Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
Business and Investment Strategy
We are a real estate investment trust (“REIT”) that invests in seniors housing and health care properties through sale-leasebacks, financing leases, mortgage financing, joint ventures and structured finance solutions including preferred equity and mezzanine lending. We seek to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in seniors housing and health care properties managed by experienced operators. Our primary seniors housing and health care property classifications include skilled nursing facilities (“SNF”), assisted living facilities (“ALF”), independent living facilities (“ILF”), memory care communities (“MC”) and combinations thereof. We also invest in other (“OTH”) types of properties, such as land parcels, projects under development (“UDP”) and behavioral health care hospitals. To meet these objectives, we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders and diversify our investment portfolio by geographic location, operator, property classification and form of investment.
We conduct and manage our business as one operating segment for internal reporting and internal decision-making purposes. For purposes of this Annual Report on Form 10-K and other presentations, we generally include ALF, ILF, and MC in the ALF property classification. We have been operating since August 1992.
The following graph summarizes our gross investments as of December 31, 2023:
Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals, interest earned on outstanding loans receivable and income from investments in unconsolidated joint ventures. Our investments in owned properties, financing leases, mortgage loans, mezzanine loans and preferred equity investments represent our primary source of liquidity to fund distributions and are dependent upon the performance of the operators on their lease and loan obligations and the rates earned thereon. To the extent that the operators experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by property type and operator. Our monitoring process includes periodic review of financial statements for each facility, periodic review of operator credit, scheduled property inspections and review of covenant compliance.
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In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk. Some operating leases, financing leases and loans are credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates.
Depending upon the availability and cost of external capital, we anticipate making additional investments in health care related properties. New investments are generally funded from cash on hand, temporary borrowings under our unsecured revolving line of credit and internally generated cash flows. Our investments generate internal cash from rent and interest receipts and principal payments on mortgage loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured revolving line of credit, is expected to be provided through a combination of public and private offerings of debt and equity securities and secured and unsecured debt financing. The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets’ environment, especially to changes in interest rates. Changes in the capital markets’ environment may impact the availability of cost-effective capital.
We believe our business model has enabled and will continue to enable us to maintain the integrity of our property investments, including in response to financial difficulties that may be experienced by operators. Traditionally, we have taken a conservative approach to managing our business, choosing to maintain liquidity and exercise patience until favorable investment opportunities arise.
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Portfolio Overview
The following tables summarize our real estate investment portfolio as of December 31, 2023 (dollar amounts in thousands):
Twelve Months Ended
December 31, 2023
Number of Percentage Percentage
Number of SNF ALF Gross of Rental of Total
Number of Percentage Interest Income Percentage
Number of SNF ALF Gross of from Financing of Total
Number of Percentage Interest Income Percentage
Number of SNF ALF Gross of from Mortgage of Total
Number of Percentage Interest Percentage
Number of SNF ALF Gross of and other of Total
Skilled Nursing — — — 13,669 0.6 % 558 0.3 %
Number of Percentage Income from Percentage
Number of SNF ALF Gross of Unconsolidated of Total
Number Number of Percentage
of SNF ALF Gross of
(2) See Item 2. Properties for discussion of bed/unit count.
As of December 31, 2023, we had $1.7 billion in carrying value of net investments, consisting of $1.0 billion or 56.7% invested in owned and leased properties, $196.0 million or 11.3% invested in properties we own accounted for as
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financing receivables, $477.3 million or 27.4% invested in mortgage loans secured by first mortgages, $60.5 million or 3.5% in notes receivable and $19.3 million or 1.1% in unconsolidated joint ventures.
Rental income, income from financing receivables and interest income from mortgage loans represented 64.6%, 7.7% and 24.2%, respectively, of Total revenues on the Consolidated Statements of Income for the year ended December 31, 2023. In most instances, our lease structure, which pertains to owned properties and those properties we own accounted for as financing receivables, contains fixed annual rental escalations and/or annual rental escalations that are contingent upon changes in the Consumer Price Index. Certain leases have annual rental escalations that are contingent upon changes in the gross operating revenues of the property. This revenue is not recognized until the appropriate contingencies have been resolved.
For the year ended December 31, 2023, we recognized a $2.1 million straight-line rental adjustment reflecting higher cash rent received than recorded as rental income and $0.8 million in amortization and write-off of lease incentives. For the remaining leases in place at December 31, 2023, assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio, except for the potential subsequent lease extensions and the leases reported below under Update on Certain Operators, we currently expect that the non-cash straight-line rent portion of rental income will increase from negative $2.1 million in 2023 to negative $2.5 million for projected annual 2024. The negative non-cash straight-line portion of rental income represents higher cash rent projected to be received than recorded as rental income. Our cash rental income is projected to increase from $130.2 million in 2023 to $131.7 million for projected annual 2024. At December 31, 2023, the straight-line rent receivable balance on the consolidated balance sheet was $19.6 million.
Many of our existing leases contain renewal options that, if exercised, could result in the amount of rent payable upon renewal being greater or less than that currently being paid.
Terminated Lease
During 2023, Brookdale Senior Living Communities, Inc. (“Brookdale”) elected not to exercise its renewal option under a master lease that matured on December 31, 2023. See Update on Certain Operators below for discussion regarding the Brookdale portfolio.
Lease Renewals and Extensions
Subsequent to December 31, 2023, a master lease covering 11 skilled nursing centers that was scheduled to mature in January 2024 was renewed for seven months extending the maturity to August 2024. The master lease was renewed at the current annualized rent of $8.0 million, or $4.7 million for seven months in 2024. The centers have a total of 1,444 beds and are located in Texas.
Transitioned Portfolios
During 2023, we transitioned a portfolio of eight assisted living communities with 500 units in Illinois, Ohio
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and Michigan to Encore Senior Living (“Encore”). We agreed to provide assistance in the second quarter of 2023 to the former operator of this portfolio and as part of transition, we received repayment of $1.2 million of deferred rent which represents $0.9 million of April and May 2023 deferred rent and $0.3 million of unrecorded deferred rent provided in 2022. Cash rent under the new two-year lease with Encore is based on mutually agreed upon fair market rent.
Subsequent to December 31, 2023, we transitioned two assisted living communities, which are located in Georgia and South Carolina with a total of 159 units, to an operator new to LTC. The new two-year master lease commenced on January 1, 2024, and provides two one-year extension periods. Cash rent is zero for the first six months. Thereafter, cash rent is based on mutually agreed upon fair market rent.
Some of our lease agreements provide purchase options allowing the lessees to purchase the properties they currently lease from us. See Item 8. FINANCIAL STATEMENTS— Note 5. Real Estate Investments. Owned Properties for a table that includes information about purchase options included in our lease agreements.
Update on Certain Operators
Anthem Memory Care
Anthem Memory Care (“Anthem”) operates 11 memory care communities under a master lease and was placed in default in 2017 resulting from Anthem’s partial payment of its minimum rent. However, we did not enforce our rights and remedies pertaining to the event of default, under the stipulation that Anthem achieves sufficient performance and pays agreed upon rent. Anthem increased their rent payment every year between 2017 and 2021. During the second and third quarter of 2022, we agreed to a certain temporary rent reduction totaling $1.5 million. During the fourth quarter of 2022, we received payment of Anthem’s $1.5 million temporary rent reduction and a return to Anthem’s previously agreed upon rent of $0.9 million per month. Anthem paid us the agreed upon annual cash rent of $10.8 million in 2022 and 2023. During the fourth quarter of 2023, the Anthem master lease was amended to set 2024 rent at $10.8 million.
During the first quarter of 2023, we transitioned a 60-unit memory care community located in Ohio to Anthem under a new two-year lease. Under the new two-year lease, no rent was paid through May 2023 after which cash rent is based on mutually agreed upon fair market rent. We received $105,000 from Anthem under this lease and expect to receive $240,000 during 2024.
Brookdale Senior Living Communities, Inc
As discussed above, Brookdale elected not to exercise its renewal option under a master lease that matured on December 31, 2023. The 35-property assisted living portfolio was apportioned as follows:
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Prestige Healthcare
Prestige Healthcare (“Prestige”) operates 22 skilled nursing centers located in Michigan secured under four mortgage loans and two skilled nursing centers located in South Carolina under a master lease. Prestige is our largest operator based upon revenues and assets representing 16.6% of our total revenues and 14.3% of our total assets as of December 31, 2023. During the second quarter of 2023, we agreed to defer up to $1.5 million, or up to $0.3 million per month for May through September 2023, in interest payments due on one of Prestige’s mortgage loans secured by 15 skilled nursing centers in Michigan. We deferred $0.6 million and $0.9 million in interest payments during the second and third quarter of 2023, respectively.
During the fourth quarter of 2023, we amended the mortgage loan with Prestige which was subject to the previously agreed upon interest deferral. Effective January 1, 2024, the minimum mortgage interest payment due to us is based on an annual current pay rate of 8.5% on the outstanding loan balance of $183.3 million. The current contractual interest rate on the loan of 10.8% remains unchanged. The amendment also provides us the right to draw on Prestige’s security to pay the difference between the contractual rate and current pay rate. We received all 2023 contractual interest of $19.5 million due from Prestige after applying $3.4 million of its security. Full contractual interest has been paid on the loan through February 2024 and we expect to receive full contractual cash interest through 2025. Subsequent to December 31, 2023, Prestige increased the security from its receipt of retro-active Medicaid funds. Accordingly, we currently hold security of $4.0 million. Additional retro-active Medicaid payments received by Prestige in 2024 will be remitted to us as security.
Other Operators
During the year ended December 31, 2023, we provided $2.6 million of abated rent to the same operator for which we have been providing assistance. During 2023, we received $0.3 million of rental income and expect to receive the same $0.3 million in 2024.
During the third quarter of 2022, a portfolio of 12 assisted living communities was temporarily transitioned to an existing operator under a two-year master lease. The temporary transition allowed us to find a more permanent solution for the portfolio as follows:
In conjunction with the ongoing negotiations related to this portfolio, during the fourth quarter of 2023, we wrote-off a $3.6 million note receivable related to this master lease. Further, we recorded an impairment loss of $3.3 million to reduce the carrying value of seven of the Texas communities which were being negotiated for sale. As of December 31, 2023, these communities did not meet the criteria to be classified as held-for-sale.
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2023 Transactions Overview
The following tables summarizes our transactions in 2023 (dollar amounts in thousand):
Investment in Owned Properties
During 2023, we entered into a $54.1 million joint venture (“JV”) and contributed $45.0 million into the JV that purchased an independent living, assisted living and memory care campus in Ohio. Under the JV agreement, the seller, our JV partner, has the option to purchase the campus between the third and fourth lease years for LTC’s allocation of the JV investment plus an IRR of 9.75%. The campus was leased to Encore under a 10-year term with an initial yield of 8.25% on LTC’s allocation of the JV investment. We committed to fund $2.1 million of lease incentives under the Encore lease of which $1.5 million was funded during 2023.
Investment in Improvement Projects
Amount
Assisted Living Communities $ 3,112
Skilled Nursing Centers 6,487
Other 87
Sold Properties
Type Number Number
of of of Sales Carrying Net
Financing Receivables
Type Number Number Initial Average
of of of Contractual Months Gross LTC
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Investment in Mortgage Loans
Amount
Originations and funding under mortgage loans receivable $ 97,058 (1)
Application of interest reserve 1,722
Scheduled principal payments received (10,351)
Mortgage loan premium amortization (7)
Provision for loan loss reserve (884)
Net increase in mortgage loans receivable $ 87,538
(1) We originated the following during 2023:
Investment in Notes Receivable
Amount
Advances under notes receivable $ 20,377 (1)
Principal payments received under notes receivable (14,687) (2)
Write-off of notes receivable (3,561) (3)
Provision for credit losses (22)
Net increase in notes receivable $ 2,107
(3) We wrote-off an uncollectible working capital note.
Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results in making operating decisions and for budget planning purposes.
Concentration Risk. We evaluate by gross real estate investment our concentration risk in terms of asset mix, real estate investment mix, operator mix and geographic mix. Concentration risk is valuable to understand what portion of our real estate investments could be at risk if certain sectors were to experience downturns. Asset mix measures the
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portion of our real estate investments that are real property or mortgage loans. Investment mix measures the portion of our investments that relate to our various property types. Operator mix measures the portion of our real estate investments that relate to our top five operators. Geographic mix measures the portion of our real estate investment that relate to our top five states.
The following table reflects our recent historical trends of concentration risk (gross investment, in thousands):
Asset mix:
Real estate investment mix:
Operator mix:
Geographic mix:
Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to gross asset value and debt to market capitalization. The leverage ratios indicate how much of our Consolidated Balance Sheet capitalization is related to long-term obligations. Our coverage ratios include interest coverage ratio and fixed charge coverage ratio. The coverage ratios indicate our ability to service interest and fixed charges (interest). The coverage ratios are based on earnings before interest, taxes, depreciation and amortization for real estate (“EBITDAre”) as defined by National Association of Real Estate Investment Trusts (“NAREIT”). EBITDAre is calculated as net income available to common stockholders (computed in accordance with GAAP) excluding (i) interest expense, (ii) income tax expense, (iii) real estate depreciation and amortization, (iv) impairment write-downs of depreciable real estate, (v) gains or losses on the sale of depreciable real estate, and (vi) adjustments for unconsolidated partnerships and joint ventures. Adjusted EBITDAre is calculated as EBITDAre adjusted for non-recurring items. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. The following table reflects the recent historical trends for our credit strength measures:
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Balance Sheet Metrics
Year Ended Quarter Ended
Interest coverage ratio (8) 3.4 x 3.3 x 3.2 x (4) 3.5 x 3.6 x (7) 4.4 x
(6) Increased due to increase in outstanding debt.
(7) Decreased due to increase in interest expense.
Year to Date Quarter Ended
Interest coverage ratio 3.4 x 3.3 x 3.2 x 3.5 x 3.6 x 4.4 x
Fixed charge coverage ratio 3.4 x 3.3 x 3.2 x 3.5 x 3.6 x 4.4 x
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;
● Changes in financing terms;
● Competition within the health care and seniors housing industries;
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● Changes in federal, state and local legislation;
● The duration, spread and severity of the COVID-19 outbreak.
Management regularly monitors the economic and other factors listed above. We develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends.
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Operating Results
Year ended December 31, 2023 compared to year ended December 31, 2022 (in thousands):
Years ended December 31,
Revenues:
Interest income from financing receivables 15,243 1,762 13,481 (2)
Expenses:
Other operating income:
Income from unconsolidated joint ventures 1,504 1,504 —
Income allocated to participating securities (587) (580) (7)
Net income available to common stockholders $ 89,148 $ 99,444 $ (10,296)
(13) Increase due to our investment into two joint ventures during 2023.
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Year ended December 31, 2022 compared to year ended December 31, 2021 (in thousands):
Years ended December 31,
Revenues:
Interest Income from financing receivables 1,762 — 1,762 (2)
Expenses:
Provision for credit losses 1,528 1,021 (507) (8)
Other operating income:
Income from unconsolidated joint ventures 1,504 1,417 87
Income allocated to non-controlling interests (560) (363) (197)
Income allocated to participating securities (580) (458) (122)
Net income available to common stockholders $ 99,444 $ 55,403 $ 44,041
(6) Decreased due to property sales.
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Funds From Operations
Funds from Operations (“FFO”) attributable to common stockholders, basic FFO attributable to common stockholders per share and diluted FFO attributable to common stockholders per share are supplemental measures of a REIT’s financial performance that are not defined by GAAP. Real estate values historically rise and fall with market conditions, but cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. We believe that by excluding the effect of historical cost depreciation, which may be of limited relevance in evaluating current performance, FFO facilitates comparisons of operating performance between periods.
We use FFO as a supplemental performance measurement of our cash flow generated by operations. FFO does not represent cash generated from operating activities in accordance with GAAP, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income available to common stockholders.
We calculate and report FFO in accordance with the definition and interpretive guidelines issued by NAREIT. FFO, as defined by NAREIT, means net income available to common stockholders (computed in accordance with GAAP) excluding gains or losses on the sale of real estate and impairment write-downs of depreciable real estate plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that have a different interpretation of the current NAREIT definition from us; therefore, caution should be exercised when comparing our FFO to that of other REITs.
The following table reconciles net income available to common stockholders to FFO attributable to common stockholders (unaudited, amounts in thousands, except per share amounts):
For the Year Ended December 31,
GAAP net income available to common stockholders $ 89,148 $ 99,444 $ 55,403
Add: Impairment loss 15,775 3,422 —
Add: Loss on unconsolidated joint ventures — — —
Less: Gain on sale of real estate, net (37,296) (37,830) (7,462)
NAREIT FFO attributable to common stockholders per share:
Effect of dilutive securities:
Add: Participating securities 587 580 —
Effect of dilutive securities:
Performance-based stock units 86 173 —
Participating securities 256 229 —
Total effect of dilutive securities 342 402 —
Critical Accounting Policies and Estimates
Our accounting policies are more fully described under Item 8. FINANCIAL STATEMENTS—Footnote 2. Summary of Significant Accounting Policies. As discussed in Footnote 2, the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Listed below are those policies and estimates that we believe are critical and require the use of significant judgement in their application.
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Impairment of Long-Lived Assets
Assets that are classified as held-for-use are periodically evaluated for impairment when events or changes in circumstances indicate that the asset may be impaired or the carrying amount of the asset may not be recoverable through future undiscounted cash flows. Where indicators of impairment exist, the estimation required in the undiscounted future cash flow assumption includes management’s probability-weighting of various scenarios such as modifying the lease with the existing operator, identifying a replacement operator or sale of the real property investment. In addition, the undiscounted future cash flows include management’s assumptions of rental revenues, net operating income, capitalization rates and expected hold periods. 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.
Collectability of operator obligations
We assess the collectability of substantially all our lease payments through maturity. If collectability is not probable, all or a portion of our straight-line rent receivables and other lease receivables may be written-off. In order to assess our lease payments for collectability, we make assumptions that include evaluating lessee’s payment history, the financial strength of the lessee, future market conditions and contractual rents, and timing of expected payments. Our ability to accurately predict collectability of substantially all of our lease payments impacts the timing of straight-line rent and other lease receivable write-offs, if any. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our consolidated financial statements.
Purchase Price Allocation
We make estimates as part of our allocation of the purchase price of acquisitions to the various components of the acquisition based upon the fair value of each component. In determining fair value, we use current appraisals or other third-party opinions of value. The most significant components of our allocations are typically the allocation of fair value to land and buildings and, for certain of our acquisitions, in-place leases and other intangible assets. In the case of the fair value of buildings and the allocation of value to land and other intangibles, the estimates of the values of these components will affect the amount of depreciation and amortization we record over the estimated useful life of the property acquired or the remaining lease term. We evaluate each purchase transaction to determine whether the acquired assets meet the definition of an asset acquisition or a business combination. Transaction costs related to acquisitions that are not deemed to be business combinations are included in the cost basis of the acquired assets, while transaction costs related to acquisitions that are deemed to be business combinations are expensed as incurred.
Liquidity and Capital Resources
Sources and Uses of Cash
As of December 31, 2023, we had a total of $20.3 million of cash and cash equivalents, $97.8 million available under our unsecured revolving line of credit and the potential ability to access the capital markets through the issuance of $76.0 million of common stock under our Equity Distribution Agreements. Furthermore, we have the ability to access the capital markets through the issuance of debt and/or equity securities under an automatic shelf registration statement.
We believe that our current cash balance, cash flow from operations available for distribution or reinvestment, our borrowing capacity and our potential ability to access the capital markets are sufficient to provide for payment of our current operating costs, meet debt obligations and pay common dividends at least sufficient to maintain our REIT status and repay borrowings at, or prior to, their maturity. The timing, source and amount of cash flows used by financing and investing activities are sensitive to the capital markets’ environment, especially to changes in interest rates. In addition, the slow recovery from the effects of the COVID-19 pandemic and inflationary pressure have adversely affected and are expected to continue to adversely affect our operators’ business, results of operations, cash flows and financial condition which could, in turn, adversely affect our financial position.
The operating results of the properties will be impacted by various factors over which the operators/owners may have no control. Those factors include, without limitation, the health of the economy, inflation pressures, employee availability and cost, changes in supply of or demand for competing seniors housing and health care facilities, ability to
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hire and maintain qualified staff, ability to control rising operating costs, and the potential for significant reforms in the health care industry, and the ongoing impact of COVID-19 and related occupancy challenges faced by our industry. In addition, our future growth in net income and cash flow may be adversely impacted by various proposals for changes in the governmental regulations and financing of the health care industry or the impact of any other infectious disease and epidemic outbreaks. We cannot presently predict what impact these potential events may have, if any. We believe that adequate provision has been made for the possibility of loans proving uncollectable but we will continually evaluate the financial status of the operations of the seniors housing and health care properties. In addition, we will monitor our borrowers and the underlying collateral for mortgage loans and will make future revisions to the provision, if considered necessary.
Depending on our borrowing capacity, compliance with financial covenants, ability to access the capital markets, and the payment of dividends may be negatively impacted. We continuously evaluate the availability of cost-effective capital and believe we have sufficient liquidity for our current dividend, corporate expenses and additional capital investments in 2024.
Our investments, principally our investments in owned properties, financing leases and mortgage loans, are subject to the possibility of loss of their carrying values as a result of changes in market prices, interest rates and inflationary expectations. The effects on interest rates may affect our costs of financing our operations and the fair market value of our financial assets. Generally, our leases have agreed upon annual increases and our loans have predetermined increases in interest rates. Inasmuch as we may initially fund some of our investments with variable interest rate debt, we would be at risk of net interest margin deterioration if medium and long-term rates were to increase.
Our primary sources of cash include rent and interest receipts, borrowings under our unsecured credit facility, public and private issuance of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures and construction advances), loan advances and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows as summarized below (in thousands):
Year Ended December 31, Change
Net Cash provided by (used in): 2023 2022 $
Increase in cash and cash equivalents 9,907 5,218 4,689
Cash and cash equivalents, beginning of period 10,379 5,161 5,218
Cash and cash equivalents, end of period $ 20,286 $ 10,379 $ 9,907
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Debt Obligations
Unsecured Credit Facility. We have an unsecured credit agreement (the “Credit Agreement”)that provides for anaggregate commitment of the lenders of up to $500.0 million comprising of a $400.0 million revolving credit facility (the “Revolving Line of Credit”) and two $50.0 million term loans (the “Term Loans”). The Credit Agreement permits us to request increases to the Revolving Line of Credit and Term Loans commitments up to a total of $1.0 billion. The Term Loans mature on November 19, 2025 and November 19, 2026. The Revolving Line of Credit had a maturity date of November 19, 2025 and provided a one-year extension option at our discretion, subject to customary conditions. During the fourth quarter of 2022, we entered into the First Amendment to Third Amended and Restated Credit Agreement to replace LIBOR with SOFR, plus a credit spread adjustment of 10 basis points (“Adjusted SOFR”), as the reference rate for purpose of calculating interest under the agreement. Other material terms of the Credit Agreement remained unchanged. Further, subsequent to December 31, 2023, we entered into a Second Amendment to Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”) to accelerate the one-year extension option notice to January 4, 2024. Concurrently, we exercised our option to extend the maturity date of the Credit Agreement, as amended to November 19, 2026.
Based on our leverage at December 31, 2023, the Revolving Line of Credit provides for interest annually at Adjusted SOFR plus 115 points and a facility fee of 20 basis point and the Term Loans provide for interest annually at Adjusted SOFR plus 135 points.
Interest Rate Swap Agreement. In connection with entering into the Term Loans as discussed above, we entered into two receive variable/pay fixed interest rate swap agreements (“Interest Rate Swaps”) with maturities of November 19, 2025 and November 19, 2026, respectively, that will effectively lock-in the forecasted interest payments on the Term Loan borrowings over the four and five year terms of the loans. The Interest Rate Swaps are considered cash flow hedges and are recorded on our Consolidated Balance Sheets at fair value, with changes in the fair value of these instruments recognized in Accumulated other comprehensive income (loss) on our Consolidated Balance Sheets. In connection with entering into the First Amendment to Third Amended and Restated Credit Agreement discussed above, we entered into amendments to our Interest Rate Swaps to account for SOFR as the updated reference rate in the First Amendment to Third Amended and Restated Credit Agreement. During 2023, we recorded a $2.6 million decrease in fair value of Interest Rate Swaps.
Senior Unsecured Notes. We have senior unsecured notes held by institutional investors with interest rates ranging from 3.66% to 5.03%. The senior unsecured notes mature between 2024 and 2033.
The debt obligations by component as of December 31, 2023 are as follows (dollar amounts in thousands):
Applicable Available
Interest Outstanding for
Debt Obligations Rate (1) Balance Borrowing
Term loans, net of debt issue costs 2.74% 99,658 —
Senior unsecured notes, net of debt issue costs 4.20% 489,409 —
(1) Represents weighted average of interest rate as of December 31, 2023.
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Our debt borrowings and repayments during the year ended December 31, 2023, are as follows (in thousands):
Debt Obligations Borrowings Repayments
Senior unsecured notes — (49,160)
Equity
Non-controlling Interests. We have entered into partnerships to develop and/or own real estate. Given that our limited members do not have substantive kick-out rights, liquidation rights, or participation rights, we have concluded that the partnerships are VIEs. Since we exercise power over and receive benefits from the VIEs, we are considered the primary beneficiary. Accordingly, we consolidate the VIEs and record the non-controlling interests at cost. As of December 31, 2023, we have the following consolidated VIEs (in thousands):
Gross
Investment Property Consolidated Non-Controlling
Year Purpose Type State Assets (1) Interests
2018 Owned real estate and development ALF/MC OR 18,452 1,246
(1) Includes the total real estate investments and excludes intangible assets.
At December 31, 2023, we had 43,021,593 shares of common stock outstanding, equity on our balance sheet totaled $916.3 million and our equity securities had a market value of $1.4 billion. During the year ended December 31, 2023, we declared and paid $94.8 million of cash dividends.
Common Stock. We have separate equity distribution agreements (collectively, “Equity Distribution Agreements”) to offer and sell, from time to time, up to $200.0 million in aggregate offering price of our common shares. The Equity Distribution Agreements provide for sales of common shares to be made by means of ordinary brokers’ transactions, which may include block trades, or transactions that are deemed to be “at the market” offerings. During the year ended December 31, 2023, we sold 1,658,400 shares of common stock for $53.7 million in net proceeds under our Equity Distribution Agreements. In conjunction with the sale of common stock, we incurred $0.8 million costs associated with this agreement which have been recorded in additional paid in capital as a reduction of proceeds received. At December 31, 2023, we had $76.0 million available under our equity distribution agreement. Subsequent to December 31, 2023, we sold 91,100 shares of common stock for $2.9 million in net proceeds under our Equity Distribution Agreements. Accordingly, we have $73.1 million available under our Equity Distribution Agreements.
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During 2023, we acquired 43,933 shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations. Subsequent to December 31, 2023, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of January, February and March 2024, payable on January 31, February 29 and March 29, 2024, respectively, to stockholders of record on January 23, February 21, and March 21, 2024, respectively.
Stock Based Compensation Plans. During 2021, we adopted, and our shareholders approved the 2021 Equity Participation Plan (the “2021 Plan”) which replaces the 2015 Equity Participation Plan (the “2015 Plan”). Under the 2021 Plan, 1,900,000 shares of common stock have been authorized and reserved for awards, less one share for every one share that was subject to an award granted under the 2015 Plan after December 31, 2020 and prior to adoption. In addition, any shares that are not issued under outstanding awards under the 2015 Plan because the shares were forfeited or cancelled after December 31, 2020 will be added to and again be available for awards under the 2021 Plan. Under the 2021 Plan, the shares were authorized and reserved for awards to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2021 Plan and the 2015 Plan are set by our compensation committee at its discretion.
Restricted Stock and Performance-based Stock Units. During 2023, we granted 232,887 shares of restricted common stock and performance-based stock units under the 2021 Plan as follows:
No. of Price per
Shares Share Award Type Vesting Period
127,960 $ 37.16 Restricted stock ratably over 3 years
86,867 $ 37.16 Performance-based stock units TSR targets (1)
At December 31, 2023, the remaining compensation expense to be recognized related to the future service period of unvested outstanding restricted common stock and performance-based stock units are as follows (dollar amounts in thousands):
Remaining
Compensation
Vesting Date Expense
Stock Options. We did not issue any stock options during the year ended December 31, 2023. At December 31, 2023, we have 5,000 stock options outstanding and exercisable.
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Material Cash Requirements
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, 2023, excluding the effects of interest and debt issue costs (in thousands):
The following table represents our projected interest expense based on current interest rates as of year-end, excluding capitalized interest, amortization of debt issue costs and bank fees, as of December 31, 2023 (in thousands):
Also, see Item 8. FINANCIAL STATEMENTS— Note 11. Commitments and Contingencies within ourconsolidated financial statements for additional information regarding our contractual commitments.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 forward or option contracts, or foreign currencies or commodities, or other types of derivative financial instruments, with exception of interest rate swaps, 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, 2023.
Our future earnings, cash flows and estimated fair values relating to financial instruments are dependent upon prevalent market rates of interest, such as SOFR 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. Our mortgage loans receivable and debt, such as our senior unsecured notes, are primarily fixed-rate instruments. Also, we have two interest rate swap agreements to effectively lock-in the forecasted interest payments on our term loans which are based on SOFR. 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. As of December 31, 2023, the interest rates for 66.1% of our consolidated borrowings were fixed or swap-fixed with interest rate swaps. As of December 31, 2023, the interest expense for our variable rate borrowings that are not hedged would increase by $3.1 million per year for every 1% increase in the related benchmark interest rate.
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At December 31, 2023, the fair value of our financing receivables using a 7.6% discount rate was approximately $199.2 million. A 1% increase in such rate would decrease their estimated fair value by $6.3 million while a 1% decrease in such rate would increase their value by $6.6 million. At December 31, 2023, the fair value of our mortgage loans receivable using a 9.2% discount rate was approximately $555.0 million. A 1% increase in such rate would decrease the estimated fair value of our mortgage loans by approximately $32.0 million while a 1% decrease in such rate would increase their estimated fair value by approximately $36.3 million. At December 31, 2023, the fair value of our notes receivable using a 6.9% discount rate approximately $67.9 million. A 1% increase in such rate would decrease the estimated fair value of our notes receivable by approximately $1.9 million. while a 1% decrease in such rate would increase their estimated fair value by approximately $2.0 million. At December 31, 2023, the fair value of our senior unsecured notes using a 6.5% discount rate for those maturing before year 2030 and 6.75% discount rate for those maturing at or beyond year 2030 was approximately $439.9 million. A 1% increase in such rate would decrease the estimated fair value of our senior unsecured notes by approximately $17.0 million while a 1% decrease in such rate would increase their estimated fair value by approximately $18.0 million. These discount rates were measured based upon management’s estimates of rates currently prevailing for comparable loans available to us and instruments of comparable maturities.
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.
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ITEM 8. FINANCIAL STATEMENTS
LTC Properties, Inc.
Index to Consolidated Financial Statements
and Financial Statements Schedules
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 54
Consolidated Balance Sheets as of December 31, 2023 and 2022 56
Notes to Consolidated Financial Statements 61
Consolidated Financial Statement Schedules
Schedule II—Valuation and Qualifying Accounts 93
Schedule III—Real Estate and Accumulated Depreciation 94
Schedule IV—Mortgage Loans on Real Estate 99
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of LTC Properties, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LTC Properties, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 15, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Real Property Investments
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1992.
Los Angeles, California
February 15, 2024
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LTC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
ASSETS
Investments:
Accumulated depreciation and amortization (387,751) (389,182)
Investments in unconsolidated joint ventures 19,340 19,340
Other assets:
Debt issue costs related to revolving line of credit 1,557 2,321
Prepaid expenses and other assets 15,969 11,099
LIABILITIES
Accrued expenses and other liabilities 43,649 32,708
EQUITY
Stockholders’ equity:
Accumulated other comprehensive income 6,110 8,719
Total LTC Properties, Inc. stockholders’ equity 881,279 828,367
See accompanying notes.
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LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31,
Revenues:
Interest income from financing receivables 15,243 1,762 —
Expenses:
Other operating income:
Income from unconsolidated joint ventures 1,504 1,504 1,417
Income allocated to non-controlling interests (1,727) (560) (363)
Income allocated to participating securities (587) (580) (458)
Net income available to common stockholders $ 89,148 $ 99,444 $ 55,403
Earnings per common share:
See accompanying notes.
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LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year Ended December 31,
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LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share amounts)
Capital in Cumulative Total Non-
shares Amount Par Value Income OCI Distributions Equity Interests Equity
Issuance of restricted stock 110 1 (1) — — — — — —
Other — — (70) — — — (70) — (70)
Issuance of restricted stock 135 1 (1) — — — — — —
Other — — (5) — — — (5) (2) (7)
Issuance of restricted stock 146 1 (1) — — —
Other (1) — — — — — — — —
See accompanying notes.
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LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
OPERATING ACTIVITIES:
Income from unconsolidated joint ventures (1,504) (1,504) (1,417)
Income distributions from unconsolidated joint ventures 56 351 —
Straight-line rental adjustment (income) 2,078 1,369 (467)
Amortization of lease incentives 773 877 608
Application of interest reserve (1,939) (6,192) (150)
Amortization of debt issue costs 1,205 1,139 1,122
Other non-cash items, net 95 113 —
Change in operating assets and liabilities
Lease incentives funded (1,627) (418) (824)
Increase in interest receivable (9,283) (7,173) (6,776)
(Decrease) increase in accrued interest payable (1,369) 1,489 (471)
Net change in other assets and liabilities (4,244) 2,115 2,962
INVESTING ACTIVITIES:
Investment in real estate properties (43,759) (51,817) —
Investment in real estate developments — (105) —
Investment in real estate capital improvements (9,686) (8,994) (6,298)
Investment in financing receivables (112,712) (61,747) —
Investments in unconsolidated joint ventures — — (5,676)
Principal payments received on notes receivable 7,227 6,843 2,694
FINANCING ACTIVITIES:
Borrowings from term loans — — 100,000
Proceeds from issuance of senior unsecured notes — 75,000 —
Proceeds from common stock issued 53,777 68,156 —
Contribution from non-controlling interests — 50 9
Distributions paid to non-controlling interests — (487) (363)
Other — (6) (70)
Increase (decrease) in cash and cash equivalents 9,907 5,218 (2,611)
Cash and cash equivalents, beginning of period 10,379 5,161 7,772
Cash and cash equivalents, end of period $ 20,286 $ 10,379 $ 5,161
Supplemental disclosure of cash flow information:
See accompanying notes.
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1. The Company
LTC Properties, Inc. (“LTC” or the “Company”), a Maryland corporation, commenced operations on August 25, 1992. LTC is a real estate investment trust (“REIT”) that invests primarily in seniors housing and health care properties primarily through sale-leasebacks, mortgage financing, joint ventures and structured finance solutions including preferred equity and mezzanine lending. We conduct and manage our business as one operating segment, rather than multiple operating segments, for internal reporting and internal decision-making purposes. Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in seniors housing and health care properties managed by experienced operators. Our primary seniors housing and health care property classifications include skilled nursing centers (“SNF”), assisted living communities (“ALF”), independent living communities (“ILF”), memory care communities (“MC”) and combinations thereof. We also invest in other (“OTH”) types of properties, such as land parcels, projects under development (“UDP”) and behavioral health care hospitals. ILF, ALF, MC and combinations thereof are included in the ALF classification.
2. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements include the accounts of LTC, our wholly-owned subsidiaries, and our consolidated companies. All intercompany investments, accounts and transactions have been eliminated.
Any reference to the number of properties or facilities, number of units, number of beds, number of operators, and yield on investments in real estate are unaudited and outside the scope of our independent registered public accounting firm’s audit of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.
Consolidation. At inception, and on an ongoing basis, as circumstances indicate the need for reconsideration, we evaluate each legal entity that is not wholly-owned by us for consolidation, first under the variable interest entity (“VIE”), then under the voting model. Our evaluation considers all of our variable interests, including common or preferred equity ownership, loans, and other participating instruments. The variable interest model applies to entities that meet certain criteria.
If an entity is determined to be a VIE, we evaluate whether we are the primary beneficiary. The primary beneficiary analysis is a qualitative analysis based on power and benefits. We consolidate a VIE if we have both power and benefits - that is (i) we have the power to direct the activities of a VIE that most significantly impact the VIE's economic performance (power), and (ii) we have the obligation to absorb losses of the VIE that could potentially be significant to the VIE, or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits). If we have a variable interest in a VIE but we are not the primary beneficiary, we account for our investment using the equity method of accounting.
If a legal entity does not meet the characteristics of a VIE, we evaluate such entity under the voting interest model. Under the voting interest model, we consolidate the entity if we, directly or indirectly, have greater than 50% of the voting shares.
The Financial Accounting Standards Board (the “FASB”) requires the classification of non-controlling interests as a component of consolidated equity in the consolidated balance sheet subject to the provisions of the 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.
Use of Estimates. Preparation of the consolidated financial statements in conformity with Generally Accepted Accounting Principles (“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
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estimates. Our most significant assumptions and estimates are related to the valuation of real estate, purchase price allocation of acquired assets, revenue recognition including the collectability of tenant receivables and asset impairment.
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.
Owned Properties. We make estimates as part of our allocation of the purchase price of acquisitions to the various components of the acquisition based upon the fair value of each component. In determining fair value, we use current appraisals or other third-party opinions of value. The most significant components of our allocations are typically the allocation of fair value to land and buildings and, for certain of our acquisitions, in-place leases and other intangible assets. In the case of the fair value of buildings and the allocation of value to land and other intangibles, the estimates of the values of these components will affect the amount of depreciation and amortization we record over the estimated useful life of the property acquired or the remaining lease term. We evaluate each purchase transaction to determine whether the acquired assets meet the definition of an asset acquisition or a business combination. Transaction costs related to acquisitions that are not deemed to be business combinations are included in the cost basis of the acquired assets, while transaction costs related to acquisitions that are deemed to be business combinations are expensed as incurred.
We capitalize direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related and essential to the acquisition, development or construction of a real estate asset. We capitalize construction and development costs while substantive activities are ongoing to prepare an asset for its intended use. We consider a construction project as substantially complete and held available for occupancy upon the issuance of the certificate of occupancy. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred. For redevelopment, renovation and expansion of existing operating properties, we capitalize the cost for the construction and improvement incurred in connection with the redevelopment, renovation and expansion. Costs previously capitalized related to abandoned acquisitions or developments are charged to earnings. Expenditures for repairs and maintenance are expensed as incurred.
Depreciation is computed principally by the straight-line method for financial reporting purposes over the estimated useful lives of the assets, which range from 3 to 5 years for computers, 5 to 15 years for furniture and equipment, 35 to 50 years for buildings, 10 to 20 years for site improvements, 10 to 50 years for building improvements and the respective lease term for acquired lease intangibles.
Financing Receivables. As part of our acquisitions, we may from time to time, invest in sale and leaseback transactions. In accordance with Accounting Standards Codification (“ASC”) Topic 842, Leases (“ACS 842”), we are required to determine whether the sale and leaseback transaction qualifies as a sale. ASC 842 clarifies that an option for the seller-lessee to repurchase a real estate asset would generally preclude accounting for the transfer of the asset as a sale. Therefore, a sale and leaseback transaction of real estate that includes a seller-lessee repurchase option is accounted for as a failed sale and leaseback transaction. As a result, the purchased assets of a failed sale and leaseback transaction would be presented as a Financing receivable on our Consolidated Balance Sheets and the rental revenue from these properties is recorded as Interest income from financing receivables on our Consolidated Statements of Income. Furthermore, upon expiration of the purchase option if the purchase option remains unexercised by the seller-lessee, the purchased assets will be reclassified from Financing receivables to Real property investments on our Consolidated Balance Sheets. Financing receivables are recorded on an amortized cost basis.
Mortgage Loans Receivable, Net of Loan Loss Reserve. Mortgage loans receivable we originate are recorded on an amortized cost basis.
Intangible Assets. As previously discussed, we make estimates as part of our allocation of the purchase price of an acquisition to various components of the acquisition based on the fair market value of each component. Occasionally, we may allocate a portion of the purchase price as in-place leases or other intangibles. In the case of the value of in-place leases, we make the best estimates based on the evaluation of the specific characteristics of each tenant’s lease. Factors
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