is applied prospectively to all disposals subsequent to the adoption. These disposals did not represent strategic shifts in our operations. As a result, we did not reclassify results of operations for these disposed properties.

(6)         Represents the loss on sale of a 47-bed skilled nursing property and related net results of operations for the sold property.

 

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Six months ended June 30, 2014 compared to six months ended June 30, 2013 (amounts in thousands)

 

 

 

Six months ended
June 30,

 

Increase/

 

 

 

2014

 

2013

 

(Decrease)

 

Revenues:

 

 

 

 

 

 

 

Rental income

 

$50,277

 

$49,015

 

$1,262

(1)

Interest income from mortgage loans

 

8,232

 

2,109

 

6,123

(2)

Interest and other income

 

156

 

185

 

(29)

 

Total revenues

 

58,665

 

51,309

 

7,356

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Interest expense

 

6,275

 

5,931

 

344

(3)

Depreciation and amortization

 

12,600

 

12,250

 

350

(1)

General and administrative expenses

 

5,653

 

6,287

 

(634)

(4)

Total expenses

 

24,528

 

24,468

 

60

 

 

 

 

 

 

 

 

 

Operating income

 

34,137

 

26,841

 

7,296

 

Gain on sale of real estate, net

 

1,140

(5)

 

1,140

 

Income from continuing operations

 

35,277

 

26,841

 

8,436

 

Discontinued operations:

 

 

 

 

 

 

 

Income from discontinued operations

 

 

52

(6)

(52)

 

Loss on sale of real estate, net

 

 

(1,014)

(6)

1,014

 

Net loss from discontinued operations

 

 

(962)

 

962

 

 

 

 

 

 

 

 

 

Net income

 

35,277

 

25,879

 

9,398

 

 

 

 

 

 

 

 

 

Income allocated to participating securities

 

(220)

 

(189)

 

(31)

 

Income allocated to preferred stockholders

 

(1,636)

 

(1,636)

 

 

Net income available to common stockholders

 

$33,421

 

$24,054

 

$9,367

 

 

 

 

 

 

(1)         Increase due to acquisitions, development and capital improvement investments partially offset by the sale of two assisted living properties with a total of 133 units and one school during 2014 and seven skilled nursing properties with a total of 277 beds during 2013.

(2)         Increase due to the origination of a $124,387 mortgage loan during the fourth quarter of 2013 and additional funding for capital improvement commitments under certain mortgage loans partially offset by normal amortization of existing mortgage loans.

(3)         Increase primarily due to higher average bank borrowings outstanding and the sale of senior unsecured notes in 2013 partially offset by an increase in capitalized interest related to development projects.

(4)         Decrease primarily due to the one-time severance and accelerated restricted stock vesting charges related to the retirement of our former Senior Vice President, Marketing and Strategic Planning during the first quarter of 2013 and timing of expenditures relating to marketing sponsorships.

(5)         Represents the gain on sale of two assisted living properties partially offset by the loss on sale of a school. During 2014, we adopted a new accounting principle which only requires the presentation of discontinued operations if a disposal represents a strategic shift in operations. The new accounting principle is applied prospectively to all disposals subsequent to the adoption. These disposals did not represent strategic shifts in our operations. As a result, we did not reclassify results of operations for these disposed properties.

(6)         Represents the loss on sale of a 47-bed skilled nursing property and related net results of operations for the sold property.

 

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Funds From Operations

 

Funds from Operations (or FFO) available to common stockholders, basic FFO available to common stockholders per share and diluted FFO available to common stockholders per share are supplemental measures of a REIT’s financial performance that are not defined by U.S. GAAP. Real estate values historically rise and fall with market conditions, but cost accounting for real estate assets in accordance with U.S. GAAP assumes that the value of real estate assets diminishes predictably over time.  We believe that by excluding the effect of historical cost depreciation, which may be of limited relevance in evaluating current performance, FFO facilitates comparisons of operating performance between periods.

 

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

 

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

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net income available to common stockholders

 

$17,338

 

$11,994

 

$33,421

 

$24,054

 

Add: Depreciation and amortization (continuing and discontinued operations)

 

6,302

 

6,131

 

12,600

 

12,267

 

(Less) add : (Gain) loss on sale of real estate, net

 

(1,140)

 

1,014

 

(1,140)

 

1,014

 

FFO available to common stockholders

 

$22,500

 

$19,139

 

$44,881

 

$37,335

 

 

 

 

 

 

 

 

 

 

 

FFO available to common stockholders per share:

 

 

 

 

 

 

 

 

 

Basic

 

$0.65

 

$0.58

 

$1.30

 

$1.18

 

Diluted

 

$0.64

 

$0.57

 

$1.27

 

$1.16

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate FFO per share:

 

 

 

 

 

 

 

 

 

Basic

 

34,597

 

32,913

 

34,592

 

31,645

 

Diluted

 

36,848

 

35,139

 

36,828

 

33,881

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity and Capital Resources

 

Operating Activities.  At June 30, 2014, our real estate investment portfolio (before accumulated depreciation and amortization) consisted of $956.5 million invested primarily in owned long-term health care properties and mortgage loans of approximately $169.8 million (prior to deducting a $1.7 million reserve).  Our portfolio consists of direct investments (properties that we either own or on which we hold promissory notes secured by first mortgages) in 101 skilled nursing properties, 104 assisted living properties, 9 range of care properties, one school, five parcels of land under development and four parcels of land held-for-use.  These properties are located in 29 states.  Assisted living properties, independent living properties, memory care properties and combinations thereof are included in the assisted living property type. Range of care properties consist of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services.  For the six months ended June 30, 2014, we had net cash provided by operating activities of $45.2 million.

 

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For the six months ended June 30, 2014, we recorded $1.2 million in straight-line rental income and a reserve of $12,000 on our straight-line rent receivable.  We currently expect that straight-line rental income will decrease from a projected $2.2 million in 2014 to a projected $1.8 million in 2015 and our cash rental income is projected to decrease from a projected $97.3 million in 2014 to a projected $84.6 million in 2015 for leases in place at June 30, 2014, excluding leases on non-accrual status and no modification or replacement of existing leases, no lease renewals including the Extendicare/ Enlivant lease, and no new leased investments are added to our portfolio.  During the six months ended June 30, 2014, we received $49.4 million of cash rental revenue and recorded amortization of lease inducement cost of $0.3 million.  For the six months ended June 30, 2014, no leases were renewed.  At June 30, 2014, the straight-line rent receivable balance, net of reserves, on the balance sheet was $30.9 million.

 

Investing and Financing Activities.  For the six months ended June 30, 2014, we used $23.3 million of cash for investing activities.  During the six months ended June 30, 2014, we received $1.1 million in regularly scheduled principal payments on our mortgage loans. Additionally, we funded $3.0 million under a $10.6 million mortgage and construction loan. This mortgage and construction loan has been fully funded with no remaining commitments and is secured by a skilled nursing property and a newly constructed 106-bed replacement skilled nursing property. The residents of the old skilled nursing property were relocated to the newly constructed 106-bed replacement skilled nursing property. The borrower closed the old skilled nursing property and is responsible for marketing and selling it. Subsequent to June 30, 2014, we funded a $3.0 million mortgage loan secured by a 100-unit independent living property in Arizona. The loan is for a term of five years and bears interest at 7.0%, escalating 0.25% annually.

 

Additionally, during the six months ended June 30, 2014, we funded $0.7 million under a $12.0 million capital improvement commitment to an existing borrower and we have a remaining commitment of $11.3 million at June 30, 2014. We also provided this borrower a commitment to borrow up to an additional $40.0 million of loan proceeds under certain conditions and based on certain operating metrics and valuation thresholds. Since these conditions have not been met, no funding has been made under this additional loan commitment.

 

During the six months ended June 30, 2014, we sold two assisted living properties located in Florida and Georgia with a total of 133 units and one school property located in Minnesota for a combined sales price of $7.9 million, resulting in net sales proceeds of $7.7 million, and a net gain on sale of $1.1 million.

 

As of June 30, 2014, we have a commitment to provide, under certain conditions, up to $5.0 million per year through December 2014 to an existing operator for expansion of the 37 properties they lease from us. The estimated yield of this commitment is 9.5% plus the positive difference, if any, between the average yields on the U.S. Treasury 10-year note for the five days prior to funding, minus 420 basis points. As of June 30, 2014, no funds have been requested under this commitment and it is highly unlikely any funds will be expended based on the lease termination date.

 

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Excluding the $5.0 million per year commitment above, the following table summarizes our investment commitments as of June 30, 2014 and year-to-date funding on our development, redevelopment, renovation and expansion projects (excludes capitalized interest, dollar amounts in thousands):

 

Type of Property

 

Investment
Commitment

 

2014
Funding
(2)

 

Commitment
Funded

 

Remaining
Commitment

 

Number of
Properties

 

Number of
Beds/Units

 

Skilled Nursing

 

$30,150

 

 $  4,290

 

$17,047

 

 $13,103

 

 7

 

760

 

Assisted Living (1)

 

  50,656

 

   22,788

 

  33,449

 

   17,207

 

 7

 

385

 

Totals

 

$80,806

 

 $27,078 (3)

 

$50,496

 

 $30,310(3)

 

14