10-Q/A: Quarterly report [Sections 13 or 15(d)]
Published on December 8, 1997
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
__________
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ____ to ____
Commission file number 1-11314
LTC PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
Maryland 71-0720518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
(Address of principal executive offices)
(805) 981-8655
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No __
-
Shares of Registrant's common stock, $.01 par value, outstanding at November 5,
1997 -24,896,621
1
LTC PROPERTIES, INC.
FORM 10-Q/A
SEPTEMBER 30, 1997
INDEX
PART I -- FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets............................. 3
Condensed Consolidated Statements of Income....................... 4
Condensed Consolidated Statements of Cash Flows................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations.........12
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................17
2
LTC PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
(Unaudited)
See accompanying notes
3
LTC PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
See accompanying notes
4
See accompanying notes
5
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. GENERAL
The condensed consolidated financial statements included herein have been
prepared by LTC Properties, Inc. (the "Company") without audit and in the
opinion of management, include all adjustments necessary for a fair
presentation of the results of operations for the nine months ended
September 30, 1997 and 1996 pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying condensed consolidated
financial statements include the accounts of the Company, its wholly-owned
subsidiaries and controlled partnerships. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the disclosures in the
accompanying financial statements are adequate to make the information
presented not misleading. The results of operations for the nine months
ended September 30, 1997 and 1996 are not necessarily indicative of the
results for a full year.
The Company has securitized portions of its mortgage loan portfolio and
retained a portion of the resulting REMIC Certificates to hold as long-term
investments. Historically, the Company has accounted for its REMIC
Certificate investments at amortized cost and provided fair value
disclosures because of the highly specialized nature of the collateral
underlying the REMIC Certificates, the lack of marketability of the
Certificates and the Company's intent and investment posture to hold its
real estate investments for long-term purposes. Moreover, the Company
believes that the fair value accounting provisions of Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS 115"), which require the recognition of unrealized
gains or losses resulting from temporary changes in the fair value of
originated mortgage-backed securities (the REMIC Certificates) that are
retained by the Company may reflect equity or earnings in the Company's
financial statements that may not be ultimately realized and portray a level
of liquidity with respect to its REMIC Certificates that may not exist.
Furthermore, the Company believed that the accounting literature supported
the accounting for the REMIC Certificates at amortized cost. However, after
reconsideration following discussions with the Staff of the Securities and
Exchange Commission, the Company decided to restate its financial statements
and adopt the fair value accounting provisions of SFAS 115 as opposed to the
amortized cost accounting the Company believed applicable under SFAS 115.
The fair value accounting provisions require the recognition in earnings of
temporary changes in the fair values of the Company's REMIC Certificates
investments, irrespective of the Company's reservations about the
realizability of such earnings. Accordingly, previously filed financial
statements have been restated to reflect the adjustment to fair value of the
Company's REMIC Certificate investments. As a result, net income increased
(decreased) by $1,872,000 ($0.12 per share), ($1,656,000) ($0.09 per share)
and $6,173,000 ($0.32 per share) for the years ended December 31, 1994, 1995
and 1996, respectively. The cumulative impact on stockholders' equity as of
December 31, 1996 was an increase of $6,389,000. For the three and nine
months ended September 30, 1996, net income increased by $18,000 ($0.00 per
share) and $5,683,000 ($0.30 per share), respectively.
6
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
No provision has been made for federal income taxes. The Company qualifies
as a real estate investment trust ("REIT") under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended. As such, the Company is not
taxed on its income which is distributed to its stockholders.
2. REAL ESTATE INVESTMENTS
In 1997, the Company's Board of Directors authorized an increase in the
Company's investment in assisted living facilities ("ALFs") from 20% to 30%
of its adjusted gross real estate investment portfolio (adjusted to include
the mortgage loans to third parties underlying the $87,744,000 investment in
REMIC Certificates). In addition, the Board of Directors also authorized an
increase in the Company's investment in properties operated by Assisted
Living Concepts, Inc. ("ALC") to 20% of its adjusted gross real estate
investment portfolio (which was approximately $783,467,000 as of September
30, 1997).
As of September 30, 1997, the Company had investments in ALFs and in
properties operated by ALC of approximately $175,414,000 and $110,137,000,
respectively or 22.4% and 14.1%, respectively, of the Company's total
adjusted gross real estate investment portfolio.
MORTGAGE LOANS
During the nine months ended September 30, 1997, the Company invested
$74,832,000 in mortgage loans. Approximately $55,740,000 of these loans are
secured by, among other things, 22 skilled nursing facilities located in 10
states with a total of 2,274 beds. These mortgage loans contain certain
guarantees and individually range from $1,000,000 to $10,000,000 in
principal amount, have stated maturities of 10 to 20 years, initial interest
rates ranging from 9.75% to 11.57% and generally have 25 year amortization
schedules. The remaining $19,092,000 of mortgage loans are secured by 14
ALFs located in four states with a total of 564 units. Of the total loans
secured by ALFs, approximately $14,510,000 in loans bearing interest at
10.14% and secured by mortgages on seven ALFs were made to ALC, a developer-
owner and operator of ALFs. ALC repaid these loans subsequent to September
30, 1997. Also included in the mortgage loans secured by ALFs was $1,292,000
of additional financing on ALFs under construction.
Subsequent to September 30, 1997, the Company completed investments in
mortgage loans of $10,752,000 which includes a net reduction of $1,073,000
in construction loans.
OWNED PROPERTIES
During the nine months ended September 30, 1997, the Company acquired six
skilled nursing facilities with a total of 463 beds and 27 ALFs with a total
of 1,085 units for approximately $71,289,000. Included in this amount were
three skilled nursing facilities purchased for $3,100,000 on which the
Company had a first mortgage loan of $2,798,000 and three ALFs purchased for
$7,059,000 which were previously financed with construction loans of
$6,483,000. The Company also added 36 beds to one of its owned skilled
nursing facilities at a total cost of approximately $1,693,000 and nine
units to one of its ALFs for $450,000. In addition, during the second
quarter of 1997, the Company converted $26,360,000 of mortgage loans secured
by ALFs into owned properties through sale lease-back transactions with ALC
with total initial annual rent
7
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
of approximately $2,604,000. Eleven of the ALFs purchased for a total of
$28,055,000 have been leased to ALC for total initial annual rent of
approximately $2,801,000 pursuant to long-term non-cancelable agreements.
Subsequent to September 30, 1997, the Company completed investments in owned
properties of $11,237,000.
REMIC CERTIFICATES
As of September 30, 1997, the outstanding certificate principal balance and
the weighted average pass-through rate for the senior REMIC Certificates
(all held by outside third parties) was $192,632,000 and 7.87%. As of
September 30, 1997, the unamortized cost and the estimated fair value of the
subordinated REMIC Certificates held by the Company was $81,298,000 and
$87,744,000, respectively.
COMMITMENTS
As of November 6, 1997, the Company had outstanding commitments aggregating
approximately $199,674,000. Included in these amounts were commitments to
ALC for approximately $63,070,000, Home and Community Care, Inc. ("HCI") for
$49,214,000 and Carriage House Assisted Living, Inc. ("Carriage") for
$6,380,000. Commitments of $49,214,000 to HCI and $50,000,000 to ALC are due
to expire in 1999 and 2000, respectively.
3. OTHER ASSETS
HCI was formed to own, operate and develop assisted living residences and to
provide home health and hospice care services. As of September 30, 1997, the
Company owned 2,000,000 shares of non-voting common stock of HCI which it
acquired for $5,000,000 in the form of a demand note. As of September 30,
1997, $2,068,000 of the demand note had been funded. The remaining
$2,932,000 due under the demand note was funded subsequent to September 30,
1997.
Subsequent to September 30, 1997, HCI declared and paid a distribution
representing a return of investment equal to $2.50 per share of outstanding
common stock which resulted in the Company receiving back its initial
investment of $5,000,000. Following the payment of the distribution, ALC
agreed to acquire all of the outstanding common stock of HCI for $1.00 per
share which will result in the Company receiving $2,000,000. As part of the
acquisition, the Company may receive future payments equal to approximately
$3,000 per unit for up to 708 units that were under development by HCI as of
the date of the acquisition. As a result of the acquisition, certain
officers of the Company ended their employment with the Company to become
employees of ALC and the Company accelerated the vesting of certain benefits
for these departing employees.
In September 1996, the Company received a 9.9% interest (990 shares) in
Carriage, a privately-held corporation that develops, sells, leases and
operates ALFs. LTC received its interest in Carriage in return for its
commitment to provide construction financing for the first five facilities
developed by Carriage in Nebraska, and LTC's further commitment to provide
permanent financing on the first ten facilities developed by Carriage
through the completion of sale/leaseback transactions. Subsequent to
September 30, 1997, ALC agreed to acquire all of the outstanding common
stock of Carriage at an exchange rate of 31.16 shares of ALC for each share
8
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
of Carriage. In connection with this acquisition, the Company received
30,850 shares of unregistered shares of ALC restricted common stock. The
Company anticipates these shares will be registered and freely tradable
during the first quarter of 1998.
4. DEBT OBLIGATIONS
BANK BORROWINGS
In August 1997, the Company obtained a 90 day $10,000,000 bank loan at LIBOR
plus 3%. In September 1997, the Company obtained an additional 45 day
$10,000,000 bank loan at LIBOR plus 3%. As of September 30, 1997, the
Company also had $81,142,000 outstanding under its repurchase agreement
secured by mortgages loans and $29,545,000 outstanding under its unsecured
revolving credit agreement.
On October 3, 1997, all amounts outstanding under the 90 day bank loan, the
45 day bank loan, the repurchase agreement and the unsecured revolving
credit agreement were refinanced with a $170,000,000 Senior Unsecured
Revolving Line of Credit (the "Revolving Credit Facility") which expires on
October 3, 2000. The Revolving Credit Facility pricing varies between LIBOR
plus 1.25% and LIBOR plus 1.5% depending on the Company's leverage ratio.
Currently the pricing is LIBOR plus 1.375%. The Revolving Credit Facility
contains financial covenants including, but not limited to, maximum leverage
ratios, minimum debt service coverage ratios, cash flow coverage ratios and
minimum consolidated tangible net worth.
CONVERTIBLE SUBORDINATED DEBENTURES
During the nine months ended September 30, 1997, holders of $43,555,000 in
principal amount of convertible subordinated debentures elected to convert
the debentures into 2,699,519 shares of common stock at prices ranging from
$10.00 to $17.25 per share. Subsequent to September 30, 1997, an additional
$320,000 in principal amount of convertible subordinated debentures
converted into 21,028 shares of the Company's common stock at prices ranging
from $15.00 to $16.50 per share.
5. STOCKHOLDERS EQUITY
ISSUANCE OF STOCK
During the first quarter of 1997, the Company completed two public
offerings. In January 1997, the Company completed the sale of 1,000,000
shares of common stock in a public offering at $17.75 per share which
resulted in net proceeds of $17,349,000. In March 1997, the Company sold
3,080,000 shares of 9.5% Series A Cumulative Preferred Stock ("Series A
Preferred Stock") which resulted in net proceeds of $73,800,000. Dividends
on the Series A Preferred Stock are cumulative from the date of original
issue and are payable monthly, commencing April 15, 1997, to stockholders of
record on the first day of each month at the rate of 9.5% per annum of the
$25 liquidation preference per share (equivalent to a fixed amount of $2.375
per share). The Series A Preferred Stock is not redeemable prior to April 1,
2001, except in certain circumstances relating to preservation of the
Company's qualification as a REIT.
On April 24, 1997, the Company filed a shelf registration statement with the
Securities and Exchange Commission covering up to $150,000,000 of debt and
equity securities to be sold from time to time in the future. The
registration statement was declared effective on May 6, 1997.
9
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
During the third quarter of 1997, the Company completed the sale of
1,000,000 shares of common stock in a public offering which generated net
proceeds of $18,095,000.
The net proceeds from these offerings were used to repay short-term
borrowings outstanding under the Company's lines of credit.
NOTES RECEIVABLE FROM STOCKHOLDERS
In March 1997, the Board of Directors adopted a loan program designed to
encourage executives, key employees, consultants and directors to acquire
common stock through the exercise of options. Under the program, the Company
will make full recourse, secured loans to participants equal to the exercise
price of vested options plus up to 50% of the taxable income resulting from
the exercise of options. Such loans will bear interest at the then current
Applicable Federal Rate and are payable in installments over nine years. For
the first five years the principal due each quarter will be equal to 50% of
the difference between the cash dividends received on the shares purchased
and the quarterly interest due. In addition, 25% of cash bonuses received by
the borrower must be used to reduce the principal balance. The loans will
convert to fully amortizing loans with 16 quarterly payments beginning in
year six. Unless the Board of Directors approves otherwise, loans must be
repaid within 90 days after termination of employment for any reason, other
than in connection with a change in control of the Company. In 1997, the
Company's management, consultants and directors purchased 585,166 of the
Company's common stock under the loan program. At September 30, 1997, the
remaining loan amounts available and the loans outstanding of $617,000 and
$7,648,000, respectively, bear interest at rates ranging from 6.27% to 6.63%
per annum and are secured by a pledge of the shares of common stock acquired
through the exercise of options. The market value of the common stock
securing these loans was $11,118,000 at September 30, 1997.
6. DISTRIBUTIONS
During the three months ended September 30, 1997, the Company declared and
paid cash dividends on the Series A Preferred Stock totaling $1,829,000.
During the nine months ended September 30, 1997, for its Series A Preferred
Stock, the Company declared and paid cash dividends totaling $4,084,000 and
$3,474,000, respectively. Dividends declared on the Series A Preferred Stock
represent a partial period dividend of $.1385 per share for the period from
March 10, 1997 through March 31, 1997 and the regular monthly dividend of
$.1979 per share for subsequent periods.
During the three months ended September 30, 1997, the Company declared and
paid cash dividends on its common stock totaling $8,897,000. During the nine
months ended September 30, 1997, for its common stock, the Company declared
and paid cash dividends totaling $25,132,000 and $31,811,000, respectively.
Dividends declared on the Company's common stock represent the regular
quarterly dividend of $.34 per share for the quarter ended March 31, 1997
and $.365 per share for the quarters ended June 30 and September 30, 1997.
10
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. OTHER INCOME, NET
In June 1997, the Company sold $11,811,000 face amount of its REMIC
Certificates recognizing a gain of approximately $1,231,000. Also in June
1997, the Company recognized $1,120,000 of expense resulting from the
accelerated vesting of 64,000 shares of restricted common stock held by
executives, certain management and non-employee directors of the Company.
8. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share ("SFAS No. 128") which is required to be adopted
on December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. Adoption
of SFAS No. 128 would have resulted in no change in primary earnings per
share for the three months ended September 30, 1997, an increase of $0.01
for the three months ended September 30, 1996 and an increase of $0.01 and
$0.02 for the nine months ended September 30, 1997 and 1996, respectively.
The impact of Statement No. 128 on the calculation of fully diluted earnings
per share for these periods is not expected to be material.
9. INTEREST RATE SWAP AGREEMENTS
In July 1996, the Company provided a $50,180,000 commitment to purchase ALFs
through sale leaseback transactions with ALC. In connection with the
commitment, in November 1996, the Company entered into a one year forward
ten year interest rate swap agreement (the "Agreement"). Under the
Agreement, the Company was credited interest at three month LIBOR and
incurred interest at a fixed rate of 6.835% on a $40,000,000 notional amount
beginning on November 7, 1997. On March 10, 1997, the Agreement was
terminated concurrently with the completion of the equity offerings
discussed in Note 5 and the Company recognized interest income of
approximately $440,000.
In September 1995, the Company entered into a seven year forward interest
rate swap agreement which is scheduled to be settled on November 17, 1997.
Under this agreement, the Company was credited interest at the six month
LIBOR and incurred interest at a fixed rate of 6.655% on a notional amount
of $60,000,000. In August 1997, the Company entered into a Treasury lock
agreement which is scheduled to be settled by December 15, 1997. Under this
agreement, the Company locked into a rate of 6.39% on the seven year
Treasury Note Rate on a notional amount of $65,000,000. Upon settlement of
the Treasury lock agreement the Company will either receive or make a
payment based on the change in the seven year Treasury Note Rate. These
agreements which are accounted for as hedges were made in connection with an
anticipated securitization to be completed in 1998 and will be extended
until the consummation of the transaction therefore, any associated gains or
losses will be included as a component of the fair value of the assets
received in the transaction. At September 30, 1997, the Company had a total
unrealized loss of $1,761,000 on these agreements.
11
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
NINE MONTHS 1997 COMPARED TO NINE MONTHS 1996
Revenues for the nine months ended September 30, 1997 increased approximately
35% to $53,411,000 from $39,575,000 for the same period in 1996. The increase
in revenues resulted from increased rental income of $7,313,000, increased
interest income on mortgage loans of $5,761,000 and interest income of $440,000
from the termination of an interest rate swap agreement. Rental income
increased $4,768,000 as a result of property acquisitions completed since
September 30, 1996 and $2,547,000 due to the inclusion of rental revenue for a
full nine months in 1997 for properties acquired during 1996. "Same-store"
rents increased $ 306,000 due to the receipt of contingent rents and rental
increases as provided for in the lease agreements. Partially offsetting the
increase in rental income was a decrease of $308,000 resulting from the sale of
properties in 1996. The increase in mortgage interest income resulted from the
higher mortgage investment base in 1997 compared to 1996. The overall increase
in mortgage interest income was mitigated by a decrease of approximately
$2,200,000 related to the securitization of mortgages in a REMIC transaction in
March 1996. Interest income from REMIC Certificates increased as a result of
the third securitization transaction which closed in March 1996.
Total expenses for the nine months ended September 30, 1997 were 52% of net
revenues compared to 58% for the same period in 1996. The decrease is due in
large part to a reduction in interest expense as a percent of net revenues. The
reduction in interest expense is primarily the result of conversions of
subordinated debentures and the utilization of equity to fund financing
activities in 1997. Depreciation and amortization expense as a percent of
rental income remained flat at 30%.
Other income decreased due to an increase in the estimated fair value of REMIC
Certificates which resulted in an unrealized gain of $5,683,000 during the prior
period as compared to the current period's unrealized gain of $57,000. Also
contributing to the decrease in the current period was $1,120,000 of expense the
Company recognized in connection with the accelerated vesting of 64,000 shares
of restricted common stock held by executives, certain management and non-
employee directors of the Company. This decrease was offset by gain of
$1,231,000 recognized on the sale of one of the Company's rated REMIC
certificates in June 1997. The sale of the certificate also reduced the amount
of the unrealized gain on the REMIC for the nine months ended September 30,
1997. On an overall basis, the REMIC Certificates' estimated fair value was
approximately $545,000 higher at September 30, 1997 than at September 30, 1996.
During the nine months ended September 30, 1997, the Company declared dividends
of $4,084,000 on its Series A Cumulative Preferred Stock issued in March 1997.
As a result of the changes in revenues and expenses discussed above, net income
available to common shareholders decreased $623,000 to $21,750,000 for the
nine months ended September 30, 1997 from $22,373,000 for the same period in
1996.
12
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
Revenues for the three months ended September 30, 1997 increased $4,517,000 to
$18,809,000 from $14,292,000 for the same period in 1996. The increase in
revenues resulted from increased rental income of $2,499,000 and interest income
on mortgage loans of $2,545,000. Rental income increased $2,442,000 as a result
of property acquisitions completed since September 30, 1996. "Same-store" rents
increased $181,000 due to the receipt of contingent rents and rental increases
as provided for in the lease agreements. Partially offsetting the increases in
rental income was a decrease of $124,000 resulting from the sale of properties.
The increase in mortgage interest income resulted from the higher mortgage
investment base in 1997 compared to 1996. Interest income from REMIC
Certificates decreased as a result of the sale of $11,811,000 face amount of
REMIC Certificates in June 1997.
Total expenses for the three months ended September 30, 1997 were 52% of net
revenues compared to 61% for the same period in 1996. The decrease is due in
large part to a reduction in interest expense as a percent of net revenues. The
reduction in interest expense is primarily the result of conversions of
subordinated debentures and the utilization of equity to fund financing
activities in 1997. Depreciation and amortization expense as a percent of
rental income remained relatively flat at 29% for 1997 compared to 30% for 1996.
Other income increased primarily as a result of the effect of a higher
unrealized gain on changes in the fair value of the REMIC Certificates for the
current period as compared to that of the prior period. On an overall basis,
the REMIC Certificates' estimated fair value was approximately $545,000 higher
at September 30, 1997 than at September 30, 1996.
During the three months ended September 30, 1997, the Company declared dividends
of $1,829,000 on its Series A Cumulative Preferred Stock issued in March 1997.
As a result of the changes in revenues and expenses discussed above, net income
available to common shareholders increased $1,909,000 to $7,545,000 for the
three months ended September 30, 1997 from $5,636,000 for the same period in
1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's real estate investment portfolio
consisted of approximately $329,339,000 invested in owned skilled nursing and
assisted living facilities (before accumulated depreciation of $17,475,000),
approximately $240,574,000 invested in mortgage loans (before allowance for
doubtful accounts of $1,000,000) and approximately $87,744,000 invested in REMIC
Certificates. The Company's portfolio consists of 262 skilled nursing
facilities and 83 assisted living facilities in 33 states.
During the nine months ended September 30, 1997, the Company completed
approximately $174,624,000 in new investments. The investments which closed
consisted of approximately $74,832,000 in mortgage loans and approximately
$99,792,000 in owned properties. The Company financed its investments through
the sale of 2,000,000 shares of common stock in public offerings at
13
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
prices ranging from $17.75 to $18.50 per share, the sale of 3,080,000 shares of
9.5% Series A Cumulative Preferred Stock at $25.00 per share, short-term
borrowings and cash on hand.
In September 1995, the Company entered into a seven year forward interest rate
swap agreement which is scheduled to be settled on November 17, 1997. Under
this agreement, the Company was credited interest at the six month LIBOR and
incurred interest at a fixed rate of 6.655% on a notional amount of $60,000,000.
In August 1997, the Company entered into a hedge agreement which is is scheduled
to be settled by December 15, 1997. Under this agreement, the Company locked
into a rate of 6.39% on the seven year Treasury Note Rate on a notional amount
of $65,000,000. These agreements were made in connection with an anticipated
REMIC to be completed in 1998 and will be extended until the consummation of the
REMIC transaction therefore, any associated gains or losses will be included as
a component of the fair market value of the assets received in the transaction.
At September 30, 1997, the Company had a total unrealized loss of $1,761,000 on
these agreements.
During the third quarter of 1997, the Company obtained a 45 day $10,000,000 bank
loan and a 90 day $10,000,000 bank loan at LIBOR plus 3%. As of September 30,
1997, the Company also had $81,142,000 outstanding under its repurchase
agreement secured by mortgages loans and $29,545,000 outstanding under its
unsecured revolving credit agreement. On October 3, 1997, all amounts
outstanding under the 90 day bank loan, the 45 day bank loan, the repurchase
agreement and the unsecured revolving credit agreement were refinanced with a
$170,000,000 Senior Unsecured Revolving Line of Credit (the "Revolving Credit
Facility") which expires on October 3, 2000. The Revolving Credit Facility
pricing varies between LIBOR plus 1.25% and LIBOR plus 1.5% depending on the
Company's leverage ratio. Currently the pricing is LIBOR plus 1.375%. The
Revolving Credit Facility contains financial covenants including, but not
limited to, maximum leverage ratios, minimum debt service coverage ratios, cash
flow coverage ratios and minimum consolidated tangible net worth. As of
November 6, 1997, the Company had $134,500,000 in borrowings outstanding under
its Revolving Credit Facility.
The Company has the option to redeem, without penalty, its outstanding $639,000
aggregate principal amount of 9.75% Convertible Subordinated Debentures at any
time. Since such debentures are convertible into common stock of the Company at
a conversion price of $10.00 per share, the Company anticipates that
substantially all of such debentures will be converted if it elects to redeem
the debentures.
Subsequent to September 30, 1997, the Company completed investments totaling
$21,989,000. As of November 6, 1997, the Company had outstanding commitments
aggregating approximately $199,674,000. Included in these amounts were
commitments to Assisted Living Concepts for approximately $63,070,000, Home and
Community Care, Inc. for $49,214,000 and Carriage House Assisted Living, Inc.
for $6,380,000. Commitments of $49,214,000 to HCI and $50,000,000 to ALC are
due to expire in 1999 and 2000, respectively
At November 6, 1997, the Company had approximately $131,675,000 available under
its shelf registration statement for future issuance of capital from time to
time.
As of September 30, 1997, the outstanding certificate principal balance and the
weighted average pass-through rate for the senior REMIC Certificates (all held
by outside third parties) was
14
LTC PROPERTIES, INC.
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
$192,632,000 and 7.87%. As of September 30, 1997, the unamortized cost and the
estimated fair value of the subordinated REMIC Certificates held by the Company
was $81,298,000 and $87,744,000, respectively. As of September 30, 1997, no
REMIC Certificates had been deemed impaired.
The REMIC Certificates retained by the Company are subordinate in rank and right
of payment to the certificates sold to third-party investors and as such would
bear the first risk of loss in the event of an impairment to any of the
underlying mortgages. The returns on the Company's investment in REMIC
Certificates are subject to certain uncertainties and contingencies including,
without limitation, the level of prepayments, estimated future credit losses,
prevailing interest rates, and the timing and magnitude of credit losses on the
underlying mortgages collateralizing the securities that are a result of the
general condition of the real estate market or long-term care industry. As
these uncertainties and contingencies are difficult to predict and are subject
to future events that may alter management's estimations and assumptions, no
assurance can be given that current yields will not vary significantly in future
periods. To minimize the impact of prepayments, the mortgage loans underlying
the REMIC Certificates generally prohibit prepayment unless the property is sold
to an unaffiliated third party (with respect to the borrower). Additionally,
management believes it employs conservative underwriting policies and to date
there have been no credit losses on any of the mortgages underlying the
certificates nor are any credit losses currently anticipated.
The REMIC Certificates' fair values are estimated, in part, based on a spread
over the applicable U.S Treasury rate, and consequently, are inversely affected
by increases or decreases in such interest rates. There is no active market in
these securities from which to readily determine their value. The estimated
fair values of both classes of Certificates are subject to change based on the
estimate of future prepayments and credit losses, as well as fluctuations in
interest rates and market risk. Since many of these factors are difficult to
predict and are beyond the control of the Company's management, changes in the
reported fair values may vary widely and may not be indicative of amounts
immediately realizable if the Company was forced to liquidate any of the
Certificates.
The Company believes that its current cash from operations available for
distribution or reinvestment, its borrowing capacity, the pending REMIC
transaction, and the Company's ability to access the capital markets are
available to provide for payment of its operating costs, provide funds for
distribution to its stockholders and to fund additional investments. The
Company is considering various alternatives to raise funds to finance future
investments.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain information contained in this report includes forward looking
statements, which can be identified by the use of forward looking terminology
such as "may", "will", "expect", "should" or comparable terms or negatives
thereof. These statements involve risks and uncertainties that could cause
actual results to differ materially from those described in the statements.
These risks and uncertainties include (without limitation) the following: the
effect of economic and market conditions and changes in interest rates,
government policy relating to the health care industry including changes in
reimbursement levels under the Medicare and Medicaid programs, changes in
reimbursement by other third party payors, the financial strength of the
operators of the Company's facilities as it affects the continuing ability of
such operators to meet their obligations to the Company under the terms of the
Company's agreements with its borrowers and operators, the amount
15
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
and the timing of additional investments, access to capital markets and changes
in tax laws and regulations affecting real estate investment trusts.
16
PART II
LTC PROPERTIES, INC.
OTHER INFORMATION
SEPTEMBER 30, 1997
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Promissory note dated September 18, 1997 for $10,000,000 between
LTC Properties, Inc. and The Sumitomo Bank, Limited
10.3 Agreement and Plan of Merger and Reorganization dated October 4,
1997 between Assisted Living Concepts, Inc. and Home and
Community Care, Inc.
11 Computation of earnings per share
27 Financial Data
In accordance with Item 601(b)(4)(iii) of Regulation S-K, certain
instruments pertaining to Registrant's long-term debt have not
been filed; copies thereof will be furnished to the Securities
and Exchange Commission upon request.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1997.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LTC PROPERTIES, INC.
Registrant
Dated: December 5, 1997 By: /s/ JAMES J. PIECZYNSKI
-----------------------
James J. Pieczynski
President and Chief Financial Officer
18