10-Q: Quarterly report [Sections 13 or 15(d)]
Published on November 12, 1998
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 6,
1998 - 27,837,485
- --------------------------------------------------------------------------------
LTC PROPERTIES, INC.
FORM 10-Q
SEPTEMBER 30, 1998
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 .......... 11
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................... 18
2
LTC PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEE ACCOMPANYING NOTES
3
LTC PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
SEE ACCOMPANYING NOTES
4
LTC PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SEE ACCOMPANYING NOTES
5
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 three and nine months ended
September 30, 1998 and 1997 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 three and nine
months ended September 30, 1998 and 1997 are not necessarily indicative of
the results for a full year. Certain reclassifications have been made to the
prior year financial statements to conform to the current year presentation.
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 that is distributed to its stockholders.
2. REAL ESTATE INVESTMENTS
MORTGAGE LOANS. During the three months ended September 30, 1998, the Company
invested $3,571,000 in a mortgage loan secured by a skilled nursing facility
with 212 beds and $6,521,000 (net of construction funding) in mortgage loans
secured by four assisted living facilities ("ALFs") with 166 units.
OWNED PROPERTIES. During the three months ended September 30, 1998, the Company
acquired an ALF with 53 units for $3,710,000, a charter school for $5,333,000
and provided additional funding of $496,000 for properties that were previously
acquired.
In September 1998, the Company sold two skilled nursing facilities acquired in
1994 and located in California for gross proceeds of approximately $5,106,000.
The Company's initial and net investment in this facility was approximately
$3,823,000 and $3,332,000, respectively. Proceeds from the sale of these
properties were used to repay borrowings outstanding under the Company's line of
credit. The Company recognized a gain of approximately $1,738,000 on the sale of
these facilities.
REMIC CERTIFICATES. As of September 30, 1998, the outstanding certificate
principal balance and the weighted average pass-through rate for the senior
REMIC Certificates (all held by outside third parties) was $302,304,000 and
7.29%. As of September 30, 1998, the face value and the estimated fair value of
the subordinated REMIC Certificates held by the Company was $82,662,000 and
$101,194,000, respectively. The effective yield on the subordinated REMIC
Certificates held by the Company, based on expected future cash flows discounted
to give effect to potential risks associated with prepayments and unanticipated
credit losses was 17.9% at September 30, 1998.
In October 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 134, "ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS
HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE" ("SFAS 134") which amends SFAS
No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES"
6
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
("SFAS 115"). Currently, under the provisions of SFAS 115, the Company is
required to classify its investment in REMIC Certificates as trading
securities, without regard to investment intent or the ability to hold such
securities, which are accounted for at fair value with unrealized holding
gains and losses recorded in earnings. SFAS 134 permits the transfer of
mortgage-backed securities from the trading category to the
available-for-sale or held-to-maturity categories based on the Company's
ability and intent, as of the date of adoption of SFAS 134, to hold such
investments. Under the provisions of SFAS 134, the Company will classify its
investment in REMIC Certificates as available-for-sale securities or
held-to-maturity securities which will result in unrealized holding gains and
losses no longer being recorded in earnings. Available-for-sale REMIC
Certificates will continue to be accounted for at fair value with unrealized
holding gains and losses recorded as a separate component of stockholders'
equity and held-to-maturity REMIC Certificates will be accounted for at
amortized cost. For the three and nine months ended September 30, 1998, the
Company recorded unrealized holding losses in earnings of $6,481,000 and
$6,578,000, respectively, on its REMIC Certificates. SFAS 134 is effective
for the first fiscal quarter beginning after December 15, 1998.
COMMITMENTS. As of November 6, 1998, the Company had outstanding commitments
aggregating approximately $124,700,000 of which $47,200,000 and $50,000,000
are due to expire in 1999 and 2000, respectively.
INVESTMENTS COMPLETED SUBSEQUENT TO SEPTEMBER 30, 1998. Subsequent to
September 30, 1998, the Company funded two mortgage loans for approximately
$5,589,000.
3. LTC HEALTHCARE, INC.
During 1998, the Company acquired 4,002 shares of LTC Healthcare, Inc.
("Healthcare") non-voting common stock for $2,001,000 and contributed equity
investments with a book value of $788,000, 13 real estate properties with a
net book value of $61,462,000 that were encumbered by mortgage debt on seven
of the properties of $29,263,000 and a minority interest liability of
$3,461,000, and other related assets and liabilities with a book value of
$93,000 to Healthcare in exchange for an additional 36,000 shares of
Healthcare non-voting common stock and borrowings by Healthcare under the
unsecured line of credit provided by the Company of $21,396,000. During 1998,
the Company provided additional funding of $8,635,000 under the unsecured
line of credit. Subsequent to the contribution of the above assets and
liabilities by the Company to Healthcare, Healthcare obtained mortgage
financing of $17,400,000 from a third-party lender on four of the
unencumbered properties. Healthcare utilized proceeds from the mortgage debt
and cash on hand to repay borrowings of $17,668,000 under the unsecured line
of credit provided by the Company.
On September 30, 1998, the 40,002 shares of Healthcare non-voting common
stock held by the Company were converted into 3,335,882 shares of Healthcare
voting common stock. Concurrently, the Company completed the spin-off of all
Healthcare voting common stock through a taxable dividend distribution to the
holders of Company common stock, Cumulative Convertible Series C Preferred
Stock ("Series C Preferred Stock") and Convertible Subordinated Debentures
(the "Debentures"). One share of Healthcare common stock was distributed to
each holder of Company common stock, Series C Preferred Stock and Debentures
for each ten shares of Company common stock owned and for each ten shares of
Company common stock that would have been issued upon conversion of the
Debentures and Series C Preferred Stock. The Company incurred costs of
approximately $500,000 in connection with the
7
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
distribution. Upon completion of the distribution, Healthcare began operating
as a separate public company.
For book purposes, no gain was recognized on the distribution of Healthcare
common stock which had a net book value of approximately $10,724,000. The
distribution was a taxable dividend distribution and accordingly, for tax
purposes, the net assets were transferred at their net fair market value of
approximately $15,650,000 ($4.69 per share of Healthcare common stock) which
resulted in a taxable gain of approximately $4,900,000.
The Company and Healthcare have entered into various agreements which, among
other things, provide for a sharing of corporate overhead under an
administrative services agreement. During the three months ended September
30, 1998, the Company charged Healthcare an administrative services fee of
approximately $175,000. In addition, the Company provided Healthcare with a
$20.0 million unsecured line of credit that bears interest at 10% and matures
in March 2008. As of September 30, 1998 approximately $12,363,000 was
outstanding under the line of credit. The Company recorded interest income
related to the unsecured line of credit of $222,200 and $320,700 for the three
and nine months ended September 30, 1998, respectively.
Subsequent to September 30, 1998, the Company acquired 299,900 shares of
Healthcare common stock, representing approximately 9.0% of Healthcare's
outstanding common stock, for an aggregate purchase price of $644,000
(excluding brokerage commissions).
4. DEBT OBLIGATIONS
BANK BORROWINGS. As of September 30, 1998, $101,500,000 was outstanding under
the Company's $170,000,000 Senior Unsecured Revolving Line of Credit (the
"Revolving Credit Facility") which expires on October 3, 2000. On October 2,
1998, the Company repaid borrowings of $23,000,000 under the Revolving Credit
Facility. 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 1.25%.
During the third quarter of 1998, the Revolving Credit Facility was amended
to permit the Company to invest up to $75 million in the child-care and
education industry. 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.
On November 2, 1998, the Company entered into an interest rate swap agreement
whereby the Company effectively fixed the interest rate on LIBOR based
variable rate debt. Under this agreement, which expires in November 2000, the
Company will be credited interest at three month LIBOR and will incur
interest at a fixed rate of 4.74% on a notional amount of $50,000,000. The
notional amount of the interest rate swap is used to measure interest to be
paid or received and does not represent the amount of exposure to credit
loss. The differential paid or received on the interest rate swap will be
recognized as an adjustment to interest expense.
In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133") which is effective for
fiscal years beginning after June 1999. SFAS 133 requires all derivatives to
be recorded at fair value and establishes unique accounting for fair value
hedges, cash flow hedges and foreign currency net investment hedges. Under
SFAS 133, the Company's
8
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
interest rate swap would be designated as a cash flow hedge of $50,000,000
outstanding principal balance under the Revolving Credit Facility and would
be recorded at fair value with changes in fair value recognized as a
component of comprehensive income. Because of the Company's limited use of
derivatives, management does not anticipate that the adoption of SFAS 133
will have a significant effect on the Company's financial position or results
of operations.
CONVERTIBLE SUBORDINATED DEBENTURES. On July 1, 1998, the Company redeemed
the outstanding $90,000 principal amount of its 8.5% Convertible Subordinated
Debentures due 2000 and $20,000 principal amount of its 9.75% Convertible
Subordinated Debentures due 2004. During the three months ended September 30,
1998, holders of $697,000 principal amount of convertible subordinated
debentures converted such debentures into 42,119 shares of common stock at
prices ranging from $15.50 to $17.25 per share. As of September 30, 1998, the
Company had $59,429,000 principal amount of convertible subordinated
debentures outstanding which were convertible into 3,679,904 shares of common
stock.
Subsequent to September 30, 1998, an additional $2,617,000 in principal
amount of convertible subordinated debentures converted into 158,580 shares
of the Company's common stock at prices ranging from $16.50 to $17.25 per
share.
5. STOCKHOLDERS EQUITY
On September 2, 1998, the Company issued 2,000,000 shares of 8.5% Series C
Convertible Preferred Stock (the "Series C Preferred Stock") at $19.25 per
share for net proceeds of $37,605,000. The Series C Preferred Stock is
convertible into 2,000,000 shares of the Company's common stock, has a
liquidation value of $19.25 per share and has an annual coupon of 8.5%,
payable quarterly.
At September 30, 1998, loans of $11,128,000 were outstanding to management
and directors bearing interest at rates ranging from 5.77% to 6.63% per
annum. These loans are secured by a pledge of the shares of common stock
acquired through the exercise of options and are full recourse to the
borrower. The market value of the common stock securing these loans was
approximately $14,525,000 at September 30, 1998.
Subsequent to September 30, 1998, the Company repurchased and retired 200,000
shares of common stock for an aggregate purchase price of approximately
$3,295,000.
6. DISTRIBUTIONS
During the three months ended September 30, 1998, the Company declared and
paid cash dividends on its Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock totaling $1,829,000, $1,125,000, $263,000,
respectively. The dividend declared and paid on the Series C Preferred Stock
represents a partial quarterly dividend for the period September 2, 1998
through September 30, 1998. During the three months ended September 30, 1998,
the Company declared and paid cash dividends on its common stock totaling
$10,794,000. Dividends declared and paid on the Company's common stock
represent the regular quarterly dividend of $.39 per share.
On September 30, 1998, the Company distributed its investment in Healthcare
common stock by means of a taxable dividend to the holders of its common
stock, convertible subordinated debentures and Series C Preferred Stock. The
book value and fair value of the distribution was approximately $10,724,000
and $15,650,000 million, respectively. See Note 3. -LTC Healthcare, Inc.
9
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
10
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues for the three months ended September 30, 1998 increased
approximately 24% to $23,251,000 from $18,809,000 for the same period in
1997. The increase in revenues resulted from increased rental income of
$3,566,000, increased interest income from REMIC certificates of $1,259,000
and an increase in interest and other income of $1,552,000. Partially
offsetting the above increases was a decrease of approximately $1,935,000 in
interest income on mortgage loans.
Rental income increased $4,388,000 as a result of property acquisitions.
"Same-store" rents increased $157,000 due to the receipt of contingent rents
and rental increases as provided for in the lease agreements. Partially
offsetting the above increases in rental income was a decrease of $979,000
resulting from the sale of properties. During May 1998, the Company completed
its fourth securitization transaction resulting in an increase in interest
income from REMIC certificates and a decrease in interest income on mortgage
loans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -Liquidity and Capital Resources." Increased interest
and other income for 1998 resulted primarily from interest income on notes
receivable from stockholders and increased commitment fees.
Total expenses for the three months ended September 30, 1998 increased
$2,062,000 however, as a percentage of revenues, total expenses decreased
slightly to 51% in 1998 from 52% in 1997. The decrease as a percentage of
revenues is primarily due to a reduction in interest expense resulting from
the conversion of subordinated debentures. Depreciation and amortization
increased as a result of a larger investment base in owned properties in 1998
as compared to 1997. The increase in operating and other expenses is
primarily due to increased salaries and benefits attributable to an increase
in full time employees.
Other income for the three months ended September 30, 1998 includes a gain of
approximately $1,738,000 on the sale of two skilled nursing facilities.
Offsetting the increase in other income attributable to the gain on the sale
of real estate was a decrease in the estimated fair value of REMIC
certificates that resulted in an unrealized loss of $6,481,000 during the
current period as compared to the prior period's unrealized gain of $257,000.
During the three months ended September 30, 1998, the Company declared
dividends of $3,217,000 representing a full quarter of dividends on its
Series A Cumulative Preferred Stock (issued in March 1997) and its Series B
Cumulative Preferred Stock (issued in December 1997) and a partial quarter of
dividends on its Series C Convertible Preferred Stock (issued in September
1998). Dividends of $1,829,000 declared during the three months ended
September 30, 1997 represent a full quarter of dividends on the Series A
Cumulative Preferred Stock.
As a result of the changes in revenues and expenses discussed above, net
income available to common shareholders decreased $4,008,000 to $3,537,000
for the three months ended September 30, 1998 from $7,545,000 for the same
period in 1997. Excluding the unrealized holding gains and losses on REMIC
certificates, net income available to common shareholders increased
$2,730,000 to $10,018,000 in 1998 from $7,288,000 in 1997.
11
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues for the nine months ended September 30, 1998 increased approximately
26% to $67,049,000 from $53,411,000 for the same period in 1997. The increase
in revenues resulted from increased rental income of $9,338,000, increased
interest income from REMIC certificates of $1,555,000 and an increase in
interest and other income of $4,029,000. Partially offsetting the above
increases was a decrease of approximately $1,284,000 in interest income on
mortgage loans.
Rental income increased $5,566,000 as a result of property acquisitions
completed during the later part of 1997 and $5,362,000 due to the property
acquisitions completed during 1998. "Same-store" rents increased $368,000 due
to the receipt of contingent rents and rental increases as provided for in
the lease agreements. Partially offsetting the above increases in rental
income was a decrease of $1,958,000 resulting from the sale of properties.
During May 1998, the Company completed its fourth securitization transaction
resulting in an increase in interest income from REMIC certificates and a
decrease in interest income on mortgage loans. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -Liquidity and
Capital Resources." Increased interest and other income for 1998 resulted
primarily from interest income on notes receivable from stockholders and
increased commitment fees.
Total expenses for the nine months ended September 30, 1998 were 48% of net
revenues compared to 52% for the same period in 1997. The decrease is
primarily due to a reduction in interest expense resulting from the
conversion of subordinated debentures. Depreciation and amortization
increased as a result of a larger investment base in owned properties in 1998
as compared to 1997. The increase in operating and other expenses is due to
increased salaries and benefits attributable to an increase in full time
employees.
Other income for the nine months ended September 30, 1998 includes a gain of
approximately $9,926,000 on the sale of three skilled nursing facilities.
Offsetting the increase in other income attributable to the gain on the sale
of real estate was a decrease in the estimated fair value of REMIC
certificates that resulted in an unrealized loss of $6,578,000 during the
current period as compared to the prior period's unrealized gain of $57,000.
During the nine months ended September 30, 1998, the Company declared
dividends of $9,125,000 representing the regular monthly dividend on its
Series A Cumulative Preferred Stock (issued in March 1997) and its Series B
Cumulative Preferred Stock (issued in December 1997) and a partial dividend
on its Series C Convertible Preferred Stock (issued in September 1998).
Dividends declared during the nine months ended September 30, 1997 represent
a partial dividend for the month of March 1997 and the regular monthly
dividend for April 1997 through September 1997 on the 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 $7,462,000 to $29,212,000
for the nine months ended September 30, 1998 from $21,750,000 for the same
period in 1997. Excluding the unrealized holding gains and losses on REMIC
certificates, net income available to common shareholders increased
$14,097,000 to $35,790,000 in 1998 from $21,693,000 in 1997.
12
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's real estate investment portfolio
consisted of approximately $403,506,000 invested primarily in owned skilled
nursing and assisted living facilities (before accumulated depreciation of
$23,941,000), approximately $171,267,000 invested in mortgage loans (before
allowance for doubtful accounts of $1,000,000) and approximately $101,194,000
invested in REMIC Certificates. As of September 30, 1998, the outstanding
certificate principal balance and the weighted average pass-through rate for the
senior REMIC Certificates (all held by outside third parties) was $302,304,000
and 7.29%. As of September 30, 1998, the face value and the estimated fair value
of the subordinated REMIC Certificates held by the Company was $82,662,000 and
$101,194,000, respectively. The effective yield on the subordinated REMIC
Certificates held by the Company, based on expected future cash flows discounted
to give effect to potential risks associated with prepayments and unanticipated
credit losses was 17.9% at September 30, 1998. The Company's portfolio consists
of 277 skilled nursing facilities, 87 assisted living facilities and four
schools in 36 states.
As of September 30, 1998, $101,500,000 was outstanding under the Company's
$170,000,000 Senior Unsecured Revolving Line of Credit (the "Revolving Credit
Facility") which expires on October 3, 2000. On October 2, 1998, the Company
repaid borrowings of $23,000,000 under the Revolving Credit Facility. 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 1.25%.
As of September 30, 1998 the Company had $565,647,000 of unencumbered real
estate investments consisting of $293,186,000 owned properties (before
accumulated depreciation), $171,267,000 in mortgage loans (before allowance for
doubtful accounts) and $101,194,000 in REMIC Certificates. The Company believes
that its current cash from operations available for distribution or
reinvestment, its borrowing capacity (including borrowings against unencumbered
real estate investments), and the Company's ability to access the capital
markets are sufficient to provide for payment of its operating costs, provide
funds for distribution to its stockholders and to fund additional investments.
During the nine months ended September 30, 1998, the Company completed
approximately $178,423,000 in new investments consisting of approximately
$28,348,000 in mortgage loans and approximately $150,075,000 in owned
properties. The Company financed its investments through the assumption of
mortgage loans and bonds of $11,224,000 bearing interest at a weighted average
rate of 11.6%, issuance of $3,432,000 in minority interests, proceeds from the
sale of real estate properties and its recently completed securitization
transaction as discussed below, short-term borrowings and cash on hand.
During June 1998, the Company sold a skilled nursing facility that was acquired
in 1992 for gross proceeds of approximately $11,600,000 and in September 1998
sold two skilled nursing facilities that were acquired in 1994 for gross
proceeds of approximately $5,106,000. The Company's initial and net investment
in these facilities was approximately $7,654,000 and $6,332,000, respectively.
In connection with the sale, proceeds of approximately $4,271,000 were used to
repay an outstanding mortgage loan secured by one of the facilities. The
mortgage loan was payable to the pool of mortgage loans securing the Company's
investment in REMIC Certificates. The remaining proceeds were used to repay
borrowings outstanding under the Company's line of credit. The Company
recognized a gain of approximately $9,926,000 on the sale of these facilities.
13
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
During May 1998, the Company completed the securitization of approximately
$129,300,000 of mortgage loans with a weighted average interest rate of 10.2%
and $26,400,000 face amount ($20,700,000 carrying value) of subordinated
certificates, retained from a securitization completed in 1993, with an
interest rate of 9.78% on the face value (15.16% on the amortized cost) (the
"1998-1 Pool"). As part of the securitization, the Company sold approximately
$121,400,000 face amount of senior certificates at a weighted average
pass-through rate of 6.3% and retained $34,300,000 face amount of
subordinated certificates along with the interest only certificates. The
subordinated and interest only certificates retained by the Company had an
aggregate fair value of approximately $41,400,000 at the time of the
securitization and a weighted average effective yield of 19.7%. Included in
the 1998-1 Pool were 40 mortgage loans, including mortgage loans of
approximately $25,741,000 with a weighted average interest rate of
approximately 8.7% provided to wholly owned subsidiaries and limited
partnerships of the Company. Net proceeds of approximately $108,613,000 from
the above securitization were used to repay borrowings outstanding under the
Company's line of credit.
On September 2, 1998, the Company issued 2,000,000 shares of 8.5% Series C
Convertible Preferred Stock at $19.25 per share for net proceeds of
$37,605,000. The Series C Preferred Stock is convertible into 2,000,000
shares of the Company's common stock, has a liquidation value of $19.25 per
share and has an annual coupon of 8.5%, payable quarterly.
Subsequent to September 30, 1998, the Company repurchased and retired 200,000
shares of common stock for an aggregate purchase price of approximately
$3,295,000.
On May 20, 1998, the Company announced that on July 1, 1998 it was redeeming
all of its outstanding 8.5% Convertible Subordinated due 2000 (the "8.5%
Debentures") and all of its outstanding 9.75% Convertible Subordinated
Debentures due 2004 (the "9.75% Debentures"). Including conversions made in
connection with the redemption of the 8.5% Debentures and the 9.75%
Debentures, during the nine months ended September 30, 1998, holders of
approximately $32,284,000 in principal amount of convertible subordinated
debentures elected to convert the debentures into 2,115,402 shares of common
stock at prices ranging from $15.00 to $17.25 per share. On July 1, 1998, the
Company redeemed the outstanding $90,000 principal amount of 8.5% Debentures
and $20,000 principal amount of 9.75% Debentures. On September 30, 1998, the
Company had $59,429,000 principal amount of convertible subordinated
debentures outstanding which were convertible into 3,679,904 shares of common
stock.
During 1998, the Company acquired 4,002 shares of LTC Healthcare, Inc.
("Healthcare") non-voting common stock for $2,001,000 and contributed equity
investments with a book value of $788,000, 13 real estate properties with a
net book value of $61,462,000 that were encumbered by mortgage debt on seven
of the properties of $29,263,000 and a minority interest liability of
$3,461,000, and other related assets and liabilities with a book value of
$93,000 to Healthcare in exchange for an additional 36,000 shares of
Healthcare non-voting common stock and borrowings by Healthcare under the
unsecured line of credit provided by the Company of $21,396,000. During 1998,
the Company provided additional funding of $8,635,000 under the unsecured
line of credit. Subsequent to the contribution of the above assets and
liabilities by the Company to Healthcare, Healthcare obtained mortgage
financing of $17,400,000 from a third-party lender on four of the
unencumbered properties. Healthcare utilized proceeds from the mortgage debt
and cash on hand to repay borrowings of $17,668,000 under the unsecured line
of credit provided by the Company.
14
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
On September 30, 1998, the 40,002 shares of Healthcare non-voting common stock
held by the Company were converted into 3,335,882 shares of Healthcare voting
common stock. Concurrently, the Company completed the spin-off of all Healthcare
voting common stock through a taxable dividend distribution to the holders of
Company common stock, Cumulative Convertible Series C Preferred Stock ("Series C
Preferred Stock") and Convertible Subordinated Debentures (the "Debentures").
One share of Healthcare common stock was distributed to each holder of Company
common stock, Series C Preferred Stock and Debentures for each ten shares of
Company common stock owned and for each ten shares of Company common stock that
would have been issued upon conversion of the Debentures and Series C Preferred
Stock. The Company incurred costs of approximately $500,000 in connection with
the distribution. Upon completion of the distribution, Healthcare began
operating as a separate public company.
For book purposes, no gain was recognized on the distribution of Healthcare
common stock which had a net book value of approximately $10,724,000. The
distribution was a taxable dividend distribution and accordingly, for tax
purposes, the net assets were transferred at their net fair market value of
approximately $15,650,000 ($4.69 per share of Healthcare common stock) which
resulted in a taxable gain of approximately $4,900,000.
The Company and Healthcare have entered into various agreements which, among
other things, provide for a sharing of corporate overhead under an
administrative services agreement. During the three months ended September 30,
1998, the Company charged Healthcare an administrative services fee of
approximately $175,000. In addition, the Company provided Healthcare with a
$20.0 million unsecured line of credit that bears interest at 10% and matures in
March 2008. As of September 30, 1998 approximately $12,363,000 was outstanding
under the line of credit. The Company recorded interest income related to the
unsecured line of credit of $222,200 and $320,700 for the three and nine months
ended September 30, 1998, respectively.
Subsequent to September 30, 1998, the Company acquired 299,900 shares of
Healthcare common stock, representing approximately 9.0% of Healthcare's
outstanding common stock, for an aggregate purchase price of approximately
$644,000 (excluding brokerage commissions).
On November 2, 1998, the Company entered into an interest rate swap agreement
whereby the Company effectively fixed the interest rate on LIBOR based variable
rate debt. Under this agreement, which expires in November 2000, the Company
will be credited interest at three month LIBOR and will incur interest at a
fixed rate of 4.74% on a notional amount of $50,000,000. The notional amounts of
interest rate agreements are used to measure interest to be paid or received and
do not represent the amount of exposure to credit loss.
As of November 6, 1998, the Company had outstanding commitments aggregating
approximately $126,700,000 of which $47,200,000 and $50,000,000 are due to
expire in 1999 and 2000, respectively.
FUNDS FROM OPERATIONS
The Company has adopted the definition of Funds From Operations ("FFO")
prescribed by the National Association of Real Estate Investment Trusts
("NAREIT"). FFO is defined as net income applicable to common stockholders
(computed in accordance with GAAP) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real property and
after adjustments for
15
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
unconsolidated entities in which a REIT holds an interest. In addition, the
Company excludes any unrealized gains or losses resulting from temporary
changes in the estimated fair value of its REMIC Certificates from the
computation of FFO.
The Company believes that FFO is an important supplemental measure of operating
performance. FFO should not be considered as an alternative to net income or any
other GAAP measurement of performance as indicator of operating performance or
as an alternative to cash flows from operations, investing or financing
activities as a measure of liquidity. The Company believes that FFO is helpful
in evaluating a real estate investment portfolio's overall performance
considering the fact that historical cost accounting implicitly assumes that the
value of real estate assets diminishes predictably over time. FFO provides an
alternative measurement criteria, exclusive of certain non-cash charges included
in GAAP income, by which to evaluate the performance of such investments. FFO,
as used by the Company in accordance with the NAREIT definition may not be
comparable to similarly entitled items reported by other REITs that have not
adopted the NAREIT definition.
The following table reconciles net income available to common stockholders to
FFO available to common stockholders (in thousands):
YEAR 2000
The Company has evaluated its internal accounting and information systems
(collectively the "Systems") to assess whether it will function properly with
respect to dates in the year 2000 and beyond. Systems that are determined to
be non-compliant with the year 2000 and beyond will be upgraded or replaced.
Implementation of year 2000 compliant Systems and upgrades to existing
Systems are expected to be completed by mid-1999. The total cost associated
with modifications required to become year 2000 compliant will not be
material to the Company's financial position, results of operations or
liquidity. Due to the Company's limited reliance on complex Systems, the
Company believes the year 2000 issue, as it relates to its internal Systems,
will not have a material adverse effect upon the Company's financial
position, results of operations or liquidity and as such has not developed a
contingency plan.
The Company is currently assessing the extent to which its operations are
vulnerable should its tenants or other parties with which the Company
conducts business fail to ensure their computer systems are year 2000
compliant. Neither we nor our lessees can be assured that the federal and
state governments, upon which our lessees rely for Medicare and Medicaid
revenue, will be in compliance in a timely manner.
16
LTC PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The General Accounting Office has reported that the Health Care Financing
Administration which runs Medicare, is behind schedule in taking steps to
deal with the year 2000 issue and that it is highly unlikely that all of the
Medicare systems will be compliant in time to ensure the delivery of
uninterrupted benefits and services into the year 2000. Due to the general
uncertainty surrounding the readiness of third-party tenants and other
third-parties, including the federal and state governments, with which the
Company and its lessees does business, the Company is unable at this time to
determine whether non-compliance with the year 2000 issue by third-parties
will have a material impact on the Company's financial position, results of
operations or liquidity.
The Company will also have year 2000 exposure in non-information technology
areas as it relates to owned properties. There is a risk that embedded chips
in elevators, security systems, electrical systems and similar
technology-driven devices may stop functioning on January 1, 2000. All of the
Company's owned properties are leased under triple-net leases and as such,
the cost to repair any of these items will be paid by the lessee.
Readers are cautioned that forward-looking statements contained in the above
discussion regarding year 2000 compliance should be read in conjunction with
the disclosure under the heading -Statement Regarding Forward Looking
Disclosure.
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 and the
timing of additional investments, access to capital markets and changes in
tax laws and regulations affecting real estate investment trusts.
17
PART II
LTC PROPERTIES, INC.
OTHER INFORMATION
SEPTEMBER 30, 1998
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Certificate of Amendment to Amended and Restated Bylaws of
LTC Properties, Inc.
3.2 Articles Supplementary Classifying 2,000,000 Shares of 8.5%
Series C Cumulative Convertible Preferred Stock of LTC
Properties, Inc.
10.1 Transfer and Repurchase Agreement dated as of April 20, 1998,
by and between LTC REMIC IV Corporation and LTC Properties,
Inc.
10.2 Purchase Agreement dated as of May 11, 1998, by and
between LTC REMIC IV Corporation, LTC Properties, Inc.
and Goldman Sachs & Co.
10.3 Subservicing Agreement dated as of May 14, 1998, by and
between GMAC Commercial Mortgage Corporation, as Master
Servicer, LTC Properties, Inc. as Subservicer
10.4 Pooling and Servicing Agreement dated as of April 20, 1998
among LTC REMIC IV Corporation, LaSalle National Bank and
LTC Properties, Inc.
10.5 Distribution Agreement, dated as of September 30, 1998, by
and between LTC Properties, Inc. and LTC Healthcare, Inc.
10.6 Administrative Services Agreement, dated as of September 30,
1998, by and between LTC Properties, Inc. and LTC Healthcare,
Inc.
10.7 Intercompany Agreement, dated as of September 30, 1998, by
and between LTC Properties, Inc. and LTC Healthcare, Inc.
10.8 Tax Sharing Agreement, dated as of September 30, 1998, by
and between LTC Properties, Inc. and LTC Healthcare, Inc.
10.9 Amended and Restated Promissory Note, dated as of May 19,
1998, between LTC Properties, Inc. and LTC Healthcare, Inc.
27 Financial Data Schedule
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, 1998.
18
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: November 12, 1998 By: /s/ JAMES J. PIECZYNSKI
-------------------------------------
James J. Pieczynski
President and Chief Financial Officer
19