<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
----------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ____ to ____
Commission file number 1-11314
LTC PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
Maryland 71-0720518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
(Address of principal executive offices)
(805) 981-8655
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports to
be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X No ___
Shares of Registrant's common stock, $.01 par value, outstanding at
November 5, 1999 - 27,367,574
===============================================================================
<PAGE>
LTC PROPERTIES, INC.
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets...............................3
Condensed Consolidated Statements of Income ........................4
Condensed Consolidated Statements of Cash Flows ....................5
Notes to Condensed Consolidated Financial Statements ...............6
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations ........9
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ..................................15
</TABLE>
2
<PAGE>
LTC PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Real Estate Investments:
Buildings and improvements, net of accumulated depreciation and
amortization: 1999 - $36,582: 1998 - $26,972 $ 404,420 $ 366,891
Land 19,074 16,796
Mortgage loans receivable held for sale, net of allowance for doubtful
accounts: 1999 - $1,250: 1998 - $1,250 145,001 179,714
REMIC Certificates 98,248 100,595
-------------- --------------
Real estate investments, net 666,743 663,996
Other Assets:
Cash and cash equivalents 1,871 1,503
Debt issue costs, net 1,421 2,040
Interest receivable 4,189 3,350
Prepaid expenses and other assets 12,633 2,397
Marketable debt securities 13,817 --
Note receivable from LTC Healthcare, Inc. 19,977 16,528
-------------- --------------
53,908 25,818
-------------- --------------
Total assets $ 720,651 $ 689,814
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible subordinated debentures due 2001-2002 $ 29,182 $ 56,667
Bank borrowings 153,000 100,000
Mortgage loans and notes payable 62,607 55,432
Bonds payable and capital lease obligations 17,160 17,596
Accrued interest 1,575 3,135
Accrued expenses and other liabilities 4,711 4,085
Distributions payable 11,664 985
-------------- --------------
Total liabilities 279,899 237,900
Minority interest 9,669 10,514
Commitments
Stockholders' equity:
Preferred stock $0.01 par value: 10,000,000 shares authorized;
shares issued and outstanding: 1999-7,080,000, 1998-7,080,000 165,500 165,500
Common stock: $0.01 par value; 40,000,000 shares authorized;
shares issued and outstanding: 1999-27,367,574: 1998-27,660,712 274 277
Capital in excess of par value 307,077 311,113
Notes receivable from stockholders (10,372) (11,200)
Cumulative net income 195,639 158,270
Accumulated comprehensive income (1,184) --
Cumulative distributions (225,851) (182,560)
-------------- --------------
Total stockholders' equity 431,083 441,400
-------------- --------------
Total liabilities and stockholders' equity $ 720,651 $ 689,814
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
LTC PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 11,572 $ 11,777 $ 34,227 $ 31,424
Interest income from mortgage loans
and notes receivable 5,026 4,747 15,127 17,886
Interest income from REMIC Certificates 4,419 4,614 13,224 12,357
Interest and other income 1,778 2,113 5,379 5,382
------------ ------------ ------------ ------------
Total revenues 22,795 23,251 67,957 67,049
------------ ------------ ------------ ------------
Expenses:
Interest expense 5,399 6,101 15,990 17,634
Depreciation and amortization 3,256 3,942 9,799 9,423
Minority interest 253 382 765 1,110
Operating and other expenses 1,941 1,329 4,034 3,893
------------ ------------ ------------ ------------
Total expenses 10,849 11,754 30,588 32,060
------------ ------------ ------------ ------------
Operating income 11,946 11,497 37,369 34,989
Other Income:
Gain on sale of real estate investments -- 1,738 -- 9,926
Unrealized loss on REMIC Certificates -- (6,481) -- (6,578)
------------ ------------ ------------ ------------
Total other income -- (4,743) -- 3,348
------------ ------------ ------------ ------------
Net income 11,946 6,754 37,369 38,337
Preferred dividends (3,772) (3,217) (11,315) (9,125)
------------ ------------ ------------ ------------
Net income available to common stockholders $ 8,174 $ 3,537 $ 26,054 $ 29,212
============ ============ ============ ============
Net Income per Common Share:
Basic $ 0.30 $ 0.13 $ 0.95 $ 1.09
============ ============ ============ ============
Diluted $ 0.30 $ 0.13 $ 0.95 $ 1.08
============ ============ ============ ============
Comprehensive Income:
Net income $ 11,946 $ 6,754 $ 37,369 $ 38,337
Unrealized gain (loss) on available for
sale securities 90 -- (1,184) --
------------ ------------ ------------ ------------
Total comprehensive income $ 12,036 $ 6,754 $ 36,185 $ 38,337
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
LTC PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,369 $ 38,337
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,799 9,423
Gain on sale of real estate investments -- (9,926)
Unrealized holding loss on estimated fair value of REMIC Certificates -- 6,578
Gain on repurchase of convertible subordinated debentures (1,021) --
Other non-cash charges 1,609 1,723
Increase (decrease) in accrued interest (1,560) (2,025)
Net change in other assets and liabilities (3,395) 1,201
------------ ------------
Net cash provided by operating activities 42,801 45,311
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the lines of credit 117,500 217,000
Repayments of bank borrowings (64,500) (203,000)
Principal payments on mortgage loans payable and capital lease obligations (771) (4,910)
Repurchase of common stock (4,488) --
Proceeds from issuance of preferred stock, net -- 37,605
Redemption of convertible subordinated debentures (25,780) --
Distributions paid (32,612) (39,883)
Other (313) (969)
------------ ------------
Net cash provided by (used in) financing activities (10,964) 5,843
CASH FLOWS USED IN INVESTING ACTIVITIES:
Investment in real estate mortgages (8,555) (28,348)
Acquisitions of real estate properties, net (5,929) (135,419)
Proceeds form the sale of REMIC Certificates, net -- 108,613
Proceeds from sale of real estate investments, net -- 16,706
Investment in debt securities (13,097) --
Principal payments on mortgage loans receivable 6,309 1,351
Investment in LTC Healthcare, Inc. -- (2,001)
Advances under note receivable from LTC Healthcare, Inc. (8,123) (8,635)
Payments on note receivable from LTC Healthcare, Inc. 4,674 17,668
Other (6,748) (628)
------------ ------------
Net cash used in investing activities (31,469) (30,693)
------------ ------------
Increase in cash and cash equivalents 368 20,461
Cash and cash equivalents, beginning of period 1,503 4,974
============ ============
Cash and cash equivalents, end of period $ 1,871 $ 25,435
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 16,604 $ 19,106
Non-cash investing and financing transactions:
Conversion of debentures into common stock $ 435 $ 32,284
Distribution of Investment in LTC Healthcare, Inc. -- 10,724
Notes receivable relating to exercise of employee stock options -- 2,088
Assumption of mortgage loans payable for acquisitions of real estate properties 7,510 11,224
Conversion of mortgage loans into owned properties 34,874 7,301
Minority interest related to acquisitions of real estate properties -- 3,432
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements included herein have been
prepared by LTC Properties, Inc. (the "Company") without audit and in the
opinion of management include all adjustments necessary for a fair presentation
of the results of operations for the three and nine months ended September 30,
1999 and 1998 pursuant to the rules and regulations of the Securities and
Exchange Commission. The accompanying condensed consolidated financial
statements include the accounts of the Company, its wholly-owned subsidiaries
and controlled partnerships. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations; however, the Company believes
that the disclosures in the accompanying financial statements are adequate to
make the information presented not misleading. The results of operations for the
three and nine months ended September 30, 1999 and 1998 are not necessarily
indicative of the results for a full year. Certain reclassifications have been
made to the prior year financial statements to conform to the current year
presentation.
No provision has been made for federal income taxes. The Company qualifies as a
real estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. As such, the Company is not taxed on
its income that is distributed to its stockholders.
2. REAL ESTATE INVESTMENTS
MORTGAGE LOANS. On September 30, 1999, the Company purchased four skilled
nursing facilities for the amount of outstanding mortgages payable to the
Company ($13,828,000). These properties were then leased to LTC Healthcare, Inc.
("Healthcare").
During the three months ended September 30, 1999, a mortgage loan with an
outstanding principal balance of approximately $3,016,000 was repaid.
OWNED PROPERTIES. In addition to the four properties purchased subject to the
mortgage loans as discussed above, on September 30, 1999, the Company purchased
three skilled nursing facilities by assuming the aggregate debt of approximately
$7,510,000. One of the skilled nursing facilities acquired subject to the debt
was in turn leased to Healthcare. In connection with an outstanding commitment,
the Company also acquired an assisted living facility for $3,500,000 in a sale
lease-back transaction.
REMIC CERTIFICATES. As of September 30, 1999 the outstanding certificate
principal balance and the weighted average pass-through rate for the senior
REMIC certificates (all held by outside third parties) was $287,464,000 and
7.22%. As of September 30, 1999, the carrying value of the subordinated REMIC
certificates held by the Company was $98,248,000. The effective yield on the
subordinated REMIC certificates held by the Company, based on expected future
cash flows discounted to give effect to potential risks associated with
prepayments and unanticipated credit losses was 17.40% at September 30, 1999.
Interest only certificates and certificates with an investment rating of "BB" or
higher are classified as available-for-sale and unrated certificates and
certificates with an investment rating of "B" or lower are classified as
held-to-maturity. As of September 30, 1999, available-for-sale certificates were
recorded at their fair value of approximately $46,449,000. Unrealized holding
gains on available-for-sale certificates of $106,000 were included in
comprehensive income for the three months ended September 30, 1999. At September
30, 1999, held-to-maturity certificates had a book value of $51,799,000 and a
fair value of
6
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
$47,894,000. As of September 30, 1999, the effective yield on the
available-for-sale certificates and the held-to-maturity certificates, based
on expected future cash flows discounted to give effect to potential risks
associated with prepayments and unanticipated credit losses, was 23.2% and
11.9%, respectively.
3. DEBT OBLIGATIONS
As of September 30, 1999, $128,000,000 was outstanding under the Company's
$170,000,000 Senior Unsecured Revolving Line of Credit (the "Revolving Credit
Facility") which expires on October 3, 2000. During the three months ended
September 30, 1999, pricing under the Revolving Credit Facility was LIBOR plus
1.25%. As of September 30, 1999, $25,000,000 was outstanding under a term loan
that bears interest at LIBOR plus 1.25% and matures on October 2, 2000.
During the three months ended September 30, 1999, the Company acquired three
skilled nursing facilities subject to the outstanding debt of $7,510,000. The
aggregate debt assumed has a weighted average interest rate of 11.4% and is
payable to the 1996-1 REMIC pool.
On September 30, 1999, $10,000,000 in outstanding principal amount of 8.25%
convertible subordinated debentures matured and was repaid. During the three
months ended September 30, 1999, the Company repurchased an aggregate of
$14,550,000 face amount of its convertible subordinated debentures on the open
market for an aggregate purchase price of $13,517,000. A gain of $836,000 on the
repurchase of convertible debentures is included in interest and other income in
the accompanying statement of operations.
Subsequent to September 30, 1999, the Company obtained mortgage financing of
$18,485,000 from a third-party lender. The mortgage loan is secured by 10
assisted living facilities, bears interest at 8.81% and matures in December
2009.
4. STOCKHOLDERS EQUITY
During the three months ended September 30, 1999, the Company declared and
paid cash dividends on its Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock totaling $1,829,000, $1,125,000, $818,000,
respectively. During the three months ended September 30, 1999, the Company
declared cash dividends of $.39 per share on its common stock totaling
$10,679,000. The dividend on the common stock for the third quarter of 1999
was paid on October 15, 1999.
6. LTC HEALTHCARE, INC.
During the three months ended September 30, 1999, the Company recorded interest
income of $451,000 on the average outstanding principal balance under the
unsecured line of credit it provided to Healthcare and Healthcare reimbursed the
Company $162,000 for administrative and management advisory services.
At September 30, 1999, the Company held 264,900 shares of Healthcare common
stock that was recorded at its fair value of approximately $497,000. An
unrealized holding loss of $16,000 was included in comprehensive income for the
three months ended September 30, 1999.
As of September 30, 1999, 18 real estate properties with a gross carrying value
of $46,582,000 or 5.1% of the Company's gross real estate investment portfolio
(adjusted to include mortgage loans underlying the REMIC Certificates) were
leased to Healthcare.
7
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Effective October 18, 1999, the Company purchased 100% of the stock of
Missouri River Corporation ("Missouri River") from Healthcare for total
proceeds of $16,050,000 which equaled Healthcare's cost basis in the
properties owned by Missouri River. Missouri River owns two assisted living
facilities that are leased under long-term triple-net leases to a third-party
operator. Healthcare used the proceeds of $16,050,000 to repay outstanding
borrowings under the unsecured line of credit provided by the Company.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $11,946 $6,754 $37,369 $38,337
Preferred dividends (3,772) (3,217) (11,315) (9,125)
---------- ---------- ---------- ----------
Net income for basic net income per share 8,174 3,537 26,054 29,212
Effect of dilutive securities:
7.75% convertible debentures due 2002 - - - 473
8.50% convertible debentures due 2001 - - - 1,671
8.50% convertible debentures due 2000 - - - 684
9.75% convertible debentures due 2004 - - - 28
8.25% convertible debentures due 1999 - - - 645
8.25% convertible debentures due 2001 - - - -
Convertible partnership units - - - 164
---------- ---------- ---------- ----------
Net income for diluted net income per share $8,174 $3,537 $26,054 $32,877
========== ========== ========== ==========
Shares for basic net income per share 27,386 27,668 27,439 26,824
Effect of dilutive securities:
Stock options - 3 16 15
7.75% convertible debentures due 2002 - - - 465
8.50% convertible debentures due 2001 - - - 1,553
8.50% convertible debentures due 2000 - - - 665
9.75% convertible debentures due 2004 - - - 33
8.25% convertible debentures due 1999 - - - 645
8.25% convertible debentures due 2001 - - - -
Convertible partnership units - - - 241
---------- ---------- ---------- ----------
Shares for diluted net income per share 27,386 27,671 27,455 30,441
========== ========== ========== ==========
Basic net income per share $0.30 $0.13 $0.95 $1.09
========== ========== ========== ==========
Diluted net income per share $0.30 $0.13 $0.95 $1.08
========== ========== ========== ==========
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OPERATING RESULTS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues for the three months ended September 30, 1999 decreased to $22,795,000
from $23,251,000 for the same period in 1998. The decrease in revenues resulted
from decreased rental income of $205,000, decreased interest income from REMIC
certificates of $195,000 and a decrease in interest and other income of $335,000
which was somewhat offset by a increase in interest from mortgage loans and
notes receivable of $279,000.
Rental income decreased $1,298,000 related to the contribution of properties to
LTC Healthcare, Inc. ("Healthcare") in September 1998 and $89,000 resulting from
the disposition of properties. Partially offsetting this decrease in rental
income was an increase of $907,000 related to property acquisitions.
"Same-store" rents increased $275,000 due to the receipt of contingent rents and
rental increases as provided for in the lease agreements. A reduction in new
investments in 1998 and a corresponding reduction in commitment fees resulted in
a decrease in interest and other income. The decrease in interest and other
income is mitigated by interest income on marketable debt securities and the
gain on the repurchase of the Company's convertible subordinated debentures.
Interest income of $451,000 on the unsecured line of credit provided to
Healthcare accounted for the increase in interest from mortgage loans and notes
receivable. The increase was somewhat offset by a decrease in interest on
mortgage loans due the temporary non-accrual of interest while borrowers were in
Chapter 11 bankruptcy protection. As of September 30, 1999, these assets had
emerged from bankruptcy protection. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations -Other Developments."
Total expenses as a percent of total revenues decreased to 48% in 1999 from 51%
in 1998. The decrease as a percent of revenues is largely due to a reduction in
interest expense resulting from the contribution of leveraged properties to
Healthcare on September 30, 1998 and the redemption of subordinated debentures.
Depreciation and amortization decreased primarily as a result of the
contribution of properties to Healthcare that were acquired by the Company
during the second and third quarter of 1998. The increase in general and
administrative expenses is due to the settlement of an employee related dispute.
Preferred dividends increased as a result of dividends on the Series C
Convertible Preferred Stock which was issued in September 1998.
Net income available to common shareholders increased to $8,174,000 for the
three months ended September 30, 1999 from $3,537,000 for the same period in
1998. Excluding the gain on the sale of real estate investments and the
unrealized loss on REMIC Certificates in 1998, net income available to common
shareholders decreased slightly to $8,174,000 for the three months ended
September 30, 1999 from $8,280,000 for the same period in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues for the nine months ended September 30, 1999 increased to $67,957,000
from $67,049,000 for the same period in 1998. The increase in revenues resulted
from increased rental income of $2,803,000, increased interest income from REMIC
certificates of $867,000 which was somewhat offset by a decrease in interest
from mortgage loans and notes receivable of $2,759,000 and a decrease in
interest and other income of $3,000
9
<PAGE>
Rental income increased $5,937,000 as a result of property acquisitions.
"Same-store" rents increased $648,000 due to the receipt of contingent rents and
rental increases as provided for in the lease agreements. Partially offsetting
the above increases in rental income were decreases of $3,301,000 related to the
contribution of properties to Healthcare in September 1998 and $481,000
resulting from the disposition of properties. Interest on the Assisted Living
Concepts, Inc. convertible debentures accounted for the increase in interest and
other income. Interest income from mortgage loans and notes receivable decreased
due to the sale of mortgage loans in connection with a REMIC securitization that
was completed in May 1998 which was somewhat offset by interest income on the
unsecured line of credit provided to Healthcare. The decrease in interest income
from mortgage loans was partially mitigated by an increase in interest income
from REMIC certificates from the retention of certificates originated in the May
1998 securitization.
Total expenses as a percent of total revenues decreased to 45% in 1999 from 48%
in 1998. The decrease as a percent of revenues is largely due to a reduction in
interest expense resulting from the contribution of leveraged properties to
Healthcare on September 30, 1998 and the redemption of subordinated debentures.
Depreciation and amortization increased as a result of a larger average
investment base in owned properties in 1999 as compared to 1998.
On January 1, 1999, in accordance with recently issued accounting standards, the
Company reclassified its investment in REMIC certificates from trading
securities to available-for-sale and held-to-maturity securities. As a result of
the change in accounting for REMIC certificates, the Company no longer
recognizes unrealized gains or losses on changes in their fair value in current
period earnings.
Preferred dividends increased as a result of dividends on the Series C
Convertible Preferred Stock which was issued in September 1998.
Net income available to common shareholders decreased to $26,054,000 for the
nine months ended September 30, 1999 from $29,212,000 for the same period in
1998. Excluding the gain on the sale of real estate investments and the
unrealized loss on REMIC Certificates in 1998, net income available to common
shareholders increased to $26,054,000 for the nine months ended September 30,
1999 from $25,864,000 for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company's real estate investment portfolio (before
accumulated depreciation and allowance for doubtful accounts) consisted of
$460,076,000 invested primarily in owned long-term care facilities, mortgage
loans of approximately $146,251,000 and subordinated REMIC certificates of
approximately $98,248,000 with a weighted average effective yield of 17.4%. At
September 30, 1999, the outstanding certificate principal balance and the
weighted average pass-through rate for the senior REMIC certificates (all held
by outside third parties) was $287,464,000 and 7.22%. The Company's portfolio
consists of 266 skilled nursing facilities, 94 assisted living facilities and
six schools in 35 states.
During the nine months ended September 30, 1999, the Company had net cash
provided by operations of $42,801,000. In addition, the Company obtained a
$25,000,000 term loan and had net borrowings of $28,000,000 under its unsecured
revolving credit facility. Subsequent to September 30, 1999, the Company
obtained mortgage financing of $18,485,000 from a third-party lender. The
mortgage loan is secured by 10 assisted living facilities, bears interest at
8.81% and matures in December 2009. Proceeds from the mortgage loan will be used
to repay outstanding borrowings under the unsecured revolving credit facility.
During the nine months ended September 30, 1999, the Company invested $6,678,000
in mortgage loans secured by three assisted living facilities ("ALFs") and
advanced $1,877,000 for renovation and expansion under a mortgage loan
previously provided on an educational facility. In addition, the Company
invested $4,657,000 in owned properties by completing the sale/leaseback of
eight ALFs that it
10
<PAGE>
had previously financed with mortgage loans and acquiring one ALF. The
Company also invested $1,272,000 in the expansion and renovation of existing
facilities. During the nine months ended September 30, 1999, the Company
purchased $4,195,000 face amount of Assisted Living Concepts, Inc. ("ALC")
5.625% convertible subordinated debentures and $15,645,000 face amount of ALC
6.0% convertible subordinated debentures for an aggregate purchase price of
$13,097,000. The ALC convertible subordinated debentures have a weighted
average effective yield of 19.1%.
During the nine months ended September 30, 1999, the Company repurchased and
retired 349,800 shares of common stock for an aggregate purchase price of
approximately $4,488,000. On September 30, 1999, $10,000,000 in outstanding
principal amount of 8.25% convertible subordinated debentures matured and was
repaid. During the nine months ended September 30, 1999, the Company repurchased
an aggregate of $17,050,000 face amount of its convertible subordinated
debentures on the open market for an aggregate purchase price of $15,780,000.
During the same period, the Company declared and paid cash dividends on its
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
totaling $5,487,000, $3,375,000, $2,453,000, respectively. In addition, the
Company paid quarterly cash dividends on its common stock totaling $21,297,000
which represented the dividend for the first and second quarter of 1999. The
cash dividend of $10,679,000 on the common stock for the third quarter of 1999
was paid on October 15, 1999.
As of September 30, 1999, borrowing capacity of $42,000,000 was available under
the Company's $170,000,000 unsecured revolving credit facility which matures in
October 2000. The revolving credit facility had pricing of LIBOR plus 1.25% at
September 30, 1999. After giving effect to borrowing base requirements for
outstanding bank borrowings, the Company had $350,829,000 of available
unencumbered real estate investments at September 30, 1999. Available
unencumbered real estate investments consisted of $211,380,000 in owned
properties (before accumulated depreciation), $41,201,000 of mortgage loans
(before allowance for doubtful accounts) and $98,248,000 of REMIC certificates.
The Company believes that its current cash from operations available for
distribution or reinvestment, its borrowing capacity (including borrowings
against unencumbered real estate investments), and the Company's ability to
access the capital markets are sufficient to provide for payment of its
operating costs, provide funds for distribution to its stockholders and to fund
additional investments.
OTHER DEVELOPMENTS
At December 31, 1998, Sun Healthcare Group, Inc. ("Sun") operated 70 facilities
representing 19% ($174.3 million) of the Company's gross real estate investment
portfolio (adjusted to include mortgage loans to third parties securing the
investment in REMIC certificates). During 1999, Sun was replaced as the operator
at 18 properties and the property owner repaid mortgage loans on two facilities
leased to Sun resulting in a reduction in the Company's total investment in
properties operated by Sun. During the third quarter of 1999, the Company
further reduced its investment in properties operated by Sun by terminating the
lease on two properties and acquiring four properties for the amount of debt
that was outstanding. These six properties have, in turn, been leased to LTC
Healthcare, Inc. As a result, at September 30, 1999, Sun operated 44 facilities
representing 12.7% ($115.5 million) of the Company's gross real estate
investment portfolio. Subsequent to September 30, 1999, Sun filed for Chapter 11
bankruptcy protection. As of November 5, 1999, all rent and principal and
interest payments due from Sun are current.
At March 31, 1999, the Company had mortgage loans to Retirement Group, L.L.C.
("Retirement Group") secured by three skilled nursing facilities with an
aggregate outstanding principal balance of $8.5 million. In addition, the
mortgage loans securing the 1998-1 REMIC pool included one mortgage loan to
Retirement Group secured by two skilled nursing facilities with an outstanding
principal balance of $8.6 million. Retirement Group had leased the properties
securing the loans to Sun who, due to a dispute between Sun and Retirement
Group, was offsetting the lease payments due to Retirement Group against
11
<PAGE>
certain alleged obligations of Retirement Group to Sun. Since Retirement was
not receiving the lease payments from Sun they were not making the mortgage
payments due to the Company or the 1998-1 REMIC pool. The Company initiated
foreclosure proceedings against Retirement Group; however, in May 1999,
Retirement Group filed a petition for Chapter 11 bankruptcy and the
bankruptcy court placed a temporary stay on the foreclosure proceedings.
Subsequently, the Company and Retirement Group entered into a stipulation
whereby, upon confirmation of a plan of reorganization by the bankruptcy
court, Retirement Group will pay all unpaid post-petition interest and all
unpaid pre-petition interest will be paid equally over 12 months beginning in
January 2000. The Company anticipates that the plan of reorganization will be
confirmed by the bankruptcy court during the fourth quarter of 1999.
Concurrent with the stipulation entered into between the Company and
Retirement Group, Retirement Group terminated the leases with Sun and the
properties are now operated by another long-term care provider. Retirement
Group resumed principal and interest payments beginning September 1, 1999.
At June 30, 1999, the Company leased two skilled nursing facilities and one
assisted living facility with a total gross book value of $8.2 million to
Newcare Health Corp ("Newcare") and had mortgage loans to Newcare secured by
three skilled nursing facilities with an aggregate outstanding balance of $11.9
million. On June 22, 1999, Newcare filed for Chapter 11 bankruptcy. On September
30, 1999, in an auction held by the bankruptcy court, the Company purchased the
three skilled nursing facilities for the amount of the outstanding mortgage
loans which were in turn leased to Healthcare.
The regulatory and reimbursement environments in which nursing home and assisted
living companies operate have experienced significant adverse changes in recent
months. Given the negative impact of these changes on the financial performance
of operators of nursing homes and assisted living facilities, the Company
intends to closely review its real estate investment portfolio for possible
impairment during the fourth quarter of 1999.
FUNDS FROM OPERATIONS
The Company has adopted the definition of Funds From Operations ("FFO")
prescribed by the National Association of Real Estate Investment Trusts
("NAREIT"). FFO is defined as net income applicable to common stockholders
(computed in accordance with GAAP) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real property and
after adjustments for unconsolidated entities in which a REIT holds an interest.
In addition, the Company excludes any unrealized gains or losses resulting from
temporary changes in the estimated fair value of its REMIC Certificates from the
computation of FFO.
The Company believes that FFO is an important supplemental measure of operating
performance. FFO should not be considered as an alternative to net income or any
other GAAP measurement of performance as indicator of operating performance or
as an alternative to cash flows from operations, investing or financing
activities as a measure of liquidity. The Company believes that FFO is helpful
in evaluating a real estate investment portfolio's overall performance
considering the fact that historical cost accounting implicitly assumes that the
value of real estate assets diminishes predictably over time. FFO provides an
alternative measurement criteria, exclusive of certain non-cash charges included
in GAAP income, by which to evaluate the performance of such investments. FFO,
as used by the Company in accordance with the NAREIT definition may not be
comparable to similarly entitled items reported by other REITs that have not
adopted the NAREIT definition.
12
<PAGE>
The following table reconciles net income available to common stockholders to
FFO available to common stockholders (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income available to common stockholders $ 8,174 $ 3,537 $ 26,054 $ 29,212
Real estate depreciation 3,256 3,942 9,799 9,423
Real estate depreciation included in equity earnings - 90 - 90
Gain on sale of real estate investments - (1,738) - (9,926)
Unrealized loss on REMIC Certificates - 6,481 - 6,578
---------------------------- ----------------------------
FFO available to common stockholders $ 11,430 $ 12,312 $ 35,853 $ 35,377
---------------------------- ----------------------------
Basic FFO per share $ 0.42 $ 0.44 $ 1.31 $ 1.32
---------------------------- ----------------------------
Diluted FFO per share $ 0.42 $ 0.43 $ 1.28 $ 1.28
============================ ============================
</TABLE>
YEAR 2000
Currently many computer programs assume the first two digits of a year are
"19" and simply identify a year by the last two digits. It is widely
anticipated that, beginning in the year 2000 when the first two digits of a
year are "20" rather than "19", these computer programs will incorrectly
identify the year (i.e. the year 2000 will be incorrectly identified as
1900). Such miscalculations could result in the disruption of operations that
are reliant on these computer programs. Computer programs that identify a
year by four digits are deemed to be year 2000 compliant. The statements in
this section include year 2000 readiness disclosure within the meaning of the
Year 2000 Information and Readiness Disclosure Act of 1998.
STATUS OF THE COMPANY'S INFORMATION TECHNOLOGY SYSTEMS AND NON-INFORMATION
TECHNOLOGY SYSTEMS. Our primary use of information technology systems is its
internal accounting and information management software (collectively the
"Systems"). We have evaluated the Systems to assess whether they will
function properly with respect to dates in the year 2000 and beyond. Systems
that were determined to be non-compliant with the year 2000 and beyond have
been upgraded or replaced. The total cost associated with modifications
required to become year 2000 compliant was not material to our financial
position, results of operations or liquidity. Due to our limited reliance on
complex Systems, we believe the year 2000 issue, as it relates to its
internal Systems, will not have a material adverse effect upon our financial
position, results of operations or liquidity.
We will also have year 2000 exposure in non-information technology areas as
it relates to owned properties and our leased corporate offices. There is a
risk that embedded chips in elevators, security systems, electrical systems
and similar technology-driven devices may stop functioning on January 1,
2000. All of our owned properties are leased under triple-net leases and as
such, the cost to repair any of these items will be paid by the lessee. While
any disruption in services at our corporate offices due to failure of
non-information technology systems may be inconvenient and disruptive to
day-to-day activities, it is not expected to have a material adverse effect
on our financial position, results of operations or liquidity.
EXPOSURE TO THIRD PARTY YEAR 2000 ISSUES. We depend upon the following third
parties: our tenants and borrowers for rents and cash flows; our financial
institutions for availability of working capital and capital markets
financing; and our transfer agent to maintain and track investor information.
If our primary tenants or borrowers are not year 2000 compliant, or if they
face disruptions in their cash flows due to year 2000 issues, we could face
significant temporary disruptions in our cash flows after that date. These
disruptions could be compounded if the commercial banks that process our cash
receipts and disbursements are not year 2000 compliant. If there are
significant disruptions to the capital markets
13
<PAGE>
as a result of year 2000 issues, our ability to access the capital markets to
fund investments could be impaired.
Neither we nor our lessees or mortgagors can be assured that the federal and
state governments, upon which our lessees rely for Medicare and Medicaid
revenue, will be in compliance in a timely manner. The General Accounting
Office has reported that the Health Care Financing Administration, which runs
Medicare, is behind schedule in taking steps to deal with the year 2000 issue
and that it is highly unlikely that all of the Medicare systems will be
compliant in time to ensure the delivery of uninterrupted benefits and
services into the year 2000. The General Accounting Office has also reported
that, based upon its survey of the states, the District of Columbia and three
territories, less than 16% of the automated systems used by state and local
government to administer Medicaid are reported to be year 2000 compliant. Due
to the general uncertainty surrounding the readiness of third-party tenants
and other third-parties, including the federal and state governments, with
which our lessees do business, we are unable at this time to determine
whether non-compliance with the year 2000 issue by third-parties will have a
material impact on our financial position, results of operations or liquidity.
CONTINGENCY PLAN. In the event we experience a significant disruption in cash
receipts due to the a delay in Medicare or Medicaid receipts by our tenants
or due to other year 2000 non-compliance issues, we would seek additional
liquidity from our lenders and slow our investment activity.
Readers are cautioned that forward-looking statements contained in the above
discussion regarding year 2000 compliance should be read in conjunction with
the disclosure under the heading "-Statement Regarding Forward Looking
Disclosure" set forth below.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain information contained in this report includes forward looking
statements, which can be identified by the use of forward looking terminology
such as "may", "will", "expect", "should" or comparable terms or negatives of
those terms. These statements involve risks and uncertainties that could
cause actual results to differ materially from those described in the
statements. These risks and uncertainties include (without limitation) the
following: the effect of economic and market conditions and changes in
interest rates, government policy relating to the health care industry
including changes in reimbursement levels under the Medicare and Medicaid
programs, changes in reimbursement by other third party payors, the financial
strength of the operators of the Company's facilities as it affects the
continuing ability of such operators to meet their obligations to the Company
under the terms of the Company's agreements with its borrowers and operators,
the amount and the timing of additional investments, access to capital
markets and changes in tax laws and regulations affecting real estate
investment trusts. Exhibit 99 to our Annual Report on Form 10-K contains a
more comprehensive discussion of risks and uncertainties associated with our
business.
14
<PAGE>
PART II
LTC PROPERTIES, INC.
OTHER INFORMATION
SEPTEMBER 30, 1999
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
In accordance with Item 601(b)(4)(iii) of Regulation S-K, certain
instruments pertaining to Registrant's long-term debt have not
been filed; copies thereof will be furnished to the Securities
and Exchange Commission upon request.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LTC PROPERTIES, INC.
Registrant
Dated: November 15, 1999 By: /s/ JAMES J. PIECZYNSKI
-------------------------------------
James J. Pieczynski
President and Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LTC
PROPERTIES, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER
30, 1999 FILED HEREWITH AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,871
<SECURITIES> 98,248
<RECEIVABLES> 166,228
<ALLOWANCES> 1,250
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 460,076
<DEPRECIATION> 36,582
<TOTAL-ASSETS> 720,651
<CURRENT-LIABILITIES> 0
<BONDS> 11,984
0
165,500
<COMMON> 274
<OTHER-SE> 265,309
<TOTAL-LIABILITY-AND-EQUITY> 720,651
<SALES> 0
<TOTAL-REVENUES> 22,795
<CGS> 0
<TOTAL-COSTS> 10,849
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,399
<INCOME-PRETAX> 11,946
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,946
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.30
</TABLE>
