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 September 30, 2024
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.)
3011 Townsgate Road, Suite 220
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 October 22, 2024 was 45,260,754.
September 30, 2024
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
31
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
54
Item 4.
Controls and Procedures
PART II -- Other Information
Legal Proceedings
55
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
56
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share)
December 31, 2023
(unaudited)
(audited)
ASSETS
Investments:
Land
$
118,382
121,725
Buildings and improvements
1,217,954
1,235,600
Accumulated depreciation and amortization
(398,080)
(387,751)
Operating real estate property, net
938,256
969,574
Properties held-for-sale, net of accumulated depreciation: 2024—$1,794; 2023—$3,616
4,058
18,391
Real property investments, net
942,314
987,965
Financing receivables, net of credit loss reserve: 2024—$3,615; 2023—$1,980
357,889
196,032
Mortgage loans receivable, net of credit loss reserve: 2024—$3,638; 2023—$4,814
360,776
477,266
Real estate investments, net
1,660,979
1,661,263
Notes receivable, net of credit loss reserve: 2024—$482; 2023—$611
47,691
60,490
Investments in unconsolidated joint ventures
30,602
19,340
Investments, net
1,739,272
1,741,093
Other assets:
Cash and cash equivalents
35,040
20,286
Debt issue costs related to revolving line of credit
1,548
1,557
Interest receivable
58,421
53,960
Straight-line rent receivable
18,677
19,626
Lease incentives
3,584
2,607
Prepaid expenses and other assets
15,095
15,969
Total assets
1,871,637
1,855,098
LIABILITIES
Revolving line of credit
240,150
302,250
Term loans, net of debt issue costs: 2024—$229; 2023—$342
99,771
99,658
Senior unsecured notes, net of debt issue costs: 2024—$1,098; 2023—$1,251
445,402
489,409
Accrued interest
3,757
3,865
Accrued expenses and other liabilities
41,120
43,649
Total liabilities
830,200
938,831
EQUITY
Stockholders’ equity:
Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding: 2024—45,034; 2023—43,022
450
430
Capital in excess of par value
1,062,374
991,656
Cumulative net income
1,707,352
1,634,395
Accumulated other comprehensive income
3,639
6,110
Cumulative distributions
(1,825,996)
(1,751,312)
Total LTC Properties, Inc. stockholders’ equity
947,819
881,279
Non-controlling interests
93,618
34,988
Total equity
1,041,437
916,267
Total liabilities and equity
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share, unaudited)
Three Months Ended
Nine Months Ended
September 30,
2024
2023
Revenues:
Rental income
32,258
31,589
97,464
94,861
Interest income from financing receivables
7,001
3,832
14,661
11,413
Interest income from mortgage loans
10,733
12,247
35,842
35,417
Interest and other income
5,791
1,635
9,298
5,358
Total revenues
55,783
49,303
157,265
147,049
Expenses:
Interest expense
10,023
12,674
31,971
34,595
Depreciation and amortization
9,054
9,499
27,173
28,085
Impairment loss
—
12,510
Provision for credit losses
215
189
942
2,107
Transaction costs
33
329
679
537
Property tax expense
3,186
3,271
9,816
9,751
General and administrative expenses
6,765
5,959
20,016
18,344
Total expenses
29,276
31,921
90,597
105,929
Other operating income:
Gain on sale of real estate, net
3,663
4,870
6,882
20,545
Operating income
30,170
22,252
73,550
61,665
Income from unconsolidated joint ventures
692
375
1,739
1,127
Net income
30,862
22,627
75,289
62,792
Income allocated to non-controlling interests
(1,496)
(430)
(2,332)
(1,287)
Net income attributable to LTC Properties, Inc.
29,366
22,197
72,957
61,505
Income allocated to participating securities
(201)
(147)
(511)
(440)
Net income available to common stockholders
29,165
22,050
72,446
61,065
Earnings per common share:
Basic
0.66
0.54
1.67
1.48
Diluted
1.65
Weighted average shares used to calculate earnings per common share:
43,868
41,153
43,313
41,127
44,394
41,211
43,839
41,185
Dividends declared and paid per common share
0.57
1.71
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands, unaudited)
Unrealized gain on cash flow hedges before reclassification
(1,289)
1,034
655
2,629
Gains reclassified from accumulated other comprehensive income to interest expense
(1,037)
(1,006)
(3,126)
(2,752)
Comprehensive income
28,536
22,655
72,818
62,669
Less: Comprehensive income allocated to non-controlling interests
Comprehensive income attributable to LTC Properties, Inc.
27,040
22,225
70,486
61,382
CONSOLIDATED STATEMENTS OF EQUITY
(amounts 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, 2022
41,262
412
931,124
1,544,660
8,719
(1,656,548)
828,367
21,940
850,307
Issuance of common stock
48
1,697
Issuance of restricted stock
128
1
(1)
Common Stock cash distributions ($0.57 per share)
(23,563)
Stock-based compensation expense
2,088
33,134
427
33,561
Cash paid for taxes in lieu of common shares
(41)
(1,538)
Non-controlling interest contributions
3,831
Non-controlling interest distributions
(406)
Fair market valuation adjustment for interest rate swap
(1,362)
Other
Balance—March 31, 2023
41,396
413
933,370
1,577,794
7,357
(1,680,111)
838,823
25,792
864,615
15
(23,599)
2,138
6,174
6,604
(2)
(81)
9,133
1,211
Balance—June 30, 2023
41,409
935,427
1,583,968
8,568
(1,703,710)
824,666
34,949
859,615
(23,605)
2,123
(405)
28
Balance—September 30, 2023
41,412
937,550
1,606,165
8,596
(1,727,315)
825,409
34,974
860,383
Balance—December 31, 2023
43,022
139
4,336
4,337
160
2
(24,616)
2,202
24,230
459
24,689
378
(50)
(1,532)
50
(2,904)
(29)
Balance—March 31, 2024
43,271
433
996,631
1,658,625
6,488
(1,775,928)
886,249
32,593
918,842
204
6,519
6,521
16
(24,787)
2,320
19,361
377
19,738
(523)
61,025
(377)
Balance—June 30, 2024
43,491
435
1,005,468
1,677,986
5,965
(1,800,715)
889,139
982,757
1,543
54,637
54,652
(25,281)
2,269
1,496
(2,326)
Balance—September 30, 2024
45,034
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
6,791
6,349
(6,882)
(20,545)
(1,739)
(1,127)
Income distributions from unconsolidated joint ventures
839
Straight-line rental adjustment
561
Exchange of prepayment fee for participating interest in mortgage loan
(1,380)
Adjustment for collectability of lease incentives and rental income
321
26
Amortization of lease incentives
626
584
Application of interest reserve
(233)
(1,788)
Amortization of debt issue costs
791
900
Other non-cash items, net
71
Change in operating assets and liabilities
Lease incentives funded
(1,794)
(1,023)
Increase in interest receivable
(7,124)
(8,605)
Decrease in accrued interest payable
(108)
(1,341)
Net change in other assets and liabilities
(3,645)
(318)
Net cash provided by operating activities
91,879
78,932
INVESTING ACTIVITIES:
Investment in real estate properties
(319)
(43,759)
Investment in real estate capital improvements
(9,908)
(5,053)
Proceeds from sale of real estate, net
33,641
51,410
Investment in financing receivables
(97)
(112,712)
Investment in real estate mortgage loans receivable
(19,078)
(72,260)
Principal payments received on mortgage loans receivable
34,474
301
(11,262)
Advances and originations under notes receivable
(340)
(19,258)
Principal payments received on notes receivable
13,268
7,077
Net cash provided by (used in) investing activities
40,379
(194,254)
FINANCING ACTIVITIES:
Borrowings from revolving line of credit
19,200
274,450
Repayment of revolving line of credit
(81,300)
(42,200)
Principal payments on senior unsecured notes
(44,160)
Proceeds from common stock issued
65,629
1,777
Distributions paid to stockholders
(74,684)
(70,767)
Distributions paid to non-controlling interests
(109)
(1,217)
Financing costs paid
(516)
(19)
Cash paid for taxes in lieu of shares upon vesting of restricted stock
(1,533)
(1,619)
(31)
Net cash (used in) provided by financing activities
(117,504)
116,245
Increase in cash and cash equivalents
14,754
923
Cash and cash equivalents, beginning of period
10,379
Cash and cash equivalents, end of period
11,302
Supplemental disclosure of cash flow information:
Interest paid
31,288
35,036
Non-cash investing and financing transactions:
Contribution from non-controlling interest
12,965
(163,460)
Exchange of mezzanine loan and related prepayment fee for participating interest in mortgage loan
(8,841)
Exchange of mortgage loans for controlling interests in joint ventures accounted for as financing receivables
102,435
Reserves withheld at financing and mortgage loan receivable origination
(5,147)
Accretion of interest reserve recorded as mortgage loan receivable
233
1,788
Decrease in fair value of interest rate swap agreements
(2,471)
(123)
2,313
Distributions paid to non-controlling interests related to property sale
2,305
Mortgage loan receivable reserve withheld at origination
1,506
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 and nine months ended September 30, 2024 and 2023 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 September 30, 2024 (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
732,120
54.5
%
73
4,341
168.65
Skilled Nursing
598,063
44.6
6,113
236
94.20
Other (2)
12,005
0.9
118
1,342,188
100.0
124
6,231
4,577
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 under a master lease that matured on December 31, 2023. The 35-property assisted living portfolio was apportioned as follows (dollar amounts in thousands):
Type
First
Lease
Year
Commencement
State
Property
Properties
Rent
Term
November 2023
OK
184
960
Three years
January 2024
CO, KS, OH, TX
17
738
9,325
Six years
NC
(3)
210
3,300
27
1,132
13,585
Sales
Year sold
Price
Proceeds (4)
FL
176
18,750
14,310
(5)
37
800
769
SC
8,409
8,153
341
27,959
23,232
35
1,473
9
During the three months ended March 31, 2024, a master lease covering 11 skilled nursing centers, that was scheduled to mature in January 2024, was renewed for seven months extending the maturity to August 2024. The centers have a total of 1,444 beds and are located in Texas. During the three months ended June 30, 2024, this master lease was amended to extend the lease term to December 31, 2028, with two five-year renewal options. The annual rent increased from $8,000,000 to $9,000,000 for 2024. Rent will increase to $9,500,000 for 2025, and $10,000,000 for 2026, escalating 3.3% annually thereafter. As a condition of the amended master lease, the operator paid $11,986,000 during 2024, towards its $13,531,000 working capital note. The remaining $1,545,000 balance of the working capital note is interest-free and will be repaid in installments through 2028.
Additionally, during 2024, another operator exercised its renewal option under its master lease for five years, from March 2025 through February 2030. Annual cash rent for 2024 is $8,004,000 escalating 2.5% annually. The master lease covers 666 beds across four skilled nursing centers, three in Texas and one in Wisconsin, and a behavioral health care hospital in Nevada.
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. During the three months ended September 30, 2024 and 2023, we had no uncollectible lease incentives or straight-line rent receivables to write-off. During the nine months ended September 30, 2024 and 2023, we wrote-off uncollectible straight-line rent receivable and lease incentive balances of $321,000 and $26,000, respectively.
We continue to take into account the current financial condition of our operators, in our estimation of uncollectible accounts at September 30, 2024. We are closely monitoring the collectability of such rents and will adjust future estimations as appropriate as further information becomes known.
The following table summarizes components of our rental income for the three and nine months ended September 30, 2024 and 2023 (in thousands):
Rental Income
Contractual cash rental income
29,215
29,065
89,142
87,204
Variable cash rental income
3,194
3,442
9,830
9,902
Straight-line rent
(747)
(561)
(1,635)
Adjustment of lease incentives and rental income
(321)
(26)
(4)
(188)
(171)
(626)
(584)
10
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):
Net Book
Option
Investments (1)
Value
Window
California
ALF/MC
38,895
32,072
2020-2029
Colorado/Kansas/Ohio/Texas
63,576
29,928
2029
Florida
76,625
2025-2027
Georgia/South Carolina
31,904
24,721
2027
North Carolina
11
121,419
2025-2028
14,654
6,876
41,000
2024-2028
North Carolina/ South Carolina
13
122,460
(6)
Ohio
MC
16,161
13,158
2024-2025
ILF/ALF/MC
54,782
51,877
Oklahoma
11,221
4,170
2027-2029
(7)
Tennessee
5,275
2,157
2023-2024
Texas
52,726
49,332
(8)
12,743
9,440
2026-2028
(9)
663,441
585,235
Impairment Loss. During the three and nine months ended September 30, 2024, we did not record an impairment loss. During the first and second quarter of 2023, in conjunction with ongoing negotiations and planned sale of two assisted living communities located in Florida and one assisted living community located in Mississippi, we performed recoverability analysis on the carrying value of these communities and concluded that their carrying values may not be recoverable through future undiscounted cash flows. Accordingly, during the three and nine months ended September 30, 2023, we recorded impairment loss of $0 and $12,510,000, respectively. The following table summarizes information regarding impairment losses recorded during the nine months ended September 30, 2024 and 2023 (dollar amounts in thousands):
Impairment
Beds/Units
Loss
n/a
70
434
60
7,522
Mississippi
67
4,554
197
Properties Held -for-Sale. The following summarizes our held-for-sale properties as of September 30, 2024 and December 31, 2023 (dollar amounts in thousands):
Beds/units
Depreciation
At September 30, 2024
CO
5,852
At December 31, 2023
WI
110
22,007
(3,616)
12
Acquisitions. The following table summarizes our acquisitions for the nine months ended September 30, 2024 and 2023 (dollar amounts in thousands):
Cash
Paid at
Assumed
Transaction
Assets
Acquisition
Liabilities
Interest
Costs
Acquired
OTH (1)
300
19
319
ALF (2)
43,759
9,767
363
63,022
242
Intangible Assets. We make estimates as part of our allocation of the purchase price of acquisitions to various components of acquisition based upon the fair value of each component. In determining fair value, we use current appraisals or other third-party opinions of value. The most significant components of our allocations are typically the allocation of fair value to land and buildings, and for certain of our acquisitions, in-place leases and other intangible assets. In the case of the value of in-place leases, we make the best estimates based on the evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during the hypothetical expected lease-up periods, market conditions and costs to execute similar leases. The following is a summary of the carrying amount of intangible assets as of September 30, 2024 and December 31, 2023 (in thousands):
Cost
Amortization
In-place leases
11,155
(6,650)
4,505
11,348
(6,109)
5,239
Tax abatement intangible
8,309
(924)
7,385
7,904
Improvements. During the nine months ended September 30, 2024 and 2023, we invested in the following capital improvement projects (in thousands):
Assisted Living Communities
8,663
2,418
Skilled Nursing Centers
1,245
2,548
87
9,908
5,053
Properties Sold. During the three and nine months ended September 30, 2024, we recorded a net gain on sale of real estate of $3,663,000 and $6,882,000, respectively. During the three and nine months ended September 30, 2023, we recorded a net gain on sale of real estate of $4,870,000 and $20,545,000, respectively. The following table summarizes property sales during the nine months ended September 30, 2024 and 2023 (dollar amounts in thousands):
Carrying
(Loss) Gain (1)
4,500
4,579
(289)
208
1,600
1,282
(390)
500
389
80
7,959
4,314
3,635
Wisconsin
20,193
16,195
3,986
(60)
Total (5)
458
34,752
26,759
4,850
4,082
65
Kentucky
11,000
10,720
57
New Jersey
39
2,000
1,552
266
New Mexico
235
21,250
5,523
15,287
Nebraska
117
2,984
2,934
Pennsylvania
130
11,128
6,054
651
53,212
30,865
(
Financing Receivables. As part of our acquisitions, we may invest in sale and leaseback transactions. In accordance with the accounting guidance, we must determine whether each sale and leaseback transaction qualifies as a sale. Generally, an option for the seller-lessee to repurchase a real estate asset precludes accounting for the transfer of the asset as a sale and the purchased assets should be presented as financing receivables.
During 2022 through 2024, we entered into joint venture agreements and contributed into these JVs for the purchase of properties through sale and leaseback transactions. Concurrently, each of these JVs leased the purchased properties back to an affiliate of the seller and provided the seller-lessee with purchase options. Accordingly, these sale and leaseback transactions meet the accounting criteria to be presented as financing receivables. Furthermore, we determined that we exercise power over and receive benefits from each of these joint ventures. Therefore, we consolidated the joint ventures as Financing Receivables on our Consolidated Balance Sheets and recorded the rental revenue from these joint ventures as Interest income from financing receivables on our Consolidated Statements of Income.
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The following tables provide information regarding our investments in financing receivables (dollar amounts in thousands):
Rate
Maturity
Investments
7.25%
2022
2032
76,626
62,301
299
256.27
2033
117,588
523
232.16
2034
NC/SC
64,450
234.15
37,985
217
188.94
361,505
282,324
1,562
The following table summarizes our financing receivables activities for the nine months ended September 30, 2024 and 2023 (dollar amounts in thousands):
Investment and funding under financing receivables
163,557
121,332
Amortization of capital costs
(65)
Provision for loan loss reserve
(1,213)
161,857
120,054
Mortgage Loans. During 2024, we committed to fund a $26,120,000 mortgage loan for the construction of a 116-unit independent living, assisted living and memory care community in Illinois. The borrower contributed $12,300,000 of equity which will initially fund the construction. The loan term is approximately six years at a current rate of 9.0% and an IRR of 9.5%. The following table sets forth information regarding our investments in mortgage loans secured by first mortgages at September 30, 2024 (dollar amounts in thousands):
Interest Rate
Loans (1)
Properties (2)
7.5%
GA
51,111
14.0
203
251.78
8.8%
2025
4,000
1.1
92
43.48
7.8%
16,706
4.7
112
149.16
7.3%
10,750
2.9
45
238.89
8.8% (4)
2026
MI
9,999
UDP
2.7
2028
IL
16,500
4.5
150
110.00
10.8% (5)
2043
180,973
49.7
1,749
103.47
9.9% (5)
2045
39,850
10.9
480
83.02
10.3% (5)
19,700
5.4
201
98.01
10.5% (5)
14,825
4.1
146
101.54
364,414
2,726
452
114.67
The following table summarizes our mortgage loan activity for the nine months ended September 30, 2024 and 2023 (in thousands):
Originations and funding under mortgage loans receivable
19,078
83,383
(102,435)
Pay-offs received
(34,094)
169
1,609
Scheduled principal payments received
(380)
(301)
Mortgage loan premium amortization
Recovery (provision) for loan loss reserve
1,176
(847)
Net (decrease) increase in mortgage loans receivable
(116,490)
83,839
3.
Investment in Unconsolidated Joint Ventures
We have preferred equity investments in two joint ventures and an acquisition, development and construction (“ADC”) loan . We determined that each of these JVs meet 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
Return
Portion
Beds/ Units
SNF/ALF
Senior Loan
9.2
104
11,262
Washington
Preferred Equity
12.0
7.0
95
6,340
ILF/ALF
8.0
267
13,000
466
The following table summarizes our capital contributions, income recognized, and cash interest received related to our investments in unconsolidated joint ventures during the nine months ended September 30, 2024 and 2023 (in thousands):
Cash Income
Non-cash
Recognized
Earned
Income Accrued
589
359
ILF/ALF (1)
948
`
337
UDP (1)
790
18
4.
Notes Receivable
Notes receivable consist of mezzanine loans and working capital loans. The following table summarizes our investments in notes receivable at September 30, 2024 (dollar amounts in thousands):
Type of
IRR
Loan
# of loans
8.3%
Working capital
9.0%
290
8.0%
11.0
Mezzanine
25,000
0.0%
1,545
17,000
6.5%
2030
138
7.4%
957
2031
2,693
48,173
The following table is a summary of our notes receivable components as of September 30, 2024 and December 31, 2023 (in thousands):
Mezzanine loans
42,000
Working capital loans
6,173
19,101
Notes receivable credit loss reserve
(482)
(611)
The following table summarizes our notes receivable activity for the nine months ended September 30, 2024 and 2023 (in thousands):
Advances under notes receivable
340
19,258
Principal payments received under notes receivable
(13,268)
(14,537)
Recovery of credit losses
129
(48)
Net (decrease) increase in notes receivable
(12,799)
4,673
5.
Lease Incentives
Our non-contingent lease incentive balances at September 30, 2024 and December 31, 2023 were $3,584,000 and $2,607,000, respectively. The following table summarizes our lease incentives activity for the nine months ended September 30, 2024 and 2023 (in thousands):
1,794
1,023
Adjustment for collectability of lease incentives
Other adjustments
(191)
Net increase in non-contingent lease incentives
977
404
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.
Credit Loss Reserve
We apply Accounting Standards Codification Topic 326, Financial Instruments-Credit Losses (“ASC 326”), which requires a forward-looking “expected loss” model, to estimate our loan losses. We determined our Financing receivables, Mortgage loans receivable and Notes receivable line items on our Consolidated Balance Sheets are within the scope of ASC 326.
Financing receivables. We obtained controlling interests in JVs that acquired properties through sale and leaseback transactions. The JVs concurrently leased the purchased properties to affiliates of sellers and provided the sellers-lessees with purchase options. We consolidated the JVs as Financing receivables on our Consolidated Balance Sheets. For more information regarding these transactions See Note 2. Financing receivables above. At September 30, 2024, we had investments in four JVs accounted for as financing receivables that owned 31 properties in three states. In addition to owning the properties through our controlling interests in the JVs, generally, these leases provide one or more of the following: security deposits, property tax impounds, repair and maintenance escrows and other credit enhancements such as corporate or personal guarantees or letters of credit.
Mortgage loans. As part of our strategy of making investments in properties used in the provision of long-term health care services, we provided mortgage loan financing on such properties. At September 30, 2024, we had ten mortgage loans secured by 27 properties in five states with seven borrowers. In addition to a lien on the mortgaged properties, the loans are generally secured by non-real estate assets of the properties and contain certain other security provisions in the form of letters of credit and/or security deposits.
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Notes receivable. Our notes receivable consist of mezzanine loans and working capital notes. Security for these notes can include all or a portion of the following credit enhancements: secured second mortgage, pledge of equity interests and personal/corporate guarantees.
The following table summarizes our financial instruments within the scope of ASC 326 by year of origination (dollar amounts in thousands):
Year of origination (1)
Investment Type:
2021
2020
Prior
Credit loss reserve
Financing receivables
163,460
121,418
361,504
3,615
Mortgage loans receivable
92,360
255,348
3,638
420
Working Capital loans
2,045
1,095
2,983
62
Total Notes Receivable
482
We monitor the credit quality of our financial instruments through a variety of methods determined by the underlying collateral or other protective rights, operator’s payment history and other internal metrics. Our monitoring process includes periodic review of financial statements for each facility, scheduled property inspections and review of covenant compliance, industry conditions and current and future economic conditions. The future economic conditions are based on the economic data from the Federal Reserve and reasonable assumptions for the future economic trends.
In determining the “expected” credit loss reserves on these instruments, 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.
The expected credit losses related to our financial instruments that are within the scope of ASC 326 are as follows (in thousands):
Balance
Recovery
due to
at
Originations/
Description
12/31/2023
payoffs
additional funding
9/30/2024
Credit Loss Reserve- Financing Receivables
1,980
Credit Loss Reserve- Mortgage Loans Receivable
4,814
(1,369)
193
Credit Loss Reserve-Notes Receivable
611
(132)
We elected not to measure an allowance for expected credit losses on accrued interest receivable under the expected credit loss standard as we have a policy in place to reserve or write off accrued interest receivable in a timely manner through our quarterly review of the loan and property performance. Therefore, we elected the policy to write off accrued interest receivable by recognizing credit loss expense. As of September 30, 2024, the total balance of accrued interest receivable of $58,421,000 was not included in the measurement of expected credit loss. During the three and nine months ended September 30, 2024, we wrote-off $613,000 related to accrued interest receivable. During the three and nine months ended September 30, 2023, we did not recognize any write-off related to accrued interest receivable.
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7.
Debt Obligations
Unsecured Credit Facility. We had an unsecured credit agreement (the “Original Credit Agreement”) that provided 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 Term Loans mature on November 19, 2025 and November 19, 2026. The Revolving Line of Credit had a maturity date of November 19, 2025 and provided a one-year extension option at our discretion, subject to customary conditions. During the first quarter of 2024, we entered into an amendment to the Original Credit Agreement (the “Credit Agreement”) to accelerate our one-year extension option notice to January 4, 2024. Concurrently, we exercised our option to extend the maturity date to November 19, 2026. Other material terms of the Original Credit Agreement remained unchanged. The Credit Agreement permitted us to request increases to the Revolving Line of Credit and Term Loans commitments up to a total of $1,000,000,000 (the “Accordion”). As permitted under the terms of the Credit Agreement, we exercised $25,000,000 of the available $500,000,000 Accordion feature of the Revolving Line of Credit, effective September 30, 2024. Accordingly, the aggregate commitment of the lenders under the Credit Agreement increased to $525,000,000, with $475,000,000 remaining available under the Accordion. The exercise of the Accordion did not materially change any other term or condition of the Credit Agreement, including its maturity date or covenant requirements.
Based on our leverage at September 30, 2024, the facility provides for interest annually at Adjusted SOFR plus 110 basis points and a facility fee of 15 basis points and the Term Loans provide for interest annually at Adjusted SOFR plus 125 basis 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. During the three and nine months ended September 30, 2024, we recorded a decrease of $2,326,000 and $2,471,000 in fair value of Interest Rate Swaps, respectively. During the three and nine months ended September 30, 2023, we recorded an increase of $28,000 and a decrease of $123,000 in fair value of Interest Rate Swaps, respectively.
Information regarding our interest rate swaps measured at fair value, which are classified as Level 2 of the fair value hierarchy is presented below (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
1,448
2,698
November 19, 2026
2.76
2,191
3,412
100,000
Senior Unsecured Notes. We have senior unsecured notes held by institutional investors with interest rates ranging from 3.66% to 4.5%. The senior unsecured notes mature between 2026 and 2033.
22
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 September 30, 2024, 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.
The following table sets forth information regarding debt obligations by component as of September 30, 2024 and December 31, 2023 (dollar amounts in thousands):
Applicable
Available
Outstanding
for
Rate (1)
Borrowing
Revolving line of credit (2)
6.17%
184,850
97,750
Term loans, net of debt issue costs
2.69%
Senior unsecured notes, net of debt issue costs
4.15%
4.58%
785,323
891,317
During the nine months ended September 30, 2024 and 2023, our debt borrowings and repayments were as follows (in thousands):
Borrowings
Repayments
Term loans
Senior unsecured notes
(125,460)
(86,360)
8.
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.
23
As of September 30, 2024, we have the following consolidated VIEs (in thousands):
Consolidated
Non-Controlling
Purpose
Assets (1)
Owned real estate
58,010
3,015
OH
9,134
14,325
2018
ILF
14,650
2,907
Owned real estate and development
18,452
1,156
2017
11,680
1,240
461,068
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 price of shares of our common stock. The Equity Distribution Agreements provide for sales of common shares to be made by means of ordinary brokers’ transactions, which may include block trades, or transactions that are deemed to be “at the market” offerings.
During the nine months ended September 30, 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.
During the nine months ended September 30, 2024, we sold 1,886,900 shares of common stock for $65,629,000 in net proceeds under our Equity Distribution Agreements. In conjunction with the sale of common stock, we incurred $119,000 of costs associated with this agreement which have been recorded in additional paid in capital as a reduction of proceeds received. At September 30, 2024, we had $9,558,000 available under the Equity Distribution Agreements. Subsequent to September 30, 2024, we sold 226,370 shares of common stock for $7,936,000 in net proceeds under our Equity Distribution Agreements. Accordingly, subsequent to September 30, 2024, we had $1,522,000 available under the Equity Distribution Agreements.
During the nine months ended September 30, 2024 and 2023, we acquired 49,540 shares and 43,933 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.
24
Distributions. We declared and paid the following cash dividends (in thousands):
Declared
Paid
Common Stock (1)
74,684
70,767
In October 2024, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of October, November and December 2024, payable on October 31, November 29, and December 31, 2024, respectively, to stockholders of record on October 23, November 21, and December 23, 2024, respectively.
Stock-Based Compensation. During 2021, we adopted and our shareholders approved the 2021 Equity Participation Plan (“the 2021 Plan”) which replaces the 2015 Equity Participation Plan (“the 2015 Plan”). Under the 2021 Plan, 1,900,000 shares of common stock have been authorized and reserved for awards, less one share for every one share that was subject to an award granted under the 2015 Plan after December 31, 2020 and prior to adoption. In addition, any shares that are not issued under outstanding awards under the 2015 Plan because the shares were forfeited or cancelled after December 31, 2020 will be added to and again be available for awards under the 2021 Plan. Under the 2021 Plan, the shares were authorized and reserved for awards to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2021 Plan and the 2015 Plan are set by our compensation committee at its discretion. Beginning in the first quarter of 2024, we entered into Performance Stock Unit Award Agreements, based upon absolute and relative total shareholder return, under the 2021 Plan. Forms of such Performance Stock Unit Award Agreements are filed as exhibits to this quarter report.
During the nine months ended September 30, 2024 and 2023, no stock options were granted or exercised. During each of the nine months ended September 30, 2024 and 2023, 5,000 stock options expired and were cancelled. At September 30, 2024, we had no stock options outstanding and exercisable.
The following table summarizes our restricted stock activity for the nine months ended September 30, 2024 and 2023:
Outstanding, January 1
258,620
229,236
Granted
175,431
146,020
Vested
(132,842)
(115,551)
Cancelled
(1,085)
Outstanding, September 30
301,209
No performance-based stock units vested during the nine months ended September 30, 2024, and 2023.
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During the nine months ended September 30, 2024 and 2023, 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
159,536
30.72
Restricted stock
ratably over 3 years
69,610
31.84
Performance-based stock units
TSR targets (1)
62,914
TSR targets (2)
15,895
34.60
307,955
127,960
37.16
86,867
TSR targets (4)
15,060
31.54
May 24, 2024
3,000
35.45
July 25, 2024
232,887
Compensation expense recognized related to the vesting of restricted common stock and performance-based stock units for the nine months ended September 30, 2024 and 2023 were $6,791,000 and $6,349,000, respectively. At September 30, 2024, 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
October - December 2024
2,260
6,450
3,385
369
12,464
9.
Commitments and Contingencies
At September 30, 2024, we had commitments as follows (in thousands):
Commitment
Funding
Funded
Real estate properties (Note 2. Real Estate Investments)
15,920
7,862
8,814
7,106
Accrued incentives and earn-out liabilities (Note 5. Lease Incentives)
6,625
587
4,580
Mortgage loans (Note 2. Real Estate Investments)
63,620
11,999
51,621
Joint venture investments (Note 3. Investments in Unconsolidated Joint Ventures)
1,536
98
1,438
Notes receivable (Note 4. Notes Receivable)
940
890
88,641
18,596
23,006
65,635
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.
10.
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 September 30, 2024:
Percentage of
Operator
Revenues
Prestige Healthcare (2)
2,694
93
15.4
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, or in the event any such operator does not renew and/or extend its relationship with us.
11.
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
(173)
(28)
Total net income allocated to participating securities
Effect of dilutive securities:
Participating securities (2)
Net income for diluted net income per share
Shares for basic net income per share
Stock options (2)
526
58
Total effect of dilutive securities
Shares for diluted net income per share
Basic net income per share
Diluted net income per share
12.
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 September 30, 2024 and December 31, 2023 were as follows (in thousands):
Fair
Financing receivables, net of credit loss reserve
363,900
199,199
Mortgage loans receivable, net of credit loss reserve
422,180
554,993
Notes receivable, net of credit loss reserve
53,923
67,877
417,267
439,865
13.
Subsequent Events
Subsequent to September 30, 2024, the following events occurred:
Real Estate. We sold a closed assisted living community located in Colorado for $5,250,000. At September 30, 2024, the community was classified as held-for-sale and had a gross book value of $5,852,000 and a net book value of $4,058,000.
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Mortgage Loan Receivable. We received the payoff of a $51,111,000 mortgage loan receivable secured by a 203-unit assisted living community in Georgia.
Debt. We repaid $93,800,000 under our unsecured revolving line of credit. Accordingly, we have $146,350,000 outstanding and $278,650,000 available for borrowing under our unsecured revolving line of credit.
Equity: We sold 226,370 shares of common stock for $7,936,000 in net proceeds under our Equity Distribution Agreements. Accordingly, we have $1,522,000 available under our Equity Distribution Agreements.
We declared a monthly cash dividend of $0.19 per share on our common stock for the months of October, November and December 2024, payable on October 31, November 29, and December 31, 2024, respectively to stockholders of record on October 23, November 21, and December 23, 2024, respectively.
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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, 2023 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 September 30, 2024:
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 September 30, 2024, seniors housing and health care properties comprised approximately 99.4% 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.
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In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk. Some operating leases and loans are credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates.
Depending upon the availability and cost of external capital, we anticipate making additional investments in health care related properties. New investments are generally funded from cash on hand, 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 loan receivables and income from unconsolidated joint ventures. 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.
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 September 30, 2024 (dollar amounts in thousands):
Rental
of Total
Owned Properties
Revenue
34.1
37,450
27.7
27.9
46,170
0.6
827
Total Owned Properties
62.6
84,447
(4)
62.4
Interest Income
from Financing
Financing Receivables
Receivable
1,263
284,878
13.3
10,452
7.7
3.5
4,209
3.1
Total Financing Receivables
16.8
10.8
from Mortgage
Mortgage Loans
Loans
82,567
3.8
4,936
3.7
271,848
12.7
24,821
18.4
Under Development (3)
0.5
580
0.4
Total Mortgage Loans
17.0
30,337
(5)
22.5
and other
765
46,490
2.1
3,686
1,683
0.1
351
0.3
2.2
4,037
(6)
3.0
Income from
Unconsolidated
Unconsolidated Joint Ventures
Joint Ventures
362
1,150
Total Unconsolidated Joint Ventures
1.4
1.3
Total Portfolio
191
9,360
7,419
2,146,881
135,221
Summary of Properties by Type
114
7,183
1,165,395
54.2
76
9,242
959,482
44.7
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As of September 30, 2024, we had $1.7 billion in net carrying value of investments, consisting of $942.3 million or 54.2% invested in owned and leased properties, $357.9 million or 20.6% invested in financing receivables, $360.8 million or 20.7% invested in mortgage loans secured by first mortgages, $47.7 million or 2.7% in notes receivable and $30.6 million or 1.8% in unconsolidated joint ventures.
Rental income, income from financing receivables and interest income from mortgage loans represented 62.0%, 9.3% and 22.8%, respectively, of Total revenues on the Consolidated Statements of Income for the nine months ended September 30, 2024. 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 under a master lease that matured on December 31, 2023. The 35-community assisted living portfolio was apportioned as follows (dollar amounts in thousands):
(1)
(2)
(3)
During the three months ended March 31, 2024, a master lease covering 11 skilled nursing centers, that was scheduled to mature in January 2024, was renewed for seven months extending the maturity to August 2024. The centers have a total of 1,444 beds and are located in Texas. During the three months ended June 30, 2024, this master lease was amended to extend the lease term to December 31,
2028, with two five-year renewal options. The annual rent increased from $8.0 million to $9.0 million for 2024. Rent will increase to $9.5 million in 2025 and $10.0 million in 2026, escalating 3.3% annually thereafter. As a condition of the amended master lease, the operator paid $12.0 million during 2024, towards its $13.5 million working capital note. The remaining $1.5 million balance of the working capital note is interest-free and repaid in installments through 2028.
Additionally, during 2024, another operator exercised its renewal option under its master lease for five years, from March 2025 through February 2030. Annual cash and GAAP rent for 2024 are $8.0 million and $7.0 million, respectively escalating 2.5% annually. The master lease covers 666 beds across four skilled nursing centers, three in Texas and one in Wisconsin and a behavioral health care hospital in Nevada.
For the nine months ended September 30, 2024, we recorded $0.6 million in straight-line rental adjustment reflecting higher cash rent received than recorded as rental income, and amortization of lease incentive cost of $0.6 million. During the nine months ended September 30, 2024, we received $99.0 million of cash rental income, which includes $9.8 million of operator reimbursements for real estate taxes. At September 30, 2024, the straight-line rent receivable balance on the consolidated balance sheet was $18.7 million.
For the nine months ended September 30, 2024, we recorded $14.7 million in Interest income from financing receivables which includes $11.7 million of interest received in cash and $3.0 million in financing receivables effective interest. At September 30, 2024, the financing receivables effective interest receivable which is included in the Interest receivable line item on our Consolidated Balance Sheets was $4.3 million.
For the nine months ended September 30, 2024, we recorded $35.8 million in Interest income from mortgage loans which includes $32.7 million of interest received in cash, $0.2 million of income from interest reserves and $2.9 million in mortgage loans effective interest. At September, 30, 2024, the mortgage loans effective interest receivable which is included in the Interest receivable line item on our Consolidated Balance Sheets was $51.9 million.
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Update on Certain Operators
ALG Senior Living
During the third quarter of 2022, a portfolio of 12 assisted living communities was temporarily transitioned to ALG Senior Living (“ALG”) under a two-year master lease. The temporary transition allowed us to find a more permanent solution for the portfolio as follows (dollar amounts in thousands):
GA, SC
159
Two years
April 2024
TX
Proceeds
4,147
MS
1,650
1,419
892
345
8,600
6,847
560
During the second quarter of 2024, we funded an additional $5.5 million under a mortgage loan receivable due from an ALG affiliate secured by 13 assisted living and memory care communities located in North Carolina (12) and South Carolina (1). We then entered into a newly formed $122.5 million joint venture with ALG, whereby we exchanged our $64.5 million mortgage loan receivable for a 53% controlling interest in the JV. Concurrently, ALG contributed these properties to the joint venture for a 47% non-controlling interest. The JV leased the properties to an ALG affiliate under a 10-year master lease, with two five-year renewal options and provided the seller-lessee with a purchase option exercisable through 2028, with an exit IRR of 8.0%.
During the second quarter of 2024, we also funded an additional $2.8 million under a mortgage loan receivable due from an ALG affiliate secured by four assisted living communities located in North Carolina. We then entered into another newly formed $41.0 million joint venture with ALG, whereby we exchanged $38.0 million of mortgage loan receivables for a 93% controlling interest in the JV. Concurrently, ALG contributed these properties and a parcel of land to the joint venture for a 7% non-controlling interest. The JV leased the properties to an ALG affiliate under a 10-year master lease, with two five-year renewal options and provided the seller-lessee with a purchase option exercisable through 2028, with an exit IRR of 8.0%. All of our investments with ALG are now cross-defaulted and cross-collateralized, providing us with added security.
We determined that these joint venture transactions meet the criteria to be presented as financing receivables and that we exercise power over and receive benefits from each of these joint ventures, thus consolidated them as Financing Receivables on our Consolidated Balance Sheets.
Additionally, we have a controlling interest in a separate consolidated JV with ALG. These communities are located in North Carolina and are accounted for as financing receivables. During the second quarter of 2024, we deferred the consolidated JV income for a total of $2.2 million for May through September 2024. Also, we agreed to defer up to $258,000 in consolidated JV income per month
related to this JV for October through December 2024. Accordingly, the estimated 2024 consolidated JV deferred income related to this JV is $3.0 million. We also agreed to reduce rent from a lease on an assisted living community operated by ALG to $0 for May through September 2024, with quarterly market-based rent resets thereafter. We wrote-off $321,000 of straight-line rent receivable related to this lease during the three months ended June 30, 2024.
Prestige Healthcare
Prestige Healthcare (“Prestige”) operates 21 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 15.4% of our total revenues and 14.0% of our total assets as of September 30, 2024. During the second quarter of 2023, we agreed to defer up to $1.5 million, or up to $0.3 million per month for May through September 2023, in interest payments due on one of Prestige’s mortgage loans secured by 15 skilled nursing centers in Michigan. During the three months ended September 30, 2024, we consented to the sale of one of the 15 skilled nursing centers that secured this mortgage loan and received $2.0 million of partial principal paydown related to the sale. Accordingly, the mortgage loan is secured by 14 skilled nursing centers.
During the fourth quarter of 2023, we amended the mortgage loan with Prestige which was subject to the previously agreed upon interest deferral. Effective January 1, 2024, the minimum mortgage interest payment due to us is based on an annual current pay rate of 8.5% on the outstanding loan balance. The current contractual interest rate on the loan of 10.8% remains unchanged. The amendment also provides us the right to draw on Prestige’s security to pay the difference between the contractual rate and current pay rate.
During the nine months ended September 30, 2024, Prestige increased the security by $2.7 million from its receipt of retroactive Medicaid funds. Additionally, in the fourth quarter of 2024, we expect to receive approximately $6.0 million of additional security from Prestige from its receipt of retroactive Medicaid payments and the security will continue to increase beginning in January 2025 by 50% of Prestige’s excess cash flow. We received all 2023 contractual interest of $19.5 million due from Prestige after applying $3.4 million of its security. Full contractual interest was received through October 2024 from payments received from Prestige and application of security. We expect to receive full contractual cash interest through at least 2025. The following table summarizes the activity of Prestige’s security (in thousands):
Deposits
Received
Applications
3/31/2024
6/30/2024
2,352
2,674
(1,074)
3,952
(1,072)
2,881
(1,062)
1,819
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2024 Activities Overview
The following tables summarize our transactions during the nine months ended September 30, 2024 (dollar amounts in thousands):
We acquired a parcel of land in Kansas adjacent to an existing community operated by Brookdale for $0.3 million. Rent was increased by 8.0% of our total cost of the investment.
Investment in Improvement projects
Properties Held -for-Sale
Properties Sold
Investment in Financing Receivables
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Investment in Mortgage Loans Receivable
During 2024, we committed to fund a $26.1 million mortgage loan receivable for the construction of a 116-unit independent living, assisted living and memory care community in Illinois. The borrower contributed $12.3 million of equity which will initially fund the construction. The loan term is approximately six years at a current rate of 9.0% and an IRR of 9.5%. The following table summarizes our mortgage loan activity for the nine months ended September 30, 2024 (in thousands):
Recovery of loan loss reserve
Net decrease in mortgage loans receivable
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Preferred Equity Investment in Unconsolidated Joint Ventures
Accrued
Net decrease in notes receivable
Health Care Regulatory
The Centers for Medicare & Medicaid Services (“CMS”) annually updates Medicare SNF prospective payment system rates and other policies. On July 31, 2024, CMS issued a final rule to update SNF rates and policies for the fiscal year 2025. CMS estimated that the updated payment rates would result in a net increase of 4.2%, or approximately $1.4 billion, in Medicare Part A payments to SNFs in fiscal year 2025. CMS stated that its impact figures do not incorporate the SNF Value-Based Purchasing (“VBP”) reductions for certain SNFs subject to the net reduction in payments under the SNF VBP, which are estimated to total $196.5 million in fiscal year 2025. The final rule also changes CMS’s enforcement policies as they relate to imposing civil monetary penalties (“CMPs”) for health and safety violations in nursing homes. In the final rule, CMS expanded the type of CMPs that can be imposed to allow for more per instance and per day CMPs to be imposed, and to permit both types of penalties to be imposed concurrently. In addition, the final rule finalized updates to the SNF Quality Reporting Program (“QRP”) to better account for adverse social conditions that negatively impact individuals’ health or health care. Finally, for the SNF VBP program, CMS finalized several operational and administrative proposals.
On April 22, 2024, CMS issued the Minimum Staffing Standards for Long-Term Care Facilities and Medicaid Institutional Payment Transparency Reporting final rule. The final rule sets forth new comprehensive minimum staffing requirements. It finalizes a total nurse staffing standard of 3.48 hours per resident day, which must include at least 0.55 hours per resident day of direct registered nurse care and 2.45 hours per resident day of direct nurse aide care. Facilities may use any combination of nurse
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staff (registered nurse, licensed practical nurse and licensed vocational nurse, or nurse aide) to account for the additional 0.48 hours per resident day needed to comply with the total nurse staffing standard. CMS also finalized enhanced facility assessment requirements and a requirement to have a registered nurse onsite 24 hours a day, seven days a week, to provide skilled nursing care. The final rule also provides a staggered implementation timeframe of the minimum nurse staffing standards and 24/7 registered nurse requirement based on geographic location as well as possible exemptions for qualifying facilities for some parts of these requirements based on workforce unavailability and other factors. The final rule has been challenged in federal courts in Texas and Iowa; the rule may be subject to further revision or deferral due to the pending litigation, pending legislation, or administration changes.
There can be no assurance that these rules or future regulations modifying Medicare SNF 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. Failure by an operator to comply with regulatory requirements can, among other things, jeopardize a facility’s compliance with the conditions of participation under relevant federal and state healthcare programs. Further the ability of our operators to comply with applicable regulations, including minimum staffing requirements, can be adversely impacted by changes in the labor market and increases in inflation.
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.
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The following table reflects our recent historical trends of concentration risk (gross investment, in thousands):
9/30/24
6/30/24
3/31/24
12/31/23
9/30/23
Asset mix:
Real property
1,342,069
1,342,921
1,379,332
1,405,848
361,525
197,990
198,012
198,033
Mortgage Loan receivables
393,375
485,095
482,080
478,344
Notes receivable
58,995
60,551
61,101
63,693
Unconsolidated joint ventures
30,504
Real estate investment mix:
Assisted living communities
1,166,053
1,096,573
1,133,543
1,149,589
Skilled nursing centers
1,001,532
991,540
991,492
987,877
Other (1)
14,844
14,830
14,792
Under development
6,878
2,940
Operator mix:
ALG Senior
307,308
249,882
298,816
310,789
Prestige Healthcare (1)
269,345
272,081
272,338
272,465
272,767
Encore Senior Living
191,988
187,645
183,345
179,753
179,430
HMG Healthcare, LLC
166,833
176,877
178,422
176,644
Anthem Memory Care, LLC
156,407
156,312
156,054
Remaining operators
1,055,000
1,086,150
1,065,503
1,054,097
1,069,574
Geographic mix:
323,737
328,428
320,214
328,467
329,545
301,142
300,893
234,918
234,665
Michigan
287,795
287,389
283,708
280,857
281,159
144,229
143,115
142,897
142,669
142,483
130,196
130,218
130,240
137,941
146,178
Remaining states
959,782
996,425
993,920
1,015,266
1,031,228
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
Year to Date
Quarter Ended
Debt to gross asset value
34.5
37.6
38.9
39.5
42.1
Debt to market capitalization ratio
32.3
36.5
37.9
(7)
39.2
41.8
Interest coverage ratio (9)
x
4.2
(8)
3.3
3.2
Fixed charge coverage ratio (9)
28,670
Less: Gain on sale
(3,663)
(3,251)
(16,751)
(4,870)
Add: Impairment loss
3,265
Add: Interest expense
10,903
11,045
12,419
Add: Depreciation and amortization
9,024
9,095
9,331
EBITDAre
127,551
46,276
39,697
41,578
36,934
39,930
(Less)/Add : Non-recurring one-time items
(5,528)
(1) (2) (3)
(4,173)
1,022
(2,377)
3,561
Adjusted EBITDAre
122,023
42,103
40,719
39,201
40,495
Interest coverage ratio
Total fixed charges
Fixed charge coverage ratio
We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved, and actual results may differ materially from our expectations. This may be a result of various factors, including, but not limited to
Additionally, the effects of inflation, COVID-19 and the pace of recovery from COVID-19 on our operators adversely affected and may continue to adversely affect our business, results of operations, cash flows and financial condition. Depending on the future developments regarding inflation, COVID-19 and the pace of recovery from its effects, 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
669
3,169
(1,514)
4,156
6,480
2,651
445
296
85
(806)
2,645
(9)
(1,207)
7,918
317
8,235
(1,066)
7,169
(54)
7,115
47
2,603
3,248
425
3,940
10,216
2,624
912
1,165
(142)
(1,672)
15,332
(10)
(11)
(13,663)
11,885
612
(12)
12,497
(1,045)
11,452
(71)
11,381
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
34,556
26,679
92,737
81,115
NAREIT FFO attributable to common stockholders per share:
Add: Participating securities
147
511
440
NAREIT Diluted FFO attributable to common stockholders
34,757
26,826
93,248
81,555
Weighted average shares used to calculate NAREIT FFO per share:
Participating securities
302
258
294
255
828
316
820
313
44,696
41,469
44,133
41,440
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Liquidity and Capital Resources
Sources and Uses of Cash
As of September 30, 2024, we had $229.4 million in liquidity as follow (amounts in thousands, except per share amounts):
Available under revolving line of credit
Available under Equity Distribution Agreements
9,558
Total Liquidity
229,448
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 and inflation have adversely affected our operators’ business, results of operations, cash flows and financial condition which could, in turn, adversely affect our financial position.
The operating results of the 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, ability to hire and maintain qualified staff, ability to control other rising operating costs, and the potential for significant reforms in the health care industry and related occupancy challenges in the governmental regulations and financing of the health care industry or the impact of any other infectious disease and epidemic outbreaks. We cannot presently predict what impact these potential events may have, if any. We believe that adequate provision has been made for the possibility of loans proving uncollectable but we will continually evaluate the financial status of the operations of the seniors housing and health care properties. In addition, we will monitor our borrowers and the underlying collateral for mortgage loans and will make future revisions to the provision, if considered necessary.
Depending on our borrowing capacity, compliance with financial covenants, ability to access the capital markets, and the payment of dividends may be negatively impacted. We continuously evaluate the availability of cost-effective capital and believe we have sufficient liquidity for our current dividend, corporate expenses and additional capital investments in 2024 and 2025.
Our investments, principally our investments in owned properties, financing receivables 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
Net Cash provided by (used in):
Operating activities
12,947
Investing activities
234,633
Financing activities
(233,749)
13,831
9,907
23,738
Unsecured Credit Facility. We had an unsecured credit agreement (the “Original Credit Agreement”) that provided 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 Term Loans mature on November 19, 2025 and November 19, 2026. The Revolving Line of Credit had a maturity date of November 19, 2025 and provided a one-year extension option at our discretion, subject to customary conditions. During the first quarter of 2024, we entered into an amendment to the Original Credit Agreement (the “Credit Agreement”) to accelerate our one-year extension option notice to January 4, 2024. Concurrently, we exercised our option to extend the maturity date to November 19, 2026. Other material terms of the Original Credit Agreement remained unchanged. The Credit Agreement permitted us to request increases to the Revolving Line of Credit and Term Loans commitments up to a total of $1.0 billion (the “Accordion”). As permitted under the terms of the Credit Agreement, we exercised $25.0 million of the available $500.0 million Accordion feature of the Revolving Line of Credit, effective September 30, 2024. Accordingly, the aggregate commitment of the lenders under the Credit Agreement increased to $525.0 million, with $475.0 million remaining available under the Accordion. The exercise of the Accordion did not materially change any other term or condition of the Credit Agreement, including its maturity date or covenant requirements.
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. During the three
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and nine months ended September 30, 2024, we recorded a decrease of $2.3 million and $2.5 million in fair value of Interest Rate Swaps, respectively.
As of September 30, 2024, the terms of the Interest Rate Swaps are as follows (dollar amounts in thousands):
The debt obligations by component as of September 30, 2024 are as follows (dollar amounts in thousands):
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During the nine months ended September 30, 2024, our debt borrowings and repayments were as follows (in thousands):
At September 30, 2024, we had 45,034,384 shares of common stock outstanding, total equity on our balance sheet $1.0 billion and our equity securities had a market value of $1.7 billion. During the nine months ended September 30, 2024, we declared and paid $74.7 million of cash dividends.
During the nine months ended September 30, 2024, we acquired 49,540 shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.
Subsequent to September 30, 2024, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of October, November and December 2024, payable on October 31, November 29, and December 31, 2024, respectively, to stockholders of record on October 23, November 21, and December 23, 2024, 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 nine months ended September 30, 2024, we sold 1,886,900 shares of common stock for $65.6 million in net proceeds under our Equity Distribution Agreements. In conjunction with the sale of common stock, we incurred $0.1 million of costs associated with this agreement which have been recorded in additional paid in capital as a reduction of proceeds received. At September 30, 2024, we had $9.6 million available under the Equity Distribution Agreements. Subsequent to September 30, 2024, we sold 226,370 shares of common stock for $7.9 million in net proceeds under our Equity Distribution Agreements. Accordingly, subsequent to September 30, 2024, we had $1.5 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.
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
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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.
During the nine months ended September 30, 2024, 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, 2023. There have been no material changes to our critical accounting policies or estimates since December 31, 2023.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our market risk during the nine months ended September 30, 2024. For additional information, refer to Item 7A as presented in our Annual Report on Form 10-K for the year ended December 31, 2023.
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 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, 2023.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
Item 5. OTHER INFORMATION
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 to the registrant’s Current Report on Form 8-K filed May 26, 2023)
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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
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: October 28, 2024
By:
/s/ Caroline Chikhale
Caroline Chikhale
Executive Vice President, Chief Accounting Officer and Treasurer
(Principal Accounting Officer)