LTC PROPERTIES, INC. Executive Overview
Business and Investment Strategy
We are a self-administered health care real estate investment trust ("REIT")
that invests primarily in seniors housing and health care properties through
sale-leaseback transactions, mortgage financing, joint ventures 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.
ILF, ALF, MC, and combinations thereof are included in the ALF communities
classification. We have been operating since August 1992 .
Substantially all of our revenues and sources of cash flows from operations are
derived from operating lease rentals, interest earned on outstanding loans
receivable and income from investment in unconsolidated joint ventures. 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 property type 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.
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Portfolio Overview
The following tables summarizes our real estate investment portfolio as of
Twelve Months Ended
Percentage December 31, 2019 Percentage Number Number of
Gross of Rental Interest of of SNF ALF
Owned Properties Investments Investments Income (1) Income Revenues Properties (2) Beds (3) Units (3)
Assisted Living (4) $ 858,852 49.4 % $ 68,641 $ - 40.7 % 106 - 6,086
Skilled Nursing 596,370 34.2 % 69,087 - 40.9 % 70 8,505 261
Under Development (5) 17,989 1.0 % - - - % - - -
Other (6) 11,360 0.7 % 955 - 0.6 % 1 118 -
Total Owned Properties 1,484,571 85.3 % 138,683 - 82.2 % 177 8,623 6,347
Mortgage Loans
Skilled Nursing 256,659 14.7 % - 29,991 17.8 % 22 2,892 -
Total Mortgage Loans 256,659 14.7 % - 29,991 17.8 % 22 2,892 -
Total Portfolio $ 1,741,230 100.0 % $ 138,683 $ 29,991 100.0 % 199 11,515 6,347
Twelve Months Ended
Percentage December 31, 2019 Percentage Number Number of
Gross of Rental Interest of of SNF ALF
Summary of Properties by Type Investments Investments Income (1)
Income Revenues Properties (2) Beds (3) Units (3) Assisted Living (4)$ 858,852 49.4 %$ 68,641 $ - 40.7 % 106 - 6,086 Skilled Nursing 853,029 48.9 % 69,087 29,991 58.7 % 92 11,397 261 Under Development (5) 17,989 1.0 % - - - % - - - Other (6) 11,360 0.7 % 955 - 0.6 % 1 118 - Total Portfolio$ 1,741,230 100.0 %$ 138,683 $ 29,991 100.0 % 199 11,515 6,347
Excludes variable rental income of
income.
(2) We have investments in 28 states leased or mortgaged to 30 different
operators.
(3) See Item 2. Properties for discussion of bed/unit count.
(4) Includes ILF, ALF, MC, and combinations thereof.
(5) Represents two development projects, consisting of a 78-unit ALF/MC located
in Oregon and a 90-bed SNF located in Missouri .
(6) Includes three parcels of land held-for-use and one behavioral health care
hospital.
As ofDecember 31, 2019 , we had$1.4 billion in carrying value of net real estate investments, consisting of$1.1 billion or 81.7% invested in owned and leased properties and$0.3 billion or 18.3% invested in mortgage loans secured by first mortgages. For the year endedDecember 31, 2019 , rental income and interest income from mortgage loans represented 82.4% and 16.2%, respectively, of total gross revenues. In most instances, our lease structure contains annual rental escalations. 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. During the years endedDecember 31, 2019 and 2018 and 2017, we recognized$0.5 million of contingent rental income. For the year endedDecember 31, 2019 , we recognized$4.5 million in straight-line rental income and$0.4 million in amortization of lease incentives. For the remaining leases in place atDecember 31, 2019 , assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio, except for the subsequent acquisitions, lease extensions, completed developments in 2020 and the leases reported below under Update on Certain Operators, we currently expect that straight-line rental income will decrease from$4.5 million in 2019 to$2.5 million for projected annual 2020. Our cash rental income is projected to increase from$150.6 million in 2019 to$150.8 million for projected annual 2020. AtDecember 31, 2019 , the straight-line rent receivable balance on the consolidated balance sheet was
$45.7 million . 28 Table of Contents Many of our existing leases contain renewal options that, if exercised, could result in the amount of rent payable upon renewal being greater or less than that currently being paid. During the year endedDecember 31, 2019 , there were no lease renewals. Some of our lease agreements provide purchase options allowing the lessees to purchase the properties they currently lease from us. See Item 8. FINANCIAL STATEMENTS- Note 5. Real Estate Investments.Owned Properties for a table that includes information about purchase options included in our lease agreements. Update on Certain Operators
During 2017, we issued a notice of default toAnthem Memory Care ("Anthem") resulting from Anthem's partial payment of minimum rent. Anthem operates 11 memory care communities under a master lease. During 2019, Anthem paid the agreed upon minimum cash rent of$7.5 million . This amount represents approximately 50% of the contractual amount due under the lease in 2019. In accordance with Accounting Standard Codification ("ASC") Topic 842, Leases ("ASC 842"), atJanuary 1, 2019 , we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Anthem and determined 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 ofJanuary 1, 2019 , as required by the ASC 842 transition guidance. We receive regular financial performance updates from Anthem and continue to monitor Anthem's performance obligations under the master lease agreement. OnDecember 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. Senior Care did not pay usDecember 2018 rent and accordingly, inDecember 2018 , we placed Senior Care on a cash basis. In accordance with ASC 842 lease accounting guidance, atJanuary 1, 2019 , we evaluated the collectibility of straight-line rent receivable and lease incentive balance related to Senior Care and determined 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 ofJanuary 1, 2019 , as required by the ASC 842 transition guidance. InJuly 2019 , Senior Care filed a motion to affirm the lease, which caused us to file an objection in opposition to Senior Care's motion. During the fourth quarter of 2019, the court rejected our motion and accordingly, our master lease with Senior Care was affirmed. Furthermore, we received the court ordered reimbursement from Senior Care for theDecember 2018 unpaid rent, late fees and legal costs totaling$1.6 million . Senior Care has paid usJanuary 2019 toFebruary 2020 rent, real estate property tax and maintenance deposits. 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 inKentucky against Preferred Care and certain affiliated entities. The affiliated entities named in the lawsuit operate properties inKentucky andNew Mexico . Preferred Care leased 24 properties under two master leases from us and none of the 24 properties are located inKentucky orNew Mexico . Those 24 properties are inArizona ,Colorado ,Iowa ,Kansas andTexas . The Preferred Care operating entities that sublease those properties did not file for bankruptcy. In accordance with ASC 842 lease accounting guidance, atJanuary 1, 2019 , we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Preferred Care and determined 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 ofJanuary 1, 2019 , as required by the ASC 842 transition guidance. Preferred Care did not affirm our master leases and began paying only$55,000 of monthly rent in the third quarter of 2019. The monthly contractual obligation under the master leases was approximately$1.0 million . We applied all of their security deposit to rental income during the third quarter and recorded only the$55,000 monthly cash received in the fourth quarter of 2019 to rental income. During the fourth quarter of 2019, we entered into multiple contracts, subject to standard due diligence and other contingencies, to sell a majority of the properties. Two of these contracts were completed during the fourth quarter of 2019, resulting in the sale of two properties inArizona andTexas . See Item 8. FINANCIAL STATEMENTS- Note 5. Real Estate Investments. Property Sales for further discussion. AtDecember 31, 2019 , the 20 properties under purchase and sale agreements met the criteria under GAAP as held-for-sale. Accordingly, these properties have been classified as held-for-sale atDecember 31, 2019 . During the three months endedMarch 31, 2019 , we placedThrive Senior Living, LLC ("Thrive") on a cash basis due to short-payment of contractual rent inNovember 2018 and non-payment of rent inDecember 2018 totaling$0.7 million . Thrive subsequently paid the delinquent rent in 2019 but failed to pay 2019 contractual rent. InApril 2019 , we issued a notice of default to Thrive. In accordance with ASC 842 lease accounting guidance, atJanuary 1, 2019 , we 29 Table of Contents 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 ofJanuary 1, 2019 , as required by the ASC 842 transition guidance. During 2019, we completed the following for all of the properties in the Thrive portfolio. As ofDecember 31, 2019 , Thrive does not operate any properties in our portfolio:
Transitioned two memory care communities located in
total of 120-units to an operator new to our portfolio during the second
quarter of 2019. The memory care communities are under a 10-year lease term
? with initial cash rent of
subject to a contingent escalation formula commencing in year five and annually
thereafter. The lease provides the lessee with a purchase option available
between 2028-2029;
Transitioned a 56-unit memory care community located in
operator and added the memory care community to an existing master lease during
the second quarter of 2019. As a result of this transition, annual cash rent
? under the existing master lease was increased by
2019 and will increase by an additional
annually thereafter. Additionally, LTC will be entitled to incremental rent
calculated as a percentage of increases in gross revenues generated by the
property above an established threshold;
Transitioned two memory care communities in
? total of 159-units to an existing operator during the third quarter of 2019.
The new 2-year lease agreement has an initial annual cash rent of
Rent increases 3.5% in year two; and
Transitioned the remaining 60-unit memory care community located in
an existing operator effective
the lessee twelve months free rent, rent of
million in year three and thereafter. In year two, the lessee has the option to
? defer rent in an amount not to exceed
to a contingent escalation formula commencing in year three and annually
thereafter. Additionally, the lease provides the lessee with a purchase option
available between 2028 and 2029. See Item 8. FINANCIAL STATEMENTS- Note 5. Real
Estate Investments.
about purchase options included in our lease agreements.
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2019 Transactions Overview
The following tables summarizes our transactions in 2019 (dollar amounts in thousand):
Investment in
Number Type Number Initial Total Total
of of of Cash Purchase Transaction Acquisition
State (1) Properties Properties Beds/Units Yield Price
Costs Costs
California - (2) Land - N/A $ 110 $ 28 $ 138
Michigan 2 ALF/MC 156 7.4 % 19,000 139 19,139
Missouri 1 (3) SNF/Land 90 (3) % 22,122 120 22,242
Virginia 1 (4) ALF/MC 74 7.4 % 16,719 176 16,895
Total 4 320 $ 57,951 $ 463 $ 58,414 Subsequent to
with an initial cash yield of 8.5%, escalating 2% annually starting in the
second year of the lease, with two five-year renewal options.
(2) We acquired a parcel of land adjacent to an existing SNF inCalifornia .
We acquired a newly constructed 90-bed SNF located in
The initial cash yield is 8.3% with annual escalation of 2% effective
(3)
committed to develop a 90-bed SNF in Missouri . The commitment totals
approximately $17,400 . The initial cash yield upon completion of the
development will be 9.3%.
We entered into a joint venture ("JV") to purchase an existing operational
(4) 74-unit ALF/MC. The non-controlling partner contributed
contributed
approximately 95%.
Sold Properties
Type Number Number Net
of of of Sales Carrying Gain
State Properties Properties Beds/Units Price Value (Loss)
N/A N/A - - $ - $ - $ 500 (1)
Arizona, Georgia and Texas SNF (2) 3 478 15,310 8,995 5,556
Texas ALF (3) 1 140 1 3,830 (3,950)
Total 4 618 $ 15,311 $ 12,825 $ 2,106 (1) Gain recognized due to the receipt of funds held in escrow related to a
portfolio of six ALFs sold during the second quarter of 2018.
We sold a property located in
with a carrying value of
Preferred Care portfolio located in
for
potential specific losses. Using the expected value model per ASC Topic 606,
Revenue from Contracts with Customers ("ASC 606"), we estimated and recorded
the holdback value of $613 . Also, we sold a SNF located in Georgia with a
carrying value of $1,639 for $7,920 .
(3) We sold an ALF located in
Development Projects
Developments Improvements
Assisted Living Communities $ 14,088 $ 2,544
Skilled Nursing Centers 6,436 -
Other - 295
Total $ 20,524 $ 2,839
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Completed Developments
Number Type Number
of of of Total
Type of Project Properties Property Beds/Units State Investment
Development 1 SNF 143 Kentucky $ 24,974
Development 1 ILF/ALF/MC 110 Wisconsin 21,999
2 253 $ 46,973 Investment in Mortgage Loans
Originations and funding under mortgage loans receivable
(1,065)
Mortgage loan premium amortization (4)
Provision for loan loss reserve (113)
Net increase in mortgage loans receivable $ 11,160 During 2019, we funded an additional
escalating by 2.25% thereafter.
Investment in
Type Type Total Currently Number Cash
of of Preferred Paid in of Investment Carrying Capital Income Interest
State Properties Investment Return Cash Beds/ Units Commitment Value Contribution Recognized Received
Arizona ALF/MC/ILF Preferred Equity 15 % 8 % (1) 585 $ - $ 19,003 (1) $ 472 $ 1,029 $ 1,580
Florida (2) ALF/ILF/MC Mezzanine N/A % N/A % N/A - (2) - (2) - 955 (2) 979 (2)
Florida (3) UDP/ALF/MC Mezzanine N/A % N/A % N/A - (3) - (3) - 404 (3) 432 (3)
585 $ - $ 19,003 $ 472 $ 2,388 $ 2,991
Effective second quarter of 2019, this JV was placed on cash basis due to
delinquency of our preferred return. In November 2019 , the JV signed a
contract for the sale of the four properties comprising the JV. The contract
was subject to standard due diligence and other contingencies to close, all
of which were met in
31, 2019, we performed a recoverability test on the carrying value of our
preferred equity investment and concluded that a portion of our preferred
equity investment will not be recoverable. Therefore, we recorded an
impairment loss from investment in unconsolidated joint ventures of
and wrote our preferred equity investment down to its estimated fair value.
We had a $2,900 mezzanine loan commitment for a 99-unit seniors housing
community in
payments were deferred and no interest was recorded for the first twelve (2) months of the loan, we used the effective interest income method in
accordance with GAAP to recognize interest income and recorded the difference
between the effective interest income and cash interest income to the loan
principal balance. During the third quarter of 2019, the mezzanine loan was
paid off.
We had a
During the first quarter of 2019, the mezzanine loan was paid off.Investment in Notes Receivable
Advances under notes receivable$ 8,967 (1)
Principal payments received under notes receivable (3,503) Reclassed to real estate under development (2)
(200) (2)
Notes receivable reserve (52)
Net increase in notes receivable $ 5,212 We originated a
204-unit ILF/ALF/MC in
12.0% return, a portion of which is paid in cash, and the remaining portion (1) of which is deferred during the first 46 months. Additionally, we originated
a
note bears interest at 7.0%. Further, we originated a
funding
Represents interim working capital loan related to a development project (2) which matured upon completion of the development project and commencement of
the lease.
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Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results in making operating decisions and for budget planning purposes. Concentration Risk. We evaluate by gross real estate investment our concentration risk in terms of asset mix, real estate investment mix, operator mix and geographic mix. Concentration risk is valuable to understand what portion of our real estate investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our real estate investments that are real property or mortgage loans. Investment mix measures the portion of our investments that relate to our various property types. Operator mix measures the portion of our real estate investments that relate to our top five operators. Geographic mix measures the portion of our real estate investment that relate to our top five states.
The following table reflects our recent historical trends of concentration risk (gross investment, in thousands):
12/31/19 9/30/19 6/30/19 3/31/19 12/31/18
Asset mix:
Real property $ 1,484,571 $ 1,474,692 $ 1,452,669 $ 1,445,596 $ 1,421,456
Loans receivable 256,659 255,737 254,555 246,775 245,386
Real estate investment mix:
Skilled nursing centers $ 853,029 $ 861,500 $ 844,136 $ 834,185 $ 830,485
Assisted living communities 858,852 844,635 843,682 840,926 820,686
Under development 17,989 12,934 8,167 6,193 4,606
Other (1) 11,360 11,360 11,239 11,067 11,065
Operator mix:
Prestige Healthcare (1) $ 269,792 $ 268,869 $ 267,688 $ 259,907 $ 258,519
Senior Lifestyle Corporation 191,283 191,283 190,758 190,368 190,368
Senior Care Centers 138,109 138,109 138,109 138,109 138,109
Anthem Memory Care 136,484 136,483 136,397 136,397 136,397Carespring Health Care Management 102,520 102,042 102,038
99,997 97,461
Remaining operators 903,042 893,643 872,234 867,593 845,988
Geographic mix:
Texas $ 284,697 $ 292,238 $ 292,159 $ 292,091 $ 292,317
Michigan (1) 276,742 256,680 255,498 247,718 246,329
Wisconsin 149,290 149,184 149,064 146,750 143,657
Colorado 114,923 114,923 114,923 114,923 114,923
California 103,240 102,561 102,412 102,254 102,254
Remaining states 812,338 814,843 793,168 788,635 767,362
We have three parcels of land as of
and are managed by Prestige.
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). The coverage ratios are based on earnings before interest,
taxes, depreciation and amortization for real estate ("EBITDAre") as defined by
National Association of Real Estate Investment Trusts ("NAREIT"). EBITDAre is
calculated as net income (computed in accordance with GAAP) excluding (i)
interest expense, (ii) income tax expense, (iii) real estate depreciation and
amortization, (iv) impairment write-downs of depreciable real estate, (v) gains
or losses on the sale of depreciable real estate, and (vi) adjustments for
unconsolidated partnerships and joint ventures. Adjusted EBITDAre is calculated
as EBITDAre adjusted for non-recurring items. 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:
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Table of Contents
Balance Sheet Metrics
Year Ended Quarter Ended
12/31/19 12/31/19 9/30/19 6/30/19 3/31/19 12/31/18
Debt to gross asset value 37.2 % 37.2 % (1) 36.8 % 36.8 % (4) 37.1 % (5) 35.2 %
Debt to market capitalization ratio 28.0 % 28.0 % (2) 25.1 % (3) 27.1 % 27.1 % (3) 28.1 %
Interest coverage ratio (7) 4.9 x 4.9 x 4.9 x 4.8 x 4.9 x (6) 5.2 x
Fixed charge coverage ratio (7) 4.9 x 4.9 x 4.9x 4.8 x 4.9 x (6) 5.2 x
Increased due to increase in outstanding debt partially offset by increase in (1) gross asset value. The increase in asset value was primarily due to
acquisitions, developments and capital improvement funding partially offset
by property sales.
(2) Increased due to decrease in market capitalization and increase in
outstanding debt.
(3) Decreased due to increase in market capitalization.
(4) Decreased due to increase in gross asset value from additional mortgage loan,
development and capital improvement funding.
Increased due to increase in outstanding debt and decrease in gross asset
value. The decrease in gross asset value was primarily due to adoption of ASC
842 during the three months ended
lease-by-lease collectibility analysis of receivables and related balances. (5) Based on our assessment, we determined that it was not probable that we would
collect substantially all of the contractual lease obligations for certain
leases through maturity. Accordingly, we wrote-off the balance of
straight-line rent receivable and lease incentives related to these leases as
a cumulative adjustment to equity, as required by the transition guidance.
Decreased due to decrease in other income compared to the fourth quarter of (6) 2018. The increase in other income during the fourth quarter of 2018 was from
the net write-off of a contingent lease incentive and related earn-out
liability.
In calculating our interest coverage and fixed charge coverage ratios above,
we use EBITDAre, which is a financial measure not derived in accordance with
measure). EBITDAre and Adjusted EBITDAre are not alternatives to net income, (7) operating income or cash flows from operating activities as calculated and
presented in accordance with GAAP. You should not rely on EBITDAre and
Adjusted EBITDAre as a substitute for any such 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 EBITDAre and Adjusted EBITDAre.
Year to Date Quarter Ended
12/31/19 12/31/19 9/30/19 6/30/19 3/31/19 12/31/18
Net income $ 80,872 $ 12,631 $ 27,280 $ 20,534 $ 20,427 $ 30,844
Less: (Gain)/ loss on sale (2,106) 4,630 (6,236) (500) - (7,984)
Add: Impairment loss from
investment in unconsolidated joint
ventures 5,500 5,500 - - - -
Add: Interest expense 30,582 7,578 7,827 7,710 7,467 7,215
Add: Depreciation and amortization 39,216 9,817 9,932 9,860 9,607 9,396
EBITDAre $ 154,064 $ 40,156 $ 38,803 $ 37,604 $ 37,501 $ 39,471
Less: Non-recurring one-time items (1,535) (2,111) - - 576 - Adjusted EBITDAre$ 152,529 $ 38,045 $ 38,803 $ 37,604 $ 38,077 $ 39,471 Interest expense$ 30,582 $ 7,578 $ 7,827 $ 7,710 $ 7,467 $ 7,215 Add: Capitalized interest 608 167 108 73 260 398 Interest incurred$ 31,190 $ 7,745 $
7,935
Interest coverage ratio 4.9 x 4.9 x
4.9 x 4.8 x 4.9 x 5.2 x
Interest incurred$ 31,190 $ 7,745 $ 7,935 $ 7,783 $ 7,727 $ 7,613 Total fixed charges$ 31,190 $ 7,745 $
7,935
Fixed charge coverage ratio 4.9 x 4.9 x 4.9 x 4.8 x 4.9 x 5.2 x
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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 seniors 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
Year ended December 31, 2019 compared to year ended December 31, 2018 (in
thousands):
Years ended December 31,
2019 2018 Difference
Revenues:
Rental income $ 152,755 $ 135,405 $ 17,350 (1) (2)
Interest income from mortgage loans 29,991 28,200 1,791 (3) Interest and other income 2,558 5,040 (2,482) (4) Total revenues 185,304 168,645 16,659 Expenses: Interest expense 30,582 30,196 (386)
Depreciation and amortization 39,216 37,555 (1,661) (5) Provision for doubtful accounts 166
87 (79)
Transaction costs 365 84 (281)
Property tax expense 16,755 - (16,755) (2)General and administrative expenses 18,453
19,193 740 (6) Total expenses 105,537 87,115 (18,422) Other operating income:
Gain on sale of real estate, net 2,106 (7) 70,682 (8) (68,576) Operating income 81,873 152,212 (70,339) Gain from property insurance proceeds 2,111 - 2,111 (9) Impairment loss from investments in unconsolidated joint ventures (5,500) - (5,500) (10) Income from unconsolidated joint ventures 2,388 2,864 (476) Net income 80,872 155,076 (74,204) Income allocated to non-controlling interests (346) (95) (251) Net income attributable to LTC Properties, Inc. 80,526 154,981 (74,455) Income allocated to participating securities (391) (625) 234
Net income available to common stockholders
Increased due to (2) below and increased rent from acquisitions and (1) developments partially offset by decreased rent from sold properties and
properties transitioned to other operators.
Increased due to recording
our operators as rental income with a corresponding property tax expense. We (2) adopted ASC 842 using a modified retrospective approach as of the adoption
date of January 1, 2019 . Accordingly, we are not required to report the
expense and revenue stream for periods prior to January 1, 2019 .
(3) Increased primarily due to mortgage originations and capital improvement
funding.
Decreased primarily due to the other income from net impact of the write-off (4) of an earn-out liability and the related lease incentive asset during 2018
partially offset by increase in other income during 2019 due to mezzanine
loan originations.
(5) Increased due to acquisitions and completed developments partially offset by
sold properties.
(6) Decreased primarily due to lower accrual of incentive compensation in 2019.
Represents the net gain resulting from sale of three SNFs and an ALF during
(7) 2019. Additionally, represents an additional
receipt of funds held in escrow related to a portfolio of six ALFs sold in
2018. See (8) below.
(8) Represents the net gain on sale related to six ALFs and four SNFs during
2018.
Relates to remaining insurance proceeds for remediation of a property in our (9) portfolio, which was sold in 2019. See Item 8. FINANCIAL STATEMENTS-Note 2.
Summary of Significant Accounting Policies. for more information.
Based on the information available to us regarding alternatives and courses
of action as of
carrying amount of our preferred equity investment and determined that a (10) portion of our preferred equity investment is not recoverable. Therefore, we
recorded an impairment loss from investment in unconsolidated joint ventures
of
fair value. See Item 8. FINANCIAL STATEMENTS-Note 6. Investment in
Unconsolidated Joint Ventures for further information.
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Year ended December 31, 2018 compared to year ended December 31, 2017 (in
thousands)
Years ended December 31,
2018 2017 Difference
Revenues:
Rental income $ 135,405 $ 137,657 $ (2,252) (1)
Interest income from mortgage loans 28,200 26,769 1,431 (2)
Interest and other income 5,040 3,639 1,401 (3)
Total revenues 168,645 168,065 580
Expenses:
Interest expense 30,196 29,949 (247) (4)
Depreciation and amortization 37,555 37,610 55
Impairment on real estate for sale - 1,880 1,880 (5)
Provision for doubtful accounts 87 (206) (293)
Transaction costs 84 56 (28)
General and administrative expenses 19,193 17,513 (1,680) (6) Total expenses 87,115 86,802 (313) Other operating income:
Gain on sale of real estate, net 70,682 (7) 3,814 (8) 66,868 (7) Operating income 152,212 85,077 67,135 Income from unconsolidated joint ventures 2,864 2,263 601 (8) Net income 155,076 87,340 67,736 Income allocated to non-controlling interests (95) - (95) Net income attributable to LTC Properties, Inc. 154,981 87,340 67,641 Income allocated to participating securities (625) (362) (263)
Net income available to common stockholders
(1)Decreased due the reduction of rent related to the properties sold during 2018 andSenior Care Centers non-payment of December rent as a result of the bankruptcy filing, partially offset by acquisitions and capital improvements.
(2) Increased primarily due to mortgage originations and capital improvement
funding partially offset by payoffs.
(3)Increased primarily due to the net impact of the write-off of an earn-out
liability and the related lease incentive asset during 2018 partially offset by
decrease in interest income due to mezzanine loan payoffs and write-off of an
earn-out liability and related lease incentive asset during 2017.
(4)Increased primarily due to a higher average outstanding balance on our line of credit and an increase in LIBOR rates, partially offset by scheduled principal payments under our senior unsecured notes and an increase in capitalized interest related to development projects.
(5)Represents the write-off of straight-line rent and other receivables in 2017 related to two properties due to negotiations to transition these properties to another operator in our portfolio.
(6)Increased primarily due to lower incentive compensation in the prior year related to a previously disclosed defaulted master lease.
(7)Represents the net gain on sale of six ALF and four SNF properties during 2018, partially offset by a net gain on sale of five ALF and a donation of
a SNF
during 2017.
(8)Increased primarily due to income generated from additional funding under a
preferred capital contribution commitment and income from a mezzanine loan
accounted for as an unconsolidated joint venture in accordance with GAAP which
was previously deferred.
Funds From Operations
Funds from Operations ("FFO") attributable to common stockholders, basic FFO
attributable to common stockholders per share and diluted FFO attributable to
common stockholders per share are supplemental measures of a REIT's financial
performance that are not defined by GAAP. Real estate values historically rise
and fall with market conditions, but cost accounting for real estate assets in
accordance with 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.
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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 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 NAREIT. FFO, as defined by NAREIT, means net income
available to common stockholders (computed in accordance with 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 attributable to common stockholders (unaudited, amounts in thousands, except
per share amounts):
For the year ended December 31,
2019 2018 2017
GAAP net income available to common stockholders
39,216 37,555 37,610
Add: Impairment charges 5,500 - 1,880
Less: Gain on sale of real estate, net (2,106) (70,682) (3,814)
NAREIT FFO attributable to common stockholders $ 122,745 $ 121,229 $ 122,654
NAREIT FFO attributable to common stockholders
per share:
Basic $ 3.10 $ 3.07 $ 3.11
Diluted $ 3.08 (1) $ 3.06 (1) $ 3.10 (1)
Weighted average shares used to calculate NAREIT
FFO per share:
Basic 39,571 39,477 39,409
Diluted 39,921 (2) 39,839 (2) 39,637 (2)
(1) Includes the effect of participating securities.
Diluted weighted average shares used to calculate FFO per share includes the (2) effect of stock option equivalents, participating securities and
performance-based stock units.
Critical Accounting Policies
See Item 8. FINANCIAL STATEMENTS-Note 2. Summary of Significant Accounting Policies.
Liquidity and Capital Resources
Sources and Uses of Cash
As ofDecember 31, 2019 , we had a total of$4.2 million of cash and cash equivalents,$506.1 million available under our unsecured revolving line of credit and$21.5 million available under our senior unsecured note shelf agreement which expired inFebruary 16, 2020 . Subsequent toDecember 31, 2019 , we borrowed$18.0 million under our unsecured revolving line of credit. Accordingly, we have$111.9 million outstanding under our unsecured revolving line of credit and$488.1 million available for borrowing. See Item 8. FINANCIAL STATEMENTS- Debt Obligations for further discussion.
Additionally, we have the ability to access the capital markets through the
issuance of
We have an automatic shelf registration statement on file with the
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common stock, preferred stock, warrants, debt, depositary shares, or units. We may from time to time publicly raise capital under our automatic shelf registration statement 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. We believe that our current cash balance, cash flow from operations available for distribution or reinvestment, our borrowing capacity and our potential ability to access the capital markets are sufficient to provide for payment of our current operating costs, meet debt obligations and pay common dividends at least sufficient to maintain our REIT status and repay borrowings at, or prior to, their maturity. The timing, source and amount of cash flows used by financing and investing activities are sensitive to the capital markets' environment, especially to changes in interest rates. We continuously evaluate the availability of cost-effective capital and believe we have sufficient liquidity for additional capital investments in 2020. We expect our future income and ability to make distributions from cash flows provided by operating activities to depend on the collectibility of our rents and mortgage loans receivable. The collection of these loans and rents will be dependent, in large part, upon the successful operation by the operators of the seniors housing and health care properties we own or that are pledged to us. The operating results of the facilities may be impacted by various factors over which the operators/owners may have no control. Those factors include, without limitation, the status of the economy, changes in supply of or demand for competing seniors housing and health care facilities, ability to control rising operating costs, and the potential for significant reforms in the health care industry. In addition, our future growth in net income and cash flow may be adversely impacted by various proposals for changes in the governmental regulations and financing of the health care industry. We cannot presently predict what impact these proposals may have, if any. We believe that an adequate provision has been made for the possibility of loans proving uncollectible but we will continually evaluate the financial status of the operations of the seniors housing and health care properties. In addition, we will monitor our borrowers and the underlying collateral for mortgage loans and will make future revisions to the provision, if considered necessary. Our investments, principally our investments in mortgage loans and owned properties, are subject to the possibility of loss of their carrying values as a result of changes in market prices, interest rates and inflationary expectations. The effects on interest rates may affect our costs of financing our operations and the fair market value of our financial assets. Generally, our loans have predetermined increases in interest rates and our leases have agreed upon annual increases. We may initially fund some of our investments with variable interest rate debt and, if so, we would be at risk of net interest margin deterioration if medium and long-term rates were to increase. Our primary sources of cash include rent and interest receipts, borrowings under our primary unsecured credit facility and proceeds from investment dispositions. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures and construction advances), loan advances and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows as summarized below
(in
thousands):
Year Ended December 31, Change
Cash provided by (used in): 2019 2018 $
Operating activities $ 122,469 $ 115,535 $ 6,934
Investing activities (78,988) (3,609) (75,379)
Financing activities (44,001) (112,375) 68,374
Decrease in cash, cash equivalents and
restricted cash (520) (449) (71)
Cash, cash equivalents and restricted cash,
beginning of period 4,764 5,213 (449)
Cash, cash equivalents and restricted cash, end
of period $ 4,244 $ 4,764 $ (520)
Debt Obligations
Bank Borrowings. We have an Unsecured Credit Agreement that provides for a revolving line of credit up to$600.0 million in aggregate commitment of the lenders and the opportunity to increase the commitment size of the credit agreement up to a total of$1.0 billion . The Unsecured Credit Agreement matures onJune 27, 2022 and provides for a one-year extension option at our discretion, subject to customary conditions. Based on our leverage atDecember 31, 2019 , the facility provides for interest annually at LIBOR plus 115 basis points and
a
facility fee of 20
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basis points. At
Senior Unsecured Notes. We have a$337.5 million shelf agreement with affiliates and managed accounts ofPGIM, Inc. ("Prudential"), with 21.5 million available for borrowings atDecember 31, 2019 , which expired for new issuance onFebruary 16, 2020 . The debt obligations by component as ofDecember 31, 2019 are as follows (dollar amounts in thousands): Applicable Available Interest Outstanding for Debt Obligations Rate (1) Balance Borrowing Bank borrowings (2) 3.14%$ 93,900 $ 506,100 Senior unsecured notes, net of debt issue costs 4.39% 599,488 21,500 Total 4.22%$ 693,388 $ 527,600
(1) Represents weighted average of interest rate as of
Subsequent to
Our debt borrowings and repayments during the year ended
Debt Obligations Borrowings Repayments Bank borrowings$ 107,900 $ (126,000) Senior unsecured notes 100,000 (33,667) Total$ 207,900 $ (159,667) Equity
At
Common Stock. We have an equity distribution agreement with sales agents to issue and sell, from time to time, up to$200.0 million in aggregate offering price of our common shares. The equity distribution agreement provides for sales of common shares to be made by means of ordinary brokers' transactions, which may include block trades, or transactions that are deemed to be "at the market" offerings. AtDecember 31, 2019 , we had$200.0 million available under our equity distribution agreement. During 2019, we acquired 45,030 shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations. Subsequent toDecember 31, 2019 , we acquired 34,016 shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations. Subsequent toDecember 31, 2019 , we declared a monthly cash dividend of$0.19 per share on our common stock for the months of January, February andMarch 2020 , payable onJanuary 31 ,February 28 andMarch 31, 2020 , respectively, to stockholders of record onJanuary 23 ,February 20 andMarch 23, 2020 , respectively. Non-controlling Interests. We may, enter into partnerships to develop and/or own real estate. Given that our limited members do not have substantive kick-out rights, liquidation rights, or participation rights, we have concluded that the partnerships are VIEs. Since we exercise power over and receive benefits from the VIEs, we are considered the primary beneficiary. Accordingly, we consolidate the VIEs and record the non-controlling interests at cost. During 2019, we invested in the following consolidated VIEs (in thousands): Gross Property Consolidated Non-Controlling Purpose Type State Assets Interests Owned real estate ALF/MC VA$ 16,895 $ 919 40 Table of Contents Stock Based Compensation Plans. During 2015, we adopted, and our stockholders approved the 2015 Equity Participation Plan (the "2015 Plan") which 1,400,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2015 Plan are set by our compensation committee at its discretion.
Restricted Stock and Performance-based Stock Units. During 2019, we granted 147,608 shares of restricted common stock and performance-based stock units under the 2015 Plan as follows:
No. of Price per Shares Share Vesting Period 78,276$ 46.54 ratably over 3 years 60,836$ 46.54 TSR targets (1) 8,496$ 44.73 May 29, 2020 147,608
(1) Vesting is based on achieving certain total shareholder return ("TSR")
targets in 4 years with acceleration opportunity in 3 years.
Subsequent to
AtDecember 31, 2019 , the total number of restricted common stock and performance-based stock units that are scheduled to vest and remaining compensation expense to be recognized related to the future service period of unvested outstanding restricted common stock and performance-based stock units are as follows (dollar amounts in thousands): Number Remaining of Compensation Vesting Date Awards Expense 2020 139,534 (1)$ 4,619 2021 119,168 (2) 2,503 2022 86,931 (3) 189 Total 345,633$ 7,311
Includes 55,057 performance-based stock units. The performance-based stock (1) units are valued utilizing a lattice-binomial option pricing model based on
over the applicable vesting period as compensation expense.
(2) Includes 66,171 performance-based stock units. See (1) above for valuation
methodology.
(3) Includes 60,836 performance-based stock units. See (1) above for valuation
methodology.
Stock Options. We did not issue any stock options during the year endedDecember 31, 2019 . During 2019, a total of 5,000 stock options were exercised at a total option value of$123,000 and a total market value on the date of exercise of$233,000 . AtDecember 31, 2019 , we have 15,000 stock options outstanding and exercisable. 41 Table of Contents Contractual Obligations We monitor our contractual obligations and commitments detailed above to ensure funds are available to meet obligations when due. The following table represents our long-term contractual obligations (scheduled principal payments and amounts due at maturity) as ofDecember 31, 2019 , excluding the effects of interest and debt issue costs (in thousands): Total 2020 2021 2022 2023 2024 Thereafter Bank borrowings$ 93,900 (1) $ - $ -$ 93,900 $ - $ - $ - Senior unsecured notes 600,300 40,160 47,160 48,160 49,160 49,160 366,500$ 694,200 $ 40,160 $ 47,160 $ 142,060 $ 49,160 $ 49,160 $ 366,500
Subsequent to
$488,100 available for borrowing under our unsecured revolving line of credit.
The following table represents our projected interest expense, excluding
capitalized interest, amortization of debt issue costs, bank fees and earn-out
accretion, as of
Total 2020 2021 2022 2023 2024 Thereafter
Bank borrowings $ 7,469 $ 2,998 $ 2,989 $ 1,482 $ - $ - $ -
Senior unsecured notes 161,051 25,658 23,565 21,281 19,003 16,747 54,797
$ 168,520 $ 28,656 $ 26,554 $ 22,763 $ 19,003 $ 16,747 $ 54,797 Off-Balance Sheet Arrangements:
We had no off-balance sheet arrangements as of
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