LTC PROPERTIES INC - Quarter Report: 2010 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2010

 

OR

 

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

 

For the Transition period from          to        

 

Commission file number 1-11314

 

LTC PROPERTIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

31365 Oak Crest Drive, Suite 200

Westlake Village, California  91361

(Address of principal executive offices, including zip code)

 

(805) 981-8655

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o  No  o

 

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

 

 

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

 

The number of shares of common stock outstanding on April 26, 2010 was 23,794,484.

 

 

Table of Contents

 

LTC PROPERTIES, INC.

 

FORM 10-Q

 

March 31, 2010

 

INDEX

 

	Page
PART I — Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets	3
Consolidated Statements of Income	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures about Market Risk	29
Item 4. Controls and Procedures	29
PART II — Other Information
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 6. Exhibits	31

 

2

Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

		March 31, 2010			December 31, 2009
		(unaudited)
ASSETS
Real Estate Investments:
Buildings and improvements, net of accumulated depreciation and amortization: 2010 — $149,014; 2009 — $145,180		$	349,923		$	337,719
Land		38,026			36,561
Mortgage loans receivable, net of allowance for doubtful accounts: 2010 — $1,508; 2009 — $704		68,155			69,883
Real estate investments, net		456,104			444,163
Other Assets:
Cash and cash equivalents		19,210			8,856
Debt issue costs, net		484			476
Interest receivable		1,470			1,964
Straight-line rent receivable, net of allowance for doubtful accounts: 2010 — $849; 2009 — $631		18,021			17,309
Prepaid expenses and other assets		8,422			8,663
Notes receivable		1,857			2,689
Marketable securities		6,474			6,473
Total Assets		$	512,042		$	490,593
LIABILITIES
Bank borrowings		$	28,500		$	13,500
Mortgage loans payable		7,641			7,685
Bonds payable		3,730			4,225
Accrued interest		110			102
Accrued expenses and other liabilities		7,047			7,801
Distributions payable		2,967			2,967
Total Liabilities		49,995			36,280
EQUITY
Stockholders’ equity:
Preferred stock $0.01 par value; 15,000 shares authorized; shares issued and outstanding: 2010 — 7,932; 2009 — 7,932		186,801			186,801
Common stock: $0.01 par value; 45,000 shares authorized; shares issued and outstanding: 2010 — 23,794; 2009 — 23,312		238			233
Capital in excess of par value		336,337			326,163
Cumulative net income		588,151			577,629
Other		362			390
Cumulative distributions		(651,804		)	(638,884		)
Total LTC Properties, Inc. Stockholders’ Equity		460,085			452,332
Non-controlling interests		1,962			1,981
Total Equity		462,047			454,313
Total Liabilities and Equity		$	512,042		$	490,593

 

(1)	On March 31, 2010 and December 31, 2009, we had $2,572,000 and $2,480,000, respectively, in straight-line rent receivable from a lessee that qualifies as a related party because the lessee’s Chief Executive Officer is on our Board of Directors. See Note 9. Transactions with Related Party for further discussion.
(2)	At March 31, 2010 and December 31, 2009, we had a $6,500,000 face value investment in marketable securities issued by an entity that qualifies as a related party because the entity’s Chief Executive Officer is on our Board of Directors. See Note 9. Transactions with Related Party for further discussion.

 

See accompanying notes.

 

3

Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(unaudited)

 

		Three Months Ended March 31,
		2010			2009
Revenues:
Rental income (1)		$	15,610		$	15,030
Interest income from mortgage loans		1,979			2,371
Interest and other income (2)		276			315
Total revenues		17,865			17,716
Expenses:
Interest expense		401			892
Depreciation and amortization		3,860			3,701
Provisions for doubtful accounts		1,061			152
Operating and other expenses		1,973			1,733
Total expenses		7,295			6,478
Net income		10,570			11,238
Income allocated to non-controlling interests		(48		)	(77		)
Net income attributable to LTC Properties, Inc.		10,522			11,161
Income allocated to participating securities		(43		)	(36		)
Income allocated to preferred stockholders		(3,785		)	(3,159		)
Net income available to common stockholders		$	6,694		$	7,966
Net income allocable to common stockholders:
Basic earnings per common share		$	0.29		$	0.35
Diluted earnings per common share		$	0.29		$	0.35
Weighted average shares used to calculate earnings per common share:
Basic		23,283			23,059
Diluted		23,384			23,141

 

(1)	During the three months ended March 31, 2010 and 2009, we received $1,034,000 and $1,008,000, respectively, in rental income and recorded $92,000 and $117,000, respectively, in straight-line rental income from a lessee that qualifies as a related party. The lessee’s Chief Executive Officer is on our Board of Directors. See Note 9. Transactions with Related Party for further discussion.
(2)	During each of the three months ended March 31, 2010 and 2009, we recognized $180,000, respectively, of interest income from an entity that qualifies as a related party because the entity’s Chief Executive Officer is on our Board of Directors. See Note 9. Transactions with Related Party for further discussion.

 

See accompanying notes.

 

4

Table of Contents

 

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2010			2009
OPERATING ACTIVITIES:
Net income		$	10,570		$	11,238
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,860			3,701
Stock-based compensation expense		366			314
Straight-line rental income (1)		(930		)	(1,152		)
Provisions for doubtful accounts		1,061			152
Other non-cash items, net		268			52
Decrease in interest receivable		173			204
Net change in other assets and liabilities		(395		)	(644		)
Net cash provided by operating activities		14,973			13,865
INVESTING ACTIVITIES:
Investment in real estate properties and capital improvements, net		(17,559		)	(638		)
Investment in real estate mortgages		(72		)	(213		)
Principal payments received on mortgage loans receivable		967			3,058
Advance under notes receivable		—			(75		)
Principal payments received on notes receivable		851			181
Net cash (used in) provided by investing activities		(15,813		)	2,313
FINANCING ACTIVITIES:
Bank borrowings		17,000			—
Repayment of bank borrowings		(2,000		)	—
Principal payments on mortgage loans payable and bonds payable		(539		)	(662		)
Proceeds from stock offering		9,654			—
Repurchase of preferred stock		—			(2,000		)
Distributions paid to non-controlling interests		(67		)	(77		)
Distributions paid to stockholders		(12,920		)	(12,869		)
Other		66			—
Net cash provided by (used in) financing activities		11,194			(15,608		)
Increase in cash and cash equivalents		10,354			570
Cash and cash equivalents, beginning of period		8,856			21,118
Cash and cash equivalents, end of period		$	19,210		$	21,688
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid		$	308		$	796
Non-cash investing and financing transactions:
Conversion of preferred stock to common stock		—			23

 

(1)

During the three months ended March 31, 2010 and 2009, we recorded $92,000 and $117,000, respectively, in straight-line rental income from a lessee that qualifies as a related party. The lessee’s Chief Executive Officer is on our Board of Directors. See Note 9. Transactions with Related Party for further discussion.

 

See accompanying notes.

 

5

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              General

 

LTC Properties, Inc., a Maryland corporation, is a real estate investment trust (or REIT) that invests primarily in long term care properties through mortgage loans, property lease transactions and other investments.

 

We have prepared consolidated financial statements included herein without audit and in the opinion of management have included all adjustments necessary for a fair presentation of the results of operations for the three months ended March 31, 2010 and 2009 pursuant to the rules and regulations of the Securities and Exchange Commission (or SEC).  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (or U.S. GAAP) have been condensed or omitted pursuant to rules and regulations governing the presentation of interim financial statements.  The results of operations for the three months ended March 31, 2010 and 2009 are not necessarily indicative of the results for a full year.

 

The accompanying consolidated financial statements include the accounts of our company, its wholly-owned subsidiaries and a controlled partnership.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Control over the partnership is based on the provisions of the partnership agreement that provide us with a controlling financial interest in the partnership.

 

Under the terms of the partnership agreement, our company, as general partner, is responsible for the management of the partnership’s assets, business and affairs.  Certain of our rights and duties in management of the partnership include making all operating decisions, setting the capital budget, executing all contracts, making all employment decisions, and handling the purchase and disposition of assets.  We, as the general partner, are responsible for the ongoing, major, and central operations of the partnership and make all management decisions.  In addition, we, as the general partner, assume the risk for all operating losses, capital losses, and are entitled to substantially all capital gains (i.e. asset appreciation).  The limited partners have virtually no rights and are precluded from taking part in the operation, management or control of the partnership.  The limited partners are also precluded from transferring their partnership interests without the express permission of the general partner.  However, we can transfer our interest without consultation or permission of the limited partners.

 

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

 

2.              Real Estate Investments

 

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at March 31, 2010 (in thousands):

 

Type of Property		Gross Investments			Percentage of Investments		Number of Loans		Number of Properties (1)		Number of Beds/ Units		Investment per Bed/Unit
Assisted Living Properties		$	26,925		38.6	%	10		16		714		$	37.71
Skilled Nursing Properties		38,988			56.0	%	29		36		4,110		$	9.49
Schools		3,750			5.4	%	1		1		N/A		N/A
Totals		$	69,663		100.0	%	40		53		4,824

 

(1)  We have investments in 14 states that include mortgages to 23 different operators.

 

6

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

At March 31, 2010, the mortgage loans had interest rates ranging from 7.6% to 14.0% and maturities ranging from 2011 to 2019.  In addition, some loans contain certain guarantees, provide for certain facility fees and generally have 20-year to 25-year amortization schedules.  The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points.

 

During the three months ended March 31, 2010, we invested $72,000 under one mortgage loan for capital improvements and we received $967,000 in regularly scheduled principal payments.  During the three months ended March 31, 2010, we recorded an $852,000 provision for doubtful accounts related to a mortgage loan secured by a private school property located in Minnesota.  On April 20, 2010, we received notice from the borrower that it had ceased operations.  Prior to that notice, the borrower was current with all loan payments.

 

During the three months ended March 31, 2009, we received $1,986,000 plus accrued interest related to the payoff of a mortgage loan secured by a skilled nursing property with 120 beds located in Tennessee.  Additionally, we invested $213,000 under one mortgage loan for capital improvements.  We received $1,072,000 in regularly scheduled principal payments.

 

Owned Properties. The following table summarizes our investments in owned properties at March 31, 2010 (in thousands):

 

Type of Property		Gross Investments			Percentage of Investments		Number of Properties (1)		Number of Beds/ Units		Investment per Bed/Unit
Assisted Living Properties		$	268,495		50.0	%	88		4,076		$	65.87
Skilled Nursing Properties		259,198			48.3	%	64		7,495		$	34.58
Schools		9,270			1.7	%	1		N/A		N/A
Totals		$	536,963		100.0	%	153		11,571

 

(1)  We have investments in 23 states leased to 26 different operators.

 

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

 

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

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

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

(iv)            specific dollar increases.

 

During the three months ended March 31, 2010, we acquired a 120-bed skilled nursing property in Florida for $9,000,000 and incurred and expensed $51,000 in transaction costs.  This property was leased to a third party operator under a 12-year lease with two 10-year renewal options.  Also during the three months ended March 31, 2010 we purchased a 166-bed skilled nursing property in Texas for $7,850,000 and incurred and expensed $30,000 in transaction costs.  This property was leased to a third

 

7

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

party operator under a 10-year lease with two five-year renewal options.  We paid this operator, who previously operated the property under a lease with the seller, $125,000 as a lease inducement.  The lease inducement is amortized as a yield adjustment over the life of the lease.  Also during the three months ended March 31, 2010, we invested $550,000 at an average yield of 10.5%, under agreements to expand and renovate seven existing properties operated by six different operators.  We also invested $78,000 in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment.

 

During the three months ended March 31, 2009, we invested $426,000 at an average yield of 11.5%, under agreements to expand and renovate three existing properties operated by two different operators.  We also invested $212,000 in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment.

 

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

 

3.              Notes Receivable

 

During the three months ended March 31, 2010, we received $851,000 in principal payments under various loans and line of credit agreements with certain operators.  At March 31, 2010, we had six such loans outstanding with a carrying value of $1,857,000 at a weighted average interest rate of 12.0%.

 

4.              Marketable Securities

 

At March 31, 2010 and December 31, 2009, we had an investment in $6,500,000 face value of Skilled Healthcare Group, Inc. (or SHG) Senior Subordinated Notes with a face rate of 11.0% and an effective yield of 11.1%.  Interest on the notes is payable semi-annually in arrears and the notes mature on January 15, 2014.  One of our board members is the chief executive officer of SHG. See Note 9. Transactions with Related Party for further discussion.

 

5.              Debt Obligations

 

Bank Borrowings. During the three months ended March 31, 2010, we added a new lender with a $30,000,000 commitment to our Unsecured Credit Agreement, dated July 17, 2008.  This additional commitment provides a total availability of $110,000,000 under our Unsecured Credit Agreement with the opportunity to increase the credit amount up to a total of $120,000,000.  The Unsecured Credit Agreement provides a revolving line of credit with no scheduled maturities other than the maturity date of July 17, 2011.  The pricing under the Unsecured Credit Agreement is either Prime Rate plus 0.50% or LIBOR plus 1.50% depending on our borrowing election.  At the time of borrowing, we may elect the 1, 2, 3 or 6 month LIBOR rate.  Under financial covenants contained in the Unsecured Credit Agreement which are measured quarterly we are required to maintain, among other things:

 

(i)                   a ratio, of total indebtedness to total asset value, not greater than 0.5 to 1.0;

(ii)                a ratio not greater than 0.35 to 1.0 of secured debt to total asset value;

(iii)             a ratio not less than 2.5 to 1.0 of EBITDA as calculated in the Unsecured Credit Agreement to interest expense; and

(iv)            a ratio of not less than 1.50 to 1.0 of EBITDA as calculated in the Unsecured Credit Agreement to fixed charges.

 

8

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

During the three months ended March 31, 2010 we borrowed $17,000,000 and repaid $2,000,000 under out Unsecured Credit Agreement.  At March 31, 2010, we had $28,500,000 outstanding at an interest rate of LIBOR plus 1.50% under our Unsecured Credit Agreement with $81,500,000 available for borrowing.  At December 31, 2009, we had $13,500,000 outstanding at an interest rate of LIBOR plus 1.50% under the Unsecured Credit Agreement.  Also, at March 31, 2010 and December 31, 2009, we were in compliance with all covenants.

 

Mortgage Loans Payable.  During the three months ended March 31, 2010 and 2009, we paid $44,000 and $197,000 respectively, in regularly scheduled principal payments. At March 31, 2010 and December 31, 2009, we had one mortgage loan outstanding with a carrying value of $7,641,000 and $7,685,000, respectively, at a fixed interest rate of 8.69%.  Subsequent to March 31, 2010, we paid off this mortgage loan and have no mortgage loans outstanding.

 

Bonds Payable.  At March 31, 2010 and December 31, 2009, we had outstanding principal of $3,730,000 and $4,225,000 respectively, on multifamily tax-exempt revenue bonds that are secured by five assisted living properties in Washington.  These bonds bear interest at a variable rate that is reset weekly and mature during 2015.  For the three months ended March 31, 2010, the weighted average interest rate, including letter of credit fees, on the outstanding bonds was 2.1%.  During the three months ended March 31, 2010 and 2009, we paid $495,000 and $465,000 in regularly scheduled principal payments.  As of March 31, 2010 and December 31, 2009, the aggregate carrying value of real estate properties securing our bonds payable was $7,377,000 and $7,443,000, respectively.

 

6.              Equity

 

Equity is allocated between controlling and non-controlling interests as follows (in thousands):

 

		LTC Properties, Inc. Stockholders’ Equity			Non-controlling Interest			Total Equity
Balance at December 31, 2009		$	452,332		$	1,981		$	454,313
Net income		10,522			48			10,570
Common stock offering		9,654			—			9,654
Vested stock options and restricted stock		366			—			366
Reclassification adjustment		(28		)	—			(28		)
Non-controlling interest preferred return		—			(67		)	(67		)
Preferred stock dividends		(3,785		)	—			(3,785		)
Common stock dividends		(9,135		)	—			(9,135		)
Stock option exercises		159			—			159
Balance at March 31, 2010		$	460,085		$	1,962		$	462,047

 

Preferred Stock.  At March 31, 2010, we had 2,000,000 shares of our 8.5% Series C Cumulative Convertible Preferred Stock (or Series C preferred stock) outstanding.  Our Series C preferred stock is convertible into 2,000,000 shares of our common stock at $19.25 per share.  Total shares reserved for issuance of common stock related to the conversion of Series C preferred stock were 2,000,000 shares at March 31, 2010.

 

9

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

At March 31, 2010, we had 37,816 shares of our 8.5% Series E Cumulative Convertible Preferred Stock (Series E preferred stock) outstanding.  During the three months ended March 31, 2010, no holders of our Series E preferred stock elected to convert into shares of our common stock.  During the three months ended March 31, 2009 holders of 900 shares of our Series E preferred stock elected to convert such shares into 1,800 shares of our common stock at the Series E preferred stock conversion rate of $12.50 per share.  Total shares reserved for issuance of common stock related to the conversion of Series E preferred stock were 75,632 at March 31, 2010.

 

At March 31, 2010, we had 5,894,216 shares of our 8.0% Series F Cumulative Preferred Stock (or Series F Preferred Stock) outstanding.  During the three months ended March 31, 2009, we invested $2,000,000 to repurchase a total of 109,484 shares of our Series F Preferred Stock at an average cost of $18.27 per share, including commissions.  The Series F preferred stock has a liquidation value of $25.00 per share.  As required by the accounting guidance regarding the effect on the calculation of earnings per share for the redemption or induced conversion of preferred stock, the discounted purchase price on these shares, which is the liquidation value over the fair value, netted with the original issuance costs has been added to net income in calculating net income allocable to common stockholders.

 

Common Stock.  During the three months ended March 31, 2010, a total of 6,666 common stock options were exercised at a total option value of $159,000 and a total market value on the date of exercise of $182,000. No common stock options were exercised during the three months ended March 31, 2009.

 

Our Board of Directors authorized a share repurchase program enabling us to repurchase up to 5,000,000 shares of our equity securities, including common and preferred stock.  During the three months ended March 31, 2010, we did not purchase shares of our common or preferred stock.  During the three months ended March 31, 2009, we purchased and retired 900 shares of common stock for an aggregate purchase price of $16,000 or $17.33 per share, including commission.  The shares were purchased on the open market under this Board authorization.  At March 31, 2010, we continue to have an open Board authorization to purchase an additional 3,360,237 shares in total of common and/or preferred stock.

 

On August 5, 2009, we entered into an equity distribution agreement with KeyBanc Capital Markets, Inc. (or KeyBanc) to issue and sell, from time to time, up to $75,000,000 in aggregate offering price of our common shares.  During the three months ended March 31, 2010, we sold 365,000 shares of common stock at a weighted average price, including fees, of $26.45, resulting in net proceeds of $9,654,000 after $249,000 of fees. At March 31, 2010 we had $64,314,000 available under this agreement.

 

Non-controlling Interests. We have one limited partnership and have reserved 112,588 shares of our common stock under this partnership agreement.  Since we exercise control, we consolidate the limited partnership and we carry the non-controlling interests at cost.  The limited partnership agreement allows the limited partners to convert, on a one-for-one basis, their limited partnership units into shares of common stock or the cash equivalent, at our option.    If we issued shares of our common stock upon limited partners’ election to exercise their conversion rights, the carrying amount of the partnership would be reclassified to stockholders’ equity.  At March 31, 2010, the carrying value and market value of the partnership conversion rights was $1,962,000 and $3,094,000, respectively.

 

10

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

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

 

		Three months Ended March 31, 2010						Three months Ended March 31, 2009
		Declared			Paid			Declared			Paid
Preferred Stock
Series C		$	818		$	818		$	818		$	818
Series E		20			20			20			21
Series F		2,947			2,947			2,947			3,002
		3,785			3,785			3,785			3,841
Common Stock (1)		9,135			9,135			9,029			9,029
Total		$	12,920		$	12,920		$	12,814		$	12,869

 

(1)          Represents $0.13 per share per month for the three months ended March 31, 2010 and 2009.

 

In April 2010, we declared a monthly cash dividend of $0.13 per common share per month for the months of April, May and June 2010, payable on April 30, May 28 and June 30, 2010, respectively, to stockholders of record on April 22, May 20 and June 22, 2010, respectively.

 

Other Equity.  Other equity consists of accumulated comprehensive income of $362,000 and $390,000 at March 31, 2010 and December 31, 2009, respectively.  This balance represents the net unrealized holding gains on available-for-sale REMIC Certificates recorded in 2005 when we repurchased the loans in the underlying loan pool.  This amount is being amortized to increase interest income over the remaining life of the loans that we repurchased from the REMIC Pool.

 

The following table represents our consolidated comprehensive income (in thousands):

 

		Three Months Ended
		March 31,
		2010			2009
Comprehensive Income:
Net income		$	10,570		$	11,238
Reclassification adjustment		(28		)	(261		)
Comprehensive income		$	10,542		$	10,977

 

Stock-Based Compensation.  No stock options were issued during the three months ended March 31, 2010 and 2009.  At March 31, 2010, the total number of stock options that are scheduled to vest through December 31, 2010, 2011 and 2012 is 73,170, 5,000 and 5,000, respectively.  We have no stock options outstanding that are scheduled to vest beyond 2012.  Compensation expense relating to the vesting of stock options for the three months ended March 31, 2010 and 2009 were $39,000 and $35,000, respectively.  The remaining compensation expense to be recognized related to the future service period of unvested outstanding stock options for 2010, 2011 and 2012 is $36,000, $17,000 and $10,000, respectively.

 

During the three months ended March 31, 2010, we granted 110,691 shares of restricted common stock at $26.53 per share. For 11,030 shares of the 110,691 shares granted, these shares vest ratably over a three-year period from the grant date.   For 99,661 shares of the 110,691 shares granted, these shares vest ratably over a five-year period with the first date of vesting beginning in December 31, 2010.  During the three months ended March 31, 2009, we granted 36,988 shares of restricted common stock at $17.06 per share.  These shares vest ratably over a three-year period from the grant date.  During the three months ended March 31, 2010 and 2009, we recognized $327,000 and $279,000, respectively, of compensation expense related to the vesting of restricted common stock.

 

11

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

7.              Commitments and Contingencies

 

The following table summarizes our capital improvement commitments as of March 31, 2010 (dollar amounts in thousands):

 

					Used			Open
Commitment			Expiration Date		Commitment at 3/31/10			Commitment at 3/31/10			Estimated Yield		Property Type		Properties		Major Operator
$	650		3/31/2010	(9)	$	621		$	29		13.00	%(1)	SNF		1		N/A
1,100			3/17/2010	(10)	896		(11a)	204		(10)	10.50	%(1)	SNF		1		N/A
726			3/31/2010	(9)	668		(11b)	58		(9)	11.00	%(2)	SNF		1		Preferred Care
4,000			12/31/2010		—			4,000			11.00	%(1)	SNF		1		Preferred Care
875			10/7/2010		653			222				(6)	ALF		1		N/A
2,500			6/16/2010		1,610			890			10.00	%(1)	SNF		1		N/A
1,600			12/1/2010		11			1,589				(5)	ALF		2		N/A
2,000			1/18/2011		—			2,000				(1)(4)	SNF		1		N/A
175			1/29/2011		—		(11c)	175				(6)	SNF		1		N/A
1,500			5/18/2011		—		(11d)	1,500				(8)	ALF		3		N/A
5,000		(7)	12/31/2014		—			5,000		(7)		(3)	ALF		37		ALC
$	20,126				$	4,459		$	15,667

 

(1)	Minimum rent will increase upon final funding and project completion or in some cases, the improvement deadline as defined in each lease agreement.
(2)	Minimum rent will increase on the 1st of each month by the amount advanced in the previous month multiplied by the estimated yield.
(3)	9.5% plus the positive difference, if any, between the average yields on the U.S. Treasury 10-year note for the five days prior to funding, minus 420 basis points (expressed as a percentage).
(4)	The higher of one-year LIBOR plus 5.3% or 10%.
(5)	The commitment is allocated in two tranches of $750,000 and $850,000. The yield for the $750,000 tranche is included in the initial lease rate; the yield for the $850,000 tranche is 8.5% with minimum rent increases as per footnote (2).
(6)	The yield is included in the initial lease rate.
(7)	$5,000,000 per year for the life of the lease.
(8)	The lease rate in affect on the date funded: 7% for March through November 2010. Minimum rent increase as per footnote (1).
(9)	Project complete.
(10)	Project complete; final funding per footnote (11) below was $199,000 less than the open commitment.
(11)	Subsequent to March 31, 2010, we invested an additional $170,000 in the following commitments:  a) $5,000, b) $58,000, c) $82,000, and d) $25,000.

 

The following table summarizes our loan commitments as of March 31, 2010 (dollar amounts in thousands):

 

Commitment			Expiration Date		Used Commitment at 3/31/10			Open Commitment at 3/31/10			Yield		Property Type		Properties		Major Operator
$	450		6/30/2010		$	250		$	200		10.00	%	SNF		4		N/A
50			3/31/2011		20			30			10.00	%	SNF		1		N/A
250			11/30/2011		150			100			9.00	%	ALF		3		N/A
$	750				$	420		$	330

 

12

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

8.              Major Operators

 

We have three operators, based on properties subject to lease agreements and secured by mortgage loans that represent between 10% and 20% of our total assets and three operators from each of which we derive over 10% of our rental revenue and interest income from mortgage loans.

 

In 2006, Extendicare Services, Inc. (or EHSI), one of our major operators, effected a reorganization whereby it completed a spin-off of Assisted Living Concepts, Inc. (or ALC).  ALC is now a NYSE traded public company operating assisted living centers. The remaining EHSI assets and operations were converted into a Canadian REIT (Extendicare REIT) listed on the Toronto Stock Exchange (or TSX).  Both Extendicare REIT and ALC continue to be parties to the leases with us.

 

Beginning in 2009, Alterra Healthcare Corporation changed its name to Brookdale Senior Living Communities, Inc. (or Brookdale Communities). Brookdale Communities is a wholly owned subsidiary of a publicly traded company, Brookdale Senior Living, Inc. (or Brookdale).

 

The following table summarizes Extendicare REIT’s, ALC’s and Brookdale’s financial information as of and for the year ended December 31, 2009 per the operators’ public filings (in thousands).  Our other operator is privately owned and thus no public financial information is available:

 

		Extendicare REIT (1)			ALC			Brookdale
Current assets		$	446,251		$	21,380		$	317,421
Non-current assets		1,221,814			433,989			4,328,522
Current liabilities		323,491			35,958			689,309
Non-current liabilities		1,385,477			146,440			2,870,052
Stockholders’ (deficit) equity		(40,903		)	272,971			1,086,582
Gross revenue		2,167,196			228,723			2,023,068
Operating expenses		1,969,127			213,289			1,993,288
Income (loss) from continuing operations		80,159			802			(66,255		)
Net income (loss)		77,708			(155		)	(66,255		)
Cash provided by operations		185,125			43,674			237,220
Cash used in investing activities		(81,647		)	(28,117		)	(351,432		)
Cash (used in) provided by financing activities		(85,770		)	(31,102		)	126,609

 

(1)	The numbers shown for Extendicare REIT are in Canadian dollars and are prepared in accordance with Canadian GAAP.
*	The financial information contained in the foregoing table for Extendicare REIT, ALC and Brookdale is based on information we obtained from such companies’ available public filings and, therefore, we have not independently verified the accuracy of such information.

 

Extendicare REIT and ALC collectively lease 37 assisted living properties with a total of 1,427 units owned by us representing approximately 11.6%, or $59,189,000, of our total assets at March 31, 2010 and 15.6% of rental revenue and interest income from mortgage loans recognized as of March 31, 2010.

 

Brookdale Communities leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 11.5%, or $58,893,000, of our total assets at March 31, 2010 and 14.7% of rental revenue and interest income from mortgage loans recognized as of March 31, 2010.

 

Preferred Care, Inc. (or Preferred Care), through various wholly owned subsidiaries, operates 33 skilled nursing properties with a total of 4,021 beds that we own or on which we hold mortgages secured by first trust deeds.  This represents approximately 11.6%, or $59,628,000, of our total assets at March 31, 2010 and 15.0% of rental revenue and interest income from mortgage loans recognized as of

 

13

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

March 31, 2010. They also operate one skilled nursing property under a sub-lease with another lessee we have which is not included in the Preferred Care rental revenue and interest income from mortgage loans.

 

Our financial position and ability to make distributions may be adversely affected by financial difficulties experienced by Brookdale Communities, Extendicare REIT, ALC, Preferred Care, or any of our lessees and borrowers, including any bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with us or our borrowers when it expires.

 

9.              Transactions with Related Party

 

We have entered into transactions with SHG.  One of our directors, Boyd W. Hendrickson, serves as Chief Executive Officer of SHG.

 

In December 2005, we purchased, on the open market, $10,000,000 face value of SHG Senior Subordinated Notes with a face rate of 11.0% and an effective yield of 11.1%.  Our Board of Directors, with Mr. Hendrickson abstaining, ratified the purchase of SHG Senior Subordinated Notes.  As a result of an early redemption by SHG in 2007, we have a remaining investment in $6,500,000 face value of SHG Senior Subordinated Notes at March 31, 2010 and December 31, 2009.  During each of the three months ended March 31, 2010 and 2009, we recognized $180,000 of interest income related to the SHG Senior Subordinated Notes. Interest on the notes is payable semi-annually in arrears and the notes mature on January 15, 2014.

 

In addition, during September 2007 SHG purchased the assets of Laurel Healthcare (or Laurel).  One of the assets SHG purchased was Laurel’s leasehold interests in the skilled nursing properties Laurel leased from us under a 15-year master lease agreement dated in February 2006.  Our Board of Directors, with Mr. Hendrickson abstaining, ratified our consent to the assignment of Laurel’s master lease to subsidiaries of SHG.  The economic terms of the master lease agreement did not change as a result of our assignment of the master lease to subsidiaries of SHG.  During the three months ended March 31, 2010 and 2009, we received $1,034,000 and $1,008,000, respectively, in rental income and recorded $92,000 and $117,000, respectively, in straight-line rental income from subsidiaries of SHG.  At March 31, 2010 and December 31, 2009, the straight-line rent receivable from subsidiaries of SHG was $2,572,000 and $2,480,000, respectively.

 

14

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

10.       Earnings per Share

 

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):

 

		Three Months Ended March 31,
		2010			2009
Net income		$	10,570		$	11,238
Less net income allocated to non-controlling interests:		(48		)	(77		)
Less net income allocated to participating securities:
Nonforfeitable dividends on participating securities		(43		)	(36		)
Total net income allocated to participating securities		(43		)	(36		)
Less net income allocated to preferred stockholders:
Preferred stock dividends		(3,785		)	(3,785		)
Allocation of income from preferred stock buyback		—			626
Total net income allocated to preferred stockholders		(3,785		)	(3,159		)
Total net income allocable to common stockholders		6,694			7,966
Effect of dilutive securities:
Convertible preferred securities		20			20
Net income for diluted net income per share		$	6,714		$	7,986
Shares for basic net income per share		23,283			23,059
Effect of dilutive securities:
Stock options		25			6
Convertible preferred securities		76			76
Shares for diluted net income per share		23,384			23,141
Basic net income per share		$	0.29		$	0.35
Diluted net income per share (1)		$	0.29		$	0.35

 

(1)	The Series C Cumulative Convertible Preferred Stock, the participating securities and the non-controlling interest have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.

 

15

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

11.       Fair Value Measurements

 

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

 

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.  We do not invest our cash in auction rate securities.  The carrying value and fair value of our financial instruments as of March 31, 2010 and December 31, 2009 assuming election of fair value for our financial assets and financial liabilities were as follows:

 

		At March 31, 2010						At December 31, 2009
		Carrying Value			Fair Value			Carrying Value			Fair Value
Mortgage loans receivable		$	68,155		$	76,178	(1)	$	69,883		$	80,200	(1)
Marketable debt securities		6,474			6,841		(2)	6,473			6,874		(2)
Mortgage loans payable		7,641			7,641		(3)	7,685			7,806		(3)
Bonds payable		3,730			3,730		(4)	4,225			4,225		(4)
Bank borrowings		28,500			28,500		(4)	13,500			13,500		(4)

 

(1)          Our investment in mortgage loans receivable is classified as Level 3.  The fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows.  The discount rate is determined using our assumption on market conditions adjusted for market and credit risk and current returns on our investments.  The discount rate used to value our future cash inflows of the mortgage loans receivable as March 31, 2010 and December 31, 2009 was 7.5%.

 

(2)          Our investment in marketable debt securities is classified as Level 2 and thus the fair value is measured using quoted market rates for identical instruments in active markets from an independent third party source.  The pricing of our marketable debt securities at March 31, 2010 and December 31, 2009 was 105.25% and 105.75%, respectively.

 

(3)          Our obligation under our mortgage loans payable is classified as Level 3 and thus the fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows.  The discount rate is measured based upon management’s estimates of rates currently prevailing for comparable loans available to us, and instruments of comparable maturities.  At December 31, 2009, the discount rate used to value our future cash outflow of our mortgage loans payable was 6.25%.  Subsequent to March 31, 2010, we paid off this mortgage loans payable and have no mortgage loans payable outstanding.

 

(4)          Our bonds payable and bank borrowings are at a variable interest rate.  The estimated fair value of our bonds payable approximated their carrying values at March 31, 2010 and December 31, 2009 based upon prevailing market interest rates for similar debt arrangements.

 

12.       Subsequent Event

 

Subsequent to March 31, 2010 the following events occurred:

 

·                  We declared a monthly cash dividend of $0.13 per common share per month for the months of April, May and June 2010, payable on April 30, May 28 and June 30, 2010, respectively, to stockholders of record on April 22, May 20 and June 22, 2010, respectively.

 

·                  We paid off one mortgage loan in the amount of $7,626,000 secured by one assisted living property located in California.  The retired debt bore an interest rate of 8.69%.

 

·                  We entered into an agreement to purchase two properties in Virginia with a total of 227 skilled nursing beds, 46 assisted living units, and 47 independent living units for a total purchase price of $22,000,000 and will enter into a 12-year triple net lease with a third party operator. The terms of the seller’s current financing required a 30-day prepayment notice which was given by the seller concurrently upon execution of the purchase agreement. This transaction is scheduled to close on or about June 1, 2010.

 

16

Table of Contents

 

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

 

·                  We invested an additional $170,000 in various capital improvement commitments and extended the commitment expiration date as followings:

 

Commitment		Expiration Date		Funded Subsequent to 3/31/10		Open Commitment Subsequent to 3/31/10		Estimated Yield		Property Type		Properties		Major Operator
1,100		3/17/2010	(6)	5		—		10.50	%(1)	SNF		1		N/A
726		3/31/2010	(5)	58		—		11.00	%(2)	SNF		1		Preferred Care
175		1/29/2011		82		93			(3)	SNF		1		N/A
1,500		5/18/2011		25		1,475			(4)	ALF		3		N/A

 

(1)	Minimum rent will increase upon final funding and project completion or in some cases, the improvement deadline as defined in each lease agreement.
(2)	Minimum rent will increase on the 1st of each month by the amount advanced in the previous month multiplied by the estimated yield.
(3)	The yield is included in the initial lease rate.
(4)	The lease rate in affect on the date funded: 7% for March through November 2010. Minimum rent increase as per footnote (1).
(5)	Project complete; this is the final funding
(6)	Project complete; this is the final funding which is $199,000 less than the open commitment.

 

17

Table of Contents

 

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

 

Executive Overview

 

Business

 

We are a self-administered health care real estate investment trust (or REIT) that invests primarily in long-term healthcare and other health care related properties through mortgage loans, property lease transactions and other investments.  In the first quarter of 2010, long-term healthcare properties, which include skilled nursing and assisted living properties, comprised approximately 98% of our investment portfolio.  We have been operating since August 1992.

 

The following table summarizes our “direct real estate investment portfolio” (properties that we own or on which we hold promissory notes secured by first mortgages) as of March 31, 2010 (dollar amounts in thousands):

 

							Three months ended March 31, 2010						Percentage		Number		Number of		Investment					Number
Type of Property		Gross Investments			Percentage of Investments		Rental Income			Interest Income (2)			of Revenues (3)		of Properties		Beds/ Units		per Bed/Unit			Number of Operators (1)		of States (1)
Assisted Living Properties		$	295,420		48.7	%	$	7,865		$	760		49.0	%	104		4,790		$	61.67		14		22
Skilled Nursing Properties		298,186			49.2	%	7,445			1,142			48.8	%	100		11,605		25.69			34		19
Schools		13,020			2.1	%	300			77			2.2	%	2		N/A		N/A			2		2
Totals		$	606,626		100.0	%	$	15,610		$	1,979		100.0	%	206		16,395

 

(1)          We have investments in 29 states leased or mortgaged to 45 different operators.

(2)          Includes Interest Income from Mortgage Loans.

(3)          Includes Rental Income and Interest Income from Mortgage Loans.

 

As of March 31, 2010 we had $456.1 million in carrying value of net real estate investment, consisting of $387.9 million or 85.0% invested in owned and leased properties and $68.2 million or 15.0% invested in mortgage loans secured by first mortgages.

 

For the three months ended March 31, 2010, rental income and interest income from mortgage loans represented 87.4% and 11.1%, respectively, of total gross revenues.   In most instances, our lease structure contains fixed annual rental escalations, which are generally recognized on a straight-line basis over the minimum lease period.  Certain leases have annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property.  This revenue is not recognized until the appropriate contingencies have been resolved.  This lease structure initially generates lower revenues and net income but enables us to generate additional growth and minimize non-cash straight-line rent over time.  For the three months ended March 31, 2010 and 2009, we recorded $0.9 million and $1.2 million, respectively, in straight-line rental income.  Also during each three months ended March 31, 2010 and 2009, we recorded an additional $0.2 million of straight-line rent receivable reserve. Straight-line rental income on a same store basis will decrease from $3.2 million for projected annual 2010 to $1.3 million for projected annual 2011 assuming no modification or replacement of existing leases and no new leased investments with fixed annual rental escalations are added to our portfolio.  Conversely, our cash rental income is projected to increase from $60.5 million for projected annual 2010 to $63.3 million for projected annual 2011 assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio.  During the three months ended March 31, 2010 and 2009, we received $14.8 million and $14.0 million, respectively, of cash rental revenue and recorded amortization of lease inducement cost of $0.2 million for each period.  At March 31, 2010 and December 31, 2009, the straight-line rent receivable balance, net of reserves, on the balance sheet was $18.0 million and $17.3 million, respectively.

 

18