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MarketScreener Homepage  >  Equities  >  Nyse  >  LTC Properties, Inc.    LTC

LTC PROPERTIES, INC.

(LTC)
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LTC PROPERTIES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

10/29/2020 | 03:46pm EST

Statement Regarding Forward Looking Disclosure


This quarterly report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, adopted pursuant to the Private
Securities Litigation Reform Act of 1995. Statements that are not purely
historical may be forward-looking. You can identify some of the forward-looking
statements by their use of forward-looking words, such as "believes," "expects,"
"may," "will," "could," "would," "should," "seeks," "approximately," "intends,"
"plans," "estimates" or "anticipates," or the negative of those words or similar
words. Forward-looking statements involve inherent risks and uncertainties
regarding events, conditions and financial trends that may affect our future
plans of operation, business strategy, results of operations and financial
position. A number of important factors could cause actual results to differ
materially from those included within or contemplated by such forward-looking
statements, including, but not limited to, the status of the economy; the status
of capital markets (including prevailing interest rates) and our access to
capital; the income and returns available from investments in health care
related real estate (including our ability to re-lease properties upon
expiration of a lease term); the ability of our borrowers and lessees to meet
their obligations to us; our reliance on a few major operators; our dependence
on operators for revenue and cash flow; the bankruptcy, insolvency or financial
deterioration of our lessees; potential limitations on our remedies when
mortgage loans default; competition faced by our borrowers and lessees within
the health care industry, public health epidemics such as coronavirus
(COVID-19); regulation of the health care industry by federal, state and local
governments; changes in Medicare and Medicaid reimbursement amounts (including
due to federal and state budget constraints); compliance with and changes to
regulations and payment policies within the health care industry; debt that we
may incur and changes in financing terms; our ability to continue to qualify as
a real estate investment trust; the relative illiquidity of our real estate
investments; and risks and liabilities in connection with properties owned
through limited liability companies and partnerships. For a discussion of these
and other factors that could cause actual results to differ from those
contemplated in the forward-looking statements, please see the discussion under
"Risk Factors" contained in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019 and in our publicly available filings with the
Securities and Exchange Commission. We do not undertake any responsibility to
update or revise any of these factors or to announce publicly any revisions to
forward-looking statements, whether as a result of new information, future
events or otherwise.

Executive Overview

Business and Investment Strategy


We are a self-administered health care real estate investment trust ("REIT")
that invests in seniors housing and health care properties 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.

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The following graph summarizes our gross investments as of September 30, 2020:

[[Image Removed: Graphic]]


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. ALF, ILF, MC, and combinations thereof are included in the
ALF classification. As of September 30, 2020, seniors housing and long-term
health care properties comprised approximately 99.3% of our real estate
investment portfolio. 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 investments 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-

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defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates.

COVID-19


On March 11, 2020, the World Health Organization declared the outbreak of
coronavirus ("COVID-19") as a pandemic, and on March 13, 2020, the United States
declared a national emergency with regard to COVID-19. The COVID-19 pandemic has
had repercussions across regional and global economies and financial markets.
The outbreak of COVID-19 in many countries, including the United States, has
significantly and adversely impacted public health and economic activity, and
has contributed to significant volatility and negative pressure in financial
markets.

The operations and occupancy levels at our properties will be adversely affected
if COVID-19 or another pandemic results in infections on a large scale at our
properties, early resident move-outs, our operators delay accepting new
residents due to quarantines, and/or potential occupants postpone moving to a
senior housing facility. Additionally, as our operators have responded to the
pandemic, operating costs have begun to rise. A decrease in occupancy, ability
to collect rents from residents and/or increase in operating costs could have a
material adverse effect on the ability of our operators to meet their financial
and other contractual obligations to us, including the payment of rent. In
recognition of the pandemic impact affecting our operators, we have agreed to
rent deferrals for certain operators totaling $1.2 million, or 1.5% of
contractual rent, for April through September 2020. Additionally, we granted
rent deferrals of $0.6 million for October 2020. Through October 2020, we have
received $0.6 million of rent deferral payments. The remaining balance of
deferred rent is due to LTC over the next 24 months or upon receipt of
government funds from the U.S. Coronavirus Aid, Relief, and Economic Security
(the "CARES Act").

The extent to which COVID-19 could impact our operations and those of our
operators will depend on future developments, which are highly uncertain and
cannot be predicted with confidence, including the duration, spread and severity
of the outbreak and the actions taken to contain the virus or mitigate its
impact, and the direct and indirect economic effects of the pandemic and
containment measures.

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Real Estate Portfolio Overview


The following tables summarize our real estate investment portfolio by owned
properties and mortgage loans and by type, as of September 30, 2020 (dollar
amounts in thousands):


                                                         Nine Months Ended
                                        Percentage      September 30, 2020      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          $    880,307          51.5 % $    52,599   $       -         42.7 %              107          -       6,164
Skilled Nursing               557,097          32.6 %      46,226           -         37.6 %               51      6,277         212
Other (4)                      11,360           0.7 %         727           -          0.6 %                1        118           -
Total Owned Properties      1,448,764          84.8 %      99,552           -         80.9 %              159      6,395       6,376

Mortgage Loans
Skilled Nursing               260,267          15.2 %           -      23,487         19.1 %               22      2,804           -
Total Mortgage Loans          260,267          15.2 %           -      23,487         19.1 %               22      2,804           -
Total Portfolio          $  1,709,031         100.0 % $    99,552$  23,487        100.0 %              181      9,199       6,376





                                                                Nine Months Ended
                                               Percentage      September 30, 2020      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                 $    880,307          51.5 %  $   52,599   $       -         42.7 %              107          -       6,164
Skilled Nursing                      817,364          47.8 %      46,226      23,487         56.7 %               73      9,081         212
Other (4)                             11,360           0.7 %         727           -          0.6 %                1        118           -
Total Portfolio                 $  1,709,031         100.0 %  $   99,552$  23,487        100.0 %              181      9,199       6,376

(1) Excludes variable rental income from lessee reimbursement and sold

    properties.



(2) We have investments in 27 states leased or mortgaged to 29 different

    operators.



(3) See Item 1. Financial Statements - Note 2. Real Estate Investments for

    discussion of bed/unit count.



(4) Includes three parcels of land held-for-use and one behavioral health care

    hospital.



As of September 30, 2020, we had $1.4 billion in net carrying value of real
estate investments, consisting of $1.1 billion or 81.1% invested in owned and
leased properties and $0.3 billion or 18.9% invested in mortgage loans secured
by first mortgages. Our investment in mortgage loans mature in 2043 and beyond
and contain interest rates between 9.2% and 9.9%.

For the nine months ended September 30, 2020, rental income and interest income
from mortgage loans represented 78.1% and 20.8%, respectively, of total gross
revenues. In most instances, our lease structure contains fixed annual rental
escalations and/or annual rental escalations that are contingent upon changes in
the Consumer Price Index, 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 gross operating revenues of
the property. This revenue is not recognized until the appropriate contingencies
have been resolved.

During the nine months ended September 30, 2020, there were no lease renewals.
During the nine months ended September 30, 2020, we consolidated our four leases
with Brookdale Senior Living Communities, Inc ("Brookdale") into one master
lease and extended the term by one year to December 31, 2021. The master lease
provides three renewal options consisting of a four-year renewal option, a
five-year renewal option and a 10-year renewal option. Also, during the nine
months ended September 30, 2020, we consolidated our two master leases with an
operator into one combined master lease. Under the new combined master lease, we
agreed to abate $0.6 million of third quarter rent along with $0.1 million that
had been deferred in second quarter of 2020 totaling $0.7 million. Additionally,
the new combined master lease allows the operator to defer rent as needed
through March 31, 2021.

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For the nine months ended September 30, 2020, we recorded $1.7 million in
straight-line rental income and amortization of lease incentive cost of $0.5
million. During the nine months ended September 30, 2020, we received
$110.2 million of cash rental income, which includes $11.7 million of operator
reimbursements for our real estate taxes. At September 30, 2020, the
straight-line rent receivable balance, net of reserves, on the balance sheet was
$24.4 million.

Update on Certain Operators
An affiliate of Senior Lifestyle Corporation ("Senior Lifestyle") operates 23
properties under a master lease with a combination of independent living,
assisted living and memory care units. Senior Lifestyle was provided partial
deferred rent in April 2020 and failed to pay full rent during the second
quarter of 2020. In accordance with ASC 842, we evaluated the collectibility of
receiving substantially all of our lease payments from the Senior Lifestyle
master lease through maturity and determined that we did not have the level of
certainty required by the standard. Accordingly, we wrote-off a total $17.7
million of straight-line rent receivable and lease incentives related to this
master lease during the second quarter of 2020 and accounted for the Senior
Lifestyle master lease on a cash basis effective July 2020. Contractual rent for
the quarter was $9.1 million of which we collected $5.3 million. In October
2020, we received $1.3 million of their contractual rent of $1.6 million. The
outstanding accounts receivable balance on our Consolidated Balance Sheets of
$2.7 million is covered by a letter of credit and security deposit totaling $3.6
million. We continue to evaluate the collectibility of our Senior Lifestyle
master lease quarterly. Additionally, we are evaluating our options for the
portfolio which may include a combination of re-leasing and selling some or all
of the properties.

During the third quarter of 2020, an operator paid $0.5 million of its
contractual rent of $1.3 million. Additionally, during the three months ended
September 30, 2020, we consolidated our two master leases with the operator into
one combined master lease. Under the new combined master lease, we agreed to
abate $0.6 million of third quarter rent along with $0.1 million that had been
deferred in second quarter of 2020, totaling $0.7 million. Additionally, the new
combined master lease allows the operator to defer rent as needed through March
31, 2021. In September 2020, the operator deferred $0.2 million of its $0.4
million contractual rent. During the three months ended September 30, 2020, we
recorded an impairment charge of $0.9 million related to an assisted living
community that was operated by the operator. The community was closed in October
2020 and we are evaluating our options for this community. In accordance with
ASC 842, we evaluated the collectibility of receiving substantially all of our
lease payments form the operator master lease through maturity and determined
that we did not have the level of certainty required by the standard.
Accordingly, we wrote-off $1.2 million of straight-line rent receivable related
to this master lease during the third quarter of 2020.

On August 10, 2020, in the Quarterly Report on Form 10-Q, Genesis Healthcare,
Inc. ("Genesis") reported doubt regarding its ability to continue as a going
concern. Accordingly, in accordance with ASC 842, we evaluated the
collectibility of receiving substantially all of our lease payments from the
Genesis master lease through maturity and determined that we did not have the
level of certainty required by the standard. Accordingly, we wrote-off $4.3
million of straight-line rent receivable related to this master lease during the
third quarter of 2020. Genesis is current on rent payments through October 2020.

Anthem Memory Care ("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. In accordance with
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,

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we wrote-off the balances to equity as of January 1, 2019, as required by the
ASC 842 transition guidance. We continue to evaluate the collectibility of our
Anthem master lease on a quarterly basis. We currently anticipate that Anthem
will pay $9.9 million of annual cash rent during 2020. However, COVID-19 may
adversely impact Anthem's operating cash flow and ability to pay rent. Anthem is
current on rent payments through October 2020. Anthem is current on 2020 rent
payments through October 2020.

Preferred Care, Inc. ("Preferred Care") and affiliated entities filed for
Chapter 11 bankruptcy in 2017 as a result of a multi-million-dollar judgment in
a lawsuit in Kentucky against Preferred Care and certain affiliated entities.
Preferred Care leased 24 properties ("Properties") under two master leases from
us and the Preferred Care operating entities that sublease those Properties did
not file for bankruptcy. In accordance with 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
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 of January 1, 2019, as required by the ASC 842 transition guidance.
Preferred Care did not affirm our master leases and subsequently filed for
Chapter 7 bankruptcy in 2019.

During the fourth quarter of 2019, we entered into multiple contracts to sell
the Properties, all of which were completed during the first quarter of 2020.
The combined net proceeds from the sales, including the 2019 transactions, was
approximately $77.9 million resulting in a total gain of approximately $44.0
million. The Properties had a combined net book value of $35.6 million. The 21
properties sold in the first quarter of 2020, which included 2,411 beds in
Arizona, Colorado, Iowa, Kansas and Texas, were sold through multiple
transactions and generated net proceeds of $72.1 million. These 21 properties
had a combined net book value of $29.1 million and resulted in total gain on
sale of $44.1 million.

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 in December 2018. Senior Care did
not pay us December 2018 rent and accordingly, in December 2018, we placed
Senior Care on a cash basis. In accordance with ASC 842 lease accounting
guidance, at January 1, 2019, we evaluated the collectibility of the
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 of January 1, 2019, as required by the ASC 842
transition guidance. During 2019, we received a court ordered reimbursement from
Senior Care for the December 2018 unpaid rent, late fees and legal costs
totaling $1.6 million. In March 2020, Senior Care emerged from bankruptcy and
affirmed our master lease. We continue to evaluate the collectibility of our
Senior Care master lease on a quarterly basis. Senior Care is current on all its
rent, real estate property tax escrow and maintenance deposits through October
2020.

During the third quarter of 2020, we consolidated our four leases with Brookdale
into one master lease and extended the term by one year to December 31, 2021.
The master lease provides three renewal options consisting of a four-year
renewal option, a five-year renewal option and a 10-year renewal option. The
notice period for the first renewal option is January 1, 2021 to April 30, 2021.
The economic terms of rent remain the same as the consolidated rent terms under
the previous four separate lease agreements.

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2020 Activities Overview

The following tables summarize our transactions during the nine months ended September 30, 2020 (dollar amounts in thousands):

Investment in Owned Properties


          Number        Type        Number     Initial                       Total           Total
            of           of           of        Cash         Purchase     Transaction     Acquisition
State   Properties   Properties   Beds/Units    Yield         Price        
 Costs           Costs
Texas            1      SNF              140       8.5 %   $   13,500   $          81   $      13,581

Investment in Development and Improvement projects



                               Developments    Improvements
Assisted Living Communities   $        4,491$       3,941
Skilled Nursing Centers                8,893              14
Total                         $       13,384$       3,955


Completed Developments


    Number       Type       Number
      of          of          of                          Total
  Properties   Property   Beds/Units    State         Investment
      1         ALF/MC        78        Oregon  (1)  $     18,447
      1          SNF          90       Missouri            13,272
      2                      168                     $     31,719

Certificate of occupancy was received in March 2020, however, due to the (1) COVID-19 pandemic, we consented to delay the opening of this community to a

    later date. As of September 2020, this community is open and taking
    residents.




Properties Sold


              Type           Number       Number
               of              of           of         Sales      Carrying      Net
 State     Properties      Properties   Beds/Units     Price       Value        Gain
  N/A         N/A                   -            -   $      -   $        -   $    108 (1)
Arizona       SNF                   1          194     12,550        2,229     10,292
Colorado      SNF                   3          275     15,000        4,271     10,364
  Iowa        SNF     (2)           7          544     14,500        4,886      9,029
 Kansas       SNF                   3          250      9,750        7,438      1,993
 Texas        SNF                   7        1,148     23,000       10,260     12,287
                                   21        2,411   $ 74,800$   29,084$ 44,073 (3)

Gain recognized from the $90 repayment of a holdback related to a property (1) sold during the fourth quarter of 2019 and the reassessment adjustment of $18

from the holdback under the expected value model per ASC Topic 606, Contracts

    with Customers ("ASC 606").




    This transaction includes a holdback of $838 which is held in an

interest-bearing account with an escrow holder on behalf of the buyer for

potential specific losses. Using the expected value model per ASC 606, we (2) estimated and recorded the holdback value of $471. During the nine months

ended September 30, 2020, we received $150 of the holdback. We reassessed the

holdback under the expected value model and recorded an additional gain of

    $115.



(3) Properties sold within the Preferred Care portfolio.


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Investment in Mortgage Loans

Originations and funding under mortgage loans receivable $ 4,176 Scheduled principal payments received

                        (565)
Mortgage loan premium amortization                             (3)
Provision for loan loss reserve                               (36)
Net increase in mortgage loans receivable                  $ 3,572

Investment in Unconsolidated Joint Ventures


                          Type              Type              Total       Contractual          Number                                                                          Cash
                           of                of             Preferred        Cash                of          Investment      Carrying          Capital          Income       Interest
State                  Properties        Investment          Return         Portion          Beds/ Units     Commitment       Value          Contribution     Recognized     Received
Arizona                ALF/MC/ILF     Preferred Equity            N/A %           N/A % (1)            -   $           -   $      729 (1)  $           58   $        231$      231
Washington (2)             UDP        Preferred Equity (2)         12 %             7 %                -               -        6,340               6,340             56           18
Washington (3)             UDP        Preferred Equity (3)         12 %             8 %                -          13,000            -                   -              -            -
                                                                                                       -   $      13,000$    7,069$        6,398$        287$      249

We had a preferred equity investment in an unconsolidated joint venture that

owned four communities providing independent living, assisted living ad (1) memory care services. During 2020, the four properties comprising the joint

venture were sold. Accordingly, we received partial liquidation proceeds of

$17,758 and recorded additional $620 loss. We anticipate receiving remaining

    proceeds of $729.



Invested $6,340 of preferred equity in an entity that will develop a 95-unit

ALF/MC in Washington. Our investment represents 15.5% of the estimated total (2) investment. The preferred equity investment earns an initial cash rate of 7%

increasing to 9% in year four until the internal rate of return ("IRR") is

8%. After achieving an 8% IRR, the cash rate drops to 8% with an IRR ranging

    between 12% to 14%.



Entered into a preferred equity agreement in an entity that will develop and

own a 267-unit ILF/ALF in Washington. Our investment represents 11.6% of the (3) estimated total investment. Upon the satisfaction of certain conditions which

are projected to be met by year-end, LTC will invest $13,000 into the entity.

The preferred equity investment will earn an initial cash rate of 8% and a

    12% IRR.


Notes Receivable


Advances under notes receivable                       $   1,366 (1)

Principal payments received under notes receivable (4,732) Reclassed to real estate under development

                (300) (2)
Notes receivable reserve                                     36
Net increase in notes receivable                      $ (3,630)

(1) We originated a $1,250 note agreement, funding $1,000 with a commitment to

    fund $250. The note bears interest at 5.0%.



Represents an interim working capital loan related to a development project (2) which matured upon completion of the development project and commencement of

the lease.

Health Care Regulatory Climate


The Centers for Medicare & Medicaid Services ("CMS") annually updates Medicare
skilled nursing facility ("SNF") prospective payment system rates and other
policies. On July 30, 2019, CMS issued its final fiscal year 2020 Medicare
skilled nursing facility update. Under the final rule, CMS projects aggregate
payments to SNFs will increase by $851 million, or 2.4%, for fiscal year 2020
compared with fiscal year 2019. The final rule also addresses implementation of
the new Patient-Driven Payment Model case mix classification system that became
effective on October 1, 2019, changes to the group therapy definition in the
skilled nursing facility setting, and various SNF Value-Based Purchasing and
quality reporting program policies. On April 10, 2020, CMS issued a proposed
rule to update SNF rates and policies for fiscal year 2021, which started
October 1, 2020, and issued the final rule on July 31, 2020. CMS estimates that
payments to SNFs would increase by $750 million, or 2.2%, for fiscal year 2021
compared to fiscal year 2020. CMS also adopted revised geographic delineations
to identify a provider's status as an urban or rural facility and to calculate
the wage index, applying a 5% cap on any decreases in a provider's wage index
from fiscal year 2020 to fiscal year 2021. Finally, CMS also

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finalized updates to the SNF value-based purchasing program to reflect
previously finalized policies, updated the 30-day phase one review and
correction deadline for the baseline period quality measure quarterly report,
and announced performance periods and performance standards for the fiscal year
2023 program year.

Since the announcement of the COVID-19 pandemic and beginning as of March 13,
2020, CMS has issued numerous temporary regulatory waivers and new rules to
assist health care providers, including SNFs, respond to the COVID-19 pandemic.
These include, waiving the SNFs 3-day qualifying inpatient hospital stay
requirement, flexibility in calculating a new Medicare benefit period, waiving
timing for completing functional assessments, waiving requirements for health
care professional licensure, survey and certification, provider enrollment, and
reimbursement for services performed by telehealth, among many others. CMS also
announced a temporary expansion of its Accelerated and Advance Payment Program
to allow SNFs and certain other Medicare providers to request accelerated or
advance payments in an amount up to 100% of the Medicare Part A payments they
received from October-December 2019; this expansion was suspended April 26, 2020
in light of other CARES Act funding relief. The Continuing Appropriations Acts,
2021 and Other Extensions Act, enacted on October 1, 2020, amended the repayment
terms for all providers and suppliers that requested and received accelerated
and advance payments during the COVID-19 public health emergency. Specifically,
Congress gave providers and suppliers that received Medicare accelerated and
advance payment(s) one year from when the first loan payment was made to begin
making repayments. In addition, CMS has also enhanced requirements for nursing
facilities to report COVID-19 infections to local, state and federal
authorities. On October 2, 2020, HHS Secretary Azar announced that he had
renewed, effective October 23, 2020, the declared public health emergency for an
additional 90-day period.

On March 26, 2020, President Trump signed into law the Coronavirus Aid, Relief,
and Economic Security Act (the "CARES Act"), sweeping legislation intended to
bolster the nation's response to the COVID-19 pandemic. In addition to offering
economic relief to individuals and impacted businesses, the law expands coverage
of COVID-19 testing and preventative services, addresses health care workforce
needs, eases restrictions on telehealth services during the crisis, and
increases Medicare regulatory flexibility, among many other provisions. Notably,
the CARES Act temporarily suspends the 2% across-the-board "sequestration"
reduction during the period May 1, 2020 through December 31, 2020, and extends
the current Medicare sequester requirement through fiscal year 2030. In
addition, the law provides $100 billion in grants to eligible health care
providers for health care related expenses or lost revenues that are
attributable to COVID-19. On April 10, 2020, CMS announced the distribution of
$30 billion in funds to Medicare providers based upon their 2019 Medicare fee
for service revenues. Eligible providers were required to agree to certain terms
and conditions in receiving these grants. In addition, the Department of Health
and Human Services ("HHS") authorized $20 billion of additional funding for
providers that have already received funds from the initial distribution of $30
billion. Unlike the first round of funds, which came automatically, providers
were required to apply for these additional funds and submit the required
supporting documentation, using the online portal provided by HHS. Providers
were required to attest to and agree to specific terms and conditions for the
use of such funds. HHS expressed a goal of allocating the whole $50 billion
proportionally across all providers based on those providers' proportional share
of 2018 net Medicare fee-for-service revenue, so that some providers will not be
eligible for additional funds. On May 22, 2020, HHS announced that it had begun
distributing $4.9 billion in additional relief funds to SNFs to offset revenue
losses and assist nursing homes with additional costs related to responding to
the COVID-19 public health emergency and the shipments of personal protective
equipment provided to nursing homes by the Federal Emergency Management Agency.
On June 9, 2020, HHS announced that it expects to distribute approximately $15
billion to eligible providers that participate in state Medicaid and Children's
Health Insurance Program ("CHIP") programs and have not received a payment from
the Provider Relief Fund General Allocation. On July 22, 2020, President Trump
announced that HHS would devote $5 billion in Provider Relief Funds to
Medicare-certified long-

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term care facilities and state veterans' homes to build nursing home skills and
enhance nursing homes' response to COVID-19, including enhanced infection
control. Nursing homes must participate in the Nursing Home COVID-19 training to
be qualified to receive this funding. On August 27, 2020, HHS announced that it
had distributed almost $2.5 billion to nursing homes to support increased
testing, staffing, and personal protective equipment needs. On September 3,
2020, HHS announced a $2 billion performance-based incentive payment
distribution to nursing homes and SNFs. Finally, on October 1, 2020, the Trump
Administration announced $20 billion in new funding for several types of
providers, including those who previously received, rejected, or accepted a
general distribution provider relief fund payment. The application deadline for
these Phase 3 funds is November 6, 2020.

On July 18, 2019, CMS published a final rule that eliminates the prohibition on
pre-dispute binding arbitration agreements between long-term care facilities and
their residents. The rule also strengthens the transparency of arbitration
agreements and makes other changes to arbitration requirements for long-term
care facilities. There can be no assurance that these rules or future
regulations modifying Medicare skilled nursing facility payment rates or other
requirements for Medicare and/or Medicaid participation will not have an adverse
effect on the financial condition of our borrowers and lessees which could, in
turn, adversely impact the timing or level of their payments to us.

Congress periodically considers legislation revising Medicare and Medicaid
policies, including legislation that could have the impact of reducing Medicare
reimbursement for SNFs and other Medicare providers, limiting state Medicaid
funding allotments, encouraging home and community-based long-term care services
as an alternative to institutional settings, or otherwise reforming payment
policy for post-acute care services. Congress continues to consider further
legislative action in response to the COVID-19 pandemic. There can be no
assurances that enacted or future legislation will not have an adverse impact on
the financial condition of our lessees and borrowers, which subsequently could
materially adversely impact our company.

Additional reforms affecting the payment for and availability of health care
services have been proposed at the federal and state level and adopted by
certain states. Increasingly, state Medicaid programs are providing coverage
through managed care programs under contracts with private health plans, which
is intended to decrease state Medicaid costs. State Medicaid budgets may
experience shortfalls due to increased costs in addressing the COVID-19
pandemic. Congress and state legislatures can be expected to continue to review
and assess alternative health care delivery systems and payment methodologies.
Changes in the law, new interpretations of existing laws, or changes in payment
methodologies may have a dramatic effect on the definition of permissible or
impermissible activities, the relative costs associated with doing business and
the amount of reimbursement by the government and other third-party payors.

Key Performance Indicators, Trends and Uncertainties


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

Concentration Risk. We evaluate by gross investment our concentration risk in
terms of asset mix, 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 investments that are real property or
mortgage loans. The National Association of Real Estate Investment Trusts
("NAREIT"), an organization representing U.S. REITs and publicly traded real
estate companies, classifies a company with 50% or

                                       35

Table of Contents


more of assets directly or indirectly in the equity ownership of real estate as
an equity REIT. Investment mix measures the portion of our investments that
relate to our various property classifications. Operator mix measures the
portion of our 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):



                                      9/30/20       6/30/20       3/31/20      12/31/19       9/30/19
Asset mix:
Real property                       $ 1,448,764$ 1,445,691$ 1,438,177$ 1,484,571$ 1,474,692
Loans receivable                        260,267       258,649       256,959       256,659       255,737
Real estate investment mix:
Skilled nursing centers (1)         $   817,364$   812,637$   807,457$   857,187$   864,447
Assisted living communities             880,307       880,343       876,319       872,683       854,622
Under development (1)                         -             -             -             -             -
Other (2)                                11,360        11,360        11,360        11,360        11,360
Operator mix:
Prestige Healthcare (2)             $   273,399$   271,781$   270,091$   269,792$   268,869
Senior Lifestyle Corporation            191,622       191,622       191,622       191,283       191,283
Senior Care Centers                     138,109       138,109       138,109       138,109       138,109
Anthem Memory Care                      136,483       136,483       136,483       136,484       136,483
Carespring Health Care Management       102,520       102,520       102,520
      102,520       102,042
Remaining operators                     866,898       863,825       856,311       903,042       893,643
Geographic mix:
Michigan (2)                        $   282,103$   279,821$   277,063$   276,742$   256,680
Texas                                   273,075       273,075       273,075       284,697       292,238
Wisconsin                               149,403       149,403       149,405       149,290       149,184
Colorado                                106,879       106,879       106,879       114,923       114,923
California                              104,924       104,687       103,970       103,240       102,561
Remaining states                        792,647       790,475       784,744       812,338       814,843

During the three months ended September 30, 2020, we completed the (1) construction of a 90-bed SNF located in Missouri. Accordingly, this property

was reclassified from "Under development" to "Skilled Nursing centers" for

    all periods presented.



(2) We have three parcels of land located adjacent to properties securing the

Prestige Healthcare mortgage loan 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 Sheets 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
NAREIT. EBITDAre is calculated as net income available to common stockholders
(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. 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

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Financials (USD)
Sales 2020 157 M - -
Net income 2020 95,8 M - -
Net Debt 2020 609 M - -
P/E ratio 2020 17,0x
Yield 2020 5,54%
Capitalization 1 616 M 1 616 M -
EV / Sales 2020 14,2x
EV / Sales 2021 12,4x
Nbr of Employees 22
Free-Float 98,2%
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Number of Analysts 10
Average target price 36,50 $
Last Close Price 41,19 $
Spread / Highest target 6,82%
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NameTitle
Wendy L. Simpson Chairman & Chief Executive Officer
Pamela J. Shelley-Kessler Co-President, Chief Financial Officer & Secretary
Clint B. Malin Co-President & Chief Investment Officer
Timothy J. Triche Independent Director
Boyd W. Hendrickson Lead Independent Director
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