LTC

Business Context and Reporting Period

Company: LTC Properties, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: LTC Properties is a Maryland corporation organized as a Real Estate Investment Trust (REIT). It invests primarily in long-term care and health care-related properties through mortgage loans, property lease transactions, and other investments. As of December 31, 2003, the portfolio consisted of 53 owned skilled nursing properties (6,047 beds), 88 owned assisted living properties (4,182 units), and one school across 23 states, with a gross investment of approximately $456.0 million. The company also holds 37 mortgage loans and investments in REMIC Certificates.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 6.9% to $63.4 million. Rental income dropped $0.9 million, primarily due to classifying eight properties leased to Sun Healthcare Group as non-accrual ($3.3 million impact) and the elimination of rents from sold properties. This was partially offset by the receipt of past-due rent and new leases.
• Income Reduction: Net income available to common stockholders fell 61.3% to $6.5 million. The decline is attributed to significantly lower gains on asset sales in 2003 ($2.3 million) compared to 2002 ($14.5 million) and increased preferred stock dividends.
• Debt Reduction: Total debt decreased by $71.5 million (31.4%). The company fully retired its Secured Revolving Credit in the fourth quarter of 2003 and replaced it with a $45.0 million Unsecured Credit Agreement.
• Impairment Charges: The company recorded a $1.3 million impairment charge in 2003, a significant decrease from the $7.1 million recorded in 2002. The 2003 charge related primarily to REMIC Certificates and a closed skilled nursing facility.
• Dividend Increase: Common stock dividends increased from $0.40 per share in 2002 to $0.65 per share in 2003, reflecting a step-up in quarterly distributions throughout the year.

Guidance, Outlook, and Risks

Management Commentary & Outlook: Management anticipates completing some level of new investments in 2004 but noted the highly competitive environment for health care real estate acquisitions. Following the retirement of the Secured Revolving Credit, the company entered a new Unsecured Credit Agreement to fund future growth. Subsequent to year-end, the company purchased a 120-bed skilled nursing property in Texas and announced the sale of Series F Preferred Stock to fund redemptions of Series A and Series B Preferred Stock.

Key Risks and Contingencies:

• Operator Concentration: The company relies heavily on a few major operators. Assisted Living Concepts, Inc. (ALC) and Alterra Healthcare Corporation each accounted for over 20% of 2003 revenues. Both operators have faced financial distress and bankruptcy proceedings, though Alterra emerged from bankruptcy in December 2003.
• Government Regulation: The health care industry is heavily regulated. Changes in Medicare and Medicaid reimbursement policies, including potential rate cuts, could adversely affect the ability of borrowers and lessees to make payments.
• REMIC Certificates: The company retains subordinated REMIC Certificates which bear the first risk of loss in the event of impairment to underlying mortgages. These securities are sensitive to prepayment risk and credit losses.
• Insurance Availability: Increasing costs and unavailability of general and professional liability insurance for long-term care facilities pose a risk to lessees' ability to operate and pay rent.

Investor Verification Checklist

• Operator Solvency: Verify the current financial stability of major lessees ALC and Alterra, given their recent bankruptcy histories and significant revenue contribution.
• Non-Accrual Status: Review the status of the eight Sun Healthcare Group properties classified as non-accrual and the likelihood of rent recovery.
• Preferred Stock Redemptions: Confirm the execution of the announced redemptions of Series A and Series B Preferred Stock using proceeds from the Series F offering.
• REMIC Valuation: Assess the fair value of retained REMIC Certificates, noting the significant difference between carrying value ($61.7 million) and fair market value ($48.2 million) as of year-end.
• Dividend Sustainability: Evaluate whether the increased dividend rate ($0.65/share) is sustainable given the decline in net income available to common stockholders and the reliance on asset sales for growth.