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Section 1: 10-Q (10-Q)

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Table of Contents

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, 2020

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)

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

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 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 þ 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 þ

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 þ

The number of shares of common stock outstanding on April 24, 2020 was 39,217,848.

Table of Contents

LTC PROPERTIES, INC.

FORM 10-Q

March 31, 2020

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

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

38

Item 4.

Controls and Procedures

39

PART II -- Other Information

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

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, 2020

December 31, 2019

(unaudited)

(audited)

ASSETS

Investments:

Land

$

127,774

$

126,703

Buildings and improvements

 

1,310,403

 

1,295,899

Accumulated depreciation and amortization

 

(320,332)

 

(312,642)

Operating real estate property, net

 

1,117,845

 

1,109,960

Properties held-for-sale, net of accumulated depreciation: 2020—$0; 2019—$35,113

 

 

26,856

Real property investments, net

 

1,117,845

 

1,136,816

Mortgage loans receivable, net of loan loss reserve: 2020—$2,563; 2019—$2,560

 

254,396

 

254,099

Real estate investments, net

 

1,372,241

 

1,390,915

Notes receivable, net of loan loss reserve: 2020—$179; 2019—$181

 

17,769

 

17,927

Investments in unconsolidated joint ventures

19,061

19,003

Investments, net

 

1,409,071

 

1,427,845

Other assets:

Cash and cash equivalents

 

30,888

 

4,244

Debt issue costs related to bank borrowings

 

1,948

 

2,164

Interest receivable

 

28,097

 

26,586

Straight-line rent receivable

 

46,541

 

45,703

Lease incentives

2,764

2,552

Prepaid expenses and other assets

 

5,476

 

5,115

Total assets

$

1,524,785

$

1,514,209

LIABILITIES

Bank borrowings

$

89,900

$

93,900

Senior unsecured notes, net of debt issue costs: 2020—$773; 2019—$812

 

599,527

 

599,488

Accrued interest

 

3,503

 

4,983

Accrued expenses and other liabilities

 

25,800

 

30,412

Total liabilities

 

718,730

 

728,783

EQUITY

Stockholders’ equity:

Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding: 202039,218; 201939,752

 

392

 

398

Capital in excess of par value

 

847,572

 

867,346

Cumulative net income

 

1,357,115

 

1,293,482

Cumulative distributions

 

(1,407,450)

 

(1,384,283)

Total LTC Properties, Inc. stockholders’ equity

 

797,629

 

776,943

Non-controlling interests

 

8,426

 

8,483

Total equity

 

806,055

 

785,426

Total liabilities and equity

$

1,524,785

$

1,514,209

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, 

  

2020

  

2019

  

Revenues:

Rental income

$

38,035

$

37,624

Interest income from mortgage loans

 

7,777

 

7,311

Interest and other income

 

598

 

521

Total revenues

 

46,410

 

45,456

Expenses:

Interest expense

 

7,710

 

7,467

Depreciation and amortization

 

9,669

 

9,607

Provision for doubtful accounts

 

1

 

83

Transaction costs

70

Property tax expense

4,223

4,386

General and administrative expenses

 

5,100

 

4,571

Total expenses

 

26,773

 

26,114

Other operating income:

Gain on sale of real estate, net

43,854

Operating income

 

63,491

 

19,342

Income from unconsolidated joint ventures

231

1,085

Net income

63,722

20,427

Income allocated to non-controlling interests

 

(89)

 

(81)

Net income attributable to LTC Properties, Inc.

 

63,633

 

20,346

Income allocated to participating securities

 

(263)

(92)

Net income available to common stockholders

$

63,370

$

20,254

Earnings per common share:

Basic

$

1.60

$

0.51

Diluted

$

1.60

$

0.51

Weighted average shares used to calculate earnings per common share:

Basic

 

39,539

 

39,532

Diluted

 

39,541

 

39,874

Dividends declared and paid per common share

$

0.57

$

0.57

Comprehensive Income:

Net income

$

63,722

$

20,427

Comprehensive income

$

63,722

$

20,427

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, 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)

(22,631)

(22,631)

(22,631)

Vesting of performance-based stock units

48

(300)

(300)

(300)

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

Common Stock cash distributions ($0.57 per share)

(22,653)

(22,653)

(22,653)

Issuance of restricted stock

8

(6)

(6)

(6)

Stock-based compensation expense

1,623

1,623

1,623

Net income

20,446

20,446

88

20,534

Non-controlling interest contributions

46

46

Non-controlling interest distributions

(87)

(87)

Balance—June 30, 2019

39,747

$

397

$

863,993

$

1,253,748

$

(1,338,967)

$

779,171

$

8,439

$

787,610

Common Stock cash distributions ($0.57 per share)

(22,658)

(22,658)

(22,658)

Stock option exercises

5

1

122

123

123

Stock-based compensation expense

1,626

1,626

1,626

Net income

27,192

27,192

88

27,280

Non-controlling interest distributions

(67)

(67)

Other

(20)

(20)

(20)

Balance—September 30, 2019

39,752

$

398

$

865,721

$

1,280,940

$

(1,361,625)

$

785,434

$

8,460

$

793,894

Common Stock cash distributions ($0.57 per share)

(22,658)

(22,658)

(22,658)

Stock-based compensation expense

1,625

1,625

1,625

Net income

12,542

12,542

89

12,631

Non-controlling interest distributions

(66)

(66)

Balance—December 31, 2019

39,752

$

398

$

867,346

$

1,293,482

$

(1,384,283)

$

776,943

$

8,483

$

785,426

Common Stock cash distributions ($0.57 per share)

(22,581)

(22,581)

(22,581)

Vesting of performance-based stock units

82

(586)

(586)

(586)

Issuance of restricted stock

76

1

(1)

Repurchase of common stock

(616)

(6)

(18,006)

(18,012)

(18,012)

Stock-based compensation expense

1,777

1,777

1,777

Net income

63,633

63,633

89

63,722

Non-controlling interest distributions

(146)

(146)

Other

(76)

(1)

(3,544)

(3,545)

(3,545)

Balance—March 31, 2020

39,218

$

392

$

847,572

$

1,357,115

$

(1,407,450)

$

797,629

$

8,426

$

806,055

5

Table of Contents

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

Three Months Ended March 31, 

  

2020

  

2019

  

OPERATING ACTIVITIES:

    

    

Net income

$

63,722

$

20,427

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

Depreciation and amortization

 

9,669

 

9,607

Stock-based compensation expense

 

1,777

 

1,689

Gain on sale of real estate, net

 

(43,854)

 

Income from unconsolidated joint ventures

 

(231)

 

(1,085)

Income distributions from unconsolidated joint ventures

231

1,105

Straight-line rental income

(839)

 

(1,238)

Adjustment for collectibility of rental income

1,926

Lease incentives funded

(13)

Amortization of lease incentives

101

87

Provision for doubtful accounts

 

1

 

83

Other non-cash items, net

 

256

 

252

Increase in interest receivable

 

(1,511)

 

(1,444)

(Decrease) increase in accrued interest payable

 

(1,480)

 

13

Net change in other assets and liabilities

 

(3,975)

 

(4,635)

Net cash provided by operating activities

 

23,854

 

26,787

INVESTING ACTIVITIES:

Investment in real estate properties

 

(13,581)

 

(15,971)

Investment in real estate developments

 

(4,854)

 

(6,957)

Investment in real estate capital improvements

 

(1,119)

 

(259)

Capitalized interest

(191)

(260)

Proceeds from sale of real estate, net

 

71,905

 

225

Investment in real estate mortgage loans receivable

 

(366)

 

(1,454)

Principal payments received on mortgage loans receivable

 

65

 

65

Investments in unconsolidated joint ventures

 

(58)

 

(293)

Proceeds from dissolution of unconsolidated joint ventures

3,400

Advances and originations under notes receivable

 

(141)

 

(6,953)

Principal payments received on notes receivable

 

 

41

Net cash provided by (used in) investing activities

 

51,660

 

(28,416)

FINANCING ACTIVITIES:

Bank borrowings

 

24,000

 

36,900

Repayment of bank borrowings

 

(28,000)

 

(2,000)

Principal payments on senior unsecured notes

(4,167)

Stock repurchase plan

(18,012)

Distributions paid to stockholders

 

(23,167)

 

(22,931)

Distributions paid to non-controlling interests

 

(146)

 

(90)

Other

 

(3,545)

 

(2,024)

Net cash (used in) provided by financing activities

 

(48,870)

 

5,688

Increase in cash, cash equivalents and restricted cash

 

26,644

 

4,059

Cash, cash equivalents and restricted cash, beginning of period

 

4,244

 

4,764

Cash, cash equivalents and restricted cash, end of period

$

30,888

$

8,823

Supplemental disclosure of cash flow information:

Interest paid

$

8,935

$

7,202

Non-cash investing and financing transactions:

Right of use asset

$

$

1,445

Lease liability

$

$

1,445

Reclassification of notes receivable to lease incentives

$

300

$

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 (“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, 2020 and 2019 are not necessarily indicative of the results for a full year.

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

New Accounting Pronouncements

New Accounting Standards Adopted by Our Company

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 (“ASU 2016-02”), Leases, which is codified under Accounting Standards Codification (“ASC”) as ASC Topic 842, Leases. Among other changes, ASU 2016-02 amends the previous accounting for lessors to:

Modify the accounting and lease classification criteria;

On a quarterly basis, on an individual lease basis, assess the collectibility of substantially all of the lease payments through maturity. If collectibility 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; and

7

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

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.

As a result of adopting ASU 2016-02 on January 1, 2019, using the modified retrospective transition approach, we evaluated the collectibility of our lease payments and determined that the level of collectibility certainty cannot be achieved for certain operators. Accordingly, we recognized a cumulative effect adjustment to equity of $42,808,000. Additionally, we now report 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. Furthermore, we assess the collectibility of substantially all of our lease payments through maturity and if collectibility is not probable, all or a portion of our straight-line rent receivable and other lease receivables may be written off and the rental income during the period would be limited to the lesser of the income that would have been recognized if collection were probable, and the lease payments received. Our assessment of collectibility of leases includes evaluating the data and assumptions used in determining whether substantially all of the future lease payments were probable based on the lessee’s payment history, the financial strength of the lessees, future contractual rents, and the timing of expected payments.

In April 2020, the FASB staff released a set of four questions and answers to provide guidance regarding accounting for lease concessions in response to the novel coronavirus (“COVID-19”) pandemic. The FASB staff guidance indicates that lessors could elect an accounting policy to not evaluate whether rent concessions provided in response to the COVID-19 pandemic are lease modifications. When only the timing of payments is impacted by the rent deferrals, but the amount of the consideration is substantially the same as required by the original lease agreement, the FASB listed two methods for lessors to account for the rent deferrals. We are still evaluating these methods:

Account for the rent deferrals as if there were no changes made to the lease agreement. Accordingly, increase the lease receivable and continue to recognize income.

Account for the rent deferrals as variable lease payments.

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. When shared risk characteristics exist, ASU 2016-13 requires a collective basis measurement of expected credit losses of the financial assets. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019.

We adopted ASU 2016-13 on January 1, 2020 and determined our Mortgage loans receivable and Notes receivable are within the scope of this ASU. We deem delinquency a credit quality indicator and consider delinquency to be 60 days of non-payment of amounts due. We utilize the probability of default and discounted cash flow methods to estimate expected credit losses. Additionally, we stress-tested the results to reflect the impact of unknown adverse future events including recessions, public health outbreaks and pandemics or epidemics, such as the coronavirus pandemic (“COVID-19”). We concluded that the adoption of ASU 2016-13 did not have a material impact on our financial statements at March 31, 2020 given that the historical reserves we had previously established approximated the expected credit losses computed by the models we utilized in the adoption of ASU 2016-13.

8

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

The expected credit losses for our financial instruments that are within the scope of ASU 2016-13 are as follows (in thousands):

Increase

/(Decrease)

Balance

in Expected

Balance

Balance Sheet

at

Credit Loss

at

Description

Location

12/31/2019

During the Quarter

3/31/2020

Expected credit losses for mortgage loans receivable

Mortgage loans receivable, net of loan loss reserve

$

2,560

$

3

$

2,563

Expected credit losses for notes receivable

Notes receivable, net of loan loss reserve

$

181

$

(2)

$

179

We elected not to measure an allowance for expected credit losses on accrued interest receivables as we have a policy in place to reserve or write off accrued interest receivables in a timely manner through our quarterly review of the loan and property performance. Therefore, we elected the policy to write off accrued interest receivables by reversing interest income and/or recognizing credit loss expense. As of March 31, 2020, total balance of accrued interest receivables of $28,097,000 was not included in the measurement of expected credit loss. For the three months ended March 31, 2020 and 2019, Company did not recognize any write-off of accrued interest receivables.

2.

Real Estate Investments

Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (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. Our 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 2.5%;
(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.

Our leases that contain fixed annual rental escalations and/or have annual rental escalations that are contingent upon changes in the Consumer Price Index, 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 gross operating revenues of the property. This revenue is not recognized until the appropriate contingencies have been resolved.

9

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

The following table summarizes our investments in owned properties at March 31, 2020 (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

$

876,319

60.9

107

6,164

$

142.17

Skilled Nursing

543,814

37.8

%

50

6,283

212

$

83.73

Under Development (2)

6,684

0.5

Other (3)

11,360

0.8

1

118

Total

$

1,438,177

100.0

158

6,401

6,376

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

(2)Represents a 90-bed SNF development project located in Missouri.

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

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):

    

 Cash

 

Rent (1)

 

2020

$

101,584

2021

 

127,050

2022

 

128,250

2023

 

129,900

2024

 

126,374

Thereafter

 

625,531

(1)Represents contractual cash rent, except for Anthem Memory Care (“Anthem”) lease which is based on cash rent received. See below for more information.

Anthem operates 11 operational memory care communities under a master lease and was placed in default in 2017 resulting from Anthem’s partial payment of its minimum rent. However, we did not enforce our rights and remedies pertaining to the event of default, under the stipulation that Anthem achieves sufficient performance and pays agreed upon rent. We currently anticipate that Anthem will pay $9,900,000 of annual cash rent during 2020. However, COVID-19 may adversely impact Anthem’s operating cash flow and ability to pay rent. In accordance with ASC 842 lease a