Item 1. Business General-Owned Properties for discussion of bed/unit count.
(2)Weighted average remaining months in lease term as of December 31, 2009.
(3)Consists of: i) $7,685 of non-recourse mortgage payable by us secured by one assisted living property with 109 units and ii) $4,225 of tax-exempt bonds secured by five assisted living properties in Washington with 188 units. As of December 31, 2009 our gross investment in properties encumbered by mortgage loans and bonds was $24,599.
(4)Of the total, $241,813 relates to investments in skilled nursing properties, $268,377 relates to investments in assisted living properties and $9,270 relates to an investment in a school.
Mortgage Loans. At December 31, 2009, we had 40 mortgage loans secured by first mortgages on 36 skilled nursing properties with a total of 4,110 beds, 16 assisted living properties with 714 units and one school. These properties are located in 14 states. See Item 8. FINANCIAL STATEMENTS-Note 6. Real Estate Investments for further description.
The following table sets forth certain information regarding our mortgage loans as of December 31, 2009 (dollars in thousands):
(1)See Item 1. Business General-Owned Properties for discussion of bed/unit count.
(2)Of the total current principal balance, $39,793 relates to investments in skilled nursing properties, $27,044 relates to investments in assisted living properties and $3,750 relates to an investment in a school. This balance is gross of a loan loss reserve of $704 and includes discounts and premiums related to loans acquired in prior years totaling $188.
(3)Includes principal and interest payments
In general, the mortgage loans may not be prepaid except in the event of the sale of the collateral property to a third party that is not affiliated with the borrower, although partial prepayments (including the prepayment premium) are often permitted where a mortgage loan is secured by more than one property upon a sale of one or more, but not all, of the collateral properties to a third party which is not an affiliate of the borrower. The terms of the mortgage loans generally impose a premium upon prepayment of the loans depending upon the period in which the prepayment occurs, whether such prepayment was permitted or required, and certain other conditions such as upon the sale of the property under a pre-existing purchase option, destruction or condemnation, or other circumstances as approved by us. On certain loans, such prepayment amount is based upon a percentage of the then outstanding balance of the loan, usually declining ratably each year. For other loans, the prepayment premium is based on a yield maintenance formula. In addition to a lien on the mortgaged property, the loans are generally secured by certain non-real estate assets of the properties and contain certain other security provisions in the form of letters of credit, pledged collateral accounts, security deposits, cross-default and cross-collateralization features and certain guarantees.
Item 3. LEGAL PROCEEDINGS
We are a party from time to time to various general and professional liability claims and lawsuits asserted against the lessees or borrowers of our properties, which in our opinion are not singularly or in the aggregate material to our results of operations or financial condition. These types of claims and lawsuits may include matters involving general or professional liability, which we believe under
applicable legal principles are not our responsibility as a non-possessory landlord or mortgage holder. We believe that these matters are the responsibility of our lessees and borrowers pursuant to general legal principles and pursuant to insurance and indemnification provisions in the applicable leases or mortgages. We intend to continue to vigorously defend such claims.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the NYSE under the symbol "LTC". Set forth below are the high and low reported sale prices for our common stock as reported on the NYSE for each of the periods indicated.
Holders of Record
As of December 31, 2009 we had approximately 378 stockholders of record of our common stock.
Dividend Information
We declared and paid total cash distributions on common stock as set forth below:
We intend to distribute to our stockholders an amount at least sufficient to satisfy the distribution requirements of a REIT. Cash flows from operating activities available for distribution to stockholders will be derived primarily from interest and rental payments from our real estate investments. All distributions will be made subject to approval of our Board of Directors and will depend on our earnings, our financial condition and such other factors as our Board of Directors deem relevant. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Internal Revenue Code, we are required to make distributions to holders of our shares equal to at least 90% of our REIT taxable income. (See "Annual Distribution Requirements" beginning on page 14.)
Issuer Purchases of Equity Securities
During the fourth fiscal quarter ended December 31, 2009, we did not repurchase any of our outstanding common stock or preferred securities.
Since inception of our existing share repurchase program through December 31, 2009, we have repurchased (i) 893,979 shares of our common stock at an average cost of $21.01 per share, including commissions, for an aggregate purchase price including commissions paid of $18,783,000 and (ii) 745,784 shares of our Series F preferred stock at an average cost of $21.83 per share, including commissions, for an aggregate purchase price including commissions paid of $16,277,000.
Our Board of Directors established the existing share repurchase program in June 2007 enabling us to repurchase up to 5,000,000 shares of our common stock on the open market. In January 2008 our Board of Directors amended the share repurchase program to include authorization to repurchase our outstanding preferred securities. This authorization does not expire until 5,000,000 shares of our equity securities, including common and preferred securities, have been repurchased or the Board of Directors terminates its authorization.
We continue to have authorization to purchase an additional 3,360,237 shares of common stock and/or preferred securities.
Stock Performance Graph
The National Association of Real Estate Investment Trusts (or NAREIT), an organization representing U.S. REITs and publicly traded real estate companies, classifies a company with 75% or more of assets directly or indirectly in the equity ownership of real estate as an equity REIT. In 2009, our equity ownership of real estate assets is more than 75%.
This graph compares the cumulative total stockholder return on our common stock from December 31, 2004 to December 31, 2009 with the cumulative stockholder total return of (1) the Standard & Poor's 500 Stock Index and (2) the NAREIT Equity REIT Index. The comparison assumes $100 was invested on December 31, 2004 in our common stock and in each of the foregoing indices and assumes the reinvestment of dividends.
Total Return Stock Performance
The stock performance depicted in the above graph is not necessarily indicative of future performance.
The stock performance graph shall not be deemed incorporated by reference into any filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934 except to the extent that we specifically incorporate such information by reference, and shall not otherwise be deemed filed under such Acts.
Item 6. SELECTED FINANCIAL DATA
The following table of selected financial information should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
(1)Dividends for the first quarter of 2006 were declared in the fourth quarter of 2005.
(2)Includes bank borrowings, mortgage loans payable, bonds payable and senior participation payable.
(3)Higher due to a gain of $32.6 million relating to four assisted living properties sold in 2006 and a $0.5 million gain recognized in 2006 from the sale of our investment in National Health Investors, Inc. (or NHI) common stock.
(4)Lower due to the pay off during 2008 of a mortgage loan in the amount of $14.2 million secured by four assisted living properties located in Ohio, as described in Item 8. FINANCIAL STATEMENTS-Note 9. Debt Obligations.
(5)Lower due to the pay off during 2009 of three mortgage loans totaling $23.9 million secured by 11 assisted living properties located in various states partially offset by outstanding bank borrowings in the amount of $13.5 million, as described in Item 8. FINANCIAL STATEMENTS-Note 9. Debt Obligations.
Item 7. 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 care and other health care related properties through mortgage loans, property lease transactions and other investments. In 2009, long-term care properties, which include skilled nursing and assisted living properties, comprised approximately 98% of our investment portfolio.
The following table summarizes our direct real estate investment portfolio which consists of properties that we own or on which we hold promissory notes secured by first mortgages as of December 31, 2009 (dollar amounts in thousands):
(1)We have investments in 29 states leased or mortgaged to 44 different operators.
(2)See Item 1. Business General-Owned Properties for discussion of bed/unit count.
(3)Includes Interest Income from Mortgage Loans.
(4)Includes Rental Income and Interest Income from Mortgage Loans.
As of December 31, 2009 we had $444.2 million in carrying value of net real estate investment, consisting of $374.3 million or 84% invested in owned and leased properties and $69.9 million or 16% invested in mortgage loans secured by first mortgages.
For the year ended December 31, 2009, rental income and interest income from mortgage loans represented 85.9% and 12.2%, 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 years ended December 31, 2009, 2008, and 2007 we recorded $4.2 million, $3.5 million, and $4.8 million, respectively, in straight-line rental income. Also during 2009 and 2008 we recorded $0.8 million and $0.1 million, respectively, of straight-line rent receivable reserve. Straight-line rental income on a same store basis will decrease from $4.2 million for 2009 to $3.0 million for projected annual 2010 assuming no new leased investments with fixed annual rental escalations are added to our portfolio. Conversely, our cash rental income is projected to increase from $56.5 million for 2009 to $58.9 million for projected annual 2010 assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio. During the year ended December 31, 2009 we received $56.5 million of cash rental revenue and recorded $0.7 million of lease inducement costs. At December 31, 2009 and 2008, the straight-line rent receivable balance, net of reserves, on the consolidated balance sheet was $17.3 million and $13.9 million, respectively.
Subsequent to December 31, 2009, we purchased two skilled nursing properties with a total of 286 beds. See Key Transactions below for further discussion of acquisitions. Subsequent to these acquisitions, straight-line rental income will decrease from $4.2 million for 2009 to $3.2 million for projected annual 2010 assuming no additional new leased investments with fixed annual rental escalations are added to our portfolio. Conversely, our cash rental income is projected to increase from $56.5 million for 2009 to $60.4 million for projected annual 2010 assuming no modification or replacement of existing leases and no additional new leased investments are added to our portfolio.
Our primary objectives are to sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in long-term care properties and other health care related properties managed by experienced operators. To meet these objectives, we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders and diversify our investment portfolio by geographic location, operator and form of investment. We opportunistically consider investments in health care facilities in related businesses where the business model is similar to our existing model and the opportunity provides an attractive expected return. Consistent with this strategy, we pursue, from time to time, opportunities for potential acquisitions and investments, with due diligence and negotiations often at different stages of development at any particular time.
•For investments in skilled nursing properties, we favor low cost per bed opportunities, whether in fee simple properties or in mortgages. The average per bed cost of our owned skilled nursing properties is approximately $33,500 per bed while that of properties subject to our mortgages is approximately $9,700 per bed.
•Additionally with respect to skilled nursing properties, we attempt to invest in properties that do not have to rely on a high percentage of private-pay patients. We seek to invest primarily in properties that are located in suburban and rural areas of states. We prefer to invest in a property that has significant market presence in its community and where state certificate of need and/or licensing procedures limit the entry of competing properties.
•For assisted living investments we have attempted to diversify our portfolio both geographically and across product levels. Thus, we believe that although the majority of our investments are in affordably priced units, our portfolio also includes a significant number of upscale units in appropriate markets with certain operators.
Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable. Our investments in mortgage loans and owned properties 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 the type of health care facility 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 relating to real estate taxes and insurance.
In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk. Historically we have financed up to 90 percent of the stabilized market value of a property. Due to current market uncertainties we most likely will finance lower than our historical percentage. Some operating leases and loans are credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates.
Depending upon the availability and cost of external capital, we anticipate making additional investments in health care related properties. New investments are generally funded from cash on hand and temporary borrowings under our unsecured line of credit and internally generated cash flows. Our investments generate internal cash from rent and interest receipts and principal payments on mortgage loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured line of credit, is expected to be provided through a combination of public and private offerings of debt and equity securities and secured and unsecured debt financing. The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. Changes in capital markets environment may impact the availability of cost-effective capital. We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance future investments during the current period of tightened credit conditions.
Economic Climate
Through 2009, the U.S continued to experience challenging financial markets, tight credit conditions, and slower growth. Continued concerns about the systemic impact of inflation, energy costs, declining business and consumer confidence, and a weakened real estate market have contributed to increased market volatility and diminished expectations for the U.S. economy. As a result, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Continued turbulence in the U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our operators. We expect that the deterioration in the credit markets should exert downward pressure on prices of long term care properties.
We believe our business model has enabled and will continue to allow us to maintain the integrity of our property investments, including in response to financial difficulties that may be experienced by operators. Traditionally, we have taken a conservative approach to managing our business, choosing to maintain liquidity and exercise patience until favorable investment opportunities arise.
At December 31, 2009, we had $8.9 million of cash on hand and $66.5 million available on our $80.0 million Unsecured Credit Agreement which matures on July 17, 2011. Also, during 2009, we entered into an equity distribution agreement with KeyBanc to issue and sell, from time to time, up to $75.0 million in aggregate offering price of our common shares. During 2009, we sold 30,000 shares of common stock at an average sales price including commissions of $25.54 per share and total proceeds of $0.8 million. At December 31, 2009 we had $74.2 million available under this agreement. In calendar year 2010, we have a mortgage debt maturity of $7.7 million due in August 2010 at an interest rate of 8.69%. This mortgage debt may be paid 90-days early. As a result, we believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance some future investments should we determine such future investments are financially feasible.
Key Transactions
Owned Properties. During 2009, we acquired three assisted living properties with a total of 192 units for $13.0 million and incurred and expensed $0.2 million in transaction costs. These properties are leased to a third party operator under a 12-year master lease with two five-year renewal options. Additionally, we invested $3.2 million at an average yield of 10.6% under agreements to expand and renovate eight properties operated by six different operators and we invested $0.6 million in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment.
Subsequent to December 31, 2009, we purchased a 166-bed skilled nursing property in Texas for $7.9 million. This property is leased to a third party operator under a 10-year lease with two five-year renewal options. This operator previously operated the property under a lease with the seller. In addition, we paid $0.1 million to this operator as a lease inducement which will be amortized as a yield adjustment over the life of the lease. Also, subsequent to December 31, 2009, we purchased a 120-bed skilled nursing property in Florida for a purchase price of $9.0 million. This property is leased to a third party operator under a 12-year lease with two 10-year renewal options.
Debt Obligations. During 2009, we paid off three mortgage loans totaling $23.9 million secured by 11 assisted living properties located in various states. The retired debts bore a weighted average interest rate of 8.68%. At December 31, 2009, we have one mortgage loan outstanding with a carrying value of $7.7 million at a fixed interest rate of 8.69%. At December 31, 2009, we had $13.5 million outstanding at an interest rate of LIBOR plus 1.50% under our Unsecured Credit Agreement with $66.5 million available for borrowing. Subsequent to December 31, 2009, we borrowed $17.0 million under our Unsecured Credit Agreement for the acquisition of two skilled nursing properties with a total of 286 beds, as previously discussed. After this borrowing, we had $30.5 million outstanding under the Unsecured Credit Agreement and $49.5 million available for borrowing.
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 our concentration risk in terms of asset mix, investment mix, operator mix and geographic mix. Concentration risk is valuable to understand what portion of our 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. In order to qualify as an equity REIT, at least 75 percent of our total assets must be represented by real estate assets, cash, cash items and government securities. Investment mix measures the portion of our investments that relate to our various property types. Operator mix measures the portion of our investments that relate to our top three operators. Geographic mix measures the portion of our investment that relate to our top five states.
The following table reflects our recent historical trends of concentration risk (gross investment, in thousands):
(1)Preferred Care, Inc. leases 25 skilled nursing properties under two master leases, one skilled nursing property under a separate lease agreement and operates seven skilled nursing properties securing six mortgage loans receivable we have with unrelated third parties and one mortgage loan receivable we have with Preferred Care. They also operate one skilled nursing facility under a sub-lease with another lessee which is not included in the Preferred Care operator mix.
Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to book capitalization and debt to market capitalization. The leverage ratios indicate how much of our consolidated balance sheet capitalization is related to long-term debt. 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 plus preferred dividends). The coverage ratios are based on earnings before interest, taxes, depreciation and amortization. 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:
(1)Increase primarily due to the increase in bank borrowing.
(2)Decrease primarily due to the increase in market capitalization partially offset by the increase in bank borrowing.
(3)Decrease primarily due to the increase in operating and other expenses relating to transaction costs incurred on the acquisition of three assisted living properties. See Item 8. FINANCIAL STATEMENTS-Note 6. Real Estate Investments for further discussion.
(4)Decrease primarily due to the repayment of $23.9 million of mortgage debt in June and July of 2009.
(5)Increase primarily due to the decrease in interest expense relating to the repayment of debt.
(6)Decrease primarily due to the repayment of $15.8 million on two mortgage loans secured by 10 assisted living properties located in various states.
(7)Increase primarily due to the decrease in market capitalization.
(8)Increase primarily due to increases in rental income resulting from lease restructuring and one-time interest income resulting from the prepayment of a mortgage loan.
We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. This may be a result of various factors, including, but not limited to
•The status of the economy;
•The status of capital markets, including prevailing interest rates;
•Compliance with and changes to regulations and payment policies within the health care industry;
•Changes in financing terms;
•Competition within the health care and senior housing industries; and
•Changes in federal, state and local legislation.
Management regularly monitors the economic and other factors listed above. We develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends.
Operating Results
Year ended December 31, 2009 compared to year ended December 31, 2008
Revenues for the year ended December 31, 2009 increased to $69.9 million from $69.4 million for the same period in 2008 primarily due to increases in rental income partially offset by decreases in interest income from mortgage loans and decreases in interest and other income, as discussed below. Rental income increased $2.4 million from the same period in 2008 primarily as a result of increases provided for in existing lease agreements which do not qualify under our straight-line rental income provision, rental increases resulting from capital improvement investments, new leases on acquired properties and new leases on properties formerly operated by affiliates of Sunwest Management, Inc. (or Sunwest), as described in Item 8. FINANCIAL STATEMENTS-Notes 6. Real Estate Investments. Same store cash rental income, properties owned for the year ended December 31, 2009 and 2008, increased $1.6 million due to rental increases provided for in existing lease agreements.
Interest income from mortgage loans for the year ended December 31, 2009 decreased $1.2 million from the same period in 2008 primarily due to mortgage loan payoffs and the conversion of a mortgage loan to an owned property in the fourth quarter of 2008 resulting from the non-payment of interest income from affiliates of Sunwest, as described in Item 8. FINANCIAL STATEMENTS-Notes 6. Real Estate Investments.
Interest and other income for the year ended December 31, 2009 decreased $0.8 million from the same period in 2008 primarily due to lower interest income from our investments of cash resulting from lower interest rates and lower cash balances.
Interest expense for the year ended December 31, 2009 was $1.7 million lower than the same period in 2008 due to a decrease in mortgage loans and bonds payable outstanding during the period resulting from the repayment of mortgage loans and normal amortization of existing mortgage loans partially offset by increase in borrowings under our Unsecured Credit Agreement.
Depreciation and amortization expense was comparable for each of the years ended December 31, 2009 and 2008.
Provisions for doubtful accounts for the year ended December 31, 2009 increased $0.7 million from the same period in 2008 primarily due to an increase in straight-line rent receivable reserve.
Operating and other expenses were $0.5 million higher in the year ended December 31, 2009 as compared to the same period in 2008 primarily due to an increase in accounting fees related to the implementation of new FASB accounting guidance during 2009, property tax expenses paid on behalf of one of our operators, transaction costs related to the acquisition of three assisted living properties and the timing of certain expenditures. As required by the new FASB accounting guidance, all acquisition-related transaction costs are expensed as incurred.
Net income allocable to common stockholders for the year ended December 31, 2009 increased $1.0 million from the same period in 2008 primarily due to the changes previously described above partially offset by the increase in income allocated to our preferred stockholders, which includes the repurchase of preferred stock for less than redemption value and preferred stock dividends. See Item 8. FINANCIAL STATEMENTS-Notes 14. Net Income Per Common Share for the components of income allocated to preferred stockholders.
Year ended December 31, 2008 compared to year ended December 31, 2007
Revenues for the year ended December 31, 2008 decreased to $69.4 million from $74.8 million for the same period in 2007 primarily due to decreases resulting from Sunwest non-payment of rental and interest income, decreases in interest income from mortgage loans and decreases in interest and other income, as discussed below. See Item 8. FINANCIAL STATEMENT-Note 6. Real Estate Investments for further discussion on Sunwest non-payment of rental income and interest income. Rental income decreased $0.3 million primarily as a result of decreases resulting from non-payment of rental income primarily from Sunwest ($1.0 million) partially offset by increases provided for in existing lease agreements which do not qualify under our straight-line rental income provision. Same store cash rental income, properties owned for both years ended December 31, 2008 and 2007, increased $2.0 million due to rental increases provided for in existing lease agreements.
Interest income from mortgage loans and notes receivable decreased $2.8 million primarily as a result of mortgage loan payoffs and Sunwest non-payment of interest income, as described in Item 8. FINANCIAL STATEMENT-Note 6. Real Estate Investments.
Interest and other income decreased $2.4 million in 2008 from the prior year primarily due to the early redemption of $3.5 million face value of the Skilled Healthcare Group, Inc. (or SHG) Senior Subordinated Notes in 2007 and lower interest income from our investments of cash resulting from lower interest rates and lower cash balances.
Interest expense decreased $0.8 million in 2008 from the prior year primarily due to a decrease in average debt outstanding during the period resulting from the repayment of a $14.2 million mortgage loan and normal amortization of existing mortgage loans.
Depreciation and amortization expense in 2008 increased $0.7 million from the prior year due to acquisitions and capital improvements made on existing properties.
Provisions for doubtful accounts in 2008 increased $0.5 million from the prior year primarily due to an increase in straight-line rent receivable reserve.
Operating and other expenses decreased $0.9 million primarily due to a decrease in restricted stock vesting expense, partially offset by an increase of one-time charges in the fourth quarter of 2008 related primarily to lease/loan defaults and terminated transactions.
Net income allocable to common stockholders for the year ended December 31, 2008 decreased $2.2 million from the same period in 2007 primarily due to the changes previously described above partially offset a $0.1 million gain on sale of a vacant parcel of land adjacent to a skilled nursing property located in New Mexico and the decrease in income allocated to our preferred stockholders, which includes the repurchase of preferred stock for less than redemption value and preferred stock dividends. During the year ended December 31, 2007, we recognized a $0.1 million gain related to the sale of a closed, previously impaired, skilled nursing property located in Texas and a 59-bed skilled nursing property located in Tennessee. See Item 8. FINANCIAL STATEMENTS-Notes 14. Net Income Per Common Share for the components of income allocated to preferred stockholders.
Critical Accounting Policies
Preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. See Item 8. FINANCIAL STATEMENTS-Note 2. Summary of Significant Accounting Policies for a description of the significant accounting policies we followed in preparing the consolidated financial statements for all periods presented. We have identified the following significant accounting policies as critical accounting policies in that they require significant judgment and estimates and have the most impact on financial reporting.
Impairments. Impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses the impairment of properties individually and impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be held and used, and carrying amount over the fair value less cost to sell in instances where management has determined that we will dispose of the property. In determining fair value, we use current appraisals or other third party opinions of value and other estimates of fair value such as estimated discounted future cash flows.
Also, we evaluate the carrying values of mortgage loans receivable on an individual basis. Management periodically evaluates the realizability of future cash flows from the mortgage loan receivable when events or circumstances, such as the non-receipt of principal and interest payments and/or significant deterioration of the financial condition of the borrower, indicate that the carrying amount of the mortgage loan receivable may not be recoverable. An impairment charge is recognized in current period earnings and is calculated as the difference between the carrying amount of the mortgage loan receivable and the discounted cash flows expected to be received, or if foreclosure is probable, the fair value of the collateral securing the mortgage.
When an investment is considered impaired, we determine whether that impairment is other-than-temporary and the measurement of an impairment loss. The FASB provides accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Comparative information for periods prior to initial application is not required.
In April 2009, the FASB issued new accounting guidance regarding the recognition and presentation of other-than-temporary impairments which amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt securities in the consolidated financial statements. This guidance is effective for fiscal years and interim periods beginning after June 15, 2009. The adoption of this guidance did not have an impact on our consolidated financial statements.
Mortgage Loans Receivable. Mortgage loans receivable we originate are recorded on an amortized cost basis. Mortgage loans we acquire are recorded at fair value at the time of purchase net of any related premium or discount which is amortized as a yield adjustment to interest income over the life of the loan. We maintain a valuation allowance based upon the expected collectability of our mortgage loans receivable. Changes in the valuation allowance are included in current period earnings.
Revenue Recognition. Interest income on mortgage loans is recognized using the effective interest method. We follow a policy related to mortgage interest whereby we consider a loan to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid mortgage interest income from that loan until the past due amounts have been received.
Rental income from operating leases is recognized in accordance with U.S. GAAP. Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four methods depending on specific provisions of each lease as follows:
(i)a specified annual 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.
The FASB does not provide for the recognition of contingent revenue until all possible contingencies have been eliminated. We consider the operating history of the lessee and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. We follow a policy related to rental income whereby we consider a lease to be non-performing after 60 days of non-payment of past due amounts and do not recognize unpaid rental income from that lease until the amounts have been received.
Rental revenues relating to non-contingent leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis. Recognizing income on a straight-line basis requires us to calculate the total non-contingent rent containing specified rental increases over the life of the lease and to recognize the revenue evenly over that life. This method results in rental income in the early years of a lease being higher than actual cash received, creating a straight-line rent receivable asset included in our consolidated balance sheet. At some point during the lease, depending on its terms, the cash rent payments eventually exceed the straight-line rent which results in the straight-line rent receivable asset decreasing to zero over the remainder of the lease term. We assess the collectability of straight-line rent in accordance with the applicable accounting standards and our reserve policy. If the lessee becomes delinquent in rent owed under the terms of the lease, we may provide a reserve against the recognized straight-line rent receivable asset for a portion, up to its full value, that we estimate may not be recoverable.
Net loan fee income and commitment fee income are amortized over the life of the related loan. Costs associated with leases are deferred and allocated over the lease term in proportion to the recognition of rental income.
Liquidity and Capital Resources
Operating Activities:
At December 31, 2009, our real estate investment portfolio (before accumulated depreciation and amortization) consisted of $519.5 million invested primarily in owned long-term healthcare properties and mortgage loans of $70.6 million (prior to deducting a $0.7 million reserve). Our portfolio consists of direct investments (properties that we either own or on which we hold promissory notes secured by first mortgages) in 98 skilled nursing properties with 11,319 beds, 104 assisted living properties with 4,790 units and two schools. These properties are located in 29 states. During the year ended December 31, 2009, net cash provided by operating activities of $60.3 million.
For the year ended December 31, 2009 we recorded $4.2 million in straight-line rent. We currently expect that straight-line rent on a same store basis will decrease from $4.2 million for 2009 to $3.0 million for projected annual 2010 assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio. Conversely, our cash rental income is projected to increase from $56.5 million for 2009 to $58.9 million for projected annual 2010 assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio. Also during the year ended December 31, 2009, we recorded an additional reserve of $0.8 million on our straight-line rent receivable. During the year ended December 31, 2009 we received $56.5 million of cash rental revenue and recorded $0.7 million of amortized lease inducement cost. At December 31, 2009 and 2008, the straight-line rent receivable balance, net of reserves, on the consolidated balance sheet was $17.3 million and $13.9 million, respectively.
Subsequent to December 31, 2009, we purchased two skilled nursing properties with a total of 286 beds, as described below. Subsequent to these acquisitions, straight-line rental income will decrease from $4.2 million for 2009 to $3.2 million for projected annual 2010 assuming no additional new leased investments with fixed annual rental escalations are added to our portfolio. Conversely, our cash rental income is projected to increase from $56.5 million for 2009 to $60.4 million for projected annual 2010 assuming no modification or replacement of existing leases and no additional new leased investments are added to our portfolio.
Investing Activities:
During 2009, we used $9.1 million of cash in investing activities. During 2009, we acquired three assisted living properties with a total of 192 units for $13.0 million and incurred and expensed $0.2 million in transaction costs. These properties are leased to a third party operator under a 12-year master lease with two five-year renewal options. We also invested $3.2 million at an average yield of 10.6% under agreements to expand and renovate eight properties operated by six different operators and we invested $0.6 million in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment. See Item 8. FINANCIAL STATEMENTS-Note 11. Commitments and Contingencies for further discussion about our commitment agreements.
Subsequent to December 31, 2009, we purchased a 166-bed skilled nursing property in Texas for $7.9 million. This property is leased to a third party operator under a 10-year lease with two five-year renewal options. This operator previously operated the property under a lease with the seller. In addition, we paid $0.1 million to this operator as a lease inducement which will be amortized as a yield adjustment over the life of the lease. Also, subsequent to December 31, 2009, we purchased a 120-bed skilled nursing property in Florida for a purchase price of $9.0 million. This property is leased to a third party operator under a 12-year lease with two 10-year renewal options.
During the year ended December 31, 2009, we invested $0.2 million under one existing mortgage loan for capital improvements. Additionally, we received $7.8 million in principal payments on
mortgage loans including $3.7 million related to the payoff of three mortgage receivables secured by three skilled nursing properties.
During the year ended December 31, 2009, we invested $0.4 million and received $0.7 million in principal payments on notes receivable.
Financing Activities:
For the year ended December 31, 2009, we used $63.5 million of cash in financing activities. We paid $0.9 million in scheduled principal payments on mortgage loans and bonds payable. Also, we paid $23.9 million related to the payoff of three mortgage loans secured by 11 assisted living properties. The retired debt bore a weighted average interest rate of 8.68%. At December 31, 2009 we have one mortgage loan outstanding with a carrying value of $7.7 million at a fixed interest rate of 8.69%.
During 2008, we amended and extended our Unsecured Revolving Credit Agreement (or Unsecured Credit Agreement) at an initial commitment amount of $80.0 million. The Unsecured Credit Agreement provides for the opportunity to increase the credit amount up to a total of $120.0 million. 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 based on our borrowing election is Prime Rate plus 0.50% or LIBOR plus 1.50%. 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 .5 to 1.0,
(ii)a ratio not greater than .35 to 1.0 of secured debt to total asset value
(iii)a ratio not less than 2.5 to 1.0 of EBITDA to interest expense, and
(iv)a ratio of not less than 1.50 to 1.0 of EBITDA to fixed charges.
During the year ended December 31, 2009, we borrowed $19.0 million and repaid $5.5 million under our Unsecured Credit Agreement. At December 31, 2009, we had $13.5 million outstanding at an interest rate of LIBOR plus 1.50% under the Unsecured Credit Agreement with $66.5 million available for borrowing. Also, at December 31, 2009, we were in compliance with all our covenants. Subsequent to December 31, 2009, we borrowed $17.0 million under our Unsecured Credit Agreement for the acquisition of two skilled nursing properties with a total of 286 beds, as previously discussed. After this borrowing, we had $30.5 million outstanding under the Unsecured Credit Agreement with $49.5 million available for borrowing.
We paid cash dividends on our Series C, Series E, and Series F preferred stocks totaling $3.3 million, $0.1 million and $11.8 million, respectively. Additionally, we declared and paid cash dividends on our common stock totaling $36.2 million. Subsequent to December 31, 2009, we declared a monthly cash dividend of $0.13 per share on our common stock for the months of January, February and March 2010, payable on January 29, February 26 and March 31, 2010, respectively, to stockholders of record on January 21, February 18 and March 23, 2010, respectively.
During the year ended December 31, 2009, holders of 900 shares of our 8.5% Series E Cumulative Convertible Preferred Stock (or 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 conversion of Series E preferred stock were 75,632 at December 31, 2009.
In June 2007 our Board of Directors terminated the prior existing share repurchase program and authorized a new share repurchase program enabling us to repurchase up to 5,000,000 shares of our
common stock. In January 2008 the Board of Directors amended the share repurchase program to include authorization to repurchase our outstanding preferred securities. This authorization does not expire until 5,000,000 shares of our equity securities, including common and preferred securities, have been repurchased or the Board of Directors terminates its authorization.
During 2009 we repurchased and retired 900 shares of common stock for an aggregate purchase price of $16,000 or $17.33 per share, including commissions. Also, during 2009, we invested $2.0 million to repurchase a total of 109,484 shares of our 8.0% Series F Preferred Stock at an average cost of $18.27 per share, including commissions. The liquidation value on our 8.0% Series F Preferred Stock is $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. At December 31, 2009 there were 5,894,216 shares of our 8.0% Series F Preferred Stock outstanding. The common and preferred shares were purchased on the open market under the new Board authorization discussed above. After these repurchases, we continue to have an open Board authorization to purchase an additional 3,360,237 shares.
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 $75.0 million in aggregate offering price of our common shares. During 2009 we sold 30,000 shares of common stock for net proceeds of $0.8 million or $25.54 per share, including commissions. At December 31, 2009 we had $74.2 million available under this agreement.
During 2008 we adopted and our shareholders approved the 2008 Equity Participation Plan which replaces the 2004 Restricted Stock Plan, the 2004 Stock Option Plan and the 1998 Equity Participation Plan. Under the 2008 Equity Participation Plan, 600,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2008 Equity Participation Plan are set by our compensation committee at its discretion. During 2009 we granted 15,000 stock options and 3,000 shares of restricted stock at $24.65 per share under this plan. Also, we granted 3,000 shares of restricted stock at $18.34 per share and 36,988 shares of restricted stock at $17.06 per share under this plan. These shares vest ratably over a three-year period.
During the year ended December 31, 2009, a total of 35,000 common stock options were exercised at a total option value $0.8 million and a total market value on the date of exercise of $0.9 million.
During 2009 one of our limited partners exercised its conversion rights and exchanged all of its interest in the limited partnership. Upon receipt of the redemption notification of 67,294 limited partnership units, we elected to convert its partnership units into 67,294 shares of our common stock. The partnership conversion price was $17.00 per partnership unit. In accordance with FASB accounting guidance, we account for this exchange as an equity transaction because there was no change in control requiring consolidation or deconsolidation and remeasurement. Accordingly, the $1.1 million carrying amount of the limited partner's interest in the partnership was reclassified to stockholders' equity. At December 31, 2009 we have one limited partnership and have reserved 112,588 shares of our common stock under this partnership agreement. The carrying value of the partnership conversion rights is $2.0 million.
Available Shelf Registrations:
During 2007, we filed a Form S-3 "shelf" registration statement which became effective August 7, 2007, and provides us with the capacity to offer up to $300.0 million in our debt and/or equity securities. On August 5, 2009, we entered into an equity distribution agreement with KeyBanc under which we may issue and sell, from time to time, up to $75.0 million in aggregate offering price of our
common shares through KeyBanc. Sales, if any, of common shares will be made by means of ordinary brokers' transactions at market prices, in block transactions, or as otherwise agreed between us and KeyBanc. At December 31, 2009, we had $74.2 million availability under our equity distribution agreement with KeyBanc.
We currently have $225.0 million of availability under our effective shelf registration. We may from time to time raise capital under our currently effective shelf registration or a new shelf registration by issuing, in public or private transactions, our equity and debt securities, but the availability and terms of such issuance will depend upon then prevailing market and other conditions.
Commitments:
The following table summarizes our capital improvement commitments as of December 31, 2009 (dollar amounts in thousands):
(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 yield 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)Maximum of $5,000,000 per year for the life of the lease.
(8)Subsequent to December 31, 2009, we committed to provide a lessee with $175,000 to invest in capital improvements to a skilled nursing property in Texas. The yield for this commitment is included in the lease rate and matures in January 2011. Also, subsequent to December 31, 2009, we invested an additional $392,000 in the following commitments: a) $316,000, b) $38,000, and c) $38,000.
(9)The current lease rate.
The following table summarizes our loan commitments as of December 31, 2009 (dollar amounts in thousands):
(1)The principal balance of the loan will increase on the date any funds are disbursed by an amount equal to such funding and shall bear interest at the then current interest rate of the existing loan. The monthly loan payment will increase at each increase to the principal balance. The interest rate at December 31, 2009 is 10.7%.
Contractual Obligations:
We monitor our contractual obligations and commitments detailed above to ensure funds are available to meet obligations when due. The following table represents our long-term contractual obligations (scheduled principal payments and amounts due at maturity) as of December 31, 2009, and excludes the effects of interest (in thousands):
(1)At December 31, 009 we had $66,500,000 available for borrowing under our Unsecured Credit Agreement. Subsequent to December 31, 2009, we borrowed $17,000,000 under our Unsecured Credit Agreement for the acquisition of two skilled nursing properties with a total of 286 beds. After this borrowing, we had $30,500,000 outstanding under the Unsecured Credit Agreement with $49,500,000 available for borrowing. Off-Balance Sheet Arrangements:
We had no off-balance sheet arrangements as of December 31, 2009.
Liquidity:
We have an Unsecured Credit Agreement in the amount of $80.0 million and it provides for the opportunity to increase the credit amount up to a total of $120.0 million. The 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 Credit Agreement based on our borrowing election is Prime Rate plus 0.50% or LIBOR plus 1.50%. At the time of borrowing, we may elect the 1, 2, 3 or 6 month LIBOR rate.
At December 31, 2009, we had $8.9 million of cash on hand and $66.5 million available on our $80.0 million Unsecured Credit Agreement which matures July 17, 2011. Also, during 2009, we entered into an equity distribution agreement with KeyBanc to issue and sell, from time to time, up to $75.0 million in aggregate offering price of our common shares. At December 31, 2009 we had $74.2 million available under this agreement. In calendar year 2010, we have a mortgage debt maturity of $7.7 million due in August 2010 at an interest rate of 8.69%. This mortgage debt may be paid
90-days early. We believe that our current cash balance, cash flow from operations available for distribution or reinvestment, our current unsecured line of credit borrowing capacity, and availability under our equity distribution agreement are sufficient to provide for payment of our current operating costs and debt obligations and to provide funds for distribution to the holders of our preferred stock and pay common dividends at least sufficient to maintain our REIT status. The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, especially to changes in interest rates.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
You are cautioned that statements contained in this section are forward looking and should be read in conjunction with the disclosure under the heading "Cautionary Statements" and the "Risk Factors" set forth above.
We are exposed to market risks associated with changes in interest rates as they relate to our mortgage loans receivable and debt. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
We do not utilize interest rate swaps, forward or option contracts or foreign currencies or commodities, or other types of derivative financial instruments nor do we engage in "off-balance sheet" transactions. The purpose of the following disclosure is to provide a framework to understand our sensitivity to hypothetical changes in interest rates as of December 31, 2009.
Our future earnings, cash flows and estimated fair values relating to financial instruments are dependent upon prevalent market rates of interest, such as LIBOR or term rates of U.S. Treasury Notes. Changes in interest rates generally impact the fair value, but not future earnings or cash flows, of mortgage loans receivable and fixed rate debt. For variable rate debt, such as our revolving line of credit, changes in interest rates generally do not impact the fair value, but do affect future earnings and cash flows.
At December 31, 2009, based on the prevailing interest rates for comparable loans and estimates made by management, the fair value of our mortgage loans receivable using a 7.5% discount rate was approximately $80.2 million. A 1% increase in such rates would decrease the estimated fair value of our mortgage loans by approximately $2.8 million while a 1% decrease in such rates would increase their estimated fair value by approximately $2.9 million. A 1% increase or decrease in applicable interest rates would not have a material impact on the fair value of our fixed rate debt.
The estimated impact of changes in interest rates discussed above are determined by considering the impact of the hypothetical interest rates on our borrowing costs, lending rates and current U.S. Treasury rates from which our financial instruments may be priced. We do not believe that future market rate risks related to our financial instruments will be material to our financial position or results of operations. These analyses do not consider the effects of industry specific events, changes in the real estate markets, or other overall economic activities that could increase or decrease the fair value of our financial instruments. If such events or changes were to occur, we would consider taking actions to mitigate and/or reduce any negative exposure to such changes. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.
Item 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
and Financial Statement Schedules
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of LTC Properties, Inc.
We have audited the accompanying consolidated balance sheets of LTC Properties, Inc. (the "Company") as of December 31, 2009 and 2008, and the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LTC Properties, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for (1) non-controlling interests with the adoption of the amendments to the FASB Accounting Standards Codification (ASC) Topic 810: Consolidation, effective January 1, 2009 and retroactively applied; (2) for business combinations with the adoption of the FASB ASC Topic 805, Business Combinations, effective January 1, 2009; and (3) participating securities with the adoption of FASB ASC Topic 260, Earnings Per Share, effective January 1, 2009 and retroactively applied.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), LTC Properties, Inc.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
February 24, 2010
LTC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(1)On December 31, 2009 and 2008, we had $2,480,000 and $2,037,000, 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 12. Transactions with Related Party for further discussion.
(2)At December 31, 2009 and 2008, 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 12. Transactions with Related Party for further discussion.
See accompanying notes.
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(1)During 2009, 2008 and 2007, we received $4,058,000, $3,917,000, and $1,267,000, respectively, in rental income and recorded $443,000, $535,000, and $206,000 respectively, in straight-line rental income from a lessee that qualifies as a related party because the lessee's Chief Executive Officer is on our Board of Directors. See Note 12. Transactions with Related Party for further discussion.
(2)During 2009, 2008, and 2007 we recognized $720,000, $728,000 and $1,327,000, 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 12. Transactions with Related Party for further discussion. NOTE: Computations of per share amounts from continuing operations, discontinued operations and net income are made independently. Therefore, the sum of per share amounts from continuing operations and discontinued operations may not agree with the per share amounts from net income allocable to common stockholders.
See accompanying notes.
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share amounts)
See accompanying notes.
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(1)During 2009, 2008 and 2007, we recorded $443,000, $535,000 and $206,000, respectively, in straight-line rental income from a lessee that qualifies as a related party because the lessee's Chief Executive Officer is on our Board of Directors. See Note 12. Transactions with Related Party for further discussion.
(2)During 2007, we received $3,885,000 as a result of a partial redemption of our marketable debt securities from an entity that qualifies as a related party because the entity's Chief Executive Officer is on our Board of Directors. See Note 12. Transactions with Related Party for further discussion.
See accompanying notes.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
LTC Properties, Inc. (or LTC), a Maryland corporation, commenced operations on August 25, 1992. LTC 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.
2. Summary of Significant Accounting Policies
In June 2009, the Financial Accounting Standard Board (or FASB) issued a new accounting pronouncement regarding the FASB Accounting Standards Codification (or Codification) and the hierarchy of U.S. generally accepted accounting principles (or U.S. GAAP). This pronouncement establishes Codification as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for U.S. Securities and Exchange Commission (or SEC) registrants. Codification has superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. Codification became effective for financial statements issued for interim and annual periods ending after September 15, 2009. The FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification. Pursuant to the provisions of Codification, we have updated references to GAAP in the accompanying consolidated financial statements.
Basis of Presentation. The accompanying consolidated financial statements include the accounts of LTC, our wholly-owned subsidiaries and our controlled partnership. All intercompany investments, accounts and transactions have been eliminated. Control over the partnership is based on the provisions of the partnership agreement that provides us with a controlling financial interest in the partnership. Under the terms of the partnership agreement, we, as the general partner, are responsible for the management of the partnership's assets, business and affairs. 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, among others. 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 (appreciation).
The FASB created a framework for evaluating whether a general partner or a group of general partners controls a limited partnership or a managing member or a group of managing members controls a limited liability company and therefore should consolidate the entity. The guidance states that the presumption of general partner or managing member control would be overcome only when the limited partners or non-managing members have certain specific rights as described in the guidance. 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 expressed permission of the general partner. However, we can transfer our interest without consultation or permission of the limited partners. We consolidate our partnerships in accordance with the guidance.
The FASB requires the classification of non-controlling interests (formerly minority interests) as a component of consolidated equity in the consolidated balance sheet subject to the provisions of the
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
rules governing classification and measurement of redeemable securities. The guidance requires consolidated net income to be reported at the amounts attributable to both the controlling and non-controlling interests. The calculation of earnings per share will be based on income amounts attributable to the controlling interest. Also, this guidance addresses accounting and reporting for a change in control of a subsidiary. This guidance is effective for fiscal years beginning December 15, 2008, and is required to be adopted prospectively, except for the presentation and disclosure requirements, which are required to be adopted retrospectively. The required retrospective adoption is reflected in the accompanying consolidated financial statements. Therefore, we have reclassified the non-controlling interests of our limited partnership from the mezzanine section of our consolidated balance sheet to equity. This reclassification totaled $1,981,000 and $3,134,000 as of December 31, 2009 and December 31, 2008.
Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation, including changes as a result of the application of accounting guidance for our non-controlling interests in consolidated entities, as described above.
The FASB addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. The guidance requires that we consolidate a "variable interest entity" if we are subject to a majority of the risk of loss from the "variable interest entity's" activities, or are entitled to receive a majority of the entity's residual returns, or both. The guidance also requires disclosure about "variable interest entities" that we are not required to consolidate but in which we have a significant variable interest. We believe that as of December 31, 2009, we do not have investments in any entities that meet the definition of a "variable interest entity."
Use of Estimates. Preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents. Cash equivalents consist of highly liquid investments with a maturity of three months or less when purchased and are stated at cost which approximates market.
Land, Buildings and Improvements. Land, buildings and improvements are recorded at fair value on the acquisition date. The FASB accounting guidance requires the acquiring entity to measure the assets acquired, liabilities assumed (including contingencies) and any non-controlling interests at their fair values on the acquisition date. In determining fair value, we use current appraisals or other third party opinions of value. This guidance also requires that acquisition-related transaction costs be expensed as incurred and acquired research and development value be capitalized. In addition, acquisition-related restructuring costs are to be capitalized only if they meet certain criteria.
Depreciation is computed principally by the straight-line method for financial reporting purposes and includes depreciation associated with properties we lease that qualify as capital leases under the FASB accounting guidance relating to accounting for leases. Estimated useful lives for financial reporting purposes generally range from 3 to 5 years for computers, 7 to 10 years for equipment, 35 to 40 years for buildings and 10 to 20 years for building improvements.
Mortgage Loans Receivable. Mortgage loans receivable we originate are recorded on an amortized cost basis. Mortgage loans we acquire are recorded at fair value at the time of purchase net of any related premium or discount which is amortized as a yield adjustment to interest income over the life of the loan.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts. The allowance for doubtful accounts is based upon the expected collectability of our receivables and is maintained at a level believed adequate to absorb potential losses in our receivables. In determining the allowance we perform a quarterly evaluation of all receivables. If this evaluation indicates that there is a greater risk of receivable charge-offs, additional allowances are recorded in current period earnings.
Impairments. Impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses the impairment of properties individually and impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be held and used, and carrying amount over the fair value less cost to sell in instances where management has determined that we will dispose of the property. In determining fair value, we use current appraisals or other third party opinions of value and other estimates of fair value such as estimated discounted future cash flows.
Also, we evaluate the carrying values of mortgage loans receivable on an individual basis. Management periodically evaluates the realizability of future cash flows from the mortgage loan receivable when events or circumstances, such as the non-receipt of principal and interest payments and/or significant deterioration of the financial condition of the borrower, indicate that the carrying amount of the mortgage loan receivable may not be recoverable. An impairment charge is recognized in current period earnings and is calculated as the difference between the carrying amount of the mortgage loan receivable and the discounted cash flows expected to be received, or if foreclosure is probable, the fair value of the collateral securing the mortgage.
When an investment is considered impaired, we determine whether that impairment is other-than-temporary and the measurement of an impairment loss. The FASB provides accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Comparative information for periods prior to initial application is not required.
In April 2009, the FASB issued new accounting guidance regarding the recognition and presentation of other-than-temporary impairments which amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt securities in the consolidated financial statements. This guidance is effective for fiscal years and interim periods beginning after June 15, 2009. The adoption of this guidance did not have an impact on our consolidated financial statements.
Fair Value of Financial Instruments. The FASB requires the disclosure of fair value information about financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Accordingly, the aggregate fair market value amounts presented in the notes to these consolidated financial statements do not represent our underlying carrying value in financial instruments.
The FASB provides guidance for using fair value to measure assets and liabilities, the information used to measure fair value, and the effect of fair value measurements on earnings. The FASB
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the FASB establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices).
The fair value guidance issued by the FASB excludes accounting pronouncements that address fair value measurements for purposes of lease classification or measurement. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value, regardless of whether those assets and liabilities are related to leases.
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 consolidated financial statements.
In April 2009, the FASB issued new accounting guidance, which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This new guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of this new guidance did not impact our consolidated financial statements. See Note 16. Fair Value Measurements for the disclosure about fair value of our financial instruments.
Investments. Investments in marketable debt and equity securities are categorized as trading, available-for-sale or held-to-maturity. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, reported in other comprehensive income until realized. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in net income. As discussed above, the FASB issued new accounting guidance regarding the recognition and presentation of other-than-temporary impairments for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt securities in the consolidated financial statements. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest and other income. Our investment in marketable debt securities is classified as held-to-maturity because we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity.
Revenue Recognition. Interest income on mortgage loans is recognized using the effective interest method. We follow a policy related to mortgage interest whereby we consider a loan to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid mortgage interest income from that loan until the past due amounts have been received.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Rental income from operating leases is recognized in accordance with U.S. GAAP. Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four methods depending on specific provisions of each lease as follows:
(v)a specified annual increase over the prior year's rent, generally between 2.0% and 3.0%;
(vi)a calculation based on the Consumer Price Index;
(vii)as a percentage of facility net patient revenues in excess of base amounts or
(viii)specific dollar increases.
The FASB does not provide for the recognition of contingent revenue until all possible contingencies have been eliminated. We consider the operating history of the lessee and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. We follow a policy related to rental income whereby we consider a lease to be non-performing after 60 days of non-payment of past due amounts and do not recognize unpaid rental income from that lease until the amounts have been received.
Rental revenues relating to non-contingent leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis. Recognizing income on a straight-line basis requires us to calculate the total non-contingent rent containing specified rental increases over the life of the lease and to recognize the revenue evenly over that life. This method results in rental income in the early years of a lease being higher than actual cash received, creating a straight-line rent receivable asset included in our consolidated balance sheet. At some point during the lease, depending on its terms, the cash rent payments eventually exceed the straight-line rent which results in the straight-line rent receivable asset decreasing to zero over the remainder of the lease term. We assess the collectability of straight-line rent in accordance with the applicable accounting standards and our reserve policy. If the lessee becomes delinquent in rent owed under the terms of the lease, we may provide a reserve against the recognized straight-line rent receivable asset for a portion, up to its full value, that we estimate may not be recoverable.
Net loan fee income and commitment fee income are amortized over the life of the related loan. Costs associated with leases are deferred and allocated over the lease term in proportion to the recognition of rental income.
Federal Income Taxes. LTC qualifies as a REIT under the Internal Revenue Code of 1986, as amended, and as such, no provision for Federal income taxes has been made. A REIT is required to distribute at least 90% of its taxable income to its stockholders and a REIT may deduct dividends in computing taxable income. If a REIT distributes 100% of its taxable income and complies with other Internal Revenue Code requirements, it will generally not be subject to Federal income taxation.
For Federal tax purposes, depreciation is generally calculated using the straight-line method over a period of 27.5 years. Earnings and profits, which determine the taxability of distributions to stockholders, differs from net income for financial statement purposes principally due to the treatment of certain interest income, other expense items, impairment charges, and depreciable lives and basis of assets. At December 31, 2009, the book basis of our net assets exceeded the tax basis (unaudited) by approximately $66,214,000, primarily due to additional depreciation taken for tax purposes.
The FASB clarified the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
guidance utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs when a company concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more likely than not to be sustained). Under step two, the tax benefit is measured as the largest amount of benefit (determined on a cumulative probability basis) that is more likely than not to be realized upon ultimate settlement. This FASB accounting guidance, which we adopted on January 1, 2007, did not have a material effect on our consolidated financial statements.
We may from time to time be assessed interest or penalties by certain tax jurisdictions. In the event we have received an assessment for interest and/or penalties, it has been classified in our consolidated financial statements as operating and other expenses.
Concentrations of Credit Risks. Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, mortgage loans receivable, marketable debt securities and operating leases on owned properties. Our financial instruments, mortgage loans receivable and operating leases, are subject to the possibility of loss of carrying value as a result of the failure of other parties to perform according to their contractual obligations or changes in market prices which may make the instrument less valuable. We obtain various collateral and other protective rights, and continually monitor these rights, in order to reduce such possibilities of loss. In addition, we provide reserves for potential losses based upon management's periodic review of our portfolio.
Discontinued Operations. Properties held-for-sale on the consolidated balance sheet includes only those properties available for immediate sale in their present condition and for which management believes that it is probable that a sale of the property will be completed within one year. Accordingly, we record reclassification adjustments to reflect properties sold subsequent to the respective consolidated balance sheet date as held-for-sale in the prior period consolidated balance sheet. Properties held-for-sale are carried at the lower of cost or fair value less estimated selling costs. No depreciation expense is recognized on properties held-for-sale once they have been classified as such. The operating results of real estate assets designated as held-for-sale are included in discontinued operations in the consolidated statement of income. In addition, all gains and losses from real estate sold are also included in discontinued operations. For comparative purposes, as required by the FASB accounting guidance, the prior year's operating results of sold and held-for-sale real estate assets have been reclassified to discontinued operations in the consolidated income statement for the prior years. See Note 6. Real Estate Investments, for a detail of the components of the net income from discontinued operations.
Net Income Per Share. Basic earnings per share is calculated using the weighted-average shares of common stock outstanding during the period excluding common stock equivalents. Diluted earnings per share includes the effect of all dilutive common stock equivalents.
In June 2008, the FASB issued new accounting guidance regarding the determination of whether instruments granted in share-based payment transactions are participating securities. This guidance clarifies that outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common stockholders and are considered participating securities, and thus, the issuing entity is required to apply the two-class method of computing basic earnings per share. This guidance was effective January 1, 2009 and the required retrospective adoption to all prior-period earnings per share data is included in the accompanying consolidated financial statements. Adoption of this guidance did not have a material effect on our basic or diluted earnings per share.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation. The FASB requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. We use the Black-Scholes-Merton formula to estimate the value of stock options granted to employees. This model requires management to make certain estimates including stock volatility, expected dividend yield and the expected term. If management incorrectly estimates these variables, the results of operations could be affected. The FASB also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow. Because we qualify as a REIT under the Internal Revenue Code of 1986, as amended, we are not subject to Federal income taxation. Therefore, this reporting requirement does not have an impact on our statement of cash flows.
Segment Disclosures. The FASB accounting guidance regarding disclosures about segments of an enterprise and related information establishes standards for the manner in which public business enterprises report information about operating segments. Management believes that substantially all of our operations comprise one operating segment.
Impact of New Accounting Pronouncement
In May 2009, the FASB issued amended guidance regarding subsequent events. This pronouncement is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This amended guidance is effective for interim or annual financial periods ending after June 15, 2009. Adoption of this amended guidance did not impact our consolidated financial statements.
3. Major Operators
We have three operators, based on properties subject to lease agreements and secured by mortgage loans that each 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 (or Extendicare REIT) listed on the Toronto Stock Exchange (or TSX). Both Extendicare REIT and ALC continue to be parties to the leases with us.
Brookdale Senior Living Communities, Inc. (or Brookdale Communities), formerly known as Alterra Healthcare Corporation, is a wholly owned subsidiary of a publicly traded company, Brookdale Senior Living, Inc. (or Brookdale). During 2009, the name Alterra Healthcare Corporation was changed to Brookdale Senior Living Communities, Inc.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes Extendicare REIT's, ALC's and Brookdale's financial information as of and for the nine months ended September 30, 2009 per the operators' public filings (in thousands, unaudited). Our other operator is privately owned and thus no public financial information is available:
(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 filing 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 12.2%, or $59,715,000, of our total assets at December 31, 2009 and 16.0% of rental revenue and interest income from mortgage loans recognized as of December 31, 2009.
Brookdale Communities, a wholly owned subsidiary of Brookdale, leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 12.1%, or $59,382,000, of our total assets at December 31, 2009 and 14.8% of rental revenue and interest income from mortgage loans recognized as of December 31, 2009.
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 12.3%, or $60,397,000, of our total assets at December 31, 2009 and 15.4% of rental revenue and interest income from mortgage loans recognized as of December 31, 2009. 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.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Supplemental Cash Flow Information
5. Impairment Charge
No impairment charges were recorded during 2009, 2008 or 2007. We have evaluated all assets and believe there were no other-than-temporary impairments. However in past years, the long-term care industry experienced significant adverse changes which resulted in operating losses by certain of our lessees and borrowers and in some instances the filing by certain lessees and borrowers for bankruptcy protection. Thus, we cannot predict what, if any, impairment charge may be needed in the future.
6. Real Estate Investments
Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at December 31, 2009 (in thousands):
(1)We have investments in 14 states mortgaged to 23 different operators.
At December 31, 2009, the mortgage loans had interest rates ranging from 7.6% to 14.0% and maturities ranging from 2011 to 2019. In addition, the loans contain certain guarantees, provide for certain facility fees and generally have 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. At December 31, 2009 and 2008, the carrying values of the mortgage loans were $69,883,000 and $77,541,000, respectively. Scheduled principal payments on mortgage loans are $4,045,000; $10,600,000; $5,110,000; $18,497,000; $9,247,000 and $22,384,000 in 2010, 2011, 2012, 2013, 2014 and thereafter, respectively.
During the year ended December 31, 2009, we received $3,716,000 plus accrued interest related to the payoff of three mortgage loans secured by three skilled nursing properties. Additionally, we
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
invested $221,000 under one mortgage loan for capital improvements. We received $4,127,000 in regularly scheduled principal payments.
During the year ended December 31, 2008, we invested $9,085,000, net of closing fees, in three mortgage loans secured by one skilled nursing and seven assisted living properties. We also invested $550,000 under three mortgage loans for capital improvements at an average rate of 11.07%.
Additionally, during the year ended December 31, 2008, we received $14,248,000 plus accrued interest related to the payoff of nine mortgage loans secured by nine skilled nursing properties and received $4,742,000 in regularly scheduled principal payments.
During the year ended December 31, 2007, we invested $6,039,000, net of closing fees and capital improvement holdbacks in two mortgage loans with the same borrower on two skilled nursing properties located in Texas. We also received a $530,000 mortgage loan secured by a skilled nursing property located in Tennessee in connection with the sale of 59-bed skilled nursing property. See Owned Properties below for further detail on the sale. This loan was paid off in July 2008. During the year ended December 31, 2007 we also received $28,509,000 related to the payoff of 11 mortgage loans secured by 14 skilled nursing properties. We also received $4,495,000 in regularly scheduled principal payments.
Owned Properties. The following table summarizes our investments in owned properties at December 31, 2009 (in thousands):
(1)We have investments in 23 states leased to 24 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 annual 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.
Contingent rent income for the years ended December 31, 2009, 2008 and 2007 was not significant in relation to contractual base rent income.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the year ended December 31, 2009, we acquired three assisted living properties with a total of 192 units for $13,000,000 and incurred and expensed $181,000 in transaction costs. These properties are leased to a third party operator under a 12-year master lease with two five-year renewal options. We also invested $3,170,000 at an average yield of 10.6% under agreements to expand and renovate eight properties operated by six different operators and we invested $633,000 in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment. See Note 11. Commitments and Contingencies for further discussion about our commitment agreements.
Subsequent to December 31, 2009, we purchased a 166-bed skilled nursing property in Texas for $7,850,000. This property is leased to a third party operator under a 10-year lease with two five-year renewal options. This operator previously operated the property under a lease with the seller. In addition, we paid $125,000 to this operator as a lease inducement which will be amortized as a yield adjustment over the life of the lease. Also, subsequent to December 31, 2009, we purchased a 120-bed skilled nursing property in Florida for a purchase price of $9,000,000. This property is leased to a third party operator under a 12-year lease with two 10-year renewal options.
During the year ended December 31, 2008, we sold for $600,000 a vacant parcel of land adjacent to a skilled nursing property in New Mexico to a third party. We received net cash proceeds of $555,000 and recognized a $92,000 gain on sale. We also acquired a 30-bed skilled nursing property located in Ohio for an aggregate price of $1,014,000 that was added to an existing master lease. Additionally, during the twelve months ended December 31, 2008, we invested $2,996,000, at an average yield of approximately 10%, under existing commitment agreements to expand and renovate 13 existing properties operated by seven different operators. We also invested $1,359,000 in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment.
During the year ended December 31, 2007 we sold a closed, previously impaired skilled nursing property located in Texas to a third party for $166,000. We also sold a 59-bed skilled nursing property located in Tennessee to a third party for $700,000. We received $322,000 in cash proceeds net of closing costs resulting from these sold properties and received a mortgage loan of $530,000 secured by the first mortgage on the skilled nursing property located in Tennessee. As a result of these two sales, we recognized a gain net of selling expenses of $106,000 in 2007. Additionally, we invested $4,014,000 at an average yield of approximately 10% under agreements to renovate 20 properties operated by nine different operators. We also invested $1,682,000 in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment.
Depreciation expense on buildings and improvements, including properties owned under capital leases and properties classified as discontinued operations, was $14,705,000 $14,709,000 and $14,032,000 for the years ended December 31, 2009, 2008 and 2007.
Future minimum base rents receivable under the remaining non-cancelable terms of operating leases excluding the effects of straight-line rent are: $58,642,000; $60,718,000; $61,690,000; $62,598,000; $62,770,000 and $281,746,000 for the years ending December 31, 2010, 2011, 2012, 2013, 2014, and thereafter.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Set forth in the table below are the components of the net income from discontinued operations (in thousands):
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 audit of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.
Sunwest Management Inc. On August 19, 2008 we disclosed in a voluntary Current Report on Form 8-K filed with the Securities and Exchange Commission that we had received letters from companies affiliated with Sunwest Management, Inc. (or Sunwest) explaining that Sunwest was experiencing certain negative cash shortfalls which they attributed to properties that had not yet matured in terms of occupancy. Our relationship with Sunwest was limited to only four properties: two mortgage loans secured by properties in Texas and a master lease covering two properties in California. We acted to preserve our investments with respect to Sunwest as described below.
During the year ended December 31, 2008 we did not receive August or September payments on a $1,523,000 loan at an interest rate of 11.15% and matures on November 19, 2011. This loan is secured by a first mortgage on a 165-unit assisted living property in Mesquite, Texas then operated by Sunwest. In October 2008 we received from non-Sunwest equity investors in this property the payment of all past due interest, property tax impounds, attorney's fees and a $50,000 replacement reserve. On October 31, 2008, we completed an assignment and assumption of the loan to an entity formed by the non-Sunwest equity investors who are currently operating the property.
During the year ended December 31, 2008 we did not receive August or September payments on a $4,704,000 loan at an interest rate of 11.15% and secured by a first mortgage on a 140-unit assisted living property in Fort Worth, Texas then operated by Sunwest. On October 7, 2008 we acquired the property through foreclosure for $4,717,000, the amount of the debt outstanding and capitalized fees associated with the foreclosure. The property is being operated by a third party operator under a 10-year lease with two five-year renewal options.
During the year ended December 31, 2008 we did not receive the August through November payments on a master lease with Sunwest covering a 109-unit assisted living property in Vacaville, California and a 113-unit assisted living property in Bakersfield, California. The total monthly lease payment under the master lease agreement was approximately $208,000 per month. Accordingly we wrote-off $124,000 of straight-line rent receivable in 2008 related to this lease. Our total gross
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
investment in the properties under the master lease is approximately $26,156,000 or 4.5% of our gross investments in real estate as of December 31, 2008. As of December 31, 2008, single purpose subsidiaries owned by us owed debt obligations totaling $16,054,000 secured by the master lease properties. Specifically, the outstanding principal balance on the Bakersfield property was $8,202,000 at a rate of 8.43% which was paid off in July 2009, and the outstanding principal balance on the Vacaville property was $7,852,000 at a rate of 8.69% and is due August 1, 2010. On December 1, 2008, we leased these properties to a third party operator under a 10-year lease with two five-year renewal options.
7. Notes Receivable
During 2009, we received $671,000 in principal payments and funded $375,000 under various loans and line of credit agreements with certain operators. At December 31, 2009, we had seven such loans outstanding with a carrying value of $2,689,000 at a weighted average interest rate of 11.52%.
8. Marketable Securities
At December 31, 2009 and 2008, we had a $6,500,000 investment in Skilled Healthcare Group, Inc.'s (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.
During 2007, SHG redeemed $3,500,000 face value of our original investment of $10,000,000 face value Senior Subordinated Notes at a redemption price equal to 111% of the principal amount of the notes, plus accrued and unpaid interest. As a result of this early redemption we recognized additional interest income of $385,000 in 2007.
9. Debt Obligations
Bank Borrowings. During 2008, we amended and extended our Unsecured Credit Agreement at an initial commitment amount of $80,000,000. The Credit Agreement provides for the opportunity to increase the credit amount up to a total of $120,000,000. The 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 amended Unsecured Revolving 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 .5 to 1.0,
(ii)a ratio not greater than .35 to 1.0 of secured debt to total asset value
(iii)a ratio not less than 2.5 to 1.0 of EBITDA to interest expense, and
(iv)a ratio of not less than 1.50 to 1.0 of EBITDA to fixed charges.
At December 31, 2009, we had $13,500,000 outstanding at an interest rate of LIBOR plus 1.50% under our Unsecured Credit Agreement with $66,500,000 available for borrowing. Also, at December 31, 2009 we were in compliance with all covenants. Subsequent to December 31, 2009, we borrowed $17,000,000 under our Unsecured Credit Agreement for the acquisition of two skilled nursing properties with a total of 286 beds. See Note 6. Real Estate Investments for further discussion on these acquisitions. After this borrowing, we had $30,500,000 outstanding under the Unsecured Credit Agreement with $49,500,000 available for borrowing.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Mortgage Loans Payable. During 2009, we paid off three mortgage loans totaling $23,935,000 secured by 11 assisted living properties located in various states. The retired debts bore a weighted average interest rate of 8.68%. We also paid $443,000 in regularly scheduled principal payments. At December 31, 2009 we have one mortgage loan outstanding with a carrying value of $7,685,000 at a fixed interest rate of 8.69%.
During 2008, we paid off a mortgage loan in the amount of $14,188,000 secured by four assisted living properties located in Ohio. Also during 2008, we paid $914,000 in regularly scheduled principal payments.
As of December 31, 2009 and 2008 the aggregate carrying value of real estate properties securing our mortgage loans payable was $10,456,000 and $38,702,000, respectively.
Bonds Payable. At December 31, 2009 and 2008 we had outstanding principal of $4,225,000 and $4,690,000, 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 year ended December 31, 2009, the weighted average interest rate, including letter of credit fees, on the outstanding bonds was 2.20%. During 2009 and 2008 we paid $465,000 and $440,000, respectively, in regularly scheduled principal payments. As of December 31, 2009 and 2008, the aggregate carrying value of real estate properties securing our bonds payable was $7,443,000 and $7,707,000, respectively.
Scheduled Principal Payments. Total scheduled principal payments for our mortgage loans payable, and bonds payable as of December 31, 2009 were $8,180,000; $530,000; $565,000; $600,000; $635,000 and $1,400,000 in 2010, 2011, 2012, 2013, 2014 and thereafter.
10. Equity
Preferred Stock. Preferred Stock is comprised of the series summarized as follows:
Our Series C Cumulative Convertible Preferred Stock (or Series C Preferred Stock) is convertible into 2,000,000 shares of our common stock at $19.25 per share. Dividends are payable quarterly. Total shares reserved for issuance of common stock related to the conversion of Series C Preferred Stock were 2,000,000 shares at December 31, 2009 and 2008.
Our Series E Cumulative Convertible Preferred Stock (or Series E Preferred Stock) is convertible at any time into shares of our common stock at a conversion price of $12.50 per share of common stock, subject to adjustment under certain circumstances. Series E Preferred Stock may be redeemed by us, at our option, in whole or from time to time in part, for $25.00 per Series E Preferred Stock in cash plus any accrued and unpaid dividends to the date of redemption. Dividends are payable quarterly.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2009, holders of 900 shares of Series E Preferred Stock notified us of their election to convert such shares into 1,800 shares of common stock. During 2008, holders of 123,419 shares of Series E Preferred Stock notified us of their election to convert such shares into 246,838 shares of common stock. During 2007, holders of 31,509 shares of Series E Preferred Stock notified us of their election to convert such shares into 63,018 shares of common stock. Total shares reserved for issuance of common stock related to the conversion of Series E Preferred Stock were 75,632 at December 31, 2009.
Our Series F Cumulative Stock (or Series F Preferred Stock) may be redeemed by us, at our option, in whole or from time to time in part, for $25.00 per Series F Preferred Stock in cash plus any accrued and unpaid dividends to the date of redemption. The dividend rate is 8.0% and the liquidation value is $25.00 per share. Dividends are cumulative from the date of original issue and are payable quarterly to stockholders of record on the first day of each quarter. During 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. During 2008, we invested $14,276,000 to repurchase a total of 636,300 shares of our Series F Preferred Stock at an average cost of $22.44 per share, including commissions. In accordance with 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.
While outstanding, the liquidation preferences of the preferred stocks are pari passu. None have any voting rights, any stated maturity, nor are they subject to any sinking fund or mandatory redemption.
Common Stock. In June 2007 our Board of Directors terminated the prior existing share repurchase program and authorized a new share repurchase program enabling us to repurchase up to 5,000,000 shares of our common stock. In January 2008 the Board of Directors amended the share repurchase program to include authorization to repurchase our outstanding preferred securities. This authorization does not expire until 5,000,000 shares of our equity securities, including common and preferred securities, have been repurchased or the Board of Directors terminates its authorization. During 2009 we repurchased and retired 900 shares of common stock for an aggregate purchase price of $16,000 or $17.33 per share, including commissions. During 2008 we did not repurchase shares of our common stock. During 2007 we repurchased and retired 893,079 shares of common stock for an aggregate purchase price of $18,768,000 or $21.01 per share, including commissions. The shares were purchased on the open market under the new Board authorization discussed above. After this common stock repurchase and the Preferred stock repurchase, as mentioned above, we continue to have an open Board authorization to purchase an additional 3,360,237 shares.
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 2009 we sold 30,000 shares of common stock at a weighted average price, including commissions, of $25.54 per share, resulting in net proceeds of $766,000 after $18,000 of commission. Included in the sale, during the fourth quarter ended December 31, 2009, we sold 10,000 shares of common stock at a weighted average price, including commissions, of $27.55 per share, resulting in net proceeds of $275,000 after $6,000 of commissions. At December 31, 2009 we had $74,216,000 available under this agreement.
Non-controlling Interests. At December 31, 2009 we had one limited partnership and reserved 112,588 shares of our common stock under this partnership agreement. Since we exercise control, we
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 limited partners' interest would be reclassified to stockholders' equity. At December 31, 2009 the carrying value and the market value of the partnership conversion rights were $1,981,000 and $3,079,000, respectively.
During 2009 one of our limited partners exercised its conversion rights and exchanged all of its interest in the limited partnership. Upon receipt of the redemption notification of 67,294 limited partnership units, we elected to convert its partnership units into 67,294 shares of our common stock. In accordance with FASB accounting guidance, we account for this exchange as an equity transaction because there was no change in control requiring consolidation or deconsolidation and remeasurement. Accordingly, the $1,144,000 carrying amount of the limited partner's interest in the partnership was reclassified to stockholders' equity.
During 2008 one of our limited partners exercised its conversion rights and exchanged a portion of its interest in the limited partnership. Upon receipt of the redemption notification of 22,000 limited partnership units, we elected to satisfy the redemption in cash. We paid the limited partner $510,000 in cash, which represented the closing price of our common stock on the redemption date multiplied by the number of limited partnership units redeemed. The amount we paid upon redemption exceeded the book value of the limited partnership interest redeemed by $136,000. We recognized this $136,000 difference as an increase in the basis of the properties.
Available Shelf Registrations. During 2007, we filed a Form S-3 "shelf" registration statement which became effective August 7, 2007, and provides us with the capacity to offer up to $300,000,000 in our debt and/or equity securities. On August 5, 2009, we entered into an equity distribution agreement with KeyBanc under which we may issue and sell, from time to time, up to $75,000,000 in aggregate offering price of our common shares through KeyBanc, as mentioned above. Sales, if any, of common shares will be made by means of ordinary brokers' transactions at market prices, in block transactions, or as otherwise agreed between us and KeyBanc. At December 31, 2009, we had $74,216,000 availability under our equity distribution agreement with KeyBanc.
We currently have $225,000,000 of availability under our effective shelf registration. We may from time to time raise capital under our currently effective shelf registration or a new shelf registration by issuing, in public or private transactions, our equity and debt securities, but the availability and terms of such issuance will depend upon then prevailing market and other conditions.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dividend Distributions. We declared and paid the following cash dividends on our common and preferred stock (in thousands):
(1)Represents $0.13 per share per month for the year ended December 31, 2009 and 2008.
(2)The difference between declared and paid is the change in distributions payable on the consolidated balance sheet.
Subsequent to December 31, 2009, we declared a monthly cash dividend of $0.13 per share on our common stock for the months of January, February and March 2010, payable on January 29, February 26 and March 31, 2010, respectively, to stockholders of record on January 21, February 18 and March 23, 2010, respectively.
Other Equity. At December 31, 2009 and 2008, Other Equity consisted of $390,000 and $735,000, respectively, of accumulated other comprehensive income.
Accumulated Other Comprehensive Income. During the years we had investments in Real Estate Mortgage Investment Conduit (or REMIC) Certificates, we retained the non-investment grade certificates issued in the securitizations. During 2005, a loan was paid off in the last remaining REMIC pool which caused the last third party REMIC Certificate holders entitled to any principal payments to be paid off in full. After this transaction, we became the sole holder of the remaining REMIC Certificates and are therefore entitled to the entire principal outstanding of the loan pool underlying the remaining REMIC Certificates. Under the FASB accounting guidance relating to accounting for changes that result in a transferor regaining control of financial assets sold, a Special Purpose Entity (or SPE) may become non-qualified or tainted which generally results in the "repurchase" by the transferor of all the assets sold to and still held by the SPE. Since we were the sole REMIC Certificate holder entitled to principal from the underlying loan pool, we had all the risks and were entitled to all the rewards from the underlying loan pool. As required by the accounting guidance, the repurchase for the transferred assets was accounted for at fair value. The accumulated other comprehensive income balance represents the fair market value adjustment offset by any previously adjusted impairment charge which is amortized to increase interest income over the remaining life of the loans that we repurchased from the REMIC pool.
Stock Based Compensation Plans. During 2008 we adopted and our shareholders approved the 2008 Equity Participation Plan which replaces the 2004 Restricted Stock Plan, the 2004 Stock Option Plan and the 1998 Equity Participation Plan. Under the 2008 Equity Participation Plan, 600,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
awards granted under the 2008 Equity Participation Plan are set by our compensation committee at its discretion. During 2009 we granted 15,000 stock options and 3,000 shares of restricted stock at $24.65 per share under this plan. Also, we granted 3,000 shares of restricted stock at $18.34 per share and 36,988 shares of restricted stock at $17.06 per share under this plan. These shares vest ratably over a three-year period. During 2008 neither stock options nor restricted stock were granted under this plan.
During 2004 we adopted and our stockholders approved the 2004 Stock Option Plan under which 500,000 shares of common stock were reserved for incentive and nonqualified stock option grants to officers, employees, non-employee directors and consultants. During 2008 this plan was terminated and replaced by the 2008 Equity Participation Plan, as mentioned above. During 2009 and 2008 no stock options were granted under the 2004 Stock Option Plan. During 2007 we granted 174,500 stock options at $23.79 per share and 30,000 stock options at $23.47 per share under this plan. All stock options outstanding that were granted under the 2004 Stock Option Plan vest over three years from the original date of grant. Unexercised stock options expire seven years after the date of vesting.
During 2004 we adopted and our stockholders approved the 2004 Restricted Stock Plan under which 100,000 shares of common stock were reserved for restricted stock grants to officers, employees, non-employee directors and consultants. During 2008 this plan was terminated and replaced by the 2008 Equity Participation Plan, as mentioned above. During 2009 and 2008 we did not issue any shares of restricted stock under the 2004 Restricted Stock Plan. During 2007 we issued 8,234 shares of restricted stock at $23.47 per share under this plan. These shares vest ratably over a three-year period.
Our stockholders approved the 1998 Equity Participation Plan under which 500,000 shares of common stock were reserved. The plan provided for the issuance of incentive and nonqualified stock options, restricted stock and other stock based awards to officers, employees, non-employee directors and consultants. During 2008 this plan was terminated and replaced by the 2008 Equity Participation Plan, as mentioned above. During 2009 and 2008 neither stock options nor restricted stocks were granted under the 1998 Equity Participation plan. During 2007 we issued 40,000 shares of restricted stock at $25.98 per share, 46,500 shares of restricted stock at $23.79 per share and 3,766 shares of restricted stock at $23.47 per share under this plan. These shares vest ratably over a three-year period. All stock options and restricted stock outstanding that were granted under the 1998 Equity Participation Plan vest over three to five years from the original date of grant. Unexercised stock options expire seven years after the date of vesting.
Restricted Stock. Restricted stock activity for the years ended December 31, 2009, 2008 and 2007 was as follows:
(1)At December 31, 2009, the total compensation cost related to unvested restricted stock granted is $844,000, which will be recognized over the remaining vesting period.
Dividends are payable on the restricted shares to the extent and on the same date as dividends are paid on all of our common stock.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2007 we extended the vesting of 27,120 shares of unvested restricted stock to align the vesting dates with the 40,000 shares of restricted stock granted under the 1998 Equity Participation Plan, as previously discussed. The impact on compensation expense related to this vesting modification was immaterial. Additionally, during 2007 we modified the vesting of 54,960 shares of unvested restricted stock by accelerating the vesting so that the 54,960 shares vested ratably from March through December 2007. Prior to this modification the shares were vesting in two tranches ratably over two and three years, respectively. The accelerated compensation expense we recognized related to this vesting acceleration was $551,000 in 2007.
Stock Options. Nonqualified stock option activity for the years ended December 31, 2009, 2008 and 2007, was as follows:
(1)The aggregate intrinsic value of exercisable options at December 31, 2009, based upon the closing price of our common shares at December 31, 2009, amounted to approximately $821,000. Options exercisable at December 31, 2009 have a weighted average remaining contractual life of approximately 5.5 years.
During 2009 a total of 35,000 options were exercised at a total option value of $770,000 and a total market value as of the exercise dates of $924,000. During 2008 a total of 17,500 options were exercised at a total option value of $416,000 and a total market value as of the exercise dates of $519,000.
We use the Black-Scholes-Merton formula to estimate the value of stock options granted to employees. This model requires management to make certain estimates including stock volatility, expected dividend yield and the expected term. If management incorrectly estimates these variables, the results of operations could be affected.
The estimates for the fair value of options granted during 2009, 2008, and 2007 were as follows:
The weighted average exercise price of the options was $22.88, $22.62 and $22.71 and the weighted average remaining contractual life was 0.6, 1.3 and 2.5 years as of December 31, 2009, 2008 and 2007,
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
respectively. At December 31, 2009, the total compensation cost related to unvested stock options granted was $102,000, which will be recognized over the remaining vesting period.
11. Commitments and Contingencies
The following table summarizes our capital improvement commitments as of December 31, 2009 (dollar amounts in thousands):
(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)Maximum of $5,000,000 per year for the life of the lease.
(8)Subsequent to December 31, 2009, we committed to provide a lessee with $175,000 to invest in capital improvements to a skilled nursing property in Texas. The yield for this commitment is included in the lease rate and matures in January 2011. Also, subsequent to December 31, 2009, we invested an additional $392,000 in the following commitments: a) $316,000, b) $38,000, and c) $36,000.
(9)The current lease rate.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes our loan commitments as of December 31, 2009 (dollar amounts in thousands):
(1)The principal balance of the loan will increase on the date any funds are disbursed by an amount equal to such funding and shall bear interest at the then current interest rate of the existing loan. The monthly loan payment will increase at each increase to the principal balance. The interest rate at December 31, 2009 is 10.7%.
12. Transactions with Related Party
We have entered into transactions with Skilled Healthcare Group, Inc. (or 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 Subordinate 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. In May 2007, SHG redeemed $3,500,000 face value of the $10,000,000 face value Senior Subordinated Notes at a redemption price equal to 111% of the principal amount of the notes, plus accrued and unpaid interest. As a result of this early redemption we received $3,885,000 in proceeds including additional interest income of $385,000 in 2007. At December 31, 2009 and 2008, we have a remaining investment in $6,500,000 face value of SHG Senior Subordinated Notes. During 2009, 2008 and 2007, we recognized $720,000, $728,000 and $1,327,000, respectively, 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 SHG. During 2009, 2008, and 2007, subsidiaries of SHG paid us $4,058,000, $3,917,000 and $1,267,000 in rent, respectively. During 2009, 2008 and 2007, we recorded $443,000, $535,000 and $206,000, respectively, of straight-line rental income from subsidiaries of SHG. At December 31, 2009 and 2008, the straight-line rent receivable from subsidiaries of SHG was $2,480,000 and $2,037,000, respectively.
Also during 2007 we committed to provide subsidiaries of SHG with $800,000 to invest in capital improvements on five skilled nursing properties they lease from us. The commitment included interest compounded at 10% on each advance made from the disbursement date until the final distribution of the commitment. Upon final distribution of the capital allowance, minimum rent increased by the total commitment multiplied by 10%. During 2008 and 2007 we funded $674,000 and $46,000, respectively,
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
under this commitment. The capital improvements on this commitment were completed in 2008 and the commitment expired.
13. Distributions
We must distribute at least 90% of our taxable income in order to continue to qualify as a REIT. This distribution requirement can be satisfied by current year distributions or, to a certain extent, by distributions in the following year.
For federal tax purposes, distributions to stockholders are treated as ordinary income, capital gains, return of capital or a combination thereof. Distributions for 2009, 2008, and 2007 were cash distributions.
The federal income tax classification of the per share common stock distributions are as follows (unaudited):
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Net Income Per Common Share
Basic and diluted net income per share were as follows (in thousands except per share amounts):
(1)For each year, the Series C Cumulative Convertible Preferred Stock, the participating securities and the convertible non-controlling interests have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Quarterly Financial Information (Unaudited)
(1)Revenues related to properties sold in 2008 have been reclassified to discontinued operations for all periods presented as required by the FASB accounting guidance.
NOTE:Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with the per share amounts for the year. Computations of per share amounts from continuing operations, discontinued operations and net income (loss) are made independently. Therefore, the sum of per share amounts from continuing operations and discontinued operations may not agree with the per share amounts from net income (loss) available to common stockholders.
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Fair Value Measurements
We did not adopt the elective fair market value option, which permitted us 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 in our consolidated financial statement.
In April 2009, the FASB issued new guidance, which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This new guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of this new guidance did not impact our consolidated 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 December 31, 2009 and 2008 assuming election of fair value for our financial assets and financial liabilities were as follows (in thousands):
(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 our mortgage loans receivable as of December 31, 2009 and 2008 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 from an independent third party source. The pricing of our marketable debt securities at December 31, 2009 and 2008 was 105.75% and 94.00%, 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 and 2008, the discount rate used to value our future cash outflow of our mortgage loans payable was 6.25%.
(4)Our bonds payable are at a variable interest rate. The estimated fair value of our bonds payable approximated their carrying values at December 31, 2009 and 2008 based upon prevailing market interest rates for similar debt arrangements.
(5)Our bank borrowings are at a variable interest rate. The estimated fair value of our bank borrowings approximated their carrying values at December 31, 2009. Subsequent to
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009 we borrowed $17,000,000 under our Unsecured Credit Agreement for the acquisition of two skilled nursing properties with a total of 286 beds, as previously discussed in Note 6. Real Estate Investments. After this borrowing, we had $30,500,000 outstanding under the Unsecured Credit Agreement with $49,500,000 available for borrowing. At December 31, 2008, we had no outstanding borrowings under our Unsecured Revolving Credit Agreement and the full amount was available for borrowing
17. Subsequent Events
We evaluated subsequent events through February 24, 2010 when our consolidated financial statements were issued. During this time, we had the following events:
•We declared a monthly cash dividend of $0.13 per common share per month for the months of January, February and March 2010, payable on January 29, February 26 and March 31, 2010, respectively, to stockholders of record on January 21, February 18 and March 23, 2010, respectively.
•We purchased a 166-bed skilled nursing property in Texas for $7,850,000. This property is leased to a third party operator under a 10-year lease with two five-year renewal options. This operator previously operated the property under a lease with the seller. In addition, we paid $125,000 to this operator as a lease inducement which will be amortized as a yield adjustment over the life of the lease. Also, we committed to provide the lessee with $175,000 to invest in capital improvements to this property. The yield for this commitment is included in the lease rate and matures in January 2011.
•We purchased a 120-bed skilled nursing property in Florida for a purchase price of $9,000,000. This property is leased to a third party operator under a 12-year lease with two 10-year renewal options.
•We borrowed $17,000,000 under our Unsecured Credit Agreement for the acquisition of two skilled nursing properties with a total of 286 beds, as previously discussed. After this borrowing, we had $30,500,000 outstanding under the Unsecured Credit Agreement with $49,500,000 available for borrowing.
•We invested an additional $392,000 in various capital improvement commitments as follows:
(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)The yield is included in the initial lease rate.
(3)Minimum rent will increase on the 1st of each month by the amount advanced in the previous month multiplied by the estimated yield.
LTC PROPERTIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
(1)Deductions represent uncollectible accounts written off.
LTC PROPERTIES, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
LTC PROPERTIES, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
LTC PROPERTIES, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
(1)Single note backed by five facilities in Washington.
(2)Depreciation for building are calculated using a 35 to 40 year life. Depreciation for building improvements are calculated using a 10 to 20 year life. Depreciation for furniture and fixtures is calculated based on a 7 to 10 year life.
(3)An impairment charge totaling $4,190 was taken against four facilities based on our estimate of the excess carrying value over the fair value of assets to be held and used, and the carrying value over the fair value less cost to sell in instances where management has determined that the Company will dispose of the property.
LTC PROPERTIES, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
Activity for the years ended December 31, 2009, 2008 and 2007 is as follows (in thousands):
LTC PROPERTIES, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
(1)Represents current stated interest rate. Generally, the loans have 25-year amortization with principal and interest payable at varying amounts over the life to maturity with annual interest adjustments through specified fixed rate increases effective either on the first anniversary or calendar year of the loan.
(2)Balloon payment is due upon maturity.
(3)This number is based upon unit/bed counts shown on operating licenses provided to us by lessees/borrowers or units/beds as stipulated by lease/mortgage documents. We have found during the years that these numbers often differ, usually not materially, from units/beds in operation at any point in time. The differences are caused by such things as operators converting a patient/resident room for alternative uses, such as offices or storage, or converting a multi-patient room/unit into a single patient room/unit. We monitor our properties on a routine basis through site visits and reviews of current licenses. In an instance where such change would cause a de-licensing of beds or in our opinion impact the value of the property, we would take action against the lessee/borrower to preserve the value of the property/collateral.
(4)Includes 40 first-lien mortgage loans as follows:
LTC PROPERTIES, INC.
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE (Continued)
Activity for the years ended December 31, 2009, 2008 and 2007 is as follows:
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the fourth fiscal quarter ended December 31, 2009. Based on this evaluation our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the fiscal quarter our disclosure controls and procedures were effective.
Internal Control over Financial Reporting.
Management Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon are set forth on pages 84 and 85, respectively.
There were no changes in our internal control over financial reporting during the fourth fiscal quarter ended December 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
At a meeting of the Compensation Committee (or the Committee) of our Board of Directors held on February 18, 2010, the Committee approved the following discretionary bonuses for the following Named Executive Officers payable in cash and shares of our restricted stock:
The number of shares of restricted stock awarded to each Named Executive Officer will be determined on the grant date, March 1, 2010, and based upon the closing price of our common stock on the New York Stock Exchange on that date. These shares vest ratably over a three-year period from the grant date for Ms. Shelley-Kessler and Messrs. Malin and Stokes. The shares granted to Ms. Simpson will vest ratably over a five-year period with the first date of vesting being December 31, 2010.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements on a timely basis. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (or COSO) in Internal Control-Integrated Framework. Based on this assessment, our management concluded that, as of the end of the fiscal year ended December 31, 2009, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2009, has been audited by Ernst &Young LLP, independent registered public accounting firm. Ernst & Young LLP's report on our internal control over financial reporting appears on page 85.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of LTC Properties, Inc.
We have audited LTC Properties, Inc.'s (the "Company") internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). LTC Properties Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, LTC Properties, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LTC Properties Inc. as of December 31, 2009 and 2008, and the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2009 of LTC Properties Inc. and our report dated February 24, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 24, 2010
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our definitive proxy statement for the 2010 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our December 31, 2009 fiscal year end) under the headings "Proposal 1 Election of Directors," "Corporate Governance Principles and Board Matters," and "Executive Officers."
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our definitive proxy statement for the 2010 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our December 31, 2009 fiscal year end) under the headings "Executive Compensation Discussion and Analysis," "Summary Compensation Table," "Director Compensation," and "Compensation Committee Report."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our definitive proxy statement for the 2010 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our December 31, 2009 fiscal year end) under the heading "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our definitive proxy statement for the 2010 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our December 31, 2009 fiscal year end) under the heading "Certain Relationships and Related Transactions, and Director Independence."
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our definitive proxy statement for the 2010 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our December 31, 2009 fiscal year end) under the heading "Independent Registered Public Accounting Firm Fees and Services."
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report:
Financial Statements
Financial Statement Schedules
II.
Valuation and Qualifying Accounts
III.
Real Estate and Accumulated Depreciation
IV.
Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or not present in amounts sufficient to require submission of the schedule or the required information is shown in the Consolidated Financial Statements and the Notes thereto.
Exhibits
The exhibits required by Item 601 of Regulation S-K are set forth in the index to exhibits on page 88 of this annual report.
LTC PROPERTIES, INC.
INDEX TO EXHIBITS
Exhibit
Number
Description
3.1
LTC Properties, Inc. Articles of Restatement (incorporated by reference to Exhibit 3.1 to LTC Properties Inc.'s Form 10-Q for the quarter ended June 30, 2009)
3.2
Bylaws of LTC Properties, Inc., as amended and restated August 3, 2009 (incorporated by reference to Exhibit 3.2 to LTC Properties Inc.'s Form 10-Q for the quarter ended June 30, 2009)
4.1
Rights Agreement dated as of May 2, 2000 (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.'s Registration Statement on Form 8-A filed on May 9, 2000)
4.2
Amendment No. 1 to Rights Agreement dated as of March 19, 2004 (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.'s Current Report on Form 8-K filed on March 19, 2004)
4.3
Amended and Restated Agreement of Limited Partnership of LTC Partners IX, L.P. and Exchange Rights Agreement dated February 11, 1998 (incorporated by reference to Exhibit 4.8 to LTC Properties, Inc.'s Registration Statement on Form S-3 filed on May 28, 2004)
10.1
Second Amended and Restated Credit Agreement dated July 17, 2008 among LTC Properties, Inc. and Bank of Montreal, Chicago Branch is the Administrative Agent, BMO Capital Markets, is Co Lead Arranger and Book Manager, Key Bank National Association is Co-Lead Arranger and Syndication Agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Current Report on Form 8-K filed July 18, 2008)
10.2
Equity Distribution Agreement, date August 5, 2009, between LTC Properties, Inc. and KeyBanc Capital Markets Inc. (incorporated by reference to Exhibit 1.1 to LTC Properties, Inc.'s Current Report on Form 8-K filed August 5, 2009)
10.3+
Second Amendment to 2007 Amended and Restated Employment Agreement of Andre Dimitriadis, dated July 1, 2007 (incorporated by reference to Exhibit 10.3 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
10.4+
Third Amendment to the 2007 Amended and Restated Employment Agreement of Wendy Simpson dated December 4, 2007 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Current Report on Form 8-K dated December 5, 2007)
10.5+
Third Amended and Restated Employment Agreement of Pamela Kessler, effective as of December 4, 2007 (incorporated by reference to Exhibit 10.13 to LTC Properties, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007)
10.6+
Second Amended and Restated Employment Agreement of Clint Malin, effective as of December 4, 2007 (incorporated by reference to Exhibit 10.15 to LTC Properties, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007)
10.7+
Amended and Restated Employment Agreement of T. Andrew Stokes, effective as of December 4, 2007 (incorporated by reference to Exhibit 10.16 to LTC Properties, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007)
10.8
The 2008 Equity Participation Plan
10.9
Form of Stock Option Agreement under the 2008 Equity Participation Plan
Exhibit
Number
Description
10.10
Form of Restricted Stock Agreement under the 2008 Equity Participation Plan
10.11
Form of Indemnity Agreement dated as of July 30, 2009 between LTC Properties, Inc. and its Directors and Officers (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009)
Ratio of Earnings to Fixed Charges
List of Subsidiaries
23.1
Consent of Independent Registered Accounting Firm
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
+Management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates.
LTC PROPERTIES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LTC PROPERTIES, INC.
Registrant
Dated: February 24, 2010
By:
/s/ PAMELA SHELLEY-KESSLER
Pamela Shelley-Kessler
Senior Vice President, Chief Financial Officer
and Corporate Secretary
(Principal Financial Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ WENDY L. SIMPSON
Wendy L. Simpson
Chief Executive Officer, President and Director
(Principal Executive Officer)
February 24, 2010
/s/ PAMELA SHELLEY-KESSLER
Pamela Shelley-Kessler
Senior Vice President, Chief Financial Officer
and Corporate Secretary
(Principal Financial Officer and Principal Accounting Officer)
February 24, 2010
/s/ ANDRE C. DIMITRIADIS
Andre C. Dimitriadis
Chairman of the Board and Director
February 24, 2010
/s/ BOYD HENDRICKSON
Boyd Hendrickson
Director
February 24, 2010
/s/ DEVRA G. SHAPIRO
Devra G. Shapiro
Director
February 24, 2010
/s/ EDMUND C. KING
Edmund C. King
Director
February 24, 2010
/s/ TIMOTHY J. TRICHE
Timothy Triche
Director
February 24, 2010
CAUTIONARY STATEMENTS
PART I
Item 1. BUSINESS
Item 1A.
Item 1A. RISK FACTORS
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
Item 2.
Item 2. PROPERTIES
Item 3.
Item 3. LEGAL PROCEEDINGS
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Item 6.
Item 6. SELECTED FINANCIAL DATA
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8.
Item 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements and Financial Statement Schedules
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
LTC PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
LTC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share amounts)
LTC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF EQUITY (In thousands, except per share amounts)
LTC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LTC PROPERTIES, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (in thousands)
LTC PROPERTIES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
LTC PROPERTIES, INC. SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Item 9B.
Item 9B. OTHER INFORMATION
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Report of Independent Registered Public Accounting Firm
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 11.
Item 11. EXECUTIVE COMPENSATION
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
LTC PROPERTIES, INC. INDEX TO EXHIBITS
LTC PROPERTIES, INC. SIGNATURES
POWER OF ATTORNEY