Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
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.)
2829 Townsgate Road, Suite 350
Westlake Village, California 91361
(Address of principal executive offices, including zip code)
(805) 981-8655
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, $.01 par value
LTC
New York Stock Exchange
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares of common stock outstanding on April 20, 2023 was 41,396,216.
March 31, 2023
INDEX
PART I -- Financial Information
Page
Item 1.
Financial Statements
Consolidated Balance Sheets
3
Consolidated Statements of Income
4
Consolidated Statements of Comprehensive Income
5
Consolidated Statements of Equity
6
Consolidated Statements of Cash Flows
7
Notes to Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
46
Item 4.
Controls and Procedures
47
PART II -- Other Information
Legal Proceedings
48
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
49
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share)
December 31, 2022
(unaudited)
(audited)
ASSETS
Investments:
Land
$
123,338
124,665
Buildings and improvements
1,258,721
1,273,025
Accumulated depreciation and amortization
(390,013)
(389,182)
Operating real estate property, net
992,046
1,008,508
Properties held-for-sale, net of accumulated depreciation: 2023—$3,088; 2022—$2,305
4,075
10,710
Real property investments, net
996,121
1,019,218
Financing receivables, net of credit loss reserve: 2023—$1,981; 2022—$768
196,096
75,999
Mortgage loans receivable, net of credit loss reserve: 2023—$4,569; 2022—$3,930
452,955
389,728
Real estate investments, net
1,645,172
1,484,945
Notes receivable, net of credit loss reserve: 2023—$469; 2022—$589
46,467
58,383
Investments in unconsolidated joint ventures
19,340
Investments, net
1,710,979
1,562,668
Other assets:
Cash and cash equivalents
5,538
10,379
Debt issue costs related to revolving line of credit
2,132
2,321
Interest receivable
48,079
46,000
Straight-line rent receivable
21,238
21,847
Lease incentives
1,571
1,789
Prepaid expenses and other assets
9,319
11,099
Total assets
1,798,856
1,656,103
LIABILITIES
Revolving line of credit
270,100
130,000
Term loans, net of debt issue costs: 2023—$455; 2022—$489
99,545
99,511
Senior unsecured notes, net of debt issue costs: 2023—$1,420; 2022—$1,477
531,400
538,343
Accrued interest
4,122
5,234
Accrued expenses and other liabilities
29,074
32,708
Total liabilities
934,241
805,796
EQUITY
Stockholders’ equity:
Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding: 2023—41,396; 2022—41,262
413
412
Capital in excess of par value
933,370
931,124
Cumulative net income
1,577,794
1,544,660
Accumulated other comprehensive income (loss)
7,357
8,719
Cumulative distributions
(1,680,111)
(1,656,548)
Total LTC Properties, Inc. stockholders’ equity
838,823
828,367
Non-controlling interests
25,792
21,940
Total equity
864,615
850,307
Total liabilities and equity
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share, unaudited)
Three Months Ended
March 31,
2023
2022
Revenues:
Rental income
31,735
30,324
Interest income from financing receivables
3,751
—
Interest income from mortgage loans
11,244
9,636
Interest and other income
2,770
827
Total revenues
49,500
40,787
Expenses:
Interest expense
10,609
7,143
Depreciation and amortization
9,210
9,438
Impairment loss
434
Provision for credit losses
1,731
354
Transaction costs
117
32
Property tax expense
3,293
3,982
General and administrative expenses
6,294
5,808
Total expenses
31,688
26,757
Other operating income:
Gain on sale of real estate, net
15,373
102
Operating income
33,185
14,132
Income from unconsolidated joint ventures
376
375
Net income
33,561
14,507
Income allocated to non-controlling interests
(427)
(95)
Net income attributable to LTC Properties, Inc.
33,134
14,412
Income allocated to participating securities
(205)
(137)
Net income available to common stockholders
32,929
14,275
Earnings per common share:
Basic
0.80
0.36
Diluted
Weighted average shares used to calculate earnings per common share:
41,082
39,199
41,189
39,349
Dividends declared and paid per common share
0.57
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands, unaudited)
Three Months Ended March 31,
Unrealized (loss) gain on cash flow hedges before reclassification
(550)
4,584
(Gains) losses reclassified from accumulated other comprehensive income to interest expense
(812)
292
Comprehensive income
32,199
19,383
Less: Comprehensive income allocated to non-controlling interests
Comprehensive income attributable to LTC Properties, Inc.
31,772
19,288
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
Capital in
Cumulative
Total
Non-
Common Stock
Excess of
Net
Accumulated
Stockholder's
Controlling
Shares
Amount
Par Value
Income
OCI
Distributions
Equity
Interests
Balance—December 31, 2021
39,374
394
856,895
1,444,636
(172)
(1,565,039)
736,714
8,413
745,127
Common Stock cash distributions ($0.57 per share)
(22,480)
Stock-based compensation expense
1,925
95
Cash paid for taxes in lieu of common shares
(37)
(1,255)
Non-controlling interest distributions
Fair market valuation adjustment for interest rate swap
4,876
Other
123
1
(7)
(6)
Balance—March 31, 2022
39,460
395
857,558
1,459,048
4,704
(1,587,519)
734,186
742,599
Balance—December 31, 2022
41,262
Issuance of common stock
1,697
Issuance of restricted stock
128
(1)
(23,563)
2,088
427
(41)
(1,538)
Non-controlling interest contributions
3,831
(406)
(1,362)
Balance—March 31, 2023
41,396
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
(15,373)
(102)
(376)
(375)
Straight-line rental adjustment
465
234
Exchange of prepayment fee for participating interest in mortgage loan
(1,380)
Adjustment for collectability of lease incentives and rental income
173
Amortization of lease incentives
209
223
Application of interest reserve
(1,149)
(1,221)
Amortization of debt issue costs
300
264
Other non-cash items, net
23
Change in operating assets and liabilities
Lease incentives funded
(8)
Increase in interest receivable
(2,079)
(1,643)
Decrease in accrued interest payable
(1,112)
(655)
Net change in other assets and liabilities
(8,513)
(4,546)
Net cash provided by operating activities
18,039
18,568
INVESTING ACTIVITIES:
Investment in real estate capital improvements
(2,608)
(1,068)
Proceeds from sale of real estate, net
31,616
Investment in financing receivable
(112,712)
Investment in real estate mortgage loans receivable
(53,226)
(1,026)
Principal payments received on mortgage loans receivable
125
Advances and originations under notes receivable
(605)
(34,791)
Principal payments received on notes receivable
5,180
1,287
Net cash used in investing activities
(132,230)
(35,473)
FINANCING ACTIVITIES:
Borrowings from revolving line of credit
162,700
47,000
Repayment of revolving line of credit
(22,600)
Principal payments on senior unsecured notes
(7,000)
Proceeds from common stock issued
1,777
Distributions paid to stockholders
Distributions paid to non-controlling interests
Financing costs paid
(20)
(27)
Cash paid for taxes in lieu of shares upon vesting of restricted stock
Net cash provided by financing activities
109,350
16,137
Decrease in cash and cash equivalents
(4,841)
(768)
Cash and cash equivalents, beginning of period
5,161
Cash and cash equivalents, end of period
4,393
Supplemental disclosure of cash flow information:
Interest paid
11,421
7,534
Non-cash investing and financing transactions:
Contribution of financing receivable from non-controlling interest
Exchange of mezzanine loan and related prepayment fee for participating interest in mortgage loan
(8,841)
Reserves withheld at financing and mortgage loan receivable origination
5,147
Accretion of interest reserve recorded as mortgage loan receivable
1,149
1,221
(Decrease) increase in fair value of interest rate swap agreements
Mortgage loan receivable reserve withheld at origination
750
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
General
LTC Properties, Inc., a health care real estate investment trust (“REIT”), was incorporated on May 12, 1992 in the State of Maryland and commenced operations on August 25, 1992. We invest 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. 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 have prepared consolidated financial statements included herein without audit and in the opinion of management have included all adjustments necessary for a fair presentation of the consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to rules and regulations governing the presentation of interim financial statements. The accompanying consolidated financial statements include the accounts of our company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended March 31, 2023 and 2022 are not necessarily indicative of the results for a full year.
No provision has been made for federal or state income taxes. Our company qualifies as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As such, we generally are not taxed on income that is distributed to our stockholders.
2.
Real Estate Investments
Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (collectively “ALF”).
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 review of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.
Owned Properties. Our owned properties are leased pursuant to non-cancelable operating leases. Each lease is a triple net lease which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and non-capital expenditures and other costs necessary in the operations of the facilities. Many of the leases contain renewal options. The majority of our leases contain provisions for specified annual increases over the rents of the prior year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table summarizes our investments in owned properties at March 31, 2023 (dollar amounts in thousands):
Average
Percentage
Number
Number of
Investment
Gross
of
SNF
ALF
per
Type of Property
Properties (1)
Beds
Units
Bed/Unit
Assisted Living
785,912
56.5
%
98
5,437
144.55
Skilled Nursing
591,305
42.6
50
6,113
236
93.13
Other (2)
12,005
0.9
118
1,389,222
100.0
149
6,231
5,673
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. During 2023, Brookdale Senior Living Communities, Inc. (“Brookdale”) elected not to exercise its renewal option. Accordingly, the master lease expires in December 2023. Additionally, during 2023, a master lease covering two skilled nursing centers that matured in 2023 was renewed at the contractual rate for another five years extending the maturity to November 2028. The centers have a total of 216 beds and are located in Florida.
We monitor the collectability of our receivable balances, including deferred rent receivable balances, on an ongoing basis. We write-off uncollectible operator receivable balances, including straight- line rent receivable and lease incentives balances, as a reduction to rental income in the period such balances are no longer probable of being collected. Therefore, recognition of rental income is limited to the lesser of the amount of cash collected or rental income reflected on a “straight-line” basis for those customer receivable balances deemed uncollectible. We wrote-off straight-line rent receivable and lease incentives balances of $144,000 and $173,000 for the three months ended March 31, 2023 and 2022, respectively, as a result of property sales and lease terminations.
We continue to take into the current financial condition of our operators, including consideration of the impact of COVID-19, in our estimation of uncollectible accounts and deferred rents receivable at March 31 2023. We are closely monitoring the collectability of such rents and will adjust future estimations as appropriate as further information becomes known.
9
The following table summarizes components of our rental income for the three months ended March 31, 2023 and 2022 (in thousands):
Rental Income
Contractual cash rental income
29,125
26,915
Variable cash rental income
3,284
(2)
4,039
Straight-line rent
(465)
(3)
(234)
(173)
(4)
(209)
(223)
Some of our lease agreements provide purchase options allowing the lessees to purchase the properties they currently lease from us. The following table summarizes information about purchase options included in our lease agreements (dollar amounts in thousands):
Type
Carrying
Option
State
Property
Properties
Investments
Value
Window
California
ALF/MC
2
38,895
33,483
2023-2029
Florida
MC
15,201
12,386
2029
76,756
2025-2027
Nebraska
7,633
2,889
TBD
North Carolina
11
121,321
2025-2028
Ohio
16,160
13,816
2024-2025
South Carolina
11,680
8,908
Texas
51,837
50,518
2027-2029
339,483
320,077
Impairment Charges. In conjunction with the planned sale of a 70-unit assisted living community located in Florida, we recorded a $434,000 impairment loss during the three months ended March 31,
10
2023 and a $1,222,000 impairment loss during the fourth quarter of 2022. Subsequent to March 31, 2023, the community was sold for $4,850,000. As of March 31, 2023, the community was classified as held-for-sale.
Properties Held -for-Sale. The following summarizes our held-for-sale properties as of March 31, 2023 (dollar amounts in thousands):
Beds/units
Depreciation
FL
70
7,163
3,088
Improvements. During the three months ended March 31, 2023 and 2022, we invested the following in improvements projects (in thousands):
Assisted Living Communities
1,548
694
Skilled Nursing Centers
973
177
87
197
2,608
1,068
Properties Sold. During the three months ended March 31, 2023 and 2022, we recorded a gain on sale of $15,373,000 and $102,000, respectively. The following table summarizes property sales during the three months ended March 31, 2023 and 2022 (dollar amounts in thousands):
Sales
Year
Beds/Units
Price
Gain (2)
2023 (1)
Kentucky
60
11,000
72
New Mexico
235
21,250
5,379
15,301
Total 2023
295
32,250
16,089
n/a
(
Financing Receivables. As part of our acquisitions, we may from time to time, invest in sale and leaseback transactions. In accordance with 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 Financing receivables 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.
During 2023, we entered into a $121,321,000 JV with an affiliate of an existing operator and contributed $117,490,000 into the JV that purchased 11 assisted living and memory care communities from an affiliate of our JV partner. The JV leased the communities back to an affiliate of the seller under a 10-year master lease, with two five-year renewal options. The contractual initial cash yield of 7.25% increases to 7.5% in year three then escalates thereafter based on CPI subject to a floor of 2.0% and a ceiling of 4.0%. Additionally, the JV provided the seller-lessee with a purchase option to buy up to 50% of the properties at the beginning of the third lease year and the remaining properties at the beginning of the fourth lease year through the end of the sixth lease year, with an exit Internal Rate of Return (“IRR”) of 9.0%. During the three months ended March 31, 2023, we recognized $2,345,000 of Interest income from financing receivables and upon origination we recorded $1,213,000 Provision for credit losses equal to 1% of the loan balance related to this investment.
During 2022, we entered into a JV and contributed $61,661,000 into the JV that purchased three skilled nursing centers located in Florida for $75,825,000. The JV leased the centers back to an affiliate of the seller under a 10-year master lease, with two five-year renewal options and provided the seller-lessee with a purchase option, exercisable at the beginning of the fourth year through the end of the fifth year. During the three months ended March 31, 2023, we recognized $1,406,000 of Interest income from financing receivables related to this investment.
12
Mortgage Loans. The following table sets forth information regarding our investments in mortgage loans secured by first mortgages at March 31, 2023 (dollar amounts in thousands):
Interest Rate
Maturity
Loans (1)
Properties (2)
7.5%
MO
1,886
OTH
0.4
2024
LA
29,346
6.4
189
155.27
GA
51,111
11.2
203
251.78
7.8%
2025
15,260
3.4
68
224.41
7.3%
NC
10,750
2.4
45
238.89
7.3% (5)
NC/SC
56,855
12.4
13
523
108.71
2026
33,598
7.3
217
154.83
812
0.2
10.6% (7)
2043
MI
184,349
40.3
15
1,875
98.32
9.6% (7)
2045
38,957
8.5
480
81.16
9.8% (7)
19,750
4.3
201
98.26
10.3% (7)
14,850
3.2
146
101.71
457,524
43
2,891
1,056
115.92
The following table summarizes our mortgage loan activity for the three months ended March 31, 2023 and 2022 (in thousands):
Originations and funding under mortgage loans receivable
62,844
1,026
1,223
Scheduled principal payments received
(125)
Mortgage loan premium amortization
Provision for loan loss reserve
(639)
(21)
Net increase in mortgage loans receivable
63,227
2,101
We apply ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) and the “expected loss” model to estimate our loan losses on our mortgage loans and notes receivable. In determining the expected losses on these receivables, we utilize the probability of default and discounted cash flow methods. Further, we stress-test the results to reflect the impact of unknown adverse future events including recessions.
As of March 31, 2023, the accrued interest receivable of $48,079,000 was not included in the measurement of expected credit losses on the financing receivables, mortgage loans receivable and notes receivable (see Note 4. Notes Receivable). We elected not to measure an allowance for expected credit losses on the related accrued interest receivable using the expected credit loss standard. Rather, we have elected to write-off accrued interest receivable by reversing interest income and/or recognizing credit loss expense as incurred. We review the collectability of the accrued interest receivable quarterly as part of our review of the financing receivables, mortgage loans receivable or notes receivables including the performance of the underlying collateral and net worth of the borrower. For the three months ended March 31, 2023 and 2022, the Company did not write-off any accrued interest receivable.
3.
Investment in Unconsolidated Joint Ventures
We have preferred equity investments in two joint ventures. We determined that each of these JVs meets the accounting criteria to be considered a variable interest entity (“VIE”). We are not the primary beneficiary of the JVs as we do not have both: 1) the power to direct the activities that most significantly affect the JVs’ economic performance, and 2) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. However, we do have significant influence over the JVs. Therefore, we have accounted for the JVs using the equity method of accounting. The following table provides information regarding these preferred equity investments (dollar amounts in thousands):
Contractual
Preferred
Cash
Return
Portion
Beds/ Units
Washington
Preferred Equity
6,340
UDP
14
13,000
During the three months ended March 31, 2023 and 2022, we recognized $376,000 and $375,000 in income from unconsolidated joint ventures. The following table summarizes our income recognized, and application of interest reserves related to our investments in unconsolidated joint ventures for the three months ended March 31, 2023 and 2022 (in thousands):
Cash Interest
Application of
Recognized
Earned
Interest Reserve
112
263
4.
Notes Receivable
Notes receivable consist of a mezzanine loan and working capital loans. The following table sets forth information regarding our investment in notes receivable at March 31, 2023 (dollar amounts in thousands):
Interest
Type of
Rate
IRR
Loan
# of loans
5.0%
Working capital
380
788
4.0%
13,531
932
2027
550
8.0%
11.0%
Mezzanine
25,000
6.5%
2030
138
7.1%
1,607
7.0%
2031
2,693
2032
1,317
46,936
The following table is a summary of our notes receivable components as of March 31, 2023 and December 31, 2022 (in thousands):
Mezzanine loans
36,815
Other loans
21,936
22,157
Notes receivable credit loss reserve
(469)
(589)
The following table summarizes our notes receivable activity for the three months ended March 31, 2023 and 2022 (in thousands):
Advances under notes receivable
605
34,791
Principal payments received under notes receivable
(12,641)
(1,287)
Provision (recovery) for credit losses
120
(333)
Net (decrease) increase in notes receivable
(11,916)
33,171
5.
Lease Incentives
Our non-contingent lease incentive balances at March 31, 2023 and December 31, 2022 $1,571,000 and $1,789,000, respectively. The following table summarizes our lease incentives activity for the three months ended March 31, 2023 and 2022 (in thousands):
Adjustment for collectability of lease incentives
Other adjustments
(9)
(13)
Net (decrease) in non-contingent lease incentives
(218)
(401)
Non-contingent lease incentives represent payments made to our lessees for various reasons including entering into a new lease or lease amendments and extensions. Contingent lease incentives represent potential contingent earn-out payments that may be made to our lessees in the future, as part of our lease agreements. From time to time, we may commit to provide contingent payments to our lessees, upon our properties achieving certain rent coverage ratios. Once the contingent payment becomes probable and estimable, the contingent payment is recorded as a lease incentive. Lease incentives are amortized as a yield adjustment to rental income over the remaining life of the lease.
6.
Debt Obligations
Unsecured Credit Facility. We have an unsecured credit agreement (the “Credit Agreement”) that provides for an aggregate commitment of the lenders of up to $500,000,000 comprising of a $400,000,000 revolving credit facility (the “Revolving Line of Credit”) and two $50,000,000 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 $1,000,000,000. The Revolving Line of Credit matures November 19, 2025 and provides for a one-year extension option at our discretion, subject to customary conditions. The Term Loans mature on November 19, 2025 and November 19, 2026. During
16
the fourth quarter of 2022, we entered into the First Amendment (the “Amended 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 Amended Credit Agreement. Other material terms of the Credit Agreement remain unchanged.
Based on our leverage at March 31, 2023, the facility provides for interest annually at Adjusted SOFR plus 120 basis points and a facility fee of 20 basis points and the Term Loans provide for interest annually at Adjusted SOFR plus 140 points.
Interest Rate Swap Agreements. In connection with entering into the Term Loans described above, we entered into two receive variable/pay fixed interest rate swap agreements (the “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 Loans’ borrowings over their 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 in Prepaid expenses and other assets, with cumulative 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 Amended Credit Agreement discussed above, we entered into amendments to our Interest Rate Swaps to account for SOFR as the updated reference rate in the Amended Credit Agreement. During the three months ended March 31, 2023 and 2022, we recorded a $1,362,000 decrease and a $4,876,000 increase in fair value of Interest Rate Swaps, respectively.
As of March 31, 2023 and December 31, 2022, the terms of the Interest Rate Swaps are as follows (dollar amounts in thousands):
Notional
Fair Value at
Date Entered
Maturity Date
Swap Rate
Rate Index
November 2021
November 19, 2025
2.62
1-month SOFR
50,000
3,394
4,003
November 19, 2026
2.76
3,963
4,716
100,000
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 senior unsecured notes and the Credit Agreement, including the Revolving Line of Credit and the Term Loans, contain financial covenants, which are measured quarterly, that require us to maintain, among other things:
At March 31, 2023, we were in compliance with all applicable financial covenants. These debt obligations also contain additional customary covenants and events of default that are subject to a number of important and significant limitations, qualifications and exceptions.
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The following table sets forth information regarding debt obligations by component as of March 31, 2023 and December 31, 2022 (dollar amounts in thousands):
At March 31, 2023
At December 31, 2022
Applicable
Available
Outstanding
for
Rate (1)
Balance
Borrowing
5.95%
129,900
270,000
Term loans, net of debt issue costs
2.69%
Senior unsecured notes, net of debt issue costs
4.24%
4.58%
901,045
767,854
During the three months ended March 31, 2023, our debt borrowings and repayments were as follows (in thousands):
Borrowings
Repayments
Revolving line of credit (1)
Senior unsecured notes
(29,600)
7.
Non-controlling Interests. We have entered into partnerships to develop and/or own real estate. Given that our limited members do not have the substantive kick-out rights, liquidation rights, or participation rights, we have concluded that the partnerships are VIEs. As 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 on the consolidated financial statements.
As of March 31, 2023, we have the following consolidated VIEs (in thousands):
Consolidated
Non-Controlling
Purpose
Assets
Owned real estate
14,325
2018
ILF
14,650
2,907
Owned real estate and development
18,452
1,184
2017
ILF/ALF/MC
WI
22,007
2,305
SC
1,240
264,866
Common Stock. We have separate equity distribution agreements (collectively, “Equity Distribution Agreements”) to offer and sell, from time to time, up to $200,000,000 in aggregate offering
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price of shares of our common stock. During the three months ended March 31, 2023, we sold 48,500 shares of common stock for $1,777,000 in net proceeds under our Equity Distribution Agreements. In conjunction with the sale of common stock, we incurred $80,000 of costs associated with this agreement which have been recorded in additional paid in capital as a reduction of proceeds received. At March 31, 2023, we had $128,822,000 available under the Equity Distribution Agreements.
During the three months ended March 31, 2023 and 2022, we acquired 41,350 shares and 36,880 shares, respectively, of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.
Available Shelf Registration. We have an automatic shelf registration statement on file with the SEC, and currently have the ability to file additional automatic shelf registration statements, to provide us with capacity to publicly offer an indeterminate amount of common stock, preferred stock, warrants, debt, depositary shares, or units. We may from time to time raise capital under our automatic shelf registration statement in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering. Our shelf registration statement expires on February 17, 2025.
Distributions. We declared and paid the following cash dividends (in thousands):
Declared
Paid
Common Stock (1)
23,563
22,480
In April 2023, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of April, May and June 2023, payable on April 28, May 31, and June 30, 2023, respectively, to stockholders of record on April 20, May 23, and June 22, 2023, respectively.
Stock-Based Compensation. During the second quarter of 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.
At March 31, 2023, we had 5,000 stock options outstanding and exercisable. During each of the three months ended March 31, 2023 and 2022, 5,000 stock options expired and were cancelled. During the three months ended March 31, 2023 and 2022, no stock options were granted or exercised.
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The following table summarizes our restricted stock activity for the three months ended March 31, 2023 and 2022:
Outstanding, January 1
229,236
197,422
Granted
127,960
122,865
Vested
(98,206)
(83,341)
Cancelled
(1,085)
Outstanding, March 31
257,905
236,946
No performance-based stock units vested during the three months ended March 31, 2023, and 2022.
During the three months ended March 31, 2023 and 2022, we granted restricted stock and performance-based stock units under the 2021 Plan as follows:
No. of
Price per
Shares/Units
Share
Reward Type
Vesting Period
37.16
Restricted stock
ratably over 3 years
86,867
Performance-based stock units
TSR targets (1)
214,827
33.94
86,332
209,197
Compensation expense recognized related to the vesting of restricted common stock and performance-based stock units for the three months ended March 31, 2023 and 2022 were $2,088,000 and $1,925,000, respectively. At March 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 (in thousands):
Remaining
Compensation
Vesting Date
Expense
April - December 2023
6,071
5,766
3,238
356
15,431
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8.
Commitments and Contingencies
At March 31, 2023, we had commitments as follows (in thousands):
Commitment
Funding
Funded
Real estate properties (Note 2. Real Estate Investments)
15,602
830
4,464
11,138
Accrued incentives and earn-out liabilities (Note 5. Lease Incentives)
19,000
Mortgage loans (Note 2. Real Estate Investments)
32,507
983
10,596
21,911
Notes receivable (Note 7. Notes Receivable)
26,630
14,700
11,930
93,739
2,418
29,760
63,979
Additionally, some of our lease agreements provide purchase options allowing the lessee to purchase the properties they currently lease from us. See Note 2. Real Estate Investments for a table summarizing information about our purchase options.
We are a party from time to time to various general and professional liability claims and lawsuits asserted against the lessees or borrowers of our properties, which in our opinion are not singularly or in the aggregate material to our results of operations or financial condition. These types of claims and lawsuits may include matters involving general or professional liability, which we believe under applicable legal principles are not our responsibility as a non-possessory landlord or mortgage holder. We believe that these matters are the responsibility of our lessees and borrowers pursuant to general legal principles and pursuant to insurance and indemnification provisions in the applicable leases or mortgages. We intend to continue to vigorously defend such claims.
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9.
Major Operators
We have one operator that represents 10% or more of our combined rental revenue and interest income from mortgage loans. The following table sets forth information regarding our major operator as of March 31, 2023:
Percentage of
Operator
Revenues (1)
Assets (2)
Prestige Healthcare (3)
24
2,820
93
16.4
14.7
Our financial position and ability to make distributions may be adversely affected if Prestige Healthcare or any of our lessees and borrowers face financial difficulties, including any bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, continuing impact upon services or occupancy levels due to COVID-19, or in the event any such operator does not renew and/or extend its relationship with us.
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10.
Earnings per Share
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):
Less income allocated to non-controlling interests
Less income allocated to participating securities:
Non-forfeitable dividends on participating securities
(147)
(58)
Total net income allocated to participating securities
Effect of dilutive securities:
Participating securities (1)
Net income for diluted net income per share
Shares for basic net income per share
Stock options (1)
107
150
Total effect of dilutive securities
Shares for diluted net income per share
Basic net income per share
Diluted net income per share
11.
Fair Value Measurements
In accordance with the accounting guidance regarding the fair value option for financial assets and financial liabilities, entities are permitted to choose to measure certain financial assets and liabilities at fair value, with the change in unrealized gains and losses reported in earnings. We did not elect the fair value option for any of our financial assets and financial liabilities.
The carrying amount of cash and cash equivalents approximates their fair value because of the short-term maturity of these instruments. We do not invest our cash in auction rate securities. The carrying value and estimated fair value of our financial instruments as of March 31, 2023 and December 31, 2022 were as follows (in thousands):
Fair
Financing receivable, net of credit loss reserve
198,741
76,033
Mortgage loans receivable, net of credit loss reserve
532,861
461,276
Notes receivable, net of credit loss reserve
50,442
61,858
477,454
(5)
477,653
12.
Subsequent Events
Subsequent to March 31, 2023 the following events occurred:
Real Estate Dispositions: We sold a 70-unit assisted living community in Florida for $4,850,000. The community had a gross book value of $7,163,000 and a net book value of $4,075,000 after $1,656,000 of impairment losses at March 31, 2023.
Debt: We repaid $6,000,000 under our revolving line of credit. Accordingly, we have $264,100,000 outstanding and $135,900,000 available for borrowing under our revolving line of credit.
Equity: We declared a monthly cash dividend of $0.19 per share on our common stock for the months of April, May and June 2023, payable on April 28, May 31, and June 30, 2023, respectively to stockholders of record on April 20, May 23, and June 22, 2023, respectively.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some of the forward-looking statements by their use of forward-looking words, such as “believes,” “expects,” “may,” “will,” “could,” “would,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or the negative of those words or similar words. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, our dependence on our operators for revenue and cash flow; the duration and extent of the effects of the COVID-19 pandemic; government regulation of the health care industry; federal and state health care cost containment measures including reductions in reimbursement from third-party payors such as Medicare and Medicaid; required regulatory approvals for operation of health care facilities; a failure to comply with federal, state, or local regulations for the operation of health care facilities; the adequacy of insurance coverage maintained by our operators; our reliance on a few major operators; our ability to renew leases or enter into favorable terms of renewals or new leases; the impact of inflation, operator financial or legal difficulties; the sufficiency of collateral securing mortgage loans; an impairment of our real estate investments; the relative illiquidity of our real estate investments; our ability to develop and complete construction projects; our ability to invest cash proceeds for health care properties; a failure to qualify as a REIT; our ability to grow if access to capital is limited; and a failure to maintain or increase our dividend. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in our publicly available filings with the Securities and Exchange Commission. We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise.
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-leaseback, financing receivables, mortgage financing, joint ventures and structured finance solutions including preferred equity and mezzanine lending. 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.
The following graph summarizes our gross investments as of March 31, 2023:
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. 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 quarterly report and other presentations, we generally include ALF, ILF, MC, and combinations thereof in the ALF classification. As of March 31, 2023, seniors housing and health care properties comprised approximately 99.3% of our gross investment portfolio. We have been operating since August 1992.
Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals, interest earned on financing receivable, interest earned on outstanding loans receivable and income from investments in unconsolidated joint ventures. Income from our 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.
In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk. Some operating leases and loans are credit enhanced by guaranties and/or letters of
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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, proceeds from periodic asset sales, 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. We could also look to 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.
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of coronavirus (“COVID-19”) as a pandemic, and on March 13, 2020, the United States declared a national emergency with regard to COVID-19. The COVID-19 pandemic has had repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries, including the United States, has significantly and adversely impacted public health and economic activity, and has contributed to significant volatility, dislocations and liquidity disruptions in financial markets. On April 10, 2023, President Biden signed a bill terminating the national emergency with regard to COVID-19.
The operations and occupancy levels at our properties have been adversely affected by COVID-19 and could be further adversely affected by COVID-19 or another pandemic especially if there are infections on a large scale at our properties. The impact of COVID-19 has included, and another pandemic could include, early resident move-outs, our operators delaying accepting new residents due to quarantines, potential occupants postponing moves to our operators’ facilities, and/or hospitals cancelling or significantly reducing elective surgeries thereby reducing the number of people in need of skilled nursing care. Additionally, as our operators have responded to the pandemic, operating costs have begun to rise. A decrease in occupancy, ability to collect rents from residents, the failure of federal and state reimbursements to keep pace with inflation and/or increase in operating costs could have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, including the payment of rent. In recognition of the ongoing pandemic impact affecting our operators, we have agreed to provide assistance in form of rent abatements and rent deferrals and will continue to provide assistance as needed.
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Real Estate Portfolio Overview
The following tables summarize our real estate investment portfolio by owned properties and mortgage loans and by property type, as of March 31, 2023 (dollar amounts in thousands):
Rental
of Total
Owned Properties
Revenue
Revenues
37.2
13,452
29.3
28.0
14,331
31.2
0.6
252
0.5
Total Owned Properties
65.8
28,035
(4)
61.0
Interest Income
from Financing
Financing Receivables
Receivable
5.8
2,345
5.1
299
3.7
1,406
3.1
Total Financing Receivables
198,077
9.5
8.2
from Mortgage
Mortgage Loans
Loans
1056
167,573
7.9
2,760
6.0
287,253
13.6
8,432
18.3
Other (3)
2,698
0.1
52
Total Mortgage Loans
21.6
24.4
and other
621
31,950
1.5
2,385
5.2
14,986
0.7
167
Total Notes Receivable
2.2
2,552
5.6
Income from
Unconsolidated
Unconsolidated Joint Ventures
Joint Ventures
0.3
Under Development
Total Unconsolidated Joint Ventures
0.8
Total Portfolio
212
9,421
7,968
2,111,099
45,958
Summary of Properties by Type
135
7,732
1,113,096
52.7
76
9,303
970,300
46.0
Other (2) (3)
14,703
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As of March 31, 2023, we had $1.7 billion in net carrying value of investments, consisting of $1.0 billion or 58.2% invested in owned and leased properties, $0.2 billion or 11.5% invested in financing receivables, $0.5 billion or 26.5% invested in mortgage loans secured by first mortgages, $46.5 million or 2.7% 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 64.1%, 7.6% and 22.7%, respectively, of Total revenues on the Consolidated Statements of Income for the three months ended March 31, 2023. In most instances, our lease structure 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.
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. During 2023, Brookdale Senior Living Communities, Inc. (“Brookdale”) elected not to exercise its renewal option. Accordingly, the master lease expires in December 2023. Additionally, during 2023, a master lease covering two skilled nursing centers that was scheduled to mature in 2023 was renewed at the contractual rate for another five years extending the maturity to November 2028. The centers have a total of 216 beds and are located in Florida.
For the three months ended March 31, 2023, we recorded $0.5 million in straight-line rental adjustment and amortization of lease incentive cost of $0.2 million. During the three months ended March 31, 2023, we received $32.4 million of cash rental income, which includes $3.3 million of operator reimbursements for real estate taxes. At March 31, 2023, the straight-line rent receivable balance on the consolidated balance sheet was $21.2 million.
For the three months ended March 31, 2023, we recorded $11.2 million in Interest income from mortgage loans which includes $9.3 million of interest received in cash, $0.6 million of income from interest reserves and $1.3 million in mortgage loans effective interest. At March 31, 2023, the mortgage loans effective interest receivable which is included in the Interest receivable line item in our Consolidated Balance Sheets was $48.1 million.
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. Accordingly, Anthem paid us the agreed upon annual cash rent of $10.8 million in 2022 and we anticipate receiving $10.8 million in 2023. During the 2023 first quarter, 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 will be paid through May 2023 after which cash rent will be based on mutually agreed upon fair market rent. Anthem is current on agreed upon rent payments through April 2023. We receive regular financial performance updates from Anthem and continue to monitor their performance obligations under the master lease agreement.
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Brookdale Senior Living Communities, Inc
Brookdale Senior Living Communities, Inc’s (“Brookdale”) master lease matures on December 31, 2023 and provided Brookdale a $4.0 million capital commitment, which matured on February 28, 2023, at a yield of 7% with a reduced rate for qualified ESG projects. During the first quarter of 2023, we funded $0.9 million under Brookdale’s capital commitment. The master lease provides three renewal options consisting of a two-year renewal option, a five-year renewal option and a 10-year renewal option. During the first quarter of 2023, Brookdale elected not to exercise its renewal option. Brookdale is obligated to pay rent on the portfolio of 35 assisted living communities through maturity and is current on rent payments through April 2023. We plan to sell approximately half of the properties in the Brookdale portfolio while re-leasing the other half.
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 16.4% of our total revenues and 14.7% of our total assets as of March 31, 2023. Subsequent to March 31, 2023, we agreed to defer up to $1.5 million in interest payments due on one of Prestige’s mortgage loans secured by 15 skilled nursing centers. The deferral will be available from May to September 2023 capped at $0.3 million per month.
Other Operators
During the quarter ended March 31, 2023, we provided $0.5 million of abated rent to the same operator for which we have been providing assistance. Also, we provided the same operator $0.2 million of abated rent in April 2023 and we agreed to provide up to $0.2 million for each of May and June 2023. We anticipate receiving $0.3 million in rent during 2023 from this operator.
Subsequent to March 31, 2023, we agreed to defer each of April and May 2023 rent of $0.5 million under a master lease on eight assisted living communities with a total of 500 units. The communities are located in Ohio, Michigan and Illinois. We are in the process of transitioning this portfolio to an existing operator and expect to complete the transaction during the second quarter of 2023. After the portfolio is transitioned cash rent will be based on mutually agreed fair market rent.
2023 Activities Overview
The following tables summarize our transactions during the three months ended March 31, 2023 (dollar amounts in thousands):
Investment in Improvement projects
Impairment Charges
In conjunction with the sale of a 70-unit assisted living community located in Florida, we recorded a $0.4 million impairment loss during the three months ended March 31, 2023 and a $1.2 million impairment loss during the fourth quarter of 2022. Subsequent to March 31, 2023, the community was sold for $4.9 million. As of March 31, 2023, the community was classified as held-for-sale.
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Properties Sold
Financing Receivables.
During 2023, we entered into a $121.3 million JV with an affiliate of an existing operator and contributed $117.9 million into the JV that purchased 11 assisted living and memory care communities from an affiliate of our JV partner. The JV leased the communities back to an affiliate of the seller under a 10-year master lease, with two five-year renewal options. The contractual initial cash yield of 7.25% increases to 7.5% in year three then escalates thereafter based on CPI subject to a floor of 2.0% and a ceiling of 4.0%. Additionally, the JV provided the seller-lessee with a purchase option to buy up to 50% of the properties at the beginning of the third lease year and the remaining properties at the beginning of the fourth lease year through the end of the sixth lease year, with an exit Internal Rate of Return (“IRR”) of 9.0%. In accordance with GAAP, the communities acquired by the JV are required to be presented as Financing receivables 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. Upon origination, we recorded $1.2 million Provision for credit losses equal to 1% of the loan balance related to this transaction during the three months ended March 31, 2023.
Investment in Mortgage Loans
(1)
31
Preferred Equity Investment in Unconsolidated Joint Ventures
Application
of Interest
Received
Reserve
Washington (1)
Washington (2)
(1)
Net increase in notes receivable
Health Care Regulatory
The Centers for Medicare & Medicaid Services (“CMS”) annually updates Medicare skilled nursing facility (“SNF”) prospective payment system rates and other policies. On April 8, 2021, CMS issued a proposed rule to update SNF rates and policies for fiscal year 2022, which started October 1, 2021, and issued the final rule on July 29, 2021. CMS estimated that the aggregate impact of the payment policies in the final rule would result in an increase of approximately $410 million in Medicare Part A payments to SNFs in fiscal year 2022. The final rule also includes several policies that update the SNF Quality Reporting Program and the SNF Value-Based Program for fiscal year 2022. On April 11, 2022, CMS issued a proposed rule to update SNF rates and policies for fiscal year 2023. CMS estimated that the aggregate impact of the payment policies in the proposed rule would result in a decrease of approximately $320 million in Medicare Part A payments to SNFs in fiscal year 2023 compared to fiscal year 2022. CMS also sought input on the effects of direct care staffing requirements to improve long-term care requirements for participation and promote thoughtful, informed staffing plans and decisions within facilities to meet residents’ needs, including maintaining or improving resident function and quality of life. Specifically, CMS sought input on establishing minimum staffing requirements for long-term care facilities. On June 29, 2022, CMS issued updates to guidance on minimum health and safety standards that long-term care facilities must meet to participate in Medicare and Medicaid, and updated and developed new guidance in the State Operations Manual to address issues that significantly affect residents of long-term care facilities. On July 29, 2022, CMS issued a final rule to update SNF rates and policies for fiscal year 2023. CMS estimated that the aggregate impact of the payment policies in the final
rule would result in an increase of 2.7%, or approximately $904 million, in Medicare Part A payments to SNFs in fiscal year 2023 compared to fiscal year 2022. CMS also finalized a permanent 5% cap on annual wage index decreases to smooth year-to-year changes in providers’ wage index payments. In addition, CMS indicated that it would continue to review the comments it received in response to its request for information on establishing minimum staffing requirements for long-term care facilities, and that it intends to issue proposed rules on a minimum staffing level measure within one year. On April 4, 2023, CMS issued a proposed rule that would update SNF rates and policies for fiscal year 2024. CMS estimated that the aggregate impact of the payment policies in the proposed rule would result in a net increase of 3.7%, or approximately $1.2 billion, in Medicare Part A payments to SNFs in fiscal year 2024. CMS also indicated that it continues to review the feedback it received from its comment solicitation regarding minimum staffing requirements and that the feedback would be used, along with evidence from its mixed-methods study launched in August 2022 collecting quantitative and qualitative evidence on staffing levels within nursing homes, to inform proposals for minimum direct care staffing requirements in nursing homes in rulemaking in spring 2023.
There can be no assurance that these rules or future regulations modifying Medicare skilled nursing facility payment rates or other requirements for Medicare and/or Medicaid participation will not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.
Since the announcement of the COVID-19 pandemic and beginning as of March 13, 2020, CMS has issued numerous temporary regulatory waivers and new rules to assist health care providers, including SNFs, respond to the COVID-19 pandemic. These include waiving the SNF 3-day qualifying inpatient hospital stay requirement, flexibility in calculating a new Medicare benefit period, waiving timing for completing functional assessments, waiving requirements for health care professional licensure, survey and certification, provider enrollment, and reimbursement for services performed by telehealth, among many others. CMS also announced a temporary expansion of its Accelerated and Advance Payment Program, which granted providers the ability to request accelerated or advance Medicare Part A payments and up to one year to make repayments. In addition, CMS enhanced requirements for nursing facilities to report COVID-19 infections to local, state and federal authorities. On February 9, 2023, HHS Secretary Becerra announced that, effective February 11, 2023, he was renewing the declared public health emergency for an additional 90-day period, and that HHS was planning for this to be the final renewal of the declared public health emergency, which would end on May 11, 2023. Separate from the declared public health emergency, on April 10, 2023, President Biden signed into law H.J. Res. 7, which terminates the national emergency related to the COVID-19 pandemic.
On March 26, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), sweeping legislation intended to bolster the nation’s response to the COVID-19 pandemic. In addition to offering economic relief to individuals and impacted businesses, the law expands coverage of COVID-19 testing and preventative services, addresses health care workforce needs, eases restrictions on telehealth services during the crisis, and increases Medicare regulatory flexibility, among many other provisions. Notably, the CARES Act temporarily suspended the 2% across-the-board “sequestration” reduction during the period May 1, 2020 through December 31, 2020, and extended the Medicare sequester requirement through fiscal year 2030. In addition, the law provides $100 billion in grants to eligible health care providers for health care related expenses or lost revenues that are attributable to COVID-19. On April 10, 2020, CMS announced the distribution of $30 billion in funds to Medicare providers based upon their 2019 Medicare fee for service revenues. Eligible providers were required to agree to certain terms and conditions in receiving these grants. In addition, the Department of Health and Human Services (“HHS”) authorized $20 billion of additional funding for providers that have already received funds from the initial distribution of $30 billion. Unlike the first round of funds, which came automatically, providers were required to apply for these additional funds and submit the required
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supporting documentation, using the online portal provided by HHS. Providers were required to attest to and agree to specific terms and conditions for the use of such funds. HHS expressed a goal of allocating the whole $50 billion proportionally across all providers based on those providers’ proportional share of 2018 net Medicare fee-for-service revenue, so that some providers would not be eligible for additional funds. On May 22, 2020, HHS announced that it had begun distributing $4.9 billion in additional relief funds to SNFs to offset revenue losses and assist nursing homes with additional costs related to responding to the COVID-19 public health emergency and the shipments of personal protective equipment provided to nursing homes by the Federal Emergency Management Agency. On June 9, 2020, HHS announced that it expected to distribute approximately $15 billion to eligible providers that participate in state Medicaid and Children’s Health Insurance Program (“CHIP”) programs and have not received a payment from the Provider Relief Fund General Allocation. On July 22, 2020, HHS announced $5 billion in Provider Relief Funds to Medicare-certified long-term care facilities and state veterans’ homes to build nursing home skills and enhance nursing homes’ response to COVID-19, including enhanced infection control. Nursing homes were required to participate in the Nursing Home COVID-19 training to qualify for this funding. On August 27, 2020, HHS announced that it had distributed almost $2.5 billion to nursing homes to support increased testing, staffing, and personal protective equipment needs. On September 3, 2020, HHS announced a $2 billion performance-based incentive payment distribution to nursing homes and SNFs. Finally, on October 1, 2020, HHS announced $20 billion in additional funding for several types of providers, including those who previously received, rejected, or accepted a general distribution provider relief fund payment. The application deadline for these Phase 3 funds was November 6, 2020.
The Consolidated Appropriations Act, 2021 included a $900 billion COVID-19 relief package. Of the $900 billion in COVID-19 relief, $73 billion was allocated to HHS. Notably, the legislation adds an additional $3 billion to the Provider Relief Fund, includes language specific to reporting requirements, and allows providers to use any reasonable method to calculate lost revenue, including the difference between such provider’s budgeted and actual revenue budget if such budget had been established and approved prior to March 27, 2020, to demonstrate entitlement for these funds. This change reverts to HHS’ previous guidance from June 2020 on how to calculate lost revenues. The Consolidated Appropriations Act, 2021 also extended the CARES Act’s sequestration suspension to March 31, 2021. On January 15, 2021, HHS announced that it would be amending the reporting timeline for Provider Relief Funds and indicated that it was working to update the Provider Relief Fund requirements to be consistent with the passage of the Consolidated Appropriations Act, 2021.
On June 11, 2021, HHS issued revised reporting requirements for recipients of Provider Relief Fund payments. The announcement included expanding the amount of time providers would have to report information, aimed to reduce burdens on smaller providers, and extended key deadlines for expending Provider Relief Fund payments for recipients who received payments after June 30, 2020. The revised reporting requirements are applicable to providers who received one or more payments exceeding, in the aggregate, $10,000 during a single Payment Received Period from the PRF General Distributions, Targeted Distributions, and/or Skilled Nursing Facility and Nursing Home Infection Control Distributions. On July 1, 2021, HHS, through the Health Resources and Services Administration (“HRSA”), notified recipients of Provider Relief Fund payments by e-mail that the Provider Relief Fund Reporting Portal was open for recipients who were required to report on the use of funds in Reporting Period 1, as described by HHS’s June 11, 2021 update to the reporting requirements. On September 10, 2021, HHS announced a final 60-day grace period of the September 30, 2021 reporting deadline for Provider Relief Funds exceeding $10,000 in aggregate payments received from April 10, 2020 to June 30, 2020. Although the September 30, 2021 reporting deadline remained in place, HHS explained that recoupment or other enforcement actions would not be initiated during the 60-day grace period, which began on October 1, 2021 and ended on November 30, 2021.
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Reporting Period 2, for providers who received one or more payments exceeding $10,000, in the aggregate, from July 1, 2020 to December 31, 2020, was from January 1, 2022 to March 31, 2022. Reporting Period 3, for providers who received one or more payments exceeding $10,000, in the aggregate, from January 1, 2021 to June 30, 2021, was from July 1, 2022 to September 30, 2022. Reporting Period 4, for providers who received one or more payments exceeding $10,000, in the aggregate, from July 1, 2021 to December 31, 2021, was from January 1, 2023 to March 31, 2023. Reporting Period 5, for providers who received one or more payments exceeding $10,000, in the aggregate, from January 1, 2022 to June 30, 2022, opens July 1, 2023.
On September 10, 2021, the Biden Administration announced $25.5 billion in new funding for health care providers affected by the COVID-19 pandemic, including $8.5 billion in American Rescue Plan (“ARP”) resources for providers who serve rural Medicaid, CHIP, or Medicare patients, and an additional $17 billion for Phase 4 Provider Relief Funds for a broad range of providers who can document revenue loss and expenses associated with the pandemic, including assisted living facilities that were state-licensed/certified on or before December 31, 2020. Approximately 25% of the Phase 4 allocation was for bonus payments based on the amount and type of services provided to Medicaid, CHIP, and Medicare beneficiaries from January 1, 2019 through September 30, 2020. On December 14, 2021, HHS announced the distribution of approximately $9 billion in Provider Relief Fund Phase 4 payments to health care providers who have experienced revenue losses and expenses related to the COVID-19 pandemic. Further, on January 25, 2022, HHS announced that it would be making more than $2 billion in Provider Relief Fund Phase 4 General Distribution payments to more than 7,600 providers across the country that same week. On March 22, 2022, HHS announced an additional $413 million in Provider Relief Fund Phase 4 payments to more than 3,600 providers across the country. Finally, on April 13, 2022, HRSA announced the disbursement of more than $1.75 billion in Provider Relief Fund payments to 3,680 providers across the country.
Following prior legislation in 2021 suspending sequestration, on December 10, 2021, President Biden signed the Protecting Medicare and American Farmers from Sequester Cuts Act, which suspended the Medicare 2% sequestration reduction through March 31, 2022, and then reduced the sequestration cuts to 1% from April through June 2022. As of July 1, 2022, cuts of 2% were re-imposed.
Congress periodically considers legislation revising Medicare and Medicaid policies, including legislation that could have the impact of reducing Medicare reimbursement for SNFs and other Medicare providers, limiting state Medicaid funding allotments, encouraging home and community-based long-term care services as an alternative to institutional settings, or otherwise reforming payment policy for post-acute care services. There can be no assurances that enacted or future legislation will not have an adverse impact on the financial condition of our lessees and borrowers, which subsequently could materially adversely impact our company.
Additional reforms affecting the payment for and availability of health care services have been proposed at the federal and state level and adopted by certain states. Increasingly, state Medicaid programs are providing coverage through managed care programs under contracts with private health plans, which is intended to decrease state Medicaid costs. State Medicaid budgets may experience shortfalls due to increased costs in addressing the COVID-19 pandemic. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodologies may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third-party payors.
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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 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 portion of our investments that are real property or mortgage loans. The National Association of Real Estate Investment Trusts (“NAREIT”), an organization representing U.S. REITs and publicly traded real estate companies, classifies a company with 50% or more of assets directly or indirectly in the equity ownership of real estate as an equity REIT. Investment mix measures the portion of our investments that relate to our various property classifications. Operator mix measures the portion of our 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):
3/31/23
12/31/22
9/30/22
6/30/22
3/31/22
Asset mix:
Real property
1,410,705
1,408,402
1,409,937
1,409,625
Financing receivables
76,767
76,267
Loans receivable
393,658
386,868
383,647
350,037
Notes receivable
58,973
59,014
58,794
62,127
Unconsolidated joint ventures
Real estate investment mix:
Assisted living communities
951,441
945,552
942,581
956,642
Skilled nursing centers
980,401
976,753
901,911
858,150
Other (1)
14,601
14,586
14,226
13,337
Under development
Operator mix:
ALG Senior
326,288
192,699
189,533
110,075
76,715
Prestige Healthcare (1)
271,904
271,476
271,851
271,853
272,326
HMG Healthcare
176,285
175,835
174,107
175,532
180,662
155,629
139,176
Brookdale Senior Living
106,921
106,010
104,461
103,831
103,136
Remaining operators
1,074,072
1,074,247
1,070,763
1,071,251
1,069,114
Geographic mix:
328,442
327,490
325,380
326,983
274,803
Michigan
280,294
280,389
280,932
280,934
281,407
North Carolina (2)
232,841
99,646
95,456
92,639
59,217
159,461
158,892
158,175
81,525
80,815
Wisconsin
114,838
114,729
Remaining states (2)
995,223
978,188
975,110
974,908
1,030,158
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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 Sheets 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 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. 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
Quarter Ended
Debt to gross asset value
41.0
37.4
38.9
37.6
39.6
Debt to market capitalization ratio
38.3
(2)
34.4
(6)
32.2
(7)
33.4
Interest coverage ratio (8)
3.6
x
(3)
4.4
(5)
4.2
Fixed charge coverage ratio (8)
18,198
13,389
54,490
Less/Add: (Gain)/loss on sale
387
(38,094)
Add: Impairment loss
2,136
1,286
Add: Interest expense
8,830
7,941
7,523
Add: Depreciation and amortization
9,294
9,385
9,379
EBITDAre
38,441
38,437
32,388
33,298
30,986
Add (less): Non-recurring one-time items
262
1,260
(859)
423
Adjusted EBITDAre
38,703
33,648
32,439
31,409
Interest coverage ratio
Total fixed charges
Fixed charge coverage ratio
We evaluate our key performance indicators in conjunction with current expectations to
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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
Additionally, as described in the Executive Overview above, COVID-19 is adversely affecting and is expected to continue to adversely affect our business, results of operations, cash flows and financial condition. Depending on the future developments regarding COVID-19, the duration, spread and severity of the outbreak, historical trends reflected in our balance sheet metrics may not be achieved in the future.
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 (unaudited, in thousands)
Difference
1,411
1,608
1,943
8,713
(3,466)
228
(434)
(1,377)
(85)
689
(8)
(486)
(9)
(4,931)
(10)
(11)
15,271
19,053
19,054
(332)
18,722
(68)
18,654
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Funds From Operations Available to Common Stockholders
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 GAAP net income available to common stockholders to NAREIT FFO available to common stockholders (unaudited, amounts in thousands, except per share amounts):
GAAP net income available to common stockholders
Less: Gain on sale of real estate, net
NAREIT FFO attributable to common stockholders
27,200
23,611
NAREIT FFO attributable to common stockholders per share:
0.66
0.60
Weighted average shares used to calculate NAREIT FFO per share:
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Liquidity and Capital Resources
Sources and Uses of Cash
As of March 31, 2023, we had a total of $5.5 million of cash and cash equivalents, $129.9 million available under our unsecured revolving line of credit and the potential ability to access the capital markets through the issuance of $128.8 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 in financing and investing activities are sensitive to the capital markets environment, especially to changes in interest rates. In addition, COVID-19 has adversely affected our operators’ business, results of operations, cash flows and financial condition which could, in turn, adversely affect our financial position.
We maintain our cash deposits primarily in financial institutions, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). We have not experienced any losses related to amounts in excess of FDIC limits.
The operating results of the facilities 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, competition from home health providers, ability to control other rising operating costs, the potential for significant reforms in the health care industry including state and federal reimbursement programs, and the ongoing impact of COVID-19. Prestige is our largest operator based upon revenues and assets representing 16.4% of our total revenues and 14.7% of our total assets as of March 31, 2023. Subsequent to March 31, 2023, we agreed to defer up to $1.5 million in interest payments due on one of Prestige’s mortgage loans secured by 15 skilled nursing centers. The deferral will be available from May to September 2023 capped at $0.3 million per month. Our financial position and ability to make distributions may be adversely affected if Prestige faces financial difficulties, including bankruptcy, inability to emerge from bankruptcy, insolvency or a general downturn in its business.
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, and the continuing impact of COVID-19. We cannot presently predict what impact these proposals may have, if any. We believe that an adequate provision has been made for the possibility of loans proving uncollectible 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 2023 and 2024.
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Our investments, principally our investments in owned properties 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 issuances 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):
Change
Cash provided by (used in):
Operating activities
(529)
Investing activities
(96,757)
Financing activities
93,213
(4,073)
5,218
1,145
Unsecured Credit Facility. We have an unsecured credit agreement (the “Credit Agreement”) that provides for an aggregate 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 Revolving Line of Credit matures November 19, 2025 and provides for a one-year extension option at our discretion, subject to customary conditions. The Term Loans mature on November 19, 2025 and November 19, 2026. During 2022, we entered into the First Amendment to the Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”) to replace London Interbank Offered Rate (“LIBOR”) with the Secured Overnight Financing Rate (“SOFR”), plus a credit spread adjustment of 10 basis points, (“Adjusted SOFR”) as the reference rate for purpose of calculating interest under the Amended Credit Agreement. Other material terms of the Credit Agreement remain unchanged. Based on our leverage at March 31, 2023, the facility provides for interest annually at Adjusted SOFR plus 120 basis points and a facility fee of 20 basis points and the Term Loans provide for interest annually at Adjusted SOFR plus 140 points.
Interest Rate Swap Agreements. In connection with entering into the Term Loans as described above, we entered into two receive variable/pay fixed interest rate swap agreements (the “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 Loans’ borrowings over their 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 Amended Credit Agreement discussed above, we entered into amendments to our Interest Rate Swaps to account for SOFR as the updated reference rate in the Amended Credit Agreement. During the three months ended March 31, 2023, we recorded a $1.4 million decrease in fair value of Interest Rate Swaps.
As of March 31, 2023, the terms of the Interest Rate Swaps are as follows (dollar amounts in thousands):
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The debt obligations by component as of March 31, 2023 are as follows (dollar amounts in thousands):
Revolving line of credit (2)
At March 31, 2023, we had 41,396,216 shares of common stock outstanding, equity on our balance sheet totaled $864.6 million and our equity securities had a market value of $1.5 billion. During the three months ended March 31, 2023, we declared and paid $23.6 million of cash dividends.
During the three months ended March 31, 2023, we acquired 41,350 shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.
Subsequent to March 31, 2023, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of April, May and June 2023, payable on April 28, May 31, and June 30, 2023, respectively, to stockholders of record on April 20, May 23, and June 22, 2023, respectively.
At-The-Market Program. 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 shares of our common stock. During the three months ended March 31, 2023, we sold 48,500 shares of common stock for $1.8 million in net proceeds under our Equity Distribution Agreements. In conjunction with the sale of common stock, we incurred $80,000 of costs associated with this agreement which have been recorded in additional paid in capital as a reduction of proceeds received. Accordingly, we have $128.8 million available under the Equity Distribution Agreements.
Available Shelf Registrations. We have an automatic shelf registration statement on file with the SEC and currently have the ability to file additional automatic shelf registration statements to provide us with capacity to publicly offer an indeterminate amount of common stock, preferred stock, warrants, debt, depositary shares, or units. We may from time to time raise capital under our automatic registration statement in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering. Our shelf registration statement expires on February 17, 2025.
During the three months ended March 31, 2023, we awarded restricted stock and performance-based stock units as follows:
Award Type
Critical Accounting Policies
Our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q are prepared in conformity with U.S. generally accepted accounting principles for interim financial information set forth in the Accounting Standards Codification as published by the Financial Accounting Standards Board, which require us to make estimates and assumptions regarding future events that affect the amounts reported in our financial statements and accompanying footnotes. We base these estimates on our experience and assumptions regarding future events we believe to be reasonable under the circumstances. Actual results could differ from those estimates and such differences may be material to the consolidated financial statements. We have described our most critical accounting policies in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to our critical accounting policies or estimates since December 31, 2022.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our market risk during the three months ended March 31, 2023. For additional information, refer to Item 7A as presented in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended). As of the end of the period covered by this report based on such evaluation our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective.
There has been no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are and may become from time to time a party to various claims and lawsuits arising in the ordinary course of business, which in our opinion are not singularly or in the aggregate anticipated to be material to our results of operations or financial condition. Claims and lawsuits may include matters involving general or professional liability asserted against the lessees or borrowers related to our properties, which we believe under applicable legal principles are not our responsibility as a non-possessory landlord or mortgage holder. We believe that these matters are the responsibility of our lessees and borrowers pursuant to general legal principles and pursuant to insurance and indemnification provisions in the applicable leases or mortgages. We intend to continue to vigorously defend such claims and lawsuits.
Item 1A. RISK FACTORS
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2023, we did not make any unregistered sales of equity securities.
During the three months ended March 31, 2023, we acquired shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations. The average prices paid per share for each month in the quarter ended March 31, 2023 are as follows:
Total Number
of Shares
Maximum
Purchased as
Part of
Shares that May
Publicly
Yet Be
Paid per
Announced
Purchased
Period
Plan
Under the Plan
January 1 - January 31, 2023
February 1 - February 28, 2023
41,350
37.19
March 1 - March 31, 2023
Item 6. EXHIBITS
LTC Properties, Inc. Articles of Restatement (incorporated by reference to Exhibit 3.1.2 to the registrant’s Current Report on Form 8-K filed June 6, 2016)
Bylaws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2.2 to the registrant’s Annual Report on Form 10-K filed February 18, 2021)
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant
Dated: April 27, 2023
By:
/s/ Caroline Chikhale
Caroline Chikhale
Executive Vice President, Chief Accounting Officer and Treasurer
(Principal Accounting Officer)