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Section 1: 10-Q (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2019

 

OR

 

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

 

For the Transition period from ____ to ____

 

Commission file number 1-11314

 

LTC PROPERTIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

 

 

 

Maryland

 

 

 

71-0720518

(State or other jurisdiction of

 

 

 

(I.R.S. Employer

incorporation or organization)

 

 

 

Identification No.)

2829 Townsgate Road, Suite 350

Westlake Village, California  91361

(Address of principal executive offices, including zip code)

 

(805) 981-8655

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes  ☑  No  ☐

 

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

 

 

 

 

 

 

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

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

 

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

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $.01 par value

LTC

New York Stock Exchange

 

The number of shares of common stock outstanding on May 2, 2019 was 39,738,695.

 


 

Table of Contents

 

LTC PROPERTIES, INC.

 

FORM 10-Q

 

March 31, 2019

 

 

INDEX

 

 

 

 

PART I -- Financial Information

Page

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Income and Comprehensive Income

4

 

Consolidated Statements of Equity

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

25

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

40

Item 4. 

Controls and Procedures

40

PART II -- Other Information 

 

 

 

Item 1. 

Legal Proceedings

41

Item 1A. 

Risk Factors

41

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 6. 

Exhibits

42

 

 

 

 


 

Table of Contents

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share)

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

(unaudited)

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Land

 

$

125,898

 

$

125,358

 

Buildings and improvements

 

 

1,313,952

 

 

1,290,352

 

Accumulated depreciation and amortization

 

 

(322,535)

 

 

(312,959)

 

Operating real estate property, net

 

 

1,117,315

 

 

1,102,751

 

Properties held-for-sale, net of accumulated depreciation: 2019—$1,916; 2018—$1,916

 

 

3,830

 

 

3,830

 

Real property investments, net

 

 

1,121,145

 

 

1,106,581

 

 

 

 

 

 

 

 

 

Mortgage loans receivable, net of loan loss reserve: 2019—$2,461; 2018—$2,447

 

 

244,314

 

 

242,939

 

Real estate investments, net

 

 

1,365,459

 

 

1,349,520

 

Notes receivable, net of loan loss reserve: 2019—$198; 2018—$128

 

 

19,558

 

 

12,715

 

Investments in unconsolidated joint ventures

 

 

27,515

 

 

30,615

 

Investments, net

 

 

1,412,532

 

 

1,392,850

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

6,715

 

 

2,656

 

Restricted cash

 

 

2,108

 

 

2,108

 

Debt issue costs related to bank borrowings

 

 

2,775

 

 

2,989

 

Interest receivable

 

 

22,176

 

 

20,732

 

Straight-line rent receivable, net of allowance for doubtful accounts: 2019—$0; 2018—$746

 

 

42,455

 

 

73,857

 

Lease incentives

 

 

2,263

 

 

14,443

 

Prepaid expenses and other assets

 

 

5,342

 

 

3,985

 

Total assets

 

$

1,496,366

 

$

1,513,620

 

LIABILITIES

 

 

 

 

 

 

 

Bank borrowings

 

$

146,900

 

$

112,000

 

Senior unsecured notes, net of debt issue costs: 2019—$900; 2018—$938

 

 

528,900

 

 

533,029

 

Accrued interest

 

 

4,193

 

 

4,180

 

Accrued expenses and other liabilities

 

 

28,220

 

 

31,440

 

Total liabilities

 

 

708,213

 

 

680,649

 

EQUITY

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding:  

2019—39,739; 2018—39,657

 

 

397

 

 

397

 

Capital in excess of par value

 

 

862,376

 

 

862,712

 

Cumulative net income

 

 

1,233,302

 

 

1,255,764

 

Cumulative distributions

 

 

(1,316,314)

 

 

(1,293,383)

 

Total LTC Properties, Inc. stockholders’ equity

 

 

779,761

 

 

825,490

 

Non-controlling interests

 

 

8,392

 

 

7,481

 

Total equity

 

 

788,153

 

 

832,971

 

Total liabilities and equity

 

$

1,496,366

 

$

1,513,620

 

 

See accompanying notes.

 

 

3


 

Table of Contents

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

  

2019

  

2018

  

Revenues:

 

 

 

 

 

 

 

Rental income

 

$

28,024

 

$

34,505

 

Interest income from mortgage loans

 

 

7,311

 

 

6,816

 

Interest and other income

 

 

521

 

 

489

 

Total revenues

 

 

35,856

 

 

41,810

 

Expenses:

 

 

 

 

 

 

 

Recovery of written-off straight-line rent receivable

 

 

(9,600)

 

 

 —

 

Interest expense

 

 

7,467

 

 

7,829

 

Depreciation and amortization

 

 

9,607

 

 

9,444

 

Provision for doubtful accounts

 

 

83

 

 

 8

 

Transaction costs

 

 

 —

 

 

 4

 

Property tax expense

 

 

4,386

 

 

 —

 

General and administrative expenses

 

 

4,571

 

 

4,797

 

Total expenses

 

 

16,514

 

 

22,082

 

Operating income

 

 

19,342

 

 

19,728

 

Income from unconsolidated joint ventures

 

 

1,085

 

 

631

 

Net income

 

 

20,427

 

 

20,359

 

Income allocated to non-controlling interests

 

 

(81)

 

 

 —

 

Net income attributable to LTC Properties, Inc.

 

 

20,346

 

 

20,359

 

Income allocated to participating securities

 

 

(92)

 

 

(88)

 

Net income available to common stockholders

 

$

20,254

 

$

20,271

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.51

 

$

0.51

 

Diluted

 

$

0.51

 

$

0.51

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

Basic

 

 

39,532

 

 

39,451

 

Diluted

 

 

39,874

 

 

39,454

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.57

 

$

0.57

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

Net income

 

$

20,427

 

$

20,359

 

Comprehensive income

 

$

20,427

 

$

20,359

 

 

See accompanying notes.

4


 

Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

Cumulative

 

 

 

 

 

Total

 

 

Non-

 

 

 

 

 

 

Common Stock

 

 

Excess of

 

 

Net

 

 

Cumulative

 

 

Stockholder's

 

 

Controlling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Par Value

 

 

Income

 

 

Distributions

 

 

Equity

 

 

Interests

 

 

Equity

 

Balance—December 31, 2017

 

39,570

 

$

396

 

$

856,992

 

$

1,100,783

 

$

(1,203,011)

 

$

755,160

 

$

3,488

 

$

758,648

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,578)

 

 

(22,578)

 

 

 —

 

 

(22,578)

 

Issuance of restricted stock

 

82

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock option exercises

 

 5

 

 

 —

 

 

123

 

 

 —

 

 

 —

 

 

123

 

 

 —

 

 

123

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,376

 

 

 —

 

 

 —

 

 

1,376

 

 

 —

 

 

1,376

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

20,359

 

 

 —

 

 

20,359

 

 

 —

 

 

20,359

 

Other

 

(28)

 

 

 —

 

 

(1,065)

 

 

 —

 

 

 —

 

 

(1,065)

 

 

 —

 

 

(1,065)

 

Balance—March 31, 2018

 

39,629

 

$

396

 

$

857,426

 

$

1,121,142

 

$

(1,225,589)

 

$

753,375

 

$

3,488

 

$

756,863

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,590)

 

 

(22,590)

 

 

 —

 

 

(22,590)

 

Issuance of restricted stock

 

 9

 

 

 —

 

 

(8)

 

 

 —

 

 

 —

 

 

(8)

 

 

 —

 

 

(8)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,521

 

 

 —

 

 

 —

 

 

1,521

 

 

 —

 

 

1,521

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

68,936

 

 

 —

 

 

68,936

 

 

 —

 

 

68,936

 

Non-controlling interest contributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,081

 

 

1,081

 

Other

 

(3)

 

 

 —

 

 

(107)

 

 

 —

 

 

 —

 

 

(107)

 

 

 —

 

 

(107)

 

Balance—June 30, 2018

 

39,635

 

$

396

 

$

858,832

 

$

1,190,078

 

$

(1,248,179)

 

$

801,127

 

$

4,569

 

$

805,696

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,600)

 

 

(22,600)

 

 

 —

 

 

(22,600)

 

Proceeds from common stock issued, net of issuance costs

 

22

 

 

 1

 

 

928

 

 

 —

 

 

 —

 

 

929

 

 

 —

 

 

929

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,487

 

 

 —

 

 

 —

 

 

1,487

 

 

 —

 

 

1,487

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

34,920

 

 

 —

 

 

34,920

 

 

17

 

 

34,937

 

Non-controlling interest contributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,882

 

 

2,882

 

Non-controlling interest distributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17)

 

 

(17)

 

Other

 

 —

 

 

 —

 

 

(21)

 

 

 —

 

 

 —

 

 

(21)

 

 

 —

 

 

(21)

 

Balance—September 30, 2018

 

39,657

 

$

397

 

$

861,226

 

$

1,224,998

 

$

(1,270,779)

 

$

815,842

 

$

7,451

 

$

823,293

 

Common Stock cash distributions ($0.57 per share)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,604)

 

 

(22,604)

 

 

 —

 

 

(22,604)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,486

 

 

 —

 

 

 —

 

 

1,486

 

 

 —

 

 

1,486

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

30,766

 

 

 —

 

 

30,766

 

 

78

 

 

30,844

 

Non-controlling interest distributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(48)

 

 

(48)

 

Balance—December 31, 2018

 

39,657

 

$

397

 

$

862,712

 

$

1,255,764

 

$

(1,293,383)

 

$

825,490

 

$

7,481

 

$

832,971

 

Cumulative effect of the adoption of the ASC 842

 

 —

 

 

 —

 

 

 —

 

 

(42,808)

 

 

 —

 

 

(42,808)

 

 

 —

 

 

(42,808)

 

As Adjusted Balance at January 1, 2019

 

39,657

 

$

397

 

$

862,712

 

$

1,212,956

 

$

(1,293,383)

 

$

782,682

 

$

7,481

 

$

790,163

 

Common Stock cash distributions ($0.57 per share)

 

48

 

 

 —

 

 

 —

 

 

 —

 

 

(22,931)

 

 

(22,931)

 

 

 —

 

 

(22,931)

 

Issuance of restricted stock

 

78

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

(1)

 

 

 

 

 

(1)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,689

 

 

 —

 

 

 —

 

 

1,689

 

 

 —

 

 

1,689

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

20,346

 

 

 —

 

 

20,346

 

 

81

 

 

20,427

 

Non-controlling interest contributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

919

 

 

919

 

Non-controlling interest distributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(89)

 

 

(89)

 

Other

 

(44)

 

 

 —

 

 

(2,024)

 

 

 —

 

 

 —

 

 

(2,024)

 

 

 —

 

 

(2,024)

 

Balance—March 31, 2019

 

39,739

 

$

397

 

$

862,376

 

$

1,233,302

 

$

(1,316,314)

 

$

779,761

 

$

8,392

 

$

788,153

 

 

 

 

 

 

 

 

 

5


 

Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

  

2019

  

2018

 

OPERATING ACTIVITIES:

 

 

    

 

 

    

 

Net income

 

$

20,427

 

$

20,359

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,607

 

 

9,444

 

Stock-based compensation expense

 

 

1,689

 

 

1,376

 

Income from unconsolidated joint ventures

 

 

(1,085)

 

 

(631)

 

Income distributions from unconsolidated joint ventures

 

 

1,105

 

 

543

 

Straight-line rental income

 

 

(1,238)

 

 

(3,440)

 

Adjustment for collectibility

 

 

1,926

 

 

 

Lease incentives funded

 

 

 —

 

 

(380)

 

Amortization of lease incentives

 

 

87

 

 

540

 

Provision for doubtful accounts

 

 

83

 

 

 8

 

Non-cash interest related to contingent liabilities

 

 

 —

 

 

126

 

Other non-cash items, net

 

 

252

 

 

323

 

Increase in interest receivable

 

 

(1,444)

 

 

(1,406)

 

Increase (decrease) in accrued interest payable

 

 

13

 

 

(1,162)

 

Net change in other assets and liabilities

 

 

(4,635)

 

 

(4,107)

 

Net cash provided by operating activities

 

 

26,787

 

 

21,593

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in real estate properties

 

 

(15,971)

 

 

 —

 

Investment in real estate developments

 

 

(6,957)

 

 

(8,591)

 

Investment in real estate capital improvements

 

 

(259)

 

 

(534)

 

Capitalized interest

 

 

(260)

 

 

(259)

 

Proceeds from sale of real estate, net

 

 

225

 

 

 —

 

Investment in real estate mortgage loans receivable

 

 

(1,454)

 

 

(9,610)

 

Principal payments received on mortgage loans receivable

 

 

65

 

 

37

 

Investments in unconsolidated joint ventures

 

 

(293)

 

 

(380)

 

Proceeds from payoff of joint venture agreements

 

 

3,400

 

 

 —

 

Advances and originations under notes receivable

 

 

(6,953)

 

 

 —

 

Principal payments received on notes receivable

 

 

41

 

 

 —

 

Net cash used in investing activities

 

 

(28,416)

 

 

(19,337)

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Bank borrowings

 

 

36,900

 

 

24,000

 

Repayment of bank borrowings

 

 

(2,000)

 

 

 —

 

Principal payments on senior unsecured notes

 

 

(4,167)

 

 

(4,166)

 

Stock option exercises

 

 

 —

 

 

123

 

Distributions paid to stockholders

 

 

(22,931)

 

 

(22,578)

 

Distributions paid to non-controlling interests

 

 

(90)

 

 

 —

 

Other

 

 

(2,024)

 

 

(1,064)

 

Net cash provided by (used in) financing activities

 

 

5,688

 

 

(3,685)

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

4,059

 

 

(1,429)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

4,764

 

 

5,213

 

Cash, cash equivalents and restricted cash, end of period

 

$

8,823

 

$

3,784

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

7,202

 

$

8,669

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

Right of use asset

 

$

1,445

 

$

 —

 

Lease liability

 

$

1,445

 

$

 —

 

Contribution from non-controlling interests

 

$

919

 

$

 —

 

 

See accompanying notes.

 

 

6


 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.General

LTC Properties, Inc., a health care real estate investment trust (“REIT”), was incorporated on May 12, 1992 in the State of Maryland and commenced operations on August 25, 1992. We invest primarily in seniors housing and health care properties primarily through sale-leaseback transactions, mortgage financing and structured finance solutions including mezzanine lending.  We conduct and manage our business as one operating segment, rather than multiple operating segments, for internal reporting and internal decision-making purposes. Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in seniors housing and health care properties managed by experienced operators. Our primary seniors housing and health care property classifications include skilled nursing centers (“SNF”), assisted living communities (“ALF”), independent living communities (“ILF”), memory care communities (“MC”) and combinations thereof. To meet these objectives, we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders and diversify our investment portfolio by geographic location, operator, property classification and form of investment.

We have prepared consolidated financial statements included herein without audit and in the opinion of management have included all adjustments necessary for a fair presentation of the consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to rules and regulations governing the presentation of interim financial statements. The accompanying consolidated financial statements include the accounts of our company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended March 31, 2019 and 2018 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.

Restricted Cash.  During the third quarter of 2017, a 170-bed skilled nursing center in our portfolio was evacuated due to damages caused by Hurricane Harvey. This property is located in Texas and operated under a triple net master lease agreement. We periodically evaluate properties for impairment when events or changes in circumstances indicate that the asset may be impaired or the carrying amount of the asset may not be recoverable through future undiscounted cash flows. Based upon a quarterly assessment of this property using the recoverability test, we concluded the property has not been impaired.

As of March 31, 2019, the gross value and the carrying value of the property were $1,796,000 and $896,000 respectively.

The provisions of our triple net lease agreements impose certain obligations on our operators including:

·

Acquire property insurance, subject to certain criteria;

·

Continue paying rent in the event of any property damage or destruction; and

·

Return the leased property back to us at the end of the lease term, in the same condition originally received.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

During the second quarter of 2018, our operator provided us with insurance proceeds of $2,619,000 to be used for remediation of the property as noted in the provisions of our master lease agreement. Accordingly, we have classified the insurance proceeds as restricted cash on our consolidated financial statements.

New Accounting Pronouncements

New Accounting Standards Adopted by Our Company

In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-15 (“ASU 2016-15”), Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the Emerging Issues Task Force). ASU 2016-15 provides guidance that reduces the diversity in practice of the classification of certain cash receipts and cash payments within the statement of cash flows. This guidance is effective for fiscal periods beginning after December 15, 2017. We adopted this standard on January 1, 2018. The adoption of this guidance did not have a material impact on our financial statements.

Revenue Recognition ASC Topic 606.  On January 1, 2018, we adopted Accounting Standard codification (“ASC”) Topic 606,  Revenue From Contracts With Customers (“ASC 606”) using the modified retrospective adoption method. ASC 606 outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We evaluated the impact of this standard by assessing our revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. We concluded that adoption of this standard did not have an impact on our results of operations or financial condition, as our revenue consists of rental income from leasing arrangements and interest income from loan arrangements, both of which are specifically excluded from ASC 606.

Leases ASC Topic 842.  In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02 (“ASU 2016-02”), Leases.  ASU 2016-02 and its amendments have now formally entered into the FASB codification as ASC Topic 842, Leases (“ASC 842”). The objective of ASC 842 is to establish the principles for lessees and lessors to apply for reporting useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease.

ASC 842 requires lessees to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance of operating leases.

ASC 842 requires the lessors to identify lease and non-lease components of a lease agreement. Revenue related to non-lease components under lease agreements will be subject to the revenue recognition standard, upon adoption of this standard. Also, the new standard narrows definition of initial direct costs. Accordingly, upon adoption of the new standard, certain costs (primarily legal costs related to lease negotiations) should be expensed rather than capitalized.

Further, per ASC 842 lessors are required to assess the probability of collecting substantially all of the lease payments. The standard defines collectibility as lessee’s ability and intent to pay. If collectibility of substantially all of the lease payments through maturity is not probable, the lease income recorded during the period would be limited to lesser of the income that would have been recognized if collection were probable, and the lease payments received. If the assessment of collectibility changes, any difference between the lease income that would have been recognized and the lease payments should be

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

recognized as an adjustment to lease income. At adoption, lessors are required to perform a lease-by-lease analysis for collectibility of all lease payments through maturity. If at adoption, it is not probable that substantially all of the lease obligations through maturity will be collected, a cumulative adjustment to equity should be made to reflect all of the lease obligations which are not probable to be collected. Under the new standard, collections of rent subsequent to the straight-line rent receivable write-off are considered recoveries of amounts previously written-off and are recognized as a contra-expense rather than rental revenue until the cumulative amount of the recovery recognized equals the amount of straight-line rent receivable written-off.

Additionally, ASC 842 provides lessors with the option to elect a practical expedient allowing them to not separate lease and non-lease components and instead, to account for those components as a single lease component. This practical expedient is limited to circumstances in which: (i) the timing and pattern of transfer are the same for the non-lease component and the related lease component and (ii) the lease component, if accounted for separately, would be classified as an operating lease. This practical expedient causes an entity to assess whether a contract is predominantly lease-based or service-based and recognize the entire contract under the relevant accounting guidance (i.e., predominantly lease-based would be accounted for under ASC 842 and predominantly service-based would be accounted for under the ASC 606). This practical expedient option is available as a single election that must be consistently applied to all existing leases at the date of adoption. Also, ASC 842 provides a practical expedient that allows companies to use an optional transition method. Under the optional transition method, a cumulative adjustment to equity during the period of adoption is recorded and prior periods would not require restatement. Consequently, entities that elect both the practical expedient and the optional transitional method will apply the new lease ASC prospectively to leases commencing or modified after January 1, 2019 and will not be required to apply the disclosures under the new lease standard to comparative periods.

ASC 842 has subsequently been amended by other issued Accounting Standards Update (“ASU”) to clarify and improve the standard as well as to provide certain practical expedients. In December 2018, the FASB issued ASU 2018-20 (“ASU 2018-20”), Narrow-Scope Improvements for Lessors, which amends ASC 842 to require the lessors to exclude the lessor costs that are directly paid by the lessee to third parties on lessor’s behalf from variable payments. However, the lessor costs that are paid by the lessor and reimbursed by the lessee are required to be included in variable payments. Furthermore, ASC 842 allows for several practical expedients which permit the following: no reassessment of lease classification or initial direct costs and use of the standard’s effective date as the date of initial application. In March 2019, the FASB issued ASU 2019-01 (“ASU 2019-01”), Leases (Topic 842), Codification Improvements which provides clarification regarding presentation and disclosures. ASC 842 and its amendments are effective January 1, 2019.

Adoption of ASC 842.  On January 1, 2019, we adopted ASC 842 using the modified retrospective approach as of the adoption date, whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated.

Upon adoption of the standard, we elected the practical expedients provided for in ASC 842, including:

·

No reassessment of whether any expired or existing contracts were or contained leases;

·

No reassessment of the lease classification for any expired or existing leases;  

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

·

No reassessment of initial direct costs for any existing leases; and

·

No separation of lease and non-lease components.

As a lessee, we have an office lease agreement with a 5-year remaining term which was classified as an operating lease under ASC 840. Due to election of the package of practical expedients, upon adoption of ASC 842 this lease agreement will continue to be classified as operating lease. For the three months ended March 31, 2019, we recorded $75,000 of rent expense related to this lease agreement. Adoption of ASC 842 resulted in recording a right-of use asset and a lease liability of $1,445,000 which represents the present value of the remaining minimum lease payments using our incremental borrowing rate.

As a lessor, our properties are leased subject to non-cancelable operating leases. 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. Upon adoption of ASC 842, we recorded real estate taxes that are reimbursed by our operators as Rental Income with a corresponding Property tax expense in the Consolidated Statements of Income and Comprehensive Income. For the three months ended March 31, 2019, we have recognized $4,335,000 in Rental Income related to reimbursement of real estate taxes from our operators.

Furthermore, upon adoption of ASC 842, we assessed the probability of collecting substantially all of our lease payments through maturity. As previously reported, we have been monitoring Anthem Memory Care (“Anthem”), Thrive Senior Living, LLC (“Thrive”), Preferred Care, Inc. (“Preferred Care”) and Senior Care Centers, LLC. (“Senior Care”) due to cash flow concerns, performance concerns and/or bankruptcy filing. In conjunction with adoption of ASC 842, we evaluated our straight-line rent receivable and lease incentive balances related to the noted operators and determined that we do not have the level of collectibility certainty required by the standard to record the straight-line rent receivable. Accordingly, we wrote-off the straight-line rent receivable and lease incentive balances associated with these leases. Also, since the new guidance does not provide for general reserve for straight-line rent receivable, we wrote-off our 1% general straight-line rent receivable reserve. These balances totaled $42,808,000 and were written-off to equity effective January 1, 2019 as required by ASC 842.

During the three months ended March 31, 2019, we recognized $9,600,000 of cash rent received from Anthem, Thrive, Preferred Care and Senior Care as a contra-expense titled Recovery of written-off straight-line rent receivable on the consolidated statements of income and comprehensive income as required by ASC 842.

New Accounting Standards Not Yet Adopted by Our Company

In 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard requires a new forward looking “expected loss” model to be used for receivables, held-to-maturity debt, loans, and other instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

2.Real Estate Investments

Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (or collectively ALF).

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

Owned Properties. The following table summarizes our investments in owned properties at March 31, 2019 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Percentage

 

Number

 

Number of

 

Investment

 

 

 

Gross

 

of

 

of

 

SNF

 

ALF

 

per

 

Type of Property

 

Investment

 

Investment

 

Properties (1)

 

Beds

 

Units

 

Bed/Unit

 

Assisted Living

 

$

821,167

 

56.8

104

 

 —

 

5,959

 

$

137.80

 

Skilled Nursing

 

 

587,410

 

40.6

%

72

 

8,893

 

261

 

$

64.17

 

Under Development (2)

 

 

25,952

 

1.8

 —

 

 —

 

 —

 

 

 —

 

Other (3)

 

 

11,067

 

0.8

 1

 

118

 

 —

 

 

 —

 

Total

 

$

1,445,596

 

100.0

177

 

9,011

 

6,220

 

 

 

 


(1)

We own properties in 28 states that are leased to 29 different operators.

 

(2)

Represents two development projects, consisting of a 78-unit ALF/MC located in Oregon and a 110-unit ILF/ALF/MC in Wisconsin.

 

(3)

Includes three parcels of land held-for-use, and one behavioral health care hospital.

 

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

(i)

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

(ii)

a calculation based on the Consumer Price Index;

(iii)

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

(iv)

specific dollar increases.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

During the three months ended March 31, 2019, we terminated a lease agreement and transitioned two operating senior housing communities under the lease agreement to a new operator. As a result of the lease termination, we wrote-off $1,926,000 straight-line rent receivable to contra-revenue in accordance with the newly adopted ASC 842.

Future minimum base rents receivable under the remaining non-cancelable terms of operating leases excluding the effects of straight-line rent receivable, amortization of lease incentives and renewal options are as follows (in thousands):

 

 

 

 

 

 

    

Annual Cash

 

 

 

Rent (1)

 

2019

 

$

101,223

 

2020

 

 

140,189

 

2021

 

 

131,128

 

2022

 

 

121,228

 

2023

 

 

124,492

 

Thereafter

 

 

729,390

 


(1)

Represents contractual annual cash rent, except for four master leases which are based on agreed upon cash rents. See below for more information.

During 2017, we issued a notice of default to Anthem Memory Care (“Anthem”) resulting from Anthem’s partial payment of minimum rent. Anthem operates 11 memory care communities under a master lease. We currently estimate that Anthem will pay $7,500,000 of annual cash rent during 2019. This amount represents approximately 50% of the contractual amount due under the lease in 2019. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Anthem and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance.

During 2017, Preferred Care, Inc. (“Preferred Care”) and affiliated entities filed for Chapter 11 bankruptcy as a result of a multi-million-dollar judgment in a lawsuit in Kentucky against Preferred Care and certain affiliated entities. The affiliated entities named in the lawsuit operate properties in Kentucky and New Mexico. Preferred Care leases 24 properties under two master leases from us and none of the 24 properties are located in Kentucky or New Mexico. Those 24 properties are in Arizona, Colorado, Iowa, Kansas and Texas. The Preferred Care operating entities that sublease those properties did not file for bankruptcy. The court ordered deadline for affirmation or rejection of the lease has passed without action by Preferred Care, but they continue to pay rent to us in a timely manner. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Preferred Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are working with Preferred Care on options for the portfolio which may include re-leasing or selling some of the properties.

On December 4, 2018, Senior Care Centers, LLC. and affiliates and subsidiaries (“Senior Care”) filed for Chapter 11 bankruptcy as a result of lease terminations from certain landlords and on-going operational challenges. Pursuant to the U.S. Bankruptcy Code, Senior Care has an initial period of 120

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

days from the petition date to assume or reject the lease. However, the Bankruptcy Code also provides that the court may extend this initial 120-day period for an additional 90 days. Accordingly, Senior Care has requested, and the court has approved an additional 90 days, which ends on July 2, 2019, to assume or reject the lease. As security under the lease, we hold a letter of credit in the amount of approximately $2,000,000, maintenance and repair escrows of approximately $2,200,000 and property tax escrows of approximately $1,800,000. Senior Care did not pay us December 2018 rent, but has paid us January to April 2019 rent, real estate property tax and maintenance deposits. We have previously requested a consensual termination of the lease and have requested Senior Care to reject our lease in bankruptcy. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Senior Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are evaluating our options to transition or sell the properties under the lease with Senior Care.

During the three months ended March 31, 2019, we placed Thrive Senior Living, LLC. (“Thrive”) on a cash basis due to short-payment of contractual rent in November 2018 and non-payment of rent in December 2018 totaling $700,000. This rent was subsequently received in 2019. Thrive has not paid January to April 2019 rent. Subsequent to March 31, 2019, we issued a notice of default to Thrive. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Thrive and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are working with Thrive and exploring our options to maximize the value of these real estate assets.

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.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

The following table summarizes components of our rental income for the three months ended March 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

Rental Income

 

 

2019

 

 

2018