UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
o

(Mark One)

x                              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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
incorporation or organization)

(I.R.S. Employer
Identification No.)

22917 Pacific Coast Highway,31365 Oak Crest Drive Suite 350200

Malibu,

Westlake Village, California  90265

91361

(Address of principal executive offices)

Registrant’s telephone number, including area code:(805) 981-8655

(310) 455-6010

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of each exchangeEach Exchange on Which Registered

Title of Stockon which registered


Common stock, $.01 Par Value

New York Stock Exchange

9.50% Series A Cumulative Preferred Stock, $.01 Par ValueNew York Stock Exchange
9.00% Series B Cumulative Preferred Stock, $.01 Par ValueNew York Stock Exchange

8.50% Series E Cumulative Convertible Preferred Stock, $.01 Par Value

New York Stock Exchange

8.00% Series F Cumulative Preferred Stock, $.01 Par Value

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  NONE

NONE

Indicate by checkmark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes o   No x

Indicate by checkmark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No x

Indicate by check mark whether the CompanyRegistrant (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 CompanyRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þx   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Company’sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ          No o

Indicate by check mark whether the CompanyRegistrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer o   Accelerated filer xNon-accelerated filer o

Indicated by check mark whether the Registrant is a shell company Yes þo   No ox


The aggregate market value of voting and non-voting stock held by non-affiliates of the CompanyRegistrant was approximately $150,679,375$492,423,470 as of June 30, 20032006 (the last business day of the Company’sRegistrant’s most recently completed second fiscal quarter).

18,005,643

(NumberThe number of shares of common stock outstanding as of March 5, 2004)
February 15, 2007 was 23,589,162.



DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant’s 2007 Annual Meeting of Stockholders have been incorporated into Part III of this Report.




STATEMENT REGARDING FORWARD LOOKING DISCLOSURE

Certain information contained in this annual report includes statements that are not purely historical and are “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, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All statements other than historical facts contained in this annual report are forward looking statements. These forward looking statements involve a number of risks and uncertainties. All forward looking statements included in this annual report are based on information available to us on the date hereof, and we assume no obligation to update such forward looking statements. Although we believe that the assumptions and expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. The actual results achieved by us may differ materially from any forward looking statements due to the risks and uncertainties of such statements.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports.

Item 1.     BUSINESS

Item 1.                        BUSINESS

General

LTC Properties, Inc., a health care real estate investment trust (or REIT), was organizedincorporated on May 12, 1992 in the State of Maryland and commenced operations on August 25, 1992. We invest primarily in long-term care and other health care related properties through mortgage loans, property lease transactions and other investments. Our primary objectives are to sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in long-term care properties and other health care related properties managed by experienced operators. 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 and form of investment.

In accordance with “plain English” guidelines provided by the Securities and Exchange Commission, whenever we refer to “our company” or to “us”, or use the terms “we” or “our”, we are referring to LTC Properties, Inc. and/or our subsidiaries.

We were organized to qualify, and intend to continue to qualify, as a REIT. So long as we qualify, with limited exceptions, we may deduct distributions, both preferred dividends and common dividends, to our stockholders from our taxable income. We have made distributions, and intend to continue to make distributions to our stockholders, in order to eliminate any federal tax liability.

Owned Properties.As of December 31, 2003,2006, our investment in owned properties consisted of 5363 skilled nursing properties with a total of 6,0477,304 beds, 8884 assisted living properties with a total of 4,1823,744 units and one school in 23 states, representing a gross investment of approximately $456.0$488.3 million. Here and throughout this Form 10-K wherever we provide details of our properties’ bed/unit count the number of beds/units applies to skilled nursing properties and assisted living residences only. This number is based upon unit/bed counts shown on operating licenses provided to us by lessees/borrowers or units/beds as stipulated by lease/mortgage documents. We have found during the years that these numbers often differ, usually not materially, from units/beds in operation at any point in time. The differences are caused by such things as operators converting a patient/resident room for alternative uses, such as offices or storage, or converting a multi-patient room/unit into a single patient room/unit. We monitor our properties on a routine basis through site visits and reviews of current licenses. In an instance where such change would cause a de-licensing of beds or in our opinion impact the value of the property, we would take action


against the lessee/borrower to preserve the value of the property/collateral. See Item 8. FINANCIAL STATEMENTSNote 6. Real Estate Investmentsfor further description.

The following operators accounted for more than 10% of our 20032006 rental revenue:

Lessee

Lessee

Percent of Revenues
Rental Revenue


Extendicare REIT and ALC


19.6

%

Alterra Healthcare Corporation

21.7

19.0

%

Assisted Living Concepts,

Preferred Care, Inc.

21.2

13.4

%

Sunwest Management, Inc.

15.3%

Mortgage Loans.   As part of our strategy of making long-term investments in properties used in the provision of long-term health care services, we provide mortgage financing on such properties based on our established investment underwriting criteria. SeeInvestment and Other Policies”Policies in this section for further discussion. We have also provided construction loans that by their terms converted into purchase/lease transactions or permanent financing mortgage loans upon completion of construction. See Item 8. FINANCIAL STATEMENTS —STATEMENTS—Note 6. Real Estate Investmentsfor further description.

See Item 8. FINANCIAL STATEMENTS —STATEMENTS—Note 11.10. Debt Obligationsfor a description of our Senior Mortgage Participation Payable, which iswas secured by certain of our mortgage loans receivable.

1


REMIC Certificates. We   In the past, we have completed securitizations by transferring mortgage loans to newly created Real Estate Mortgage Investment Conduits (or REMIC) that, in turn, issued mortgage pass-through certificates aggregating approximately the same amount. A portion of the REMIC Certificates were then sold to third parties and a portion of the REMIC Certificates were retained by us. The REMIC Certificates we retained arewere subordinated in right of payment to the REMIC Certificates sold to third parties and a portion of the REMIC Certificates we retained are interest onlywere interest-only certificates which havehad no principal amount and entitleentitled us to receive cash flows designated as interest. Since inceptionBetween 1993 and 1998 we have completed four REMIC pools. The first1993, 1994, 1996 and 1998 REMIC pools have all been fully retired. During 2005, a loan was in 1993 and was fully retired in 2003 without a realized loss within the pool. The last REMIC we completed was in 1998. We may again employ this type of financingpaid off in the future should1998 REMIC pool which caused the last third party REMIC Certificate holders entitled to any principal payments to be paid off in full. Under Emerging Issues Task Force No. 02-9 (“EITF 02-9”) “Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold”, a Special Purpose Entity (“SPE”) may become non-qualified or tainted which generally results in the “repurchase” by the transferor of all the assets sold to and still held by the SPE. Since we determineare now the financing environmentsole REMIC Certificate holder entitled to principal from the underlying loan pool, we bear all the risks and are entitled to all the rewards from the underlying loan pool. As required by EITF 02-9, the repurchase for the transferred assets was appropriateaccounted for this type of transaction.at fair value. At December 31, 2003,2006, we had investmentsdid not have any investment in REMIC Certificates with a carrying value of $61.7 million and a fair market value of $48.2 million.on our balance sheet. See Item 8. FINANCIAL STATEMENTSNote 6. Real Estate Investments and Note 7. Asset Securitizationsfor further description of our historical investments in REMIC Certificates.

We maintain a long-term investment interest in mortgages we originate either through the direct retention of the mortgages or historically through the retention of REMIC Certificates originated in our securitizations. We are a REIT and, as such, make our investments with the intent to hold them for long-term purposes. However, in the past we may securitizehave securitized a portion of our mortgage loan portfolio when a securitization providesprovided us with the best available form of capital to fund additional long-term investments. In addition, we believe that the REMIC Certificates we retainretained in the past from our securitizations provideprovided our stockholders with a more diverse real estate investment while maintaining the returns that provideprovided value to our stockholders.


Investment and Other Policies

Objectives and Policies.   Our investment policy is to invest primarily in income-producing long-term care properties. Also seeGovernment Regulation” below. Primarily, as a result of obligations we had under our Secured Revolving Credit, we have made few investments in years 2000 through 2003. Over the last five years. In the fourth quarter of 2003past three years (2004 through 2006), we retired the Secured Revolving Creditinvested approximately $57.6 million in mortgage loans and signed a $45.0 million Unsecured Credit Agreement. Subsequent to December 31, 2003 we purchased for $3.4 million a 120 bedacquired skilled nursing property in Texas. We have entered into a 20 year triple net lease with an operator which begins March 3, 2004, and assisted living properties for an annual lease amount of $0.4 million in the first year and increasing 2% every year thereafter.approximately $49.7 million. At this time, we anticipate completing some additional level of new investments in 2004;2007; however, given the highly competitive environment for health care real estate acquisitions and mortgages, we can give no assurances that we will complete a significant level of new investments in 2004.2007.

We believe that this competitive market has created an environment of very highly priced properties and low yielding mortgages. Because our historical strategy has been to invest in low cost per bed properties, we believe there is an opportunity for us to invest additional funds in our owned properties where the lessees have high occupancies and expansion ability. This market is captive to us since we own the properties. We are actively reviewing all of our owned properties and discussing additional investments with such likely lessees. We would make these investments at rates that would approximate our historical lease rates.

Historically our investments have consisted of:

• mortgage loans secured by long-term care properties;
• fee ownership of long-term care properties which are leased to providers; or
• ·       mortgage loans secured by long-term care properties;

·       fee ownership of long-term care properties which are leased to providers; or

·participation in such investments indirectly through investments in real estate partnerships or other entities that themselves make direct investments in such loans or properties.

In evaluating potential investments, we consider factors such as:

• ·type of property;
• the location;
• construction quality, condition and design of the property;
• the property’s current and anticipated cash flow and its adequacy to meet operational needs and lease obligations or debt service obligations;
• the experience, reputation and solvency of the licensee providing services;
• the payor mix of private, Medicare and Medicaid patients;
• the growth, tax and regulatory environments of the communities in which the properties are located;

2·       the location;


·       construction quality, condition and design of the property;

·       the property’s current and anticipated cash flow and its adequacy to meet operational needs and lease obligations or debt service obligations;

·       the experience, reputation and solvency of the licensee providing services;

• the occupancy and demand for similar properties in the area surrounding the property; and
• ·       the payor mix of private, Medicare and Medicaid patients;

·       the growth, tax and regulatory environments of the communities in which the properties are located;

·       the occupancy and demand for similar properties in the area surrounding the property; and

·the Medicaid reimbursement policies and plans of the state in which the property is located.

For investments in long-term care properties we favor low cost per bed opportunities, whether in fee simple properties or in mortgages. In addition, with respect to skilled nursing properties, we attempt to invest in properties that do not have to rely on a high percentage of private-pay patients. We seek to invest in properties that are located in suburban and rural areas of states. Prior to every investment, we conduct a property site review to assess the general physical condition of the property and the potential of additional sub-acute services. In addition, we review the environmental reports, state survey and financial statements of the property before the investment is made. We prefer to invest in a property that has a significant


market presence in its community and where state certificate of need and/or licensing procedures limit the entry of competing properties.

We believe that assisted living facilities are an important sector in the long-term care market and our investments include direct ownership of assisted living properties.

For assisted living investments we have attempted to diversify our portfolio both geographically and across product levels. Thus, we believe that although the majority of our investments are in affordably priced units, our portfolio also includes a significant number of upscale units in appropriate markets with certain operators. As skilled nursing facilities reimbursement cuts have created cost and pricing pressures in that industry, we have tended to emphasize fee simple investments in the assisted living sector where we believe facilities tend to be both newer and less dependent, if at all, on any government reimbursement.

Our new Unsecured Credit Agreement signed in December 2003, includes no formal restrictions in our investment in any single type of property. At December 31, 2003, we had committed to provide Alterra Healthcare Corporation (or Alterra) $2.5 million over three years to invest in leasehold improvements to properties leased from us and an additional $2.5 million over three years to expand properties leased from us. Both of these investments would be made at a 10% annual return to us.

Borrowing Policies.   We may incur additional indebtedness when, in the opinion of our Board of Directors, it is advisable. We may incur such indebtedness to make investments in additional long-term care properties or to meet the distribution requirements imposed upon REITs under the Internal Revenue Code of 1986, as amended. For other short-term purposes, we may, from time to time, negotiate lines of credit, or arrange for other short-term borrowings from banks or otherwise. We may also arrange for long-term borrowings through public offerings or from institutional investors.

In addition, we may incur mortgage indebtedness on real estate which we have acquired through purchase, foreclosure or otherwise. We may also obtain mortgage financing for unleveraged or underleveraged properties in which we have invested or may refinance properties acquired on a leveraged basis. There is no limitation on the number or amount of mortgages that may be placed on any one property, and we have no policy with respect to limitations on borrowing, whether secured or unsecured.

Prohibited Investments and Activities.   Our policies, which are subject to change by our Board of Directors without stockholder approval, impose certain prohibitions and restrictions on our investment practices or activities including prohibitions against:

• acquiring any real property unless the consideration paid for such real property is based on the fair market value of the property;
• ·investing in any junior mortgage loan unless by appraisal or other method, the Directors determine that

(a) (a)the capital invested in any such loan is adequately secured on the basis of the equity of the borrower in the property underlying such investment and the ability of the borrower to repay the mortgage loan; or

(b) (b)such loan is a financing device we enter into to establish the priority of our capital investment over the capital invested by others investing with us in a real estate project;

• ·investing in commodities or commodity futures contracts (other than interest rate futures, when used solely for hedging purposes);
• investing more than 1% of our total assets in contracts for sale of real estate unless such contracts are recordable in the chain of title;

3·       investing more than 1% of our total assets in contracts for sale of real estate unless such contracts are recordable in the chain of title;


• ·holding equity investments in unimproved, non-income producing real property, except such properties as are currently undergoing development or are presently intended to be developed within one year, together with mortgage loans on such property (other than first mortgage development loans), aggregating to more than 10% of our assets.

Competition

In the health care industry, we compete for real property investments with health care providers, other health care related REITs, real estate partnerships, banks, insurance companiesprivate equity funds, venture capital funds and other investors. Many of our competitors are significantly larger and have greater financial resources and lower cost of capital than we have available to us. Our ability to compete successfully for real property investments will be determined by numerous factors, including our ability to identify suitable acquisition


targets, our ability to negotiate acceptable terms for any such acquisition and the availability and our cost of capital.capital.

The lessees and borrowers of our properties compete on a local, regional and, in some instances, national basis with other health care providers. The ability of the lessee or borrower to compete successfully for patients or residents at our properties depends upon several factors, including the levels of care and services provided by the lessees or borrowers, the reputation of the providers, physician referral patterns, physical appearances of the properties, family preferences, financial condition of the operator and other competitive systems of health care delivery within the community, population and demographics.

Government Regulation

The health care industry is heavily regulated by the government. Our borrowers and lessees who operate health care facilities are subject to heavyextensive regulation by federal, state and local governments. These laws and regulations are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law. These changes may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by both government and other third-party payors. These changes may be applied retroactively. The ultimate timing or effect of these changes cannot be predicted. The failure of any borrower of funds from us or lessee of any of our properties to comply with such laws, requirements and regulations could result in sanctions or remedies such as denials of payment for new Medicare and Medicaid admissions, civil monetary penalties, state oversight and loss of Medicare and Medicaid participation or licensure. Such action could affect itsour borrower’s or lessee’s ability to operate its facility or facilities and could adversely affect such borrower’s or lessee’s ability to make debt or lease payments to us.

The properties owned by us and the manner in which they are operated are affected by changes in the reimbursement, licensing and certification policies of federal, state and local governments. Properties may also be affected by changes in accreditation standards or procedures of accrediting agencies that are recognized by governments in the certification process. In addition, expansion (including the addition of new beds or services or acquisition of medical equipment) and occasionally the discontinuation of services of health care facilities are, in some states, subjected to state and regulatory approval through “certificate of need” laws and regulations.

The ability of our borrowers and lessees to generate revenue and profit determines the underlying value of that property to us. Revenues of our borrowers and lessees are generally derived from payments for patient care. Sources of such payments for skilled nursing facilities include the federal Medicare program, state Medicaid programs, private insurance carriers, health care service plans, health maintenance organizations, preferred provider arrangements, and self-insured employers, as well as the patients themselves.

A significant portion of the revenue of our skilled nursing facility borrowers and lessees is derived from governmentally-funded reimbursement programs, such as Medicare and Medicaid. Because of significant health care costs paid by such government programs, both federal and state governments have adopted and continue to consider various health care reform proposals to control health care costs. In recent years, thereThere have been fundamental changes in the Medicare program that resulted in reduced levels of payment for a substantial portion of health care services. In many instances, revenues from Medicaid programs are already insufficient to cover the actual costs incurred in providing care to those patients. According to a report issued by the Kaiser Family FoundationCommission on Medicaid and the Uninsured in January 2003, 19October 2006, while many states have reduced,continued to freeze provider rates in fiscal year 2006, more states implemented provider rate increases in fiscal year 2006 or are considering reducing,plan to do so in fiscal year 2007. In fiscal year 2006, 46 states froze or cut rates for at least one provider type, but the same number of states also increased rates for at least one


group of providers. Similarly in fiscal year 2007, 47 states intend to increase rates for at least one group of providers and 43 states plan rate freezes or cuts, but no state currently plans to cut Medicaid payments for skilled nursing facilities for fiscal year 2007. Skilled nursing facilities also were the major provider group most likely to see payment increases for fiscal year 2006 and fiscal year 2007, although some skilled nursing facility payment rates.rate increases are tied to increased provider taxes. Nevertheless, future reduction in state Medicaid payments for skilled nursing facility services could 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. Moreover, health care facilities have experienced increasingcontinue to experience pressures from private payors attempting to control health care costs, and

4


reimbursement from private payors has in many cases effectively been reduced to levels approaching those of government payors.

Governmental and public concern regarding health care costs may result in significant reductions in payment to health care facilities, and there can be no assurance that future payment rates for either governmental or private payors will be sufficient to cover cost increases in providing services to patients. Any changes in reimbursement policies which reduce reimbursement to levels that are insufficient to cover the cost of providing patient care could adversely affect revenues of our skilled nursing facilityproperty borrowers and lessees and to a much lesser extent our assisted living facilitiesproperty borrowers and lessees and thereby adversely affect those borrowers’ and lessees’ abilities to make their debt or lease payments to us. Failure of the borrowers or lessees to make their debt or lease payments would have a direct and material adverse impact on us.

On August 4, 2003,2005, the Centers for Medicare & Medicaid Services, commonly known as CMS, published a final rule announcing that it will implementupdating skilled nursing facility prospective payment rates for fiscal year 2006, which began October 1, 2005. This update implemented refinements to the patient classification system and triggered the expiration of a 3.0%temporary payment add-on for certain high-acuity patients, effective January 1, 2006. The final rule also adopted a 3.1 percent market basket increase infor fiscal year 2006. On July 31, 2006, CMS published a notice updating Medicare skilled nursing facility prospective payment system rates for fiscal year 2004,2007, which began October 1, 2003.2006. Under the notice, skilled nursing facilities receive the full 3.1 percent market basket increase to rates, increasing Medicare payments to skilled nursing facilities by approximately $560.0 million for fiscal year 2007.

On February 5, 2007, the Bush Administration released its fiscal year 2008 budget proposal, which includes legislative and administrative proposals that would reduce Medicare spending by approximately $5.3 billion in fiscal 2008 and $75.8 billion over 5 years. Among other things, the budget would provide no update for skilled nursing facilities in 2008 and a - -0.65% adjustment to the update annually thereafter. The budget also would move toward site-neutral post-hospital payments to limit inappropriate incentives for five conditions commonly treated in both skilled nursing properties and inpatient rehabilitation facilities. The budget proposal also would eliminate all bad debt reimbursements for unpaid beneficiary cost-sharing over four years. In addition, the rule will adjustbudget proposal includes a series of proposals impacting Medicaid, including legislative and administrative changes that would reduce Medicaid payments by almost $26.0 billion over five years. Many of the proposed policy changes would require Congressional approval to implement. Thus, while the fiscal year 2004 rates by an additional 3.26% to reflect cumulative forecast errors since the start of the2007 skilled nursing facility prospectiverates will not decrease payments to skilled nursing facilities, the loss of revenues associated with potential future changes in skilled nursing facility payment systemrates could, in the future, have an adverse effect on July 1, 1998.the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.

The federal physician self-referral law, commonly known as Stark II (or Stark Law), prohibits physicians and certain other types of practitioners (including a medical doctor, doctor of osteopathy, optometrist, dentist or podiatrist) from making referrals for certain designated health services paid in whole or in part by Medicare and Medicaid to entities with which the practitioner or a member of the practitioner’s immediate family has a financial relationship, unless the financial relationship fits within an applicable exception to the Stark Law. The Stark Law also prohibits the entity receiving the referral from seeking payment under the Medicare and Medicaid programs for services rendered pursuant


to a prohibited referral. If an entity is paid for services rendered pursuant to a prohibited referral, it may incur civil penalties of up to $15,000 per prohibited claim and may be excluded from participating in the Medicare and Medicaid programs.

Legislative Developments

Each year, legislative proposals are introduced or proposed in Congress and in some state legislatures that would affect major changes in the health care system, either nationally or at the state level. Among the proposals under consideration are additional cost controls on statethe Medicare and Medicaid reimbursements,programs, health care provider cost-containment initiatives, by public and private payors, health care coverage expansion for the uninsured, increased scrutiny ofmeasures to prevent medical errors, limits on damages that could be claimed in physician malpractice lawsuits, and a “Patient Bill of Rights” to increase the liability of insurance companies as well as the ability of patients to sue in the event of a wrongful denial of claim. We cannot predict whether any proposals will be adopted or, if adopted, what effect, if any, such proposals would have on our business.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property or a secured lender (such as us) may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). Such laws often impose such liability without regard to whether the owner or secured lender knew of, or was responsible for, the presence or disposal of such substances and may be imposed on the owner or secured lender in connection with the activities of an operator of the property. The cost of any required remediation, removal, fines or personal or property damages and the owner’s or secured lender’s liability therefore could exceed the value of the property, and/or the assets of the owner or secured lender. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral which, in turn, would reduce our revenues.

Although the mortgage loans that we provide and leases covering our properties require the borrower and the lessee to indemnify us for certain environmental liabilities, the scope of such obligations may be limited and we cannot assure that any such borrower or lessee would be able to fulfill its indemnification obligations.

5Insurance


It is our current policy and we intend to continue this policy that all borrowers of funds from us and lessees of any of our properties secure adequate comprehensive property and general and professional liability insurance that covers us as well as the borrower and/or lessee. Even though that is our policy, certain borrowers and lessees have been unable to obtain general and professional liability insurance in the specific amounts required by our leases or mortgages because the cost of such insurance has increased substantially and some insurers have stopped offering such insurance for long-term care facilities. Additionally, in the past, insurance companies have filed for bankruptcy protection leaving certain of our borrowers and/or lessees without coverage for periods that were believed to be covered prior to such bankruptcies. The unavailability and associated exposure as well as increased cost of such insurance could have a material adverse effect on the lessees and borrowers, including their ability to make lease or mortgage payments. Although we contend that as a non-possessory landlord we are not generally responsible for what takes place on real estate we do not possess, claims including general and professional liability claims, may still be asserted against us which may result in costs and exposure for which insurance is not available. Certain risks may be uninsurable, not economically insurable or insurance may not be available and there can be no assurance that we, a borrower or lessee will have adequate funds to cover all


contingencies. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could be subject to an adverse claim including claims for general or professional liability, could lose the capital that we have invested in the properties, as well as the anticipated future revenue for the properties and, in the case of debt which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the properties. Certain losses such as losses due to floods or seismic activity if insurance is available may be insured subject to certain limitations including large deductibles or co-payments and policy limits.

InsuranceEmployees

We currently employ 12 people. The employees are not members of any labor union, and we consider our relations with our employees to be excellent.

Taxation of Our Company

General.   We believe that we have been organized and have operated in such a manner as to qualify for taxation as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 1992. We intend to continue to operate in such a manner, but no assurance can be given that we have operated or will be able to continue to operate in a manner so as to qualify or to remain qualified. This summary is qualified in its entirety by the applicable Internal Revenue Code provisions, rules and regulations, and administrative and judicial interpretations.

If we continue to qualify for taxation as a REIT, we will generally not be subject to federal corporate income taxes as long as we distribute all of our taxable income as dividends. This treatment substantially eliminates the “double taxation” (i.e., at the corporate and stockholder levels) that generally results from investment in a corporation. However, we will continue to be subject to federal income tax as follows:

First, we will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains.

Second, under certain circumstances, we may be subject to the alternative minimum tax, if our dividend distributions are less than our alternative minimum taxable income.

Third, if we have (i) net income from the sale or other disposition of foreclosure property which is held primarily for sale to customers in the ordinary course of business or (ii) other non-qualifying income from foreclosure property, we may elect to be subject to tax at the highest corporate rate on such income, if necessary to maintain our REIT status.

Fourth, if we have net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax.

Fifth, if we fail to satisfy the 75% gross income test or the 95% gross income test, but nonetheless maintain our qualification as a REIT because certain other requirements have been met, we will be subject to a 100% tax on an amount equal to (a) the gross income attributable to the greater of the amount by which we fail the 75% or 95% test multiplied by (b) a fraction intended to reflect our profitability.

Sixth, if we fail to distribute during each calendar year at least the sum of (i) 85% of our ordinary income for such year, (ii) 95% of our REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed.

Seventh, if we acquire an asset which meets the definition of a built-in gain asset from a corporation which is or has been a C corporation (i.e., generally a corporation subject to full corporate-level tax) in


certain transactions in which the basis of the built-in gain asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and if we subsequently recognize gain on the disposition of such asset during the ten-year period, called the recognition period, beginning on the date on which we acquired the asset, then, to the extent of the built-in gain (i.e., the excess of (a) the fair market value of such asset over (b) our adjusted basis in such asset, both determined as of the beginning of the recognition period), such gain will be subject to tax at the highest regular corporate tax rate, pursuant to IRS regulations.

Eighth, if we have taxable REIT subsidiaries, we will also be subject to a tax of 100% on the amount of any rents from real property, deductions or excess interest paid to us by any of our taxable REIT subsidiaries that would be reduced through reapportionment under certain federal income tax principles in order to more clearly reflect income for the taxable REIT subsidiary.

Requirements for Qualification.   The Internal Revenue Code defines a REIT as a corporation, trust or association:

(1)         which is managed by one or more trustees or directors;

(2)         the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

(3)         which would be taxable, but for Sections 856 through 860 of the Internal Revenue Code, as a domestic corporation;

(4)         which is neither a financial institution; nor, an insurance company subject to certain provisions of the Internal Revenue Code;

(5)         the beneficial ownership of which is held by 100 or more persons;

(6)         during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals (including specified entities); and

(7)         which meets certain other tests, described below, regarding the amount of its distributions and the nature of its income and assets.

The Internal Revenue Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

Income Tests.   There presently are two gross income requirements that we must satisfy to qualify as a REIT:

·       First, at least 75% of our gross income (excluding gross income from “prohibited transactions,” as defined below) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property, including rents from real property, or from certain types of temporary investment income.

·       Second, at least 95% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from income that qualifies under the 75% test or from dividends, interest and gain from the sale or other disposition of stock or securities.

Cancellation of indebtedness income generated by us is not taken into account in applying the 75% and 95% income tests discussed above. A “prohibited transaction” is a sale or other disposition of property (other than foreclosure property) held for sale to customers in the ordinary course of business. Any gain realized from a prohibited transaction is subject to a 100% penalty tax.


If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year if we are eligible for relief. These relief provisions will be generally available if: our failure to meet the tests was due to reasonable cause and not due to willful neglect, we attach a schedule of the sources of our income to our return; and any incorrect information on the schedule was not due to fraud with intent to evade tax.

Asset Tests.   We, at the close of each quarter of our taxable year, must also satisfy four tests relating to the nature of our assets.

·       First, at least 75% of the value of our total assets must be represented by real estate assets (including stock or debt instruments held for not more than one year purchased with the proceeds of a stock offering or long-term (at least five years) public debt offering of our company), cash, cash items and government securities.

·       Second, not more than 25% of our total assets may be represented by securities other than those in the 75% asset class.

·       Third, of the investments included in the 25% asset class, the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets and we may not own more than 10% of any one issuer’s outstanding voting securities.

·       Fourth, the Tax Relief Extension Act of 1999 (or 99 Act), provides that, subject to certain exceptions, for taxable years commencing after December 31, 2000, we may not own more than 10% of the total value of the securities of any issuer. See the 99 Act description beginning on page 12.

·       Fifth, the 99 Act also provides that not more than 20% of our value may be represented by securities of one or more taxable REIT subsidiaries.

With the passage of the American Jobs Creation Act of 2004 (2004 Act), for years beginning after the effective date of October 22, 2004, if we meet certain requirements, a violation of the prohibition of owning securities of any one issuer that exceeds 5% of the value of our assets or owning securities of any one issuer that exceeds 10% of that issuer’s voting securities or 10% of the value of that issuer’s outstanding securities may not result in disqualification as a REIT.

The 2004 Act provides that a de minimis failure, where we dispose of assets in order to meet these requirements within six months of the last day of the quarter in which the failure is identified or the requirements are otherwise met within this time frame, will not result in disqualification. A de minimis failure is one where the failure is due to ownership of assets the total value of which does not exceed the lesser of one percent of the total value of our assets at the end of the quarter or $10.0 million.

In addition, a failure exceeding the de minimis amount is considered to have satisfied the requirements if such failure is due to reasonable cause and not due to willful neglect, a description of each asset that causes the failure is filed with the Internal Revenue Service, a certain tax is paid, and the assets that cause the failure are disposed of within six months of the last day of the quarter in which we identify the failure. The tax is the greater of $50,000 or the net income generated by such assets during the period beginning on the date of failure until disposal taxed at the highest corporate rate.

Ownership of a Partnership Interest or Stock in a Corporation.   We own an interest in a partnership. In the case of a REIT that is a partner in a partnership, Treasury regulations provide that for purposes of the REIT income and asset tests the REIT will be deemed to own its proportionate share of the assets of the partnership, and will be deemed to be entitled to the income of the partnership attributable to such share. The ownership of an interest in a partnership by a REIT may involve special tax risks, including the challenge by the Internal Revenue Service of the allocations of income and expense items of the partnership, which would affect the computation of taxable income of the REIT, and the status of the


partnership as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes.

We also own interests in a number of subsidiaries which are intended to be treated as qualified real estate investment trust subsidiaries. The Internal Revenue Code provides that such subsidiaries will be ignored for federal income tax purposes and all assets, liabilities and items of income, deduction and credit of such subsidiaries will be treated as assets, liabilities and such items of ours.

If any partnership or qualified real estate investment trust subsidiary in which we own an interest were treated as a regular corporation (and not as a partnership or qualified real estate investment trust subsidiary) for federal income tax purposes, we would likely fail to satisfy the REIT asset test prohibiting a REIT from owning greater than 10% of the voting power of the stock or value of securities of any issuer, as described above, and would therefore fail to qualify as a REIT. As described above, the 2004 Act provides relief for certain failures of the REIT asset test for years beginning after October 22, 2004. We believe that each of the partnerships and subsidiaries in which we own an interest will be treated for tax purposes as a partnership or qualified real estate investment trust subsidiary, respectively, although no assurance can be given that the Internal Revenue Service will not successfully challenge the status of any such organization.

REMIC.   A regular or residual interest in a REMIC will be treated as a real estate asset for purposes of the REIT asset tests, and income derived with respect to such interest will be treated as interest on an obligation secured by a mortgage on real property, assuming that at least 95% of the assets of the REMIC are real estate assets. If less than 95% of the assets of the REMIC are real estate assets, only a proportionate share of the assets of and income derived from the REMIC will be treated as qualifying under the REIT asset and income tests. All of our historical REMIC Certificates were secured by real estate assets, therefore we believe that our historic REMIC interests fully qualified for purposes of the REIT income and asset tests.

Annual Distribution Requirements.   In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders annually in an amount at least equal to:

(1)         the sum of:

(a)           90% (95% for taxable years ending prior to January 1, 2001) of our “real estate investment trust taxable income” (computed without regard to the dividends paid deduction and our net capital gain); and

(b)          90% (95% for taxable years ending prior to January 1, 2001) of the net income, if any (after tax), from foreclosure property; minus

(2)         the excess of certain items of non-cash income over 5% of our real estate investment trust taxable income.

These annual distributions are paid in the taxable year to which they relate. Alternatively, they must be declared and payable to stockholders of record in either October, November, or December and paid during January of the following year. In addition, if we elect, the dividends may be declared before the due date of the tax return (including extensions) and paid on or before the first regular dividend payment date after such declaration, and we must specify the dollar amount in our tax returns.

Amounts distributed must not be preferential; that is, every stockholder of the class of stock with respect to which a distribution is made must be treated the same as every other stockholder of that class, and no class of stock may be treated otherwise than in accordance with its dividend rights as a class.

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To the extent that we do not distribute all of our net long-term capital gain or distribute at least 90% (95% for taxable years ending prior to January 1, 2001), but less than 100%, of our “real estate investment trust taxable income,” as adjusted, it will be subject to tax on such amounts at regular corporate tax rates. Furthermore, if we should fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates in the last three months of the calendar year, by the end of the following January) at least the sum of:

(1)         85% of our real estate investment trust ordinary income for such year;

(2)         95% of our real estate investment trust capital gain net income for such year; and

(3)         any undistributed taxable income from prior periods;

we would be subject to a 4% excise tax on the excess of such required distributions over the amounts actually distributed. Any real estate investment trust taxable income and net capital gain on which this excise tax is imposed for any year is treated as an amount distributed during that year for purposes of calculating such tax.

Failure to Qualify.   If we fail to qualify for taxation as a REIT in any taxable year, and certain relief provisions do not apply, we will be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to stockholders in any year in which we fail to qualify as a REIT will not be deductible by us, nor will any distributions be required to be made. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances we would be entitled to the statutory relief. Failure to qualify for even one year could substantially reduce distributions to stockholders and could result in our incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes.

99 Act.The 99 Act made a number of substantial changes to the qualification and tax treatment of REITs. Certain of those provisions were subsequently modified by the 2004 Act effective concurrently with the 99 Act. The following is a brief summary of certain of the significant REIT provisions in the 99 Act, as modified by the 2004 Act.

1)Investment limitations and taxable REIT subsidiaries.   The 99 Act modified the REIT asset test by adding a requirement effective for years beginning after December 31, 2000 that, with the exception of the stock of a taxable REIT subsidiary, a REIT cannot own more than 10% of the total value of the “securities” of any issuer (10% Rule). Excluded from the definition of “securities” are straight debt securities, a REIT’s interest as a partner in a partnership, any loan to an individual or an estate, certain rental agreements, any obligation to pay rents from real property, certain securities issued by States, the District of Columbia, a foreign government, or the Commonwealth of Puerto Rico, any security issued by a REIT, and any other arrangement that is determined by the Internal Revenue Service. Straight debt securities are non-convertible, non-contingent debt provided that the REIT or any controlled taxable REIT subsidiaries does not own any other “securities” of the issuer that have an aggregate value greater than 1% of the issuer’s outstanding securities.

2)              For a corporation to qualify as a taxable REIT subsidiary the following requirements must be satisfied.

(1)          The REIT must own stock in the subsidiary corporation.

(2)          Both the REIT and the subsidiary corporation must join in an election that the subsidiary corporation be treated as a “taxable REIT subsidiary” of the REIT.


(3)          The subsidiary corporation cannot directly or indirectly operate or manage either a lodging or health care facility.

(4)          The subsidiary corporation generally cannot provide to any person rights to any brand name under which lodging or health care facilities are operated.

A taxable REIT subsidiary can provide a limited amount of services to tenants of REIT property (even if such services were not considered customarily furnished in connection with the rental of real property) and can manage or operate properties, generally for third parties, without causing the rents received by the REIT from such parties not to be treated as rent from real properties. The rule that rents paid to a REIT do not qualify as rental from real property if the REIT owns more than 10% of the corporation paying the rent is modified by excepting rents paid by taxable REIT subsidiaries provided that 90% of the space is leased to third parties at comparable rents for comparable space. The 2004 Act prospectively removes the safe harbor for rents received by a REIT for customary services performed by a taxable REIT subsidiary. Instead, such payments will satisfy the existing safe harbor if the REIT pays the taxable REIT subsidiary 150% of the cost to the taxable REIT subsidiary of providing any services.

Interest paid by a taxable REIT subsidiary to the related REIT is subject to the earnings stripping rules contained in Section 163(j) of the Code and therefore the taxable REIT subsidiary cannot deduct interest in any year that it would exceed 50% of the subsidiary’s adjusted gross income. If any amount of interest, rent, or other deductions of the taxable REIT subsidiary to be paid to the REIT is determined not to be at arm’s length, an excise tax of 100% is imposed on the portion that is determined to be excessive. However, rent received by a REIT shall not fail to qualify as rents from real property by reason of the fact that all or any portion of such rent is redetermined for purposes of the excise tax.

The Act permits a REIT to own up to 100% of the stock of a “taxable REIT subsidiary.”  However, the value of all of the securities of taxable REIT subsidiaries owned by the REIT cannot exceed 20% of the value of the REIT’s assets.

The 10% Rule generally will not apply to securities owned by a REIT on July 12, 1999 (or Transition Rule). However, the Transition Rule would cease to apply to securities of an issuer if, after July 12, 1999, the REIT acquires additional securities of such issuer or if such issuer engages in a substantial new line of business, or acquires any substantial assets, other than in a reorganization or in a transaction qualifying under Section 1031 or 1033 of the Code.

3)Ownership of health care facilities.   The 99 Act permits a REIT to own and operate a health care facility for at least two years, and treat it as permitted “foreclosure” property, if the facility is acquired as the result of a default (or imminent default) of a lease or indebtedness.

4)REIT distribution requirements.   The 99 Act reduces the requirement that a REIT must distribute at least 95% of its income as deductible dividends to 90% of its income.

5)Rents from personal property.   A REIT may treat rent from personal property as rent from real property so long as the rent from personal property does not exceed 15% of the total rent from both real and personal property for the taxable year. The Act provides that this determination will be made by comparing the fair market value of the personal property to the fair market value of the real and personal property.

State and local taxation.We may be subject to state or local taxation in various state or local jurisdictions, including those in which we transact business or reside. Our state and local tax treatment may not conform to the federal income tax consequences discussed above.


Investor Information

We make available to the public free of charge through our internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. Our internet website address is www.ltcproperties.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.

Posted on our website and available upon request of any stockholders to our Investor Relations Department are the charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, our Corporate Governance Guidelines and a Code of Business Conduct and Ethics governing our directors, officers and employees. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code Business Conduct and Ethics and any waiver applicable to our senior financial officers and our executive officers or directors. In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors. Our Investor Relations Department can be contacted at:

LTC Properties, Inc.
31365 Oak Crest Drive, Suite #200
Westlake Village, California  91361
Attn: Investor Relations
(805) 981-8655

You may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy statements and other information we file. The address of the SEC website is www.sec.gov.

Our company is listed on the New York Stock Exchange (or NYSE), ticker symbol LTC. Section 303A.12(a) of the NYSE Listed Company Manual requires that listed companies disclose in their annual report to stockholders that the previous year’s NYSE Annual CEO Certification has been filed with the NYSE and disclose any qualifications. We filed, with the NYSE, our Annual CEO Certification for our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 without any qualifications.

Item 1A.                RISK FACTORS

Certain information contained in this annual report includes statements that are not purely historical and are “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, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All statements other than historical facts contained in this annual report are forward looking statements. These forward looking statements involve a number of risks and uncertainties. All forward looking statements included in this annual report are based on information available to us on the date hereof, and we assume no obligation to update such forward looking statements. Although we believe that the assumptions and expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. The actual results achieved by us may differ materially from any forward looking statements due to the risks and uncertainties of such statements.


We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports.

Such risks and uncertainties include, among other things, the following risks including those described in more detail below:

·       the status of the economy;

·       the status of capital markets, including prevailing interest rates;

·       compliance with and changes to regulations and payment policies within the health care industry;

·       changes in financing terms;

·       competition within the health care and senior housing industries; and

·       changes in federal, state and local legislation.

A Failure to Maintain or Increase our Dividend Could Reduce the Market Price of Our Stock.In January 2007, we declared a $0.125 per share monthly dividend for the first quarter of calendar 2007. During calendar 2006, we paid a $0.12 monthly dividend in each of the first, second, third and fourth quarters on our common stock. During calendar 2005, we paid a $0.30 dividend in the first quarter and a $0.11 monthly dividend in each of the second, third and fourth quarters on our common stock. The ability to maintain or raise our common dividend is dependent, to a large part, on growth of funds from operations. This growth in turn depends upon increased revenues from additional investments and loans, rental increases and mortgage rate increases.

At Times, We May Have Limited Access to Capital Which Will Slow Our Growth.A REIT is required to make dividend distributions and retains little capital for growth. As a result, growth for a REIT is generally through the steady investment of new capital in real estate assets. Presently, we believe capital is readily available to us. However, there will be times when we will have limited access to capital from the equity and/or debt markets. During such periods, virtually all of our available capital will be required to meet existing commitments and to reduce existing debt. We may not be able to obtain additional equity or debt capital or dispose of assets on favorable terms, if at all, at the time we require additional capital to acquire health care properties on a competitive basis or meet our obligations.

Income and Returns from Health Care Facilities Can be Volatile.   The possibility that the health care properties in which we invest will not generate income sufficient to meet operating expenses, will generate income and capital appreciation, if any, at rates lower than those anticipated or will yield returns lower than those available through investments in comparable real estate or other investments are additional risks of investing in health care related real estate. Income from properties and yields from investments in such properties may be affected by many factors, including changes in governmental regulation (such as zoning laws and government payment), general or local economic conditions (such as fluctuations in interest rates and employment conditions), the available local supply of and demand for improved real estate, a reduction in rental income as the result of an inability to maintain occupancy levels, natural disasters (such as hurricanes, earthquakes and floods) or similar factors.

We Depend on Lease Income and Mortgage Payments from Real Property.   Since a substantial portion of our income is derived from mortgage payments and lease income from real property, our income would be adversely affected if a significant number of our borrowers or lessees were unable to meet their obligations to us or if we were unable to lease our properties or make mortgage loans on economically favorable terms. There can be no assurance that any lessee will exercise its option to renew its lease upon the expiration of the initial term or that if such failure to renew were to occur, we could lease the property to others on favorable terms.


We Rely on a Few Major Operators.Extendicare REIT and Assisted Living Concepts, Inc (or ALC) lease 37 assisted living properties with a total of 1,427 units owned by us representing approximately 11.6%, or $66.0 million, of our total assets at December 31, 2006.

Alterra Healthcare Corporation (or Alterra), a wholly owned subsidiary of Brookdale Senior Living, Inc., leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 11.5%, or $65.2 million, of our total assets at December 31, 2006.

Preferred Care, Inc. (or Preferred Care) operates 32 skilled health care properties with a total of 3,871 beds that we own or on which we hold mortgages secured by first trust deeds. This represents approximately 10.9% or $62.1 million of our total assets at December 31, 2006.

Our financial position and ability to make distributions may be adversely affected by financial difficulties experienced by any of our other lessees and borrowers, including 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 or our borrowers when it expires.

Our Borrowers and Lessees Face Competition in the Health Care Industry.   The long-term care industry is highly competitive and we expect that it may become more competitive in the future. Our borrowers and lessees are competing with numerous other companies providing similar long-term care services or alternatives such as home health agencies, hospices, life care at home, community-based service programs, retirement communities and convalescent centers. There can be no assurance that our borrowers and lessees will not encounter increased competition in the future which could limit their ability to attract residents or expand their businesses and therefore affect their ability to make their debt or lease payments to us.

The Health Care Industry is Heavily Regulated by the Government.   Our borrowers and lessees who operate health care facilities are subject to extensive regulation by federal, state and local governments. These laws and regulations are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law. These changes may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by both government and other third-party payors. These changes may be applied retroactively. The ultimate timing or effect of these changes cannot be predicted. The failure of any borrower of funds from us or lessee of any of our properties to comply with such laws, requirements and regulations could affect its ability to operate its facility or facilities and could adversely affect such borrower’s or lessee’s ability to make debt or lease payments to us. Also see “Government Regulation” beginning on page 5.

Congress and the States Have Enacted Health Care Reform Measures.   The health care industry continues to face various challenges, including increased government and private payor pressure on health care providers to control costs. For instance, the Balanced Budget Act of 1997 enacted significant changes to the Medicare and Medicaid programs designed to modernize payment and health care delivery systems while achieving substantial budgetary savings. In seeking to limit Medicare reimbursement for long-term care services, Congress established the prospective payment system for skilled nursing facility services to replace the cost-based reimbursement system. Skilled nursing facilities needed to restructure their operations to accommodate the new Medicare prospective payment system reimbursement. Since the skilled nursing facility prospective payment system was enacted, several then publicly held operators of long-term care facilities and at least two then publicly held operators of assisted living facilities filed for reorganization under Chapter 11 of the federal bankruptcy laws. During their reorganizations and in some instances subsequent thereto, long-term care operators and assisted living operators reduced their operations by rejecting leases and/or defaulting on loans resulting in properties being returned to lessors or lenders. There can be no assurances given that there will not be additional bankruptcies of skilled nursing and assisted living operators in the future.


In recent years, Congress has adopted legislation to somewhat mitigate the impact of the Balanced Budget Act on providers, including skilled nursing facilities. For instance, on December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (P.L. 108-173). In addition to providing expanded Medicare prescription drug coverage, the new act modifies Medicare payments to a variety of health care providers. With respect to skilled nursing facilities, the act provides a temporary 128% increase in the Medicare payment for skilled nursing facility residents with acquired immune deficiency syndrome, applicable to services furnished on or after October 1, 2004. This temporary increase is still in effect as of December 31, 2006.

On the other hand, in February 2006 Congress gave final approval to the Deficit Reduction Act (or DRA), which will reduce net Medicare and Medicaid spending by approximately $11.0 billion over five years. Among other things, the legislation reduces Medicare skilled nursing facility bad debt payments by 30 percent for those individuals who are not dually eligible for Medicare and Medicaid, and strengthens Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage.

Most recently, on December 20, 2006, President Bush signed into law the Tax Relief and Health Care Act of 2006 (P.L 109-432), which also modifies a number of Medicare and Medicaid policies. Among other things, the law reduces the limit on Medicaid provider taxes from 6% (set forth in regulations) to 5.5% from January 1, 2008 through September 30, 2011. The Bush Administration had been expected to issue regulations calling for deeper cuts in funding, which is used by many states to finance state health programs. President Bush’s proposed 2008 fiscal year budget also would reduce Medicare and Medicaid payments to providers. Congress may consider legislation in the future that would further restrict Medicare and Medicaid funding. No assurances can be given that any additional Medicare or Medicaid legislation enacted by Congress would not reduce Medicare or Medicaid reimbursement to skilled nursing facilities or result in additional costs for operators of skilled nursing facilities.

In addition, comprehensive reforms affecting the payment for and availability of health care services have been proposed at the federal and state levels and major reform proposals have been adopted by certain states. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodology may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third party payors. The DRA also gives states greater flexibility to expand access to home and community based services by allowing states to provide these services as an optional benefit without undergoing the waiver approval process. Moreover, the DRA includes a new demonstration to encourage states to provide long-term care services in a community setting to individuals who currently receive Medicaid services in nursing homes. Together the provisions could increase state funding for home and community based services, while prompting states to cut funding for nursing facilities and homes for persons with disabilities. In light of continuing state Medicaid program reforms, budget cuts, and regulatory initiatives, no assurance can be given that the implementation of such regulations and reforms will not have a material adverse effect on the financial condition or results of operations of our lessees and/or borrowers which, in turn, could effect their ability to meet their contractual obligations to us. Also see “Government Regulation” beginning on page 5.

Our Borrowers and Lessees Rely on Government and Third Party Reimbursement.   The ability of our borrowers and lessees to generate revenue and profit determines the underlying value of that property to us. Revenues of our borrowers and lessees are generally derived from payments for patient care. Sources of such payments include the federal Medicare program, state Medicaid programs, private insurance carriers, health care service plans, health maintenance organizations, preferred provider arrangements, self-insured employers, as well as the patients themselves. Also see “Government Regulation” beginning on page 5.


We Could Incur More Debt.We operate with a policy of incurring debt when, in the opinion of our Directors, it is advisable. We may incur additional debt by issuing debt securities in a public offering or in a private transaction. Accordingly, we could become more highly leveraged. The degree of leverage could have important consequences to stockholders, including affecting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes and making us more vulnerable to a downturn in business or the economy generally.

We Could Fail to Collect Amounts Due Under Our Straight-line Rent Receivable Asset.Straight-line accounting requires us to calculate the total rent we will receive as a fixed amount over the life of the lease and recognize that revenue evenly over that life. In a situation where a lease calls for fixed rental increases during the life of the lease rental income recorded in the early years of a lease is higher than the actual cash rent received, which creates an asset on the balance sheet called deferred rent receivable. At some point during the lease, depending on the rent levels and terms, this reverses and the cash rent payments received during the later years of the lease are higher than the rental income recognized, which reduces the deferred rent receivable balance to zero by the end of the lease. We periodically assess the collectibility of the deferred rent receivable. If during our assessment we determined that we were unlikely to collect a portion or all of the deferred rent receivable balance, we may record an impairment charge in current period earnings for the portion, up to its full value, that we estimate will not be recovered.

Our Assets May be Subject to Impairment Charges.We periodically but not less than quarterly evaluate our real estate investments and other assets for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, operator performance and legal structure. If we determine that a significant impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset, which could have a material adverse affect on our results of operations and a non-cash impact on funds from operations in the period in which the write-off occurs.

A Failure to Reinvest Cash Available to Us Could Adversely Affect Our Future Revenues and Our Ability to Increase Dividends to Stockholders; There is Considerable Competition in Our Market for Attractive Investments.   From time to time, we will have cash available from (1) proceeds of sales of shares of securities, (2) proceeds from new debt issuances, (3) principal payments on our mortgages and other investments, (4) sale of properties, and (5) funds from operations. We may reinvest this cash in health care investments in accordance with our investment policies, repay outstanding debt or invest in qualified short-term or long-term investments. We compete for real estate investments with a broad variety of potential investors. The competition for attractive investments negatively affects our ability to make timely investments on acceptable terms. Delays in acquiring properties or making loans will negatively impact revenues and perhaps our ability to increase distributions to our stockholders.

Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences to Our Stockholders.   We intend to operate so as to qualify as a REIT under the Internal Revenue Code (the Code). We believe that we have been organized and have operated in a manner which would allow us to qualify as a REIT under the Code beginning with our taxable year ended December 31, 1992. However, it is possible that we have been organized or have operated in a manner which would not allow us to qualify as a REIT, or that our future operations could cause us to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must pay dividends to stockholders aggregating annually at least 90% (95% for taxable years ending prior to January 1, 2001) of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding capital gains). Legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a


REIT or the federal income tax consequences of such qualification. However, we are not aware of any pending tax legislation that would adversely affect our ability to operate as a REIT.

If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless we are entitled to relief under statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year during which we lost qualification. If we lose our REIT status, our net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved. In addition, we would no longer be required to make distributions to stockholders.

Our real estate investments are relatively illiquid.   Real estate investments are relatively illiquid and, therefore, tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. All of our properties are “special purpose” properties that cannot be readily converted to general residential, retail or office use. Health care facilities that participate in Medicare or Medicaid must meet extensive program requirements, including physical plant and operational requirements, which are revised from time to time. Such requirements may include a duty to admit Medicare and Medicaid patients, limiting the ability of the facility to increase its private pay census beyond certain limits. Medicare and Medicaid facilities are regularly inspected to determine compliance, and may be excluded from the programs—in some cases without a prior hearing—for failure to meet program requirements. Transfers of operations of nursing homes and other healthcare-related facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and other types of real estate. Thus, if the operation of any of our properties becomes unprofitable due to competition, age of improvements or other factors such that our lessee or mortgagor becomes unable to meet its obligations on the lease or mortgage loan, the liquidation value of the property may be substantially less, particularly relative to the amount owing on any related mortgage loan, than would be the case if the property were readily adaptable to other uses. The receipt of liquidation proceeds or the replacement of an operator that has defaulted on its lease or loan could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the property or the replacement of the operator with a new operator licensed to manage the facility. In addition, certain significant expenditures associated with real estate investment, such as real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment. Should such events occur, our income and cash flows from operations would be adversely affected.

Our Remedies May Be Limited When Mortgage Loans Default.To the extent we invest in mortgage loans, such mortgage loans may or may not be recourse obligations of the borrower and generally will not be insured or guaranteed by governmental agencies or otherwise. In the event of a default under such obligations, we may have to foreclose on the property underlying the mortgage or protect our interest by acquiring title to a property and thereafter make substantial improvements or repairs in order to maximize the property’s investment potential. Borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against such enforcement and/or bring claims for lender liability in response to actions to enforce mortgage obligations. If a borrower seeks bankruptcy protection, the Bankruptcy Court may impose an automatic stay that would preclude us from enforcing foreclosure or other remedies against the borrower. Relatively high “loan to value” ratios and declines in the value of the property may prevent us from realizing an amount equal to our mortgage loan upon foreclosure.


We are Subject to Risks and Liabilities in Connection with Properties Owned Through Limited Liability Companies and Partnerships.   We have ownership interests in limited liability companies and/or partnerships. We may make additional investments through these ventures in the future. Partnership or limited liability company investments may involve risks such as the following:

·       our partners or co-members might become bankrupt (in which event we and any other remaining general partners or members would generally remain liable for the liabilities of the partnership or limited liability company);

·       our partners or co-members might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals;

·       our partners or co-members may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT; and

·       agreements governing limited liability companies and partnerships often contain restrictions on the transfer of a member’s or partner’s interest or “buy-sell” or other provisions which may result in a purchase or sale of the interest at a disadvantageous time or on disadvantageous terms.

We will, however, generally seek to maintain sufficient control of our partnerships and limited liability companies to permit us to achieve our business objectives. Our organizational documents do not limit the amount of available funds that we may invest in partnerships or limited liability companies. The occurrence of one or more of the events described above could have a direct and adverse impact on us.

Item 1B.               UNRESOLVED STAFF COMMENTS

None.

Item 2.                        PROPERTIES

Investment Portfolio

At December 31, 2006, our “direct real estate investment portfolio” (properties that we own or on which we hold promissory notes secured by first mortgages) consisted of investments in 121 skilled nursing properties with 13,953 beds, 94 assisted living properties with 4,449 units and two schools in 32 states. We had approximately $488.3 million (before accumulated depreciation of $102.1 million) invested in properties we own and lease to lessees and approximately $118.3 million invested in mortgage loans (before allowance for doubtful accounts of $1.3 million). Subsequent to December 31, 2006, we sold a closed, previously impaired skilled nursing property to a third party for $0.2 million. As a result of the sale, we will recognize a gain of $0.1 million in 2007.

Skilled nursing facilities provide restorative, rehabilitative and nursing care for people not requiring the more extensive and sophisticated treatment available at acute care hospitals. Many skilled nursing facilities provide ancillary services that include occupational, speech, physical, respiratory and IV therapies, as well as provide sub-acute care services which are paid either by the patient, the patient’s family, or through federal Medicare or state Medicaid programs.

Assisted living facilities serve elderly persons who require assistance with activities of daily living, but do not require the constant supervision skilled nursing facilities provide. Services are usually available 24-hours a day and include personal supervision and assistance with eating, bathing, grooming and administering medication. The facilities provide a combination of housing, supportive services, personalized assistance and health care designed to respond to individual needs.


The schools in our real estate investment portfolio are charter schools. Charter schools provide an alternative to the traditional public school. Charter schools are generally autonomous entities authorized by the state or locality to conduct operations independent from the surrounding public school district. Laws vary by state, but generally charters are granted by state boards of education either directly or in conjunction with local school districts or public universities. Operators are granted charters to establish and operate schools based on the goals and objectives set forth in the charter. Upon receipt of a charter, schools receive an annuity from the state for each student enrolled.

Owned Properties.At December 31, 2006, we owned 63 skilled nursing properties with a total of 7,304 beds, 84 assisted living properties with a total of 3,744 units and one school in 23 states, representing a gross investment of approximately $488.3 million. The properties are leased pursuant to non-cancelable leases generally with an initial term of 10 to 30 years. The leases provide for a fixed minimum base rent during the initial and renewal periods. Most of the leases provide for annual fixed rent increases or increases based on consumer price indices over the term of the lease. In addition, certain of our leases provide for additional rent through revenue participation (as defined in the lease agreement) in incremental revenues generated by the facilities over a defined base period, effective at various times during the term of the lease. Each lease is a triple net lease which requires the lessee to pay additional charges including all taxes, insurance, assessments, maintenance and repair (capital and non-capital expenditures), and other costs necessary in the operation of the facility. Most of the leases contain renewal options. Subsequent to December 31, 2006, we sold a closed, previously impaired skilled nursing property to a third party for $0.2 million. As a result of the sale, we will recognize a gain of $0.1 million in 2007.

The following table sets forth certain information regarding our owned properties as of December 31, 2006 (dollar amounts in thousands):

Location

 

 

 

No. of
SNFs

 

No. of
ALFs

 

No. of
Schools

 

No. of
Beds/Units(1)

 

Encumbrances

 

Lease
Term(2)

 

Current
Investment

 

Alabama

 

 

3

 

 

 

1

 

 

 

 

 

 

458

 

 

 

$

 

 

 

81

 

 

 

$

16,539

 

 

Arizona

 

 

5

 

 

 

2

 

 

 

 

 

 

1,029

 

 

 

 

 

 

156

 

 

 

41,053

 

 

California

 

 

1

 

 

 

2

 

 

 

 

 

 

343

 

 

 

16,712

 

 

 

62

 

 

 

29,305

 

 

Colorado

 

 

4

 

 

 

6

 

 

 

 

 

 

562

 

 

 

6,294

 

 

 

181

 

 

 

27,401

 

 

Florida

 

 

3

 

 

 

6

 

 

 

 

 

 

776

 

 

 

2,130

 

 

 

161

 

 

 

32,831

 

 

Georgia

 

 

2

 

 

 

1

 

 

 

 

 

 

292

 

 

 

 

 

 

58

 

 

 

6,550

 

 

Idaho

 

 

 

 

 

4

 

 

 

 

 

 

148

 

 

 

 

 

 

96

 

 

 

9,756

 

 

Indiana

 

 

 

 

 

2

 

 

 

 

 

 

78

 

 

 

 

 

 

96

 

 

 

5,070

 

 

Iowa

 

 

7

 

 

 

1

 

 

 

 

 

 

645

 

 

 

 

 

 

168

 

 

 

17,087

 

 

Kansas

 

 

3

 

 

 

4

 

 

 

 

 

 

398

 

 

 

 

 

 

172

 

 

 

17,313

 

 

Nebraska

 

 

 

 

 

4

 

 

 

 

 

 

156

 

 

 

 

 

 

96

 

 

 

9,332

 

 

New Jersey

 

 

 

 

 

1

 

 

 

1

 

 

 

39

 

 

 

 

 

 

111

 

 

 

12,195

 

 

New Mexico

 

 

7

 

 

 

 

 

 

 

 

 

860

 

 

 

 

 

 

149

 

 

 

48,503

 

 

N. Carolina

 

 

 

 

 

5

 

 

 

 

 

 

210

 

 

 

 

 

 

168

 

 

 

13,096

 

 

Ohio

 

 

4

 

 

 

11

 

 

 

 

 

 

683

 

 

 

14,814

 

 

 

124

 

 

 

53,210

 

 

Oklahoma

 

 

 

 

 

6

 

 

 

 

 

 

221

 

 

 

4,252

 

 

 

168

 

 

 

12,315

 

 

Oregon

 

 

1

 

 

 

3

 

 

 

 

 

 

218

 

 

 

 

 

 

101

 

 

 

10,652

 

 

Pennsylvania

 

 

 

 

 

1

 

 

 

 

 

 

69

 

 

 

 

 

 

136

 

 

 

8,327

 

 

S. Carolina

 

 

 

 

 

3

 

 

 

 

 

 

128

 

 

 

 

 

 

168

 

 

 

7,610

 

 

Tennessee

 

 

3

 

 

 

 

 

 

 

 

 

201

 

 

 

 

 

 

142

 

 

 

3,866

 

 

Texas(5)

 

 

16

 

 

 

13

 

 

 

 

 

 

2,660

 

 

 

4,064

 

 

 

147

 

 

 

67,904

 

 

Virginia

 

 

3

 

 

 

 

 

 

 

 

 

443

 

 

 

 

 

 

174

 

 

 

12,168

 

 

Washington

 

 

1

 

 

 

8

 

 

 

 

 

 

431

 

 

 

5,545

 

 

 

98

 

 

 

26,204

 

 

TOTAL

 

 

63

 

 

 

84

 

 

 

1

 

 

 

11,048

 

 

 

53,811

(3)

 

 

 

 

 

 

488,287

(4)

 


1.                 See Item 1. Business General—Owned Properties for discussion of bed/unit count.

22




2.                 Weighted average remaining months in lease term as of December 31, 2006.

3.                 Consists of: i) $48,266 of non-recourse mortgages payable by us secured by 16 assisted living properties with 828 units and ii) $5,545 of tax-exempt bonds secured by five assisted living properties in Washington with 188 units. As of December 31, 2006 our gross investment in properties encumbered by mortgage loans, bonds and capital leases was $83,771.

4.                 Of the total, $230,159 relates to investments in skilled nursing properties, $248,858 relates to investments in assisted living properties and $9,270 relates to an investment in a school.

5.                 Subsequent to December 31, 2006, we sold a closed, previously impaired skilled nursing property to a third party for $166. As a result of the sale, we will recognize a gain of $149 in 2007.

Mortgage Loans.At December 31, 2006, we had 58 mortgage loans secured by first mortgages on 58 skilled nursing properties with a total of 6,649 beds, 10 assisted living properties with 705 units and one school located in 19 states. See Item 8. FINANCIAL STATEMENTS—Note 6. Real Estate Investments for further description.

The following table sets forth certain information regarding our mortgage loans as of December 31, 2006 (dollar amounts in thousands):

Location

 

 

 

No. of
SNFs

 

No. of
ALFs

 

No. of
Schools

 

No. of
Beds/
Units(3)

 

Interest
Rate %

 

Average
Months to
Maturity

 

Face Amount
of Mortgage
Loans

 

Current Amount
of Mortgage
Loans

 

Current
Annual Debt
Service(1)

 

Alabama

 

 

1

 

 

 

 

 

 

 

 

 

120

 

 

9.63%

 

 

39

 

 

 

$

3,788

 

 

 

$

3,730

 

 

 

$

402

 

 

Arkansas

 

 

1

 

 

 

 

 

 

 

 

 

174

 

 

11.45

 

 

51

 

 

 

2,000

 

 

 

1,436

 

 

 

251

 

 

California

 

 

8

 

 

 

1

 

 

 

 

 

 

1,177

 

 

9.85-12.10

 

 

96

 

 

 

20,016

 

 

 

15,132

 

 

 

2,727

 

 

Florida

 

 

5

 

 

 

 

 

 

 

 

 

537

 

 

11.20-13.13

 

 

21

 

 

 

13,860

 

 

 

12,864

 

 

 

1,907

 

 

Georgia

 

 

4

 

 

 

 

 

 

 

 

 

419

 

 

10.13-12.17

 

 

34

 

 

 

10,900

 

 

 

10,332

 

 

 

1,218

 

 

Iowa

 

 

1

 

 

 

1

 

 

 

 

 

 

104

 

 

12.12-12.64

 

 

15

 

 

 

5,600

 

 

 

5,120

 

 

 

714

 

 

Louisiana

 

 

1

 

 

 

 

 

 

 

 

 

127

 

 

12.02

 

 

119

 

 

 

1,600

 

 

 

1,234

 

 

 

212

 

 

Michigan

 

 

1

 

 

 

 

 

 

 

 

 

196

 

 

12.13

 

 

47

 

 

 

3,000

 

 

 

2,122

 

 

 

392

 

 

Minnesota

 

 

 

 

 

 

 

 

1

 

 

 

 

 

6.64

 

 

150

 

 

 

3,751

 

 

 

3,751

 

 

 

249

 

 

Missouri

 

 

2

 

 

 

 

 

 

 

 

 

190

 

 

9.88-10.35

 

 

75

 

 

 

3,000

 

 

 

2,488

 

 

 

339

 

 

Montana

 

 

2

 

 

 

1

 

 

 

 

 

 

197

 

 

12.12-12.89

 

 

29

 

 

 

7,946

 

 

 

7,195

 

 

 

1,015

 

 

Nebraska

 

 

1

 

 

 

4

 

 

 

 

 

 

245

 

 

11.03-12.64

 

 

18

 

 

 

12,111

 

 

 

11,272

 

 

 

1,524

 

 

Nevada

 

 

1

 

 

 

 

 

 

 

 

 

100

 

 

11.63

 

 

43

 

 

 

1,200

 

 

 

827

 

 

 

152

 

 

Oklahoma

 

 

2

 

 

 

 

 

 

 

 

 

273

 

 

12.15

 

 

80

 

 

 

2,600

 

 

 

1,382

 

 

 

243

 

 

S. Dakota

 

 

 

 

 

1

 

 

 

 

 

 

34

 

 

12.64

 

 

27

 

 

 

2,346

 

 

 

2,242

 

 

 

301

 

 

Tennessee

 

 

2

 

 

 

 

 

 

 

 

 

190

 

 

9.85-10.38

 

 

74

 

 

 

5,675

 

 

 

4,686

 

 

 

656

 

 

Texas

 

 

23

 

 

 

2

 

 

 

 

 

 

2,981

 

 

10.05-12.95

 

 

59

 

 

 

42,264

 

 

 

29,013

 

 

 

5,190

 

 

Washington

 

 

2

 

 

 

 

 

 

 

 

 

175

 

 

12.40-12.75

 

 

68

 

 

 

2,600

 

 

 

1,721

 

 

 

532

 

 

Wisconsin

 

 

1

 

 

 

 

 

 

 

 

 

115

 

 

11.00

 

 

122

 

 

 

2,200

 

 

 

1,725

 

 

 

272

 

 

TOTAL

 

 

58

 

 

 

10

 

 

 

1

 

 

 

7,354

 

 

 

 

 

 

 

 

 

$

146,457

 

 

 

$

118,272

(2)

 

 

$

18,296

 

 


1.Includes principal and interest payments.

2.Of the total current principal balance, $89,328 relates to investments in skilled nursing properties, $25,193 relates to investments in assisted living properties and $3,751 relates to an investment in a school. This balance is gross of allowance for doubtful accounts.

3.See Item 1. Business General—Owned Properties for discussion of bed/unit count.

In general, the mortgage loans may not be prepaid except in the event of the sale of the collateral property to a third party that is not affiliated with the borrower, although partial prepayments (including the prepayment premium) are often permitted where a mortgage loan is secured by more than one property upon a sale of one or more, but not all, of the collateral properties to a third party which is not an


affiliate of the borrower. The terms of the mortgage loans generally impose a premium upon prepayment of the loans depending upon the period in which the prepayment occurs, whether such prepayment was permitted or required, and certain other conditions such as upon the sale of the property under a pre-existing purchase option, destruction or condemnation, or other circumstances as approved by us. On certain loans, such prepayment amount is based upon a percentage of the then outstanding balance of the loan, usually declining ratably each year. For other loans, the prepayment premium is based on a yield maintenance formula. In addition to a lien on the mortgaged property, the loans are generally secured by certain non-real estate assets of the properties and contain certain other security provisions in the form of letters of credit, pledged collateral accounts, security deposits, cross-default and cross-collateralization features and certain guarantees.

Item 3.                        LEGAL PROCEEDINGS

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.

Item 4.                        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5.                        MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is listed on the New York Stock Exchange (or NYSE). Set forth below are the high and low reported sale prices for our common stock as reported on the NYSE for each of the periods indicated below.

 

 

2006

 

2005

 

 

 

High

 

Low

 

High

 

Low

 

First Quarter

 

$

23.51

 

$

20.78

 

$

20.00

 

$

16.87

 

Second Quarter

 

$

23.44

 

$

19.99

 

$

21.95

 

$

16.50

 

Third Quarter

 

$

25.00

 

$

20.77

 

$

23.92

 

$

19.26

 

Fourth Quarter

 

$

27.99

 

$

23.84

 

$

22.23

 

$

19.30

 

Holders of Record

As of December 31, 2006 we had approximately 450 stockholders of record of our common stock.


Dividend Information

We declared and paid total cash distributions on common stock as set forth below:

 

 

Declared

 

Paid

 

 

 

2006

 

2005

 

2006

 

2005

 

First Quarter

 

$

0.360

 

$

0.300

 

$

0.360

 

$

0.300

 

Second Quarter

 

$

 

$

0.660

 

$

0.360

 

$

0.330

 

Third Quarter

 

$

0.360

 

$

0.330

 

$

0.360

 

$

0.330

 

Fourth Quarter

 

$

0.360

 

$

0.360

 

$

0.360

 

$

0.330

 

 

 

$

1.080

 

$

1.650

 

$

1.440

 

$

1.290

 

We intend to distribute to our stockholders an amount at least sufficient to satisfy the distribution requirements of a REIT. Cash flows from operating activities available for distribution to stockholders will be derived primarily from interest and rental payments from our real estate investments. All distributions will be made subject to approval of the Board of Directors and will depend on our earnings, our financial condition and such other factors as the Board of Directors deem relevant. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Internal Revenue Code, we are required to make distributions to holders of our shares equal to at least 90% of our REIT taxable income. (See “Annual Distribution Requirements” beginning on page 11.)

Securities Authorized for Issuance under Equity Compensation Plans

Securities authorized for issuance under equity compensation plans as of December 31, 2006 is as follows:

Equity Compensation Plan Information

Plan Category

 

 

 

(a)
Number of securities to
be issued upon exercise
of outstanding options
warrants and rights

 

(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights

 

(c)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))

 

Equity compensation plans approved by security holders

 

 

64,000

 

 

 

$

10.33

 

 

 

577,850

 

 

Equity compensation plans not approved by security holders

 

 

 

 

 

 

 

 

 

 

Total

 

 

64,000

 

 

 

$

10.33

 

 

 

577,850

 

 


Stock Performance Graph

This graph compares the cumulative total stockholder return on our common stock from December 31, 2001 to December 31, 2006 with the cumulative stockholder total return of (1) the Standard & Poor’s 500 Stock Index and (2) the NAREIT Hybrid REIT Index. The comparison assumes $100 was invested on December 31, 2001 in our common stock and in each of the foregoing indices and assumes the reinvestment of dividends.

Total Return Stock Performance

The following companies comprise the NAREIT Hybrid REIT Index: Presidential Realty Corporation (Class B), iStar Financial Inc., Capital Lease Funding Inc., Arizona Land Income Corporation, PMC Commercial Trust, National Health Investors Inc., and LTC Properties Inc.

The stock performance depicted in the above graph is not necessarily indicative of future performance. The stock performance graph and compensation committee report shall not be deemed incorporated by reference into any filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934 except to the extent that we specifically incorporate such information by reference, and shall not otherwise be deemed filed under such Acts.

26




Item 6.                        SELECTED FINANCIAL INFORMATION

The following table of selected financial information should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

(In thousands, except per share amounts)

 

Operating Information:

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

73,163

 

$

72,408

 

$

62,177

 

$

58,825

 

$

63,056

 

Income from continuing operations

 

45,485

 

50,637

 

32,252

 

17,106

 

16,643

 

Preferred stock dividends

 

(17,157

)

(17,343

)

(17,356

)

(16,596

)

(15,042

)

Preferred stock redemption charge

 

 

 

(4,029

)

(1,241

)

 

Net income available to common stockholders

 

61,631

 

35,366

 

15,003

 

6,482

 

16,761

 

Per share Information:

 

 

 

 

 

 

 

 

 

 

 

Net Income per Common Share from Continuing Operations Net of Preferred Stock Dividends:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.21

 

$

1.49

 

$

0.56

 

$

0.08

 

$

0.03

 

Diluted

 

$

1.21

 

$

1.47

 

$

0.56

 

$

0.08

 

$

0.03

 

Net Income Per Common Share Available to Common Stockholders:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.64

 

$

1.58

 

$

0.77

 

$

0.36

 

$

0.91

 

Diluted

 

$

2.51

 

$

1.56

 

$

0.77

 

$

0.36

 

$

0.91

 

Common Stock Distributions declared

 

$

1.08

 

$

1.65

 

$

1.125

 

$

0.65

 

$

0.40

 

Common Stock Distributions paid

 

$

1.44

 

$

1.29

 

$

1.125

 

$

0.65

 

$

0.40

 

Balance Sheet Information:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

567,767

 

$

585,271

 

$

547,880

 

$

574,924

 

$

599,925

 

Total debt(1)

 

53,811

 

92,361

 

96,764

 

149,765

 

223,787

 


(1)          Includes bank borrowings, mortgage loans payable, bonds payable and capital lease obligations and senior participation payable


Item 7.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

Business

LTC Properties, Inc. a self-administered, health care real estate investment trust (or REIT) commenced operations in 1992. We invest primarily in long-term care and other health care related properties through mortgage loans, property lease transactions and other investments. The following table summarizes our portfolio as of December 31, 2006:

Type of Property

 

 

 

Gross
Investments
(in thousands)

 

Percentage of
Investments

 

For the
twelve
months ended
12/31/06
Revenues(2)
(in thousands)

 

Percentage
of Revenues

 

Number of
Properties

 

Number of
Beds/Units(4)

 

Investment
per Bed/Unit
(in thousands)

 

Number of 
Operators(1)

 

Number 
of
States(1)

 

Assisted Living Properties

 

 

$

274,052

(3)

 

 

45.2

%

 

 

$

31,672

 

 

 

46.2

%

 

 

94

 

 

 

4,449

 

 

 

$

61.60

 

 

 

9

 

 

 

22

 

 

Skilled Nursing Properties

 

 

319,487

 

 

 

52.6

%

 

 

35,411

 

 

 

51.7

%

 

 

121

 

 

 

13,953

 

 

 

22.90

 

 

 

46

 

 

 

24

 

 

Schools

 

 

13,020

 

 

 

2.2

%

 

 

1,428

 

 

 

2.1

%

 

 

2

 

 

 

N/A

 

 

 

N/A

 

 

 

2

 

 

 

2

 

 

Totals

 

 

$

606,559

 

 

 

100.0

%

 

 

$

68,511

 

 

 

100.0

%

 

 

217

 

 

 

18,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)We have investments in 32 states leased or mortgaged to 54 different operators.

(2)Revenues exclude interest and other income from non-mortgage loan sources and include $725,000 of revenue from properties that were sold in the first quarter of 2006.

(3)In January 2006, we sold four assisted living properties operated by Sunwest with a total of 431 units to an entity formed by the principals of Sunwest for $58.5 million. We received $54.5 million in proceeds after paying approximately $3.8 million of 8.75% State of Oregon bond obligations related to one of the properties sold. As a result of the sale, we recognized a gain of $31.9 million in 2006.

(4)See Item 1. Business General—Owned Properties for discussion of bed/unit count.

Our primary objectives are to sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in long-term care properties and other health care related properties managed by experienced operators. 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 and form of investment.

Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable. Our investments in mortgage loans and owned properties 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 the type of health care facility and operator. Our monitoring process includes review of financial statements for each facility, periodic review of operator credit, scheduled property inspections and review of covenant compliance relating to real estate taxes and insurance.

In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk. We typically invest in or finance up to 90 percent of the stabilized appraised value of a property. Operating leases and loans are normally 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.

For the twelve months ended December 31, 2006, rental income and interest income represented 72% and 21%, respectively, of total gross revenues. Our lease structure most often contains fixed annual rental escalations, which are generally recognized on a straight-line basis over the minimum lease period. Certain leases have annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property. This revenue is not recognized until the appropriate contingencies have been resolved. This lease structure initially generates lower revenues and net income but enables us to generate additional growth and minimized non-cash straight-line rent over time.

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 invested cash on hand and temporary borrowings under our unsecured line of credit and internally generated cash flows. Our investments generate internal cash from rent and interest receipts and principal payments on mortgage loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured line of credit, is expected to be provided through a combination of public and private offerings of debt and equity securities and the incurrence of secured debt. We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance future investments.

Key Transactions

During 2006, we sold four assisted living properties with a total of 431 units and one 174-bed skilled nursing property. We recognized a gain of $32.6 million on the two transactions and received total net cash proceeds of $54.0 million after paying $3.8 million of 8.75% State of Oregon bond obligations related to one of the properties sold. Also during 2006 we purchased five skilled nursing properties with a total of 373 beds for $13.5 million in cash. One of the properties was acquired in a like-kind exchange transaction with a fair market value of $3.4 million.

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 business planning purposes.


Concentration Risk.We evaluate our concentration risk in terms of asset mix, investment mix, operator mix and geographic mix. Concentration risk is valuable to understand what portion of our investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our investments that are real property. In order to qualify as an equity REIT, at least 75 percent of our total assets must be represented by real estate assets, cash, cash items and government securities. Investment mix measures the portion of our investments that relate to our various property types. Operator mix measures the portion of our investments that relate to our top three operators. Geographic mix measures the portion of our investment that relate to our top five states. The following table reflects our recent historical trends of concentration risk:

 

 

Period Ended

 

 

 

12/31/06

 

9/30/06

 

6/30/06

 

3/31/06

 

12/31/05

 

 

 

(gross investment, in thousands)

 

Asset mix:

 

 

 

 

 

 

 

 

 

 

 

Real property

 

$

488,287

 

$

485,460

 

$

476,541

 

$

468,435

 

$

500,723

 

Loans receivable

 

118,272

 

119,523

 

127,192

 

133,264

 

149,332

 

Investment asset mix:

 

 

 

 

 

 

 

 

 

 

 

Assisted living properties

 

$

274,052

 

$

273,711

 

$

276,720

 

$

280,748

 

$

313,628

 

Skilled nursing properties

 

319,487

 

318,252

 

313,993

 

307,931

 

323,407

 

School

 

13,020

 

13,020

 

13,020

 

13,020

 

13,020

 

Operator asset mix:

 

 

 

 

 

 

 

 

 

 

 

Alterra

 

$

84,210

 

$

84,194

 

$

84,194

 

$

84,194

 

$

84,194

 

Preferred Care, Inc.(2)

 

80,506

 

72,422

 

71,969

 

71,550

 

71,580

 

Extendicare REIT & ALC

 

88,034

 

88,034

 

88,034

 

88,034

 

88,034

 

Sunwest(1)

 

 

 

 

 

64,803

 

Remaining operators

 

353,809

 

360,333

 

359,536

 

357,921

 

341,444

 

Geographic asset mix:

 

 

 

 

 

 

 

 

 

 

 

California

 

$

44,439

 

$

44,697

 

$

44,950

 

$

45,198

 

$

54,185

 

Florida

 

45,693

 

45,204

 

48,032

 

47,536

 

53,935

 

Ohio

 

53,210

 

52,838

 

52,488

 

45,939

 

50,511

 

Texas

 

96,947

 

97,339

 

97,636

 

96,952

 

98,781

 

Washington

 

27,925

 

28,002

 

20,952

 

21,024

 

21,094

 

Remaining states

 

338,345

 

336,903

 

426,542

 

345,050

 

371,549

 


(1)          In January 2006, we sold four assisted living properties operated by Sunwest with a total of 431 units to an entity formed by the principals of Sunwest for $58.5 million. We received $54.0 million in proceeds after paying $3.8 million of 8.75% State of Oregon bond obligations related to one of the properties sold. As a result of the sale, we recognized a gain of $31.9 million. As of March 31, 2006, Sunwest operates four assisted living properties which do not represent more than 10% of total assets. Therefore, beginning with March 31, 2006, the value of the assets operated by Sunwest is grouped into the Remaining Operators category.

(2)          In October 2006 we entered into a lease termination agreement with Centers For Long Term Care, Inc. As of November 1, 2006 these assets are under a master lease with Preferred Care, Inc.

Credit Strength.We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to book capitalization and debt to market capitalization. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt. 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 plus preferred dividends). The coverage ratios are


based on earnings before interest, taxes, depreciation and amortization. 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:

 

 

Three Months Ended

 

 

 

12/31/06

 

9/30/06

 

6/30/06

 

3/31/06

 

12/31/05

 

Debt to book capitalization ratio

 

 

9.7

%

 

 

11.6

%

 

 

12.8

%

 

 

13.0

%

 

 

16.9

%

 

Debt to market capitalization ratio

 

 

5.9

%

 

 

7.7

%

 

 

9.1

%

 

 

8.8

%

 

 

11.9

%

 

Interest coverage ratio

 

 

10.4

x

 

 

8.9

x(1)

 

 

9.7

x

 

 

9.1

x

 

 

8.7

x

 

Fixed charge coverage ratio

 

 

2.8

x

 

 

2.6

x(1)

 

 

2.8

x

 

 

2.8

x

 

 

2.7

x

 


(1)          As a result of including the $1.0 million proposed IRS settlement (see Item 8. FINANCIAL STATEMENTS—Note 2. Summary of Significant Accounting Policies—Federal Income Taxes) in the annualized calculation of coverage ratios, our ratios were lower than as of six months ended June 30, 2006. Excluding this charge, our Interest Coverage ratio would have been 9.4x and our Fixed Charge ratio would have been 2.8x.

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

·       The status of the economy;

·       The status of capital markets, including prevailing interest rates;

·       Compliance with and changes to regulations and payment policies within the health care industry;

·       Changes in financing terms;

·       Competition within the health care and senior housing industries; and

·       Changes in federal, state and local legislation.

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.

Operating Results

Year ended December 31, 2006 compared to year ended December 31, 2005

Revenues for the year ended December 31, 2006, were $73.2 million compared to $72.4 million for the same period in 2005. Rental income increased $2.6 million primarily as a result of properties acquired in 2005 and 2006 ($3.2 million), new leases and rental increases provided for in existing lease agreements ($1.6 million) and increase in straight-line rental income ($1.5 million) partially offset by the receipt of a note payoff in 2005 as described in Item 8. FINANCIAL STATEMENTS—Note 8. Notes Receivable, part of which related to past due rents that were not accrued ($3.7 million). Same store rental income, (rental income from properties owned for both years ended December 31, 2006 and 2005 and excluding straight-line rental income) decreased $2.1 million due to the receipt in 2005 of past due rents that were not previously accrued ($3.7 million) partially offset by rental increases provided for in existing lease agreements ($1.6 million).


Interest income from mortgage loans and notes receivable increased $0.9 million primarily as a result of new loans ($2.9 million) partially offset by the payoff of loans ($1.7 million), the conversion of a mortgage loan to an owned property ($0.1 million) and principal payments ($0.2 million).

Interest income from REMIC Certificates decreased $3.5 million due to the dissolution of the 1994-1 and 1996-1 REMIC Pools, and the effective repurchase of the mortgage loans in the remaining REMIC pool as discussed in Item 8. FINANCIAL STATEMENTS—Note 6. Real Estate Investments.

Interest and other income increased $0.7 million in 2006 from the prior year primarily as a result of new notes, temporary investments income resulting from higher cash balances, and interest and dividend income from our investment in marketable securities, partially offset by the effects of a note payoff in 2005, as described in Item 8. FINANCIAL STATEMENTS—Note 8. Notes Receivable, part of which related to past due interest on the note that was not accrued, and interest received in 2005 on notes that paid off in 2005.

Interest expense decreased $1.3 million in 2006 from the prior year primarily due to a decrease in average borrowings outstanding during the period as a result of the payoff of mortgage loans, capital leases and bond obligations.

Depreciation and amortization expense for 2006 increased $1.2 million from the prior year due to acquisitions, the conversions of mortgage loans into owned properties, and the renovation projects on owned properties. See Item 8. FINANCIAL STATEMENTS—Note 6. Real Estate Investments.

Legal expenses during 2006 were comparable to 2005.

Operating and other expenses increased $0.3 million due to a $0.5 million reimbursement in 2005 partially offset by a $0.2 million reimbursement in 2006 of certain expenses we paid in prior years on behalf of two operators.

Non-operating income decreased by $5.7 million due to a $0.5 million gain recognized in 2006 from the sale of the National Health Investors, Inc. (or NHI) common stock, as described in Item 8. FINANCIAL STATEMENTS—Note 9. Marketable Securities, offset by the $6.2 million income related to the note payoff in 2005, as described in Item 8. FINANCIAL STATEMENTS—Note 8. Notes Receivable.

Minority interest expense was comparable for 2006 and 2005.

For the year ended December 31, 2006, net income from discontinued operations was $33.3 million. During 2006 we sold four assisted living properties in various states with a total of 431 units and one 174-bed skilled nursing property in Arizona. We recognized a gain of $32.6 million on the two transactions. During 2006 we realized $0.7 million in income from discontinued operations related to the properties that were sold in 2006. For the year ended December 31, 2005, net income from discontinued operations was $2.1 million. During 2005 we sold a closed skilled nursing property located in Texas and a 53-bed skilled nursing property in New Mexico. We realized a $1.5 million loss on the two transactions. During 2005 we realized $3.6 million in income from discontinued operations related to properties that were sold in 2005 and 2006. This reclassification was made in accordance with SFAS No. 144 which requires that the financial results of properties meeting certain criteria be reported on a separate line item called “Discontinued Operations.”

Net income available to common stockholders for the year ended December 31, 2006, was $61.6 million compared to $35.4 million for the year ended December 31, 2005. This increase is due primarily to an increase in rental income and a gain on the sale of assets as previously discussed. Excluding the effects of the note payoff, as described in Item 8. FINANCIAL STATEMENTSNote 8. Notes Receivable, net income available to common stockholders was $23.7 million in 2005.


Year ended December 31, 2005 compared to year ended December 31, 2004

Revenues for the year ended December 31, 2005, were $72.4 million compared to $62.2 million for the same period in 2004. Rental income increased $7.9 million primarily as a result of receiving the note payoff, as described in Item 8. FINANCIAL STATEMENTSNote 8. Notes Receivable, part of which related to past due rents that were not accrued ($3.7 million), the receipt of rent from properties acquired in 2004 and 2005 ($1.4 million), new leases and rental increases provided for in existing lease agreements ($2.4 million) and an increase in straight-line rental income ($0.4 million). Same store rental income, (rental income from properties owned for both years ended December 31, 2005 and 2004 and excluding straight-line rental income) increased $6.0 million due to the effect of receiving the note payoff, part of which related to past due rents that were not accrued ($3.7 million) and rental increases provided for in existing lease agreements ($2.3 million).

Interest income from mortgage loans and notes receivable increased $5.4 million primarily as a result of new loans ($6.1 million) partially offset by the payoff of loans ($0.3 million), the conversion of a mortgage loan to an owned property ($0.3 million) and principal payments ($0.1 million).

Interest income from REMIC Certificates decreased $3.9 million in 2005 due to the dissolution of the 1994-1 and 1996-1 REMIC Pools, the amortization of our remaining REMIC Certificates, the early payoff of certain mortgage loans underlying our investment in REMIC Certificates, and the effective repurchase of the mortgage loans in the remaining REMIC pool as discussed in Item 8. FINANCIAL STATEMENTSNote 6. Real Estate Investments.

Interest and other income increased $0.9 million in 2005 from the prior year primarily as a result of receiving the note payoff, as described in Item 8. FINANCIAL STATEMENTSNote 8. Notes Receivable, part of which related to past due interest on the note that was not accrued ($2.3 million), partially offset by conversions of notes receivable to mortgage loans, a reduction in loan modification and extension fees received from the REMIC Trust as per our subservicing agreement and a decrease in interest income from our investment in Assisted Living Concepts, Inc. Senior and Junior Notes that were redeemed in the first quarter of 2004.

Interest expense decreased $3.2 million in 2005 from the prior year primarily due to a decrease in average borrowings outstanding during the period as a result of the payoff of mortgage loans.

Depreciation and amortization expense for 2005 increased $0.9 million from the prior year due to acquisitions. See Item 8. FINANCIAL STATEMENTS—Note 6. Real Estate Investments.

We perform periodic comprehensive evaluations of our investments. During 2005 we did not record an impairment charge. During 2004, we recorded a $0.3 million impairment charge related to the reclassification of the fair market value adjustment on available-for-sale interest-only REMIC Certificates from comprehensive income to realized loss.

Legal expenses during 2005 were comparable to 2004.

Operating and other expenses increased $1.2 million due to a special $1.0 million bonus paid out related to the realization of the value of a note receivable, as described in Item 8. FINANCIAL STATEMENTSNote 8. Notes Receivable, and expenses paid in the current year on behalf of certain operators.

During 2005, we realized $6.2 million of non-operating income related to the note payoff, as described in Item 8. FINANCIAL STATEMENTSNote 8. Notes Receivable ($3.6 million of which was in Accumulated Comprehensive Income at December 31, 2004). The $6.2 million of non-operating income is net of $1.3 million of legal and investment advisory fees associated with the transaction that resulted in the note payoff. No non-operating income was recognized in 2004.

33




Minority interest in income decreased $0.5 million due to the conversion of all but one of the interests in eight of our limited partnerships to common stock and cash in 2004.

For the year ended December 31, 2005, net income from discontinued operations was $2.1 million. During 2005, we sold a closed skilled nursing property located in Texas to a third party who wanted to use the property to house victims of hurricane Katrina. As part of our company’s hurricane relief efforts, we sold the property for $1,000 and in addition, donated $50,000 in cash to the American Red Cross hurricane Katrina relief fund. As a result of the sale, we recognized a loss of $0.8 million. Also, we sold a skilled nursing property with 53 beds in New Mexico for $0.5 million in cash and recognized a loss of $0.7 million. During 2005 we realized $3.6 million in income from discontinued operations related to properties that were sold in 2005 and 2006. This reclassification was made in accordance with SFAS No. 144 which requires that the financial results of properties meeting certain criteria be reported on a separate line item called “Discontinued Operations” for all periods presented.

For the year ended December 31, 2004, net income from discontinued operations was $4.1 million. During 2004 we sold five skilled nursing properties, two of which were formerly operated by Sun Healthcare Group, Inc. (or Sun) resulting in a gain on sale of $0.6 million. We also realized $3.5 million in income from discontinued operations related to properties that were sold during 2004, 2005 and 2006. This reclassification was made in accordance with SFAS No. 144 which requires that the financial results of properties meeting certain criteria be reported on a separate line item called “Discontinued Operations” for all periods presented.

We did not redeem any of our preferred stock during 2005. During 2004, we redeemed all of our outstanding Series A and Series B preferred stock. Accordingly, we recognized a $4.0 million preferred stock redemption charge related to the original issue costs of the preferred stock redeemed. Preferred stock dividends in 2005 were comparable to 2004.

Net income available to common stockholders for the year ended December 31, 2005, was $35.4 million compared to $15.0 million for the year ended December 31, 2004. This increase is due primarily to an increase in rental income and non-operating income and a decrease in interest expense and preferred stock redemption charges as previously discussed. Excluding the effects of the note payoff, net income available to common stockholders was $23.7 million in 2005. Excluding the effects of the preferred stock redemption charge, net income available to common stockholders was $19.0 million in 2004.

Critical Accounting Policies

Preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. See Item 8. FINANCIAL STATEMENTS—Note 2. Summary of Significant Accounting Policies for a description of the significant accounting policies we followed in preparing the consolidated financial statements for all periods presented. We have identified the following significant accounting policies as critical accounting policies in that they require significant judgment and estimates and have the most impact on financial reporting.

Impairments.   Impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses the impairment of properties individually and impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be held and used, and the carrying amount over the fair value less cost to sell in instances where management has determined that we will dispose of the property as required by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. In determining fair value, we use current appraisals or other third party opinions of value and other estimates of fair value such as estimated undiscounted future cash flows.


In accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan” we evaluate the carrying values of mortgage loans receivable on an individual basis. Management periodically evaluates the realizability of future cash flows from the mortgages when events or circumstances, such as the non-receipt of principal and interest payments and/or significant deterioration of the financial condition of the borrower, indicate that the carrying amount of the mortgage loan receivable may not be recoverable. An impairment charge is recognized in current period earnings and is calculated as the difference between the carrying amount of the mortgage loan receivable and the discounted cash flows expected to be received, or if foreclosure is probable, the fair value of the collateral securing the mortgage.

Mortgage Loans Receivable.   Mortgage loans receivable are recorded on an amortized cost basis. We maintain a valuation allowance based upon the expected collectibility of our mortgage loans receivable. Changes in the valuation allowance are included in current period earnings.

Revenue Recognition.Interest income on mortgage loans and REMIC Certificates is recognized using the effective interest method. We follow a policy related to mortgage interest whereby we consider a loan to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid mortgage interest income from that loan until the amounts have been received.

Base rents under operating leases are accrued as earned over the terms of the leases. Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four methods depending on specific provisions of each lease as follows: (i) a specified annual increase over the prior year’s rent, generally 2%; (ii) an increase based on the change in the Consumer Price Index from year to year; (iii) an increase derived as a percentage of facility net patient revenues in excess of base revenue amounts or (iv) specific dollar increases over prior years. SEC Staff Bulletin No. 101 “Revenue Recognition in Financial Statements” (or SAB 101) does not provide for the recognition of contingent revenue until all possible contingencies have been eliminated. We consider the operating history of the lessee and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. We follow a policy related to rental income whereby we consider a lease to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid rental income from that lease until the amounts have been received.

Rental revenues relating to leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis when we believe that all of the rent related to a particular lease will be collected according to the terms of the lease. In evaluating whether we believe all the rent will be collected we have determined that all of the following conditions must be met: (i) the property has been operated by the same operator for at least six months (adding a new property to a master lease with an operator that otherwise qualifies does not disqualify the lease from being straight-lined); (ii) payments for any monetary obligations due under the lease, or any other lease such operator has with us have been received late no more than (four) times during last eight fiscal quarters; (iii) the operator of the property has not during the last eight fiscal quarters (a) been under the protection of any Bankruptcy court; (b) admitted in writing its inability to pay it debts generally as they come due; (c) made an assignment for the benefit of creditors; or, (d) been under the supervision of a trustee, receiver or similar custodian; and (iv) the property operating income has covered the applicable lease payment in each of the prior four fiscal quarters.

We will discontinue booking rent on a straight-line basis if the lessee becomes delinquent in rent owed under the terms of the lease and has been put on “non-accrual” status (i.e. we have stopped booking rent on an accrual basis for a particular lease because the collection of rent is uncertain). Once a lease is on “non-accrual” status, we will evaluate the collectibility of the related straight-line rent asset. If it is determined that the collection problem is temporary, we will resume booking rent on a straight-line basis once payment is received for past due rents. If it appears that we will not collect future rent under the “non-accrual lease” we will record an impairment charge related to the straight-line rent asset.


Historically, management periodically evaluated the realizability of future cash flows from the mortgages underlying our REMIC Certificates. Included in our evaluation, management considered such factors as actual and/or expected loan prepayments, actual and/or expected credit losses, and other factors that may have impacted the amount and timing of REMIC Certificate future cash flows. Impairments were recorded when an adverse change in cash flows was evident and was determined to be other than temporary in nature. Additionally, interest recognition amortization schedules were adjusted periodically to reflect changes in expected future cash flows from the REMIC Certificates, thus, accordingly adjusting future interest income recognized. At December 31, 2006 and 2005 we did not have any investment in REMIC Certificates. See Item 8. FINANCIAL STATEMENTSNote 6. Real Estate Investments for discussion of our historical investment in REMIC Certificates.

Net loan fee income and commitment fee income are amortized over the life of the related loan. Costs associated with leases are deferred and allocated over the lease term in proportion to the recognition of rental income as required by SFAS No. 13 “Accounting for Leases.”

Liquidity and Capital Resources

Financing Activities:

During 2006, we used $89.8 million in cash in financing activities. We borrowed $2.0 million and repaid $18.0 million under our Unsecured Revolving Credit. Additionally, $11.5 million in principal was received by the non-recourse senior mortgage participation holder and we paid $11.0 million in principal payments on mortgage loans and bonds payable.

During 2006, we repurchased and retired 71,493 shares of common stock for an aggregate purchase price of $1.5 million, an average of $20.65 per share. The shares were purchased on the open market under a Board authorization to purchase up to 5,000,000 shares. Including these purchases, 2,604,393 shares have been purchased under this authorization. Therefore, we continue to have an open Board authorization to purchase an additional 2,395,607 shares.

We also paid cash dividends on our Series C, Series E, and Series F preferred stocks totaling $3.3 million, $0.6 million and $13.3 million respectively. Additionally, we declared cash dividends on our common stock totaling $25.3 million and paid cash dividends on our common stock totaling $33.7 million. Subsequent to December 31, 2006, we increased the monthly common dividend by 4% and we declared a monthly cash dividend of $0.125 per share on our common stock for the months of January, February and March 2007, payable on January 31, February 28, and March 30, 2007, respectively, to stockholders of record on January 23, February 20, and March 22, 2007.

During 2006, we received $0.2 million, which represented payment in full, on a note receivable from a stockholder. We also received $0.4 million in conjunction with the exercise of 46,200 stock options. The total market value as of the dates of exercise was approximately $1.1 million. Subsequent to December 31, 2006, a total of 15,000 options were exercised at a total option value of approximately $0.1 million and a total market value as of the exercise dates of approximately $0.4 million.

During 2006, holders of 159,031 shares of our 8.5% Series E Cumulative Convertible Preferred Stock (or Series E Preferred Stock) notified us of their election to convert such shares into 318,062 shares of our common stock at the Series E Preferred Stock conversion rate of $12.50 per share. Subsequent to December 31, 2006, holders of 2,497 shares of our Series E Preferred Stock notified us of their election to convert such shares into 4,994 shares of common stock. Subsequent to this most recent conversion, there are 191,147 shares of our Series E Preferred Stock outstanding.

As of December 31, 2006, we are obligated to make scheduled principal payments on our mortgage loans payable and bonds payable. The total scheduled principal payments and debt maturities in 2007


through 2011 and thereafter is approximately $1.5 million, $15.5 million, $24.8 million, $8.2 million, $0.5 million, and $3.2 million, respectively.

Available Shelf Registrations:

During 2004, we filed a Form S-3 “shelf” registration statement which became effective April 5, 2004 and provides us with the capacity to offer up to $200.0 million in our debt and/or equity securities. We currently have $104.8 million of availability under our effective shelf registration. We may from time to time raise capital under our currently effective shelf registration or a new shelf registration by issuing, in public or private transactions, our equity and debt securities, but the availability and terms of such issuance will depend upon then prevailing market and other conditions.

Operating and Investing Activities:

During the year ended December 31, 2006, net cash provided by operating activities was $56.6 million. At December 31, 2006 we had accrued $1.0 million, which is included in operating and other expenses, related to a proposed closing agreement pending with the Internal Revenue Service (or IRS). During the 2006 we voluntarily approached the IRS to correct our filing for the year 2000, which is a closed year. In September 2006 we submitted a closing agreement for IRS approval to correct a technical violation which occurred in the spring of 2000. Subsequent to December 31, 2006, we received a draft closing agreement from the IRS. We anticipate signing a final agreement and paying the $1.0 million settlement to them in the first quarter of 2007.

In 2006 we had net cash provided by investing activities of $59.6 million. We acquired five skilled nursing properties in various states with a total of 373 beds for $13.5 million in cash and $3.4 million in property. These properties were leased to two third parties under 10-year master leases, each with two five-year renewal options. The combined initial annual rent is approximately $1.9 million, an 11.4% current yield. We also invested $5.0 million at an average yield of 9.7% under agreements to renovate ten properties operated by seven different operators. Additionally, we invested $1.2 million in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment.

During 2006, we received total net cash proceeds from the sale of four assisted living properties of $54.0 million after paying both closing costs and $3.8 million in principal and accrued interest to fully repay the 8.75% State of Oregon bond obligation related to one of the properties sold as discussed in Item 8. FINANCIAL STATEMENTS—Note 6. Real Estate Investments. See Item 8. FINANCIAL STATEMENTSNote 10. Debt Obligations for further discussion of the debt payoff. Additionally, we exchanged one 174-bed skilled nursing property located in Arizona for a 100-bed skilled nursing property located in Arizona with a fair market value of $3.4 million. We also received $31.5 million in principal payments on mortgage loans including $26.7 million related to the payoff of twelve mortgage loans secured by nine skilled nursing properties and three assisted living properties and the partial principal pay down of two mortgage loans secured by two skilled nursing properties. During 2006, we invested $1.4 million in 60,000 shares of National Health Investors, Inc. common stock and subsequently sold the shares in 2006 for $1.9 million and recognized a gain of $0.5 million.

During 2006 we funded $1.5 million under various loans and line of credit agreements with certain operators. At December 31, 2005, we held a Promissory Note (or Note) from Sunwest in the amount of $1.5 million. During the fourth quarter of 2005, we sold an option to purchase four of our assisted living properties to Sunwest. The price of the option was $0.5 million in cash and the Note. During 2006, the option to purchase the properties was exercised and the proceeds from the payoff of the Note were applied to the purchase price of the four properties (see Item 8. FINANCIAL STATEMENTS—Note 6. Real Estate Investments). Additionally, we received $4.2 million in principal payments on notes receivable.


During 2006, we paid $9.5 million in deferred lease costs related to the termination of our master lease with Centers for Long Term Care, Inc. (or CLC) effective November 1, 2006. Also on that date we entered into a new 15-year master lease with Preferred Care for the 25 skilled nursing properties formerly leased to CLC. The Preferred Care master lease has two five-year renewal options and provided that monthly rent for November and December 2006 would be $551,500 per month. The initial annual minimum rent beginning in January 2007 is $8,188,000 and increases annually by 2.5% on each November 1st thereafter. We committed to provide Preferred Care with up to $3.0 million for capital improvements and will invest this amount, if requested by Preferred Care, at no additional investment return. This commitment expires March 31, 2010. Additionally, we committed to provide Preferred Care with up to $7.1 million for capital improvements for specific properties. Preferred Care’s annual minimum rent will increase by an amount equal to 11.0% of our funding of part or all of the $7.1 million including capitalized interest during any construction project. As part of the new agreement, we agreed to provide $0.3 million for inventory and equipment needs during the transition of the 25 properties from CLC to Preferred Care.

Commitments:

As of December 31, 2006, we had the following commitments outstanding:

We committed to provide to Alterra $2.5 million over three years ending December 4, 2009 to expand the 35 properties they lease from us. This investment would be made at a 10% annual return to us. To date, Alterra has not requested any funds under this agreement.

We committed to provide Extendicare REIT & ALC up to $5.0 million per year, under certain conditions, for expansion of the 37 properties they lease from us under certain conditions. Should we expend such funds, Extendicare REIT & ALC’s monthly minimum rent would increase by an amount equal to (a) 9.5% plus the positive difference, if any, between the average yield on the U.S. Treasury 10-year note for the five days prior to funding, minus 420 basis points (expressed as a percentage), multiplied by (b) the amounts funded. To date, Extendicare REIT & ALC have not requested any funds under this agreement.

We committed to provide Preferred Care $3.0 million for capital improvements on 25 of the skilled nursing properties they lease from us under a master lease. During 2006, we funded $0.1 million under this agreement. Subsequent to 2006, we funded $0.2 million under this agreement. We also committed to invest up to $7.1 million on specific projects on five skilled nursing properties they lease from us. The $7.1 million commitment includes interest capitalized at 11% on each advance made from each disbursement date until final distribution by specific project. Upon final distribution for each specific project, minimum rent shall increase by the total project cost multiplied by 11%. To date no funds have been requested under this agreement. These commitments expire on March 31, 2010. We also committed to provide Preferred Care with a $0.5 million capital allowance for a skilled nursing property they lease from us under a separate lease. This commitment expires on June 30, 2007. Monthly minimum rent increases by the previous month’s capital funding multiplied by 10%. To date no funds have been requested under this agreement.

We committed to provide a lessee of a skilled nursing property an accounts receivable financing. The loan has a credit limit not to exceed $0.2 million and an interest rate of 10%. The commitment expires on July 31, 2007. To date $0.1 million has been funded under this agreement. We also committed to invest $1.2 million in capital improvements for this property. During 2006, we funded $0.7 million under this agreement.

We committed to provide a lessee of a skilled nursing property an accounts receivable financing. The loan has a credit limit not to exceed $0.1 million and an interest rate of 10%. The commitment expires on June 30, 2007. To date $25,000 has been requested under this agreement. We have also committed to replace the roof and install a fire sprinkler system for this property. The lessee’s monthly minimum rent


will increase by an amount equal to 11% of our investment in these capital improvements. During 2006, we funded $0.1 million under this agreement.

We committed to provide a lessee of three skilled nursing properties with the following: up to $0.3 million to invest in capital improvements to a property they lease from us; up to $0.7 million to invest in capital improvements on two properties they lease from us, however, under this commitment, the monthly minimum rent will increase by the amount of the capital funding multiplied by 11%; and up to $3.0 million to purchase land, construct and equip a new property in the general vicinity of an existing property they lease from us with a corresponding increase in the monthly minimum rent of 11% multiplied by the amount funded plus capitalized interest costs associated with the construction of the new property.

We committed to provide a lessee with a $0.4 million capital improvement allowance for two skilled nursing properties and an assisted living property they lease from us. The commitment includes interest capitalized at 10% on each advance made from each disbursement date until final distribution of the commitment. The commitment expires on March 31, 2007. Upon final distribution of the capital allowance, minimum rent shall increase by the total commitment multiplied by 10%. During 2006, we funded $0.2 million under these agreements.

We committed to provide a lessee with a $0.2 million capital improvement allowance for three skilled nursing properties they lease from us. The commitment includes interest capitalized at 10.3% on each advance made from each disbursement date until final distribution of the commitment. The commitment expires on June 30, 2007. Upon final distribution of the capital allowance, minimum rent shall increase by the total commitment multiplied by 10.3%. During 2006, we funded $0.2 million under this agreement.

We committed to provide a lessee of a skilled nursing property $1.7 million to invest in leasehold improvements to the property they lease from us. The commitment includes interest capitalized at 10% on each advance made from each disbursement date until final distribution of the commitment. The leasehold improvements must be completed by March 31, 2007. Upon final distribution of the capital allowance, minimum rent shall increase by the total commitment multiplied by 10%. During 2006, we funded $0.9 million under this agreement. Subsequent to December 31, 2006, we funded an additional $0.1 million under this agreement.

We committed to provide a lessee of an assisted living property with a $1.0 million capital improvement allowance for a property they lease from us. Monthly minimum rent increases by the previous month’s capital funding multiplied by 8%. The commitment will mature in February 2008. During 2006, we funded $0.4 million under this agreement. Subsequent to December 31, 2006, we funded an additional $0.3 million under this agreement.

Contractual Obligations:

We monitor our contractual obligations and commitments detailed above to ensure funds are available to meet obligations when due. The following table represents our long-term contractual obligations as of December 31, 2006, and excludes the effects of interest (amounts in thousands):

 

 

Total

 

Less than
1 year

 

1-2
years

 

3-5
years

 

After
5 years

 

Mortgage loans payable

 

$

48,266

 

 

$

1,101

 

 

$

39,480

 

$

7,685

 

$

 

Bonds payable

 

5,545

 

 

415

 

 

905

 

1,025

 

3,200

 

Operating lease obligation

 

672

 

 

164

 

 

344

 

164

 

 

 

 

$

54,483

 

 

$

1,680

 

 

$

40,729

 

$

8,874

 

$

3,200

 


The total maximum funds committed as of December 31, 2006 with specific termination dates were $21.8 million from 2007 through 2010 at interest rates from 8.0% to 11.0%. Additionally, we committed to provide Extendicare REIT & ALC up to $5.0 million per year at a minimum interest rate of 9.5%.

Off-Balance Sheet Arrangements:

We had no off-balance sheet arrangements as of December 31, 2006.

Liquidity:

In 2005 we increased our Unsecured Credit Agreement from $65.0 million to $90.0 million and extended its maturity to November 2008. As a result of the sale of assets described in Item 8. FINANCIAL STATEMENTSNote 6. Real Estate Investments, we have significant cash on hand and the entire $90.0 million available for liquidity.

We believe we have additional liquidity and financing capability to fund additional investments in 2007, maintain our preferred dividend payments, pay common dividends at least sufficient to maintain our REIT status and repay borrowings at or prior to their maturity through our generation of funds from operations, borrowings under our Unsecured Credit Agreement, additional opportunistic asset sales, proceeds from mortgage notes receivable, and/or additional financings. We believe our liquidity and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that some or all of these sources of funds will be available at a time and upon terms acceptable to us in sufficient amounts to meet our liquidity needs.

Item 7a.                 Quantitative and Qualitative Disclosures About Market Risk

Readers are cautioned that statements contained in this section “Quantitative and Qualitative Disclosures About Market Risk” are forward looking and should be read in conjunction with the disclosure under the heading “Risk Factors” set forth above.

We are exposed to market risks associated with changes in interest rates as they relate to our mortgage loans receivable and debt. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.

We do not utilize interest rate swaps, forward or option contracts or foreign currencies or commodities, or other types of derivative financial instruments nor do we engage in “off-balance sheet” transactions. The purpose of the following disclosure is to provide a framework to understand our sensitivity to hypothetical changes in interest rates as of December 31, 2006.

Our future earnings, cash flows and estimated fair values relating to financial instruments are dependent upon prevalent market rates of interest, such as LIBOR or term rates of U.S. Treasury Notes. Changes in interest rates generally impact the fair value, but not future earnings or cash flows, of mortgage loans receivable and fixed rate debt. For variable rate debt, such as our revolving line of credit, changes in interest rates generally do not impact the fair value, but do affect future earnings and cash flows.

At December 31, 2006, based on the prevailing interest rates for comparable loans and estimates made by management, the fair value of our mortgage loans receivable was approximately $129.9 million. A 1% increase in such rates would decrease the estimated fair value of our mortgage loans by approximately $4.1 million while a 1% decrease in such rates would increase their estimated fair value by approximately $4.4 million. A 1% increase or decrease in applicable interest rates would not have a material impact on the fair value of our fixed rate debt.


The estimated impact of changes in interest rates discussed above are determined by considering the impact of the hypothetical interest rates on our borrowing costs, lending rates and current U.S. Treasury rates from which our financial instruments may be priced. We do not believe that future market rate risks related to our financial instruments will be material to our financial position or results of operations. These analyses do not consider the effects of industry specific events, changes in the real estate markets, or other overall economic activities that could increase or decrease the fair value of our financial instruments. If such events or changes were to occur, we would consider taking actions to mitigate and/or reduce any negative exposure to such changes. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.

41







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of LTC Properties, Inc.

We have audited the accompanying consolidated balance sheets of LTC Properties, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedules listed in the index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LTC Properties, Inc. at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2007, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California
February 21, 2007

43




LTC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

 

 

December 31,

 

 

 

2006

 

2005

 

ASSETS

 

 

 

 

 

Real Estate Investments:

 

 

 

 

 

Buildings and improvements, net of accumulated depreciation and amortization: 2006—$102,091; 2005—$88,652

 

$

351,148

 

$

342,664

 

Land

 

35,048

 

32,956

 

Properties held for sale, net of accumulated depreciation and amortization: 2006—$0; 2005—$7,119

 

 

29,332

 

Mortgage loans receivable, net of allowance for doubtful accounts: 2006 and 2005—$1,280

 

116,992

 

148,052

 

Real estate investments, net

 

503,188

 

553,004

 

Other Assets:

 

 

 

 

 

Cash and cash equivalents

 

29,887

 

3,569

 

Debt issue costs, net

 

548

 

1,268

 

Interest receivable

 

3,170

 

3,436

 

Prepaid expenses and other assets

 

16,771

 

5,130

 

Notes receivable

 

4,264

 

8,931

 

Marketable debt securities

 

9,939

 

9,933

 

Total assets

 

$

567,767

 

$

585,271

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Bank borrowings

 

$

 

$

16,000

 

Mortgage loans payable

 

48,266

 

58,891

 

Bonds payable and capital lease obligations

 

5,545

 

5,935

 

Senior mortgage participation payable

 

 

11,535

 

Accrued interest

 

358

 

524

 

Accrued expenses and other liabilities

 

6,223

 

8,427

 

Accrued expenses and other liabilities related to properties held for sale

 

 

3,852

 

Distributions payable

 

3,423

 

11,890

 

Total liabilities

 

63,815

 

117,054

 

Minority interests

 

3,518

 

3,524

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock $0.01 par value: 15,000 shares authorized; shares issued and outstanding: 2006—8,834; 2005—8,993

 

209,341

 

213,317

 

Common stock: $0.01 par value; 45,000 shares authorized; shares issued and outstanding: 2006—23,569; 2005—23,276

 

236

 

233

 

Capital in excess of par value

 

332,149

 

331,415

 

Cumulative net income

 

442,833

 

364,045

 

Other

 

1,693

 

(941

)

Cumulative distributions

 

(485,818

)

(443,376

)

Total stockholders’ equity

 

500,434

 

464,693

 

Total liabilities and stockholders’ equity

 

$

567,767

 

$

585,271

 

See accompanying notes.

44




LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)

 

 

Years ended December 31,

 

 

 

2006

 

2005

 

2004

 

Revenues:

 

 

 

 

 

 

 

Rental income

 

$

52,342

 

$

49,709

 

$

41,844

 

Interest income from mortgage loans and notes receivable

 

15,444

 

14,500

 

9,138

 

Interest income from REMIC Certificates

 

 

3,480

 

7,342

 

Interest and other income

 

5,377

 

4,719

 

3,853

 

Total revenues

 

73,163

 

72,408

 

62,177

 

Expenses:

 

 

 

 

 

 

 

Interest expense

 

7,028

 

8,310

 

11,523

 

Depreciation and amortization

 

13,892

 

12,738

 

11,823

 

Impairment charge

 

 

 

274

 

Legal expenses

 

236

 

194

 

193

 

Operating and other expenses

 

6,696

 

6,397

 

5,216

 

Total expenses

 

27,852

 

27,639

 

29,029

 

Income before non-operating income and minority interest

 

45,311

 

44,769

 

33,148

 

Non-operating income

 

517

 

6,217

 

 

Minority interest

 

(343

)

(349

)

(896

)

Income from continuing operations

 

45,485

 

50,637

 

32,252

 

Discontinued operations:

 

 

 

 

 

 

 

Income from discontinued operations

 

746

 

3,576

 

3,528

 

Gain (loss) on sale of assets, net

 

32,557

 

(1,504

)

608

 

Net income from discontinued operations

 

33,303

 

2,072

 

4,136

 

Net income

 

78,788

 

52,709

 

36,388

 

Preferred stock redemption charge

 

 

 

(4,029

)

Preferred stock dividends

 

(17,157

)

(17,343

)

(17,356

)

Net income available to common stockholders

 

$

61,631

 

$

35,366

 

$

15,003

 

Net Income per Common Share from Continuing Operations Net of Preferred Stock Dividends:

 

 

 

 

 

 

 

Basic

 

$

1.21

 

$

1.49

 

$

0.56

 

Diluted

 

$

1.21

 

$

1.47

 

$

0.56

 

Net Income Per Common Share from Discontinued Operations:

 

 

 

 

 

 

 

Basic

 

$

1.43

 

$

0.09

 

$

0.21

 

Diluted

 

$

1.41

 

$

0.09

 

$

0.21

 

Net Income Per Common Share Available to Common Stockholders:

 

 

 

 

 

 

 

Basic

 

$

2.64

 

$

1.58

 

$

0.77

 

Diluted

 

$

2.51

 

$

1.56

 

$

0.77

 

Basic weighted average shares outstanding

 

23,366

 

22,325

 

19,432

 

Comprehensive Income:

 

 

 

 

 

 

 

Net income

 

$

78,788

 

$

52,709

 

$

36,388

 

Unrealized gain on available-for-sale securities

 

 

3,743

 

378

 

Reclassification adjustment

 

(715

)

(4,141

)

274

 

Comprehensive income

 

$

78,073

 

$

52,311

 

$

37,040

 

See accompanying notes.

45




LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share amounts)

 

 

Shares

 

 

 

 

 

Capital in

 

Cumulative

 

 

 

 

 

 

 

Preferred
Stock

 

Common
Stock

 

Preferred
Stock

 

Common
Stock

 

Excess of
Par Value

 

Net
Income

 

Other

 

Cumulative
Distributions

 

Balance—December 31, 2003

 

 

8,026

 

 

 

17,807

 

 

$

189,163

 

 

$

178

 

 

$

250,055

 

$

274,948

 

$

(638

)

 

$

(344,924

)

 

Payments on stockholder notes

 

 

 

 

 

 

 

 

 

 

 

 

 

2,285

 

 

 

 

Stock option exercises

 

 

 

 

 

99

 

 

 

 

1

 

 

546

 

 

 

 

 

 

Reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

274

 

 

 

 

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

378

 

 

 

 

Conversion of 8.5% Series E Preferred Stock

 

 

(1,639

)

 

 

3,278

 

 

(40,968

)

 

33

 

 

40,935

 

 

 

 

 

 

Conversion of minority interests

 

 

 

 

 

208

 

 

 

 

2

 

 

3,192

 

 

 

 

 

 

Issue restricted stock

 

 

 

 

 

12

 

 

 

 

 

 

202

 

 

(202

)

 

 

 

Issue stock options

 

 

 

 

 

 

 

 

 

 

 

77

 

 

(77

)

 

 

 

9.5% Series A Preferred Stock redemption

 

 

(1,838

)

 

 

 

 

(45,963

)

 

 

 

1,861

 

 

 

 

(1,861

)

 

8.0% Series B Preferred Stock redemption

 

 

(1,988

)

 

 

 

 

(49,700

)

 

 

 

2,168

 

 

 

 

(2,168

)

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

36,388

 

 

 

 

 

Vested stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 

 

 

 

Vested restricted stock

 

 

 

 

 

 

 

 

 

 

 

399

 

 

34

 

 

 

 

Canceled restricted stock

 

 

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

 

8.0% Series F Preferred Stock offering

 

 

6,640

 

 

 

 

 

166,000

 

 

 

 

(6,695

)

 

 

 

 

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,356

)

 

Common stock cash distributions ($1.125 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,376

)

 

Balance—December 31, 2004

 

 

9,201

 

 

 

21,374

 

 

218,532

 

 

214

 

 

292,740

 

311,336

 

2,070

 

 

(388,685

)

 

Conversion of 8.5% Series E Preferred Stock

 

 

(208

)

 

 

416

 

 

(5,215

)

 

4

 

 

5,211

 

 

 

 

 

 

Common stock offering

 

 

 

 

 

1,500

 

 

 

 

15

 

 

32,611

 

 

 

 

 

 

Payments on stockholder notes

 

 

 

 

 

 

 

 

 

 

 

 

 

282

 

 

 

 

Reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,141

)

 

 

 

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

3,743

 

 

 

 

Repurchase of stock

 

 

 

 

 

(184

)

 

 

 

(2

)

 

(3,294

)

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

52,709

 

 

 

 

 

Vested stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

 

Stock option exercises

 

 

 

 

 

101

 

 

 

 

1

 

 

674

 

 

 

 

 

 

Issue stock options

 

 

 

 

 

 

 

 

 

 

 

43

 

 

(43

)

 

 

 

Change restricted stock vesting

 

 

 

 

 

 

 

 

 

 

 

1,435

 

 

(1,435

)

 

 

 

Cancel restricted stock

 

 

 

 

 

(11

)

 

 

 

 

 

(6

)

 

6

 

 

 

 

Vested restricted stock

 

 

 

 

 

 

 

 

 

 

 

283

 

 

257

 

 

 

 

Issue restricted stock

 

 

 

 

 

80

 

 

 

 

1

 

 

1,718

 

 

(1,719

)

 

 

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,343

)

 

Common stock cash distributions ($1.29 per share paid and $0.36 per share accrued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,348

)

 

Balance—December 31, 2005

 

 

8,993

 

 

 

23,276

 

 

213,317

 

 

233

 

 

331,415

 

364,045

 

(941

)

 

(443,376

)

 

Conversion of 8.5% Series E Preferred Stock

 

 

(159

)

 

 

318

 

 

(3,976

)

 

3

 

 

3,973

 

 

 

 

 

 

Payments on stockholder notes

 

 

 

 

 

 

 

 

 

 

 

 

 

226

 

 

 

 

Reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

(3,123

)

 

2,408

 

 

 

 

Repurchase of stock

 

 

 

 

 

(71

)

 

 

 

(1

)

 

(1,476

)

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

78,788

 

 

 

 

 

Vested stock options

 

 

 

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

Stock option exercises

 

 

 

 

 

46

 

 

 

 

1

 

 

368

 

 

 

 

 

 

Vested restricted stock

 

 

 

 

 

 

 

 

 

 

 

949

 

 

 

 

 

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,157

)

 

Common stock cash distributions ($1.44 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,285

)

 

Balance—December 31, 2006

 

 

8,834

 

 

 

23,569

 

 

$

209,341

 

 

$

236

 

 

$

332,149

 

$

442,833

 

$

1,693

 

 

$

(485,818

)

 

See accompanying notes.

46




LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 

 

Year ended December 31,

 

 

 

2006

 

2005

 

2004

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

78,788

 

$

52,709

 

$

36,388

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization—continuing operations

 

13,892

 

12,738

 

11,823

 

Depreciation and amortization—discontinued operations

 

52

 

960

 

1,104

 

Minority interest

 

343

 

349

 

896

 

(Gain) loss on sale of real estate and other investments, net

 

(33,074

)

1,504

 

(608

)

Realization of reserve on note receivable

 

 

(3,905

)

 

Realization of deferred gain on note receivable

 

 

(3,610

)

 

Non-cash impairment charge

 

 

 

274

 

Straight-line rental income

 

(3,085

)

(1,614

)

(1,121

)

Other non-cash items, net

 

(772

)

2,021

 

3,079

 

Decrease (increase) in interest receivable

 

487

 

(115

)

603

 

Decrease (increase) in prepaid, other assets and allowance

 

161

 

(362

)

145

 

Decrease in accrued interest

 

(172

)

(97

)

(303

)

(Decrease) increase in accrued expenses and other liabilities

 

(45

)

2,975

 

(154

)

Net cash provided by operating activities

 

56,575

 

63,553

 

52,126

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in real estate properties and capital improvements, net

 

(19,685

)

(30,135

)

(6,768

)

Conversion of mortgage loans to owned properties

 

 

(459

)

(80

)

Proceeds from sale of real estate investments, net

 

54,035

 

605

 

4,733

 

Payment of deferred lease cost

 

(9,500

)

 

 

Principal payments on mortgage loans receivable and REMIC Certificates

 

31,509

 

17,443

 

17,563

 

Investment in real estate mortgages

 

 

(38,219

)

(19,389

)

Conversion of REMIC certificates to mortgage loans

 

 

(855

)

 

Investment in marketable debt and equity securities

 

(1,440

)

(9,933

)

 

Proceeds from the sale of marketable equity securities

 

1,957

 

 

 

Advances under notes receivable

 

(1,486

)

(4,088

)

(1,903

)

Principal payments received on notes receivable

 

4,180

 

15,225

 

202

 

Investment in REMIC certificates

 

 

 

(3,898

)

Proceeds from redemption of investment in debt securities

 

 

 

12,281

 

Net cash provided by (used in) investing activities

 

59,570

 

(50,416

)

2,741

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Bank borrowings

 

2,000

 

30,700

 

36,500

 

Repayment of bank borrowings

 

(18,000

)

(14,700

)

(36,500

)

Repayment of senior mortgage participation

 

(11,535

)

(3,872

)

(2,843

)

Principal payments on mortgage loans, bonds payable and capital leases

 

(11,021

)

(9,478

)

(53,359

)

Proceeds from common and preferred stock offerings

 

 

32,626

 

159,305

 

Repurchase of common stock

 

(1,476

)

(3,296

)

 

Distributions paid to stockholders

 

(50,909

)

(46,419

)

(38,498

)

Repayment of stockholder loans

 

226

 

282

 

2,285

 

Preferred Stock redemption

 

 

 

(126,305

)

Distributions paid to minority interests

 

(349

)

(531

)

(1,189

)

Conversion of minority interests

 

 

 

(8,496

)

Other

 

1,237

 

805

 

629

 

Net cash used in financing activities

 

(89,827

)

(13,883

)

(68,471

)

Increase (decrease) in cash and cash equivalents

 

26,318

 

(746

)

(13,604

)

Cash and cash equivalents, beginning of year

 

3,569

 

4,315

 

17,919

 

Cash and cash equivalents, end of year

 

$

29,887

 

$

3,569

 

$

4,315

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

7,045

 

$

8,216

 

$

11,653

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

See Note 4: Supplemental Cash Flow Information for further discussion.

 

 

 

 

 

 

 

See accompanying notes.

47




LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

LTC Properties, Inc. (LTC), a Maryland corporation, commenced operations on August 25, 1992. LTC is a real estate investment trust (or REIT) that invests primarily in long-term care properties through mortgage loans, property lease transactions and other investments.

2. Summary of Significant Accounting Policies

Basis of Presentation.The accompanying consolidated financial statements include the accounts of LTC, our wholly-owned subsidiaries and our controlled partnership. All intercompany investments, accounts and transactions have been eliminated. Control over the partnership is based on the provisions of the partnership agreement that provides us with a controlling financial interest in the partnership. Under the terms of the partnership agreement, we are responsible for the management of the partnership’s assets, business and affairs. Our rights and duties in management of the partnership include making all operating decisions, setting the capital budget, executing all contracts, making all employment decisions, and the purchase and disposition of assets, among others. The general partner is responsible for the ongoing, major, and central operations of the partnership and makes all management decisions. In addition, the general partner assumes the risk for all operating losses, capital losses, and is entitled to substantially all capital gains (appreciation).

Emerging Issues Task Force (or EITF) Issue No. 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners have Certain Rights” (or EITF 04-5) creates a framework for evaluating whether a general partner or a group of general partners controls a limited partnership or a managing member or a group of managing members controls a limited liability company and therefore should consolidate the entity. EITF 04-5 states that the presumption of general partner or managing member control would be overcome only when the limited partners or non-managing members have certain specific rights as described in EITF 04-5. The limited partners have virtually no rights and are precluded from taking part in the operation, management or control of the partnership. The limited partners are also precluded from transferring their partnership interests without the expressed permission of the general partner. However we can transfer our interest without consultation or permission of the limited partners. We consolidate our partnerships in accordance with EITF 04-5.

Statement of Accounting Financial Standard (or SFAS) No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. Any non-controlling minority interest that may be redeemed with equity of any entity (including equity of an entity other than the subsidiary) does not meet the definition of a mandatorily redeemable financial instrument and thus does not fall under SFAS No. 150 guidelines. Since the partnership agreement with our limited partners (minority interests) specifies that the limited partners’ exchange rights may be settled in our common stock or cash at our option SFAS No. 150 does not have an impact on the financial statement presentation or accounting for our minority interests.

Financial Accounting Standards Board (or FASB) Interpretation No. 46(R) “Consolidation of Variable Interest Entities” (or FIN 46) addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. FIN 46 requires that we consolidate a “variable interest entity” if we are subject to a majority of the risk of loss from the “variable interest entity’s” activities, or are entitled to receive a majority of the entity’s residual returns, or both. FIN 46 also requires disclosure about


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

“variable interest entities” that we are not required to consolidate but in which we have a significant variable interest. We believe that as of December 31, 2006, we do not have investments in any entities that meet the definition of a “variable interest entity.”

Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation as required by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Use of Estimates.Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents.Cash equivalents consist of highly liquid investments with a maturity of three months or less when purchased and are stated at cost which approximates market.

Land, Buildings and Improvements.Land, buildings and improvements are recorded at cost. Depreciation is computed principally by the straight-line method for financial reporting purposes and includes depreciation associated with properties we lease that qualify as capital leases under SFAS No. 13 “Accounting for Leases.”  Estimated useful lives for financial reporting purposes range from 3 years for computers to 7 years for equipment and 35 to 40 years for buildings.

Mortgage Loans Receivable.   Mortgage loans receivable we originate are recorded on an amortized cost basis. Mortgage loans we acquire are recorded at fair value at the time of purchase net of any related premium or discount which is amortized as a yield adjustment to interest income over the life of the loan.

Allowance for Loan Losses.   We maintain an allowance for loan losses in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan,” as amended, and SEC Staff Bulletin No. 102 “Selected Loan Loss Allowance Methodology and Documentation Issues.”  The allowance for loan losses based upon the expected collectibility of the mortgage loans receivable and is maintained at a level believed adequate to absorb potential losses in our loans receivable. In determining the allowance we perform a quarterly evaluation of all outstanding loans. If this evaluation indicates that there is a greater risk of loan charge-offs, additional allowances are recorded in current period earnings.

Impairments.   Impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses the impairment of properties individually and impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be held and used, and carrying amount over the fair value less cost to sell in instances where management has determined that we will dispose of the property, as required by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”  In determining fair value, we use current appraisals or other third party opinions of value and other estimates of fair value such as estimated discounted future cash flows.

In accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan” we evaluate the carrying values of mortgage loans receivable on an individual basis. Management periodically evaluates the realizability of future cash flows from the mortgages when events or circumstances, such as the non-receipt of principal and interest payments and/or significant deterioration of the financial condition of the borrower, indicate that the carrying amount of the mortgage loan receivable may not be recoverable. An impairment charge is recognized in current period earnings and is calculated as the difference between the


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

carrying amount of the mortgage loan receivable and the discounted cash flows expected to be received, or if foreclosure is probable, the fair value of the collateral securing the mortgage.

EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” gives guidance to be used to determine when an investment is considered impaired, whether that impairment is other-than-temporary and the measurement of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Comparative information for periods prior to initial application is not required. On November 3, 2005, the FASB issued FASB Staff Position (or FSP) FAS No. 115-1 which replaces the impairment evaluation guidance of EITF No. 03-1. We have adopted FSP FAS No. 115-1 as required.

Fair Value of Financial Instruments.SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” requires the disclosure of fair value information about financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair market value amounts presented in the notes to these financial statements do not represent our underlying value in financial instruments.

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments. The fair value of investments in marketable debt securities at December 31, 2006 is based upon the market rate for those securities. The fair values of mortgage loans receivable, REMIC Certificates and long-term debt obligations are based upon the estimates of management and on rates currently prevailing for comparable loans, and instruments of comparable maturities.

The carrying value and fair value of our financial instruments as of December 31, 2006 and 2005 were as follows (in thousands):

 

 

At December 31, 2006

 

At December 31, 2005

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Mortgage loans receivable

 

$

116,992

 

$

129,882

 

$

148,052

 

$

153,606

 

Marketable debt securities

 

9,939

 

11,000

 

9,933

 

9,933

 

Mortgage loans payable

 

48,266

 

48,266

 

58,891

 

58,891

 

Bonds payable

 

5,545

 

5,545

 

9,759

 

9,759

 

Senior mortgage participation payable

 

 

 

11,535

 

11,860

 

For discussion of our investments in mortgage loans receivable see Note 6. Real Estate Investments. For discussion of our investment in marketable debt securities see Note 9. Marketable Securities. For discussion of our mortgage loans payable, bonds payable and senior mortgage participation payable, see Note 10. Debt Obligations.

Investments.   Investments and marketable debt and equity securities are accounted for in accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” which requires that we categorize our investments as trading, available-for-sale or held-to-maturity. Available-for-sale


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

securities are stated at fair value, with the unrealized gains and losses, reported in other comprehensive income until realized. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in net income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest and other income. Our investment in marketable debt securities is classified as held-to-maturity because we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity.

Revenue Recognition.Interest income on mortgage loans is recognized using the effective interest method. We follow a policy related to mortgage interest whereby we consider a loan to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid mortgage interest income from that loan until the past due amounts have been received.

Base rents under operating leases are accrued as earned over the terms of the leases. Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four methods depending on specific provisions of each lease as follows: (i) a specified annual increase over the prior year’s rent, generally 2%; (ii) an increase based on the change in the Consumer Price Index from year to year; (iii) an increase derived as a percentage of facility net patient revenues in excess of base revenue amounts or (iv) specific dollar increases over prior years. SEC Staff Bulletin No. 101 “Revenue Recognition in Financial Statements” (or SAB 101) does not provide for the recognition of contingent revenue until all possible contingencies have been eliminated. We consider the operating history of the lessee and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. We follow a policy related to rental income whereby we consider a lease to be non-performing after 60 days of non-payment of past due amounts and do not recognize unpaid rental income from that lease until the amounts have been received.

Rental revenues relating to leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis when we believe that all of the rent related to a particular lease will be collected according to the terms of the lease. In evaluating whether we believe all the rent will be collected  we have determined that all of the following conditions must be met: (i) the property has been operated by the same operator for at least six months (adding a new property to a master lease with an operator that otherwise qualifies does not disqualify the lease from being straight-lined); (ii) payments for any monetary obligations due under the lease, or any other lease such operator has with us have been received late no more than four times during last eight fiscal quarters; (iii) the operator of the property has not during the last eight fiscal quarters (a) been under the protection of any Bankruptcy court; (b) admitted in writing its inability to pay it debts generally as they come due; (c) made an assignment for the benefit of creditors; or, (d) been under the supervision of a trustee, receiver or similar custodian; and (iv) the property operating income has covered the applicable lease payment in each of the prior four fiscal quarters.

We will discontinue booking rent on a straight-line basis if the lessee becomes delinquent in rent owed under the terms of the lease and has been put on “non-accrual” status (i.e. we have stopped booking rent on an accrual basis for a particular lease because the collection of rent is uncertain). Once a lease is on “non-accrual” status, we will evaluate the collectibility of the related straight-line rent asset. If it is determined that the delinquency is temporary, we will resume booking rent on a straight-line basis once


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

payment is received for past due rents. If it appears that we will not collect future rent under the “non-accrual lease” we will record an impairment charge related to the straight-line rent asset.

During the period that we owned REMIC Certificates, management periodically evaluated the realizability of future cash flows from the mortgages underlying REMIC Certificates. Included in our evaluation, management considered such factors as actual and/or expected loan prepayments, actual and/or expected credit losses, and other factors that may impact the amount and timing of Certificate future cash flows. Impairments were recorded when an adverse change in cash flows was evident and was determined to be other than temporary in nature. Additionally, interest recognition amortization schedules were adjusted periodically to reflect changes in expected future cash flows from the REMIC certificates, thus, accordingly adjusting future interest income recognized. For the year ended December 31, 2005 and 2004, we recognized $3.5 million and $7.3 million, respectively, in interest income from our investment in REMIC Certificates. At December 31, 2006 and 2005, we did not have any investment in REMIC Certificates. See Note 6. Real Estate Investments for discussion of our historical investment in REMIC Certificates.

Net loan fee income and commitment fee income are amortized over the life of the related loan. Costs associated with leases are deferred and allocated over the lease term in proportion to the recognition of rental income as required by SFAS No. 13 “Accounting for Leases”.

Federal Income Taxes.   LTC qualifies as a REIT under the Internal Revenue Code of 1986, as amended, and as such, no provision for Federal income taxes has been made. A REIT is required to distribute at least 90% of its taxable income to its stockholders and a REIT may deduct dividends in computing taxable income. If a REIT distributes 100% of its taxable income and complies with other Internal Revenue Code requirements, it will generally not be subject to Federal income taxation.

For Federal tax purposes, depreciation is generally calculated using the straight-line method over a period of 27.5 years. Earnings and profits, which determine the taxability of distributions to stockholders, differs from net income for financial statement purposes principally due to the treatment of certain interest income, other expense items, impairment charges, and depreciable lives and basis of assets. At December 31, 2006, the book basis of our net assets exceeded the tax basis by approximately $34,164,000, primarily due to additional depreciation taken for tax purposes.

At December 31, 2006 we had accrued $950,000 related to a proposed closing agreement pending with the Internal Revenue Service (or IRS). During the 2006 we voluntarily approached the IRS to correct our filing for the year 2000, which is a closed year. In September 2006 we submitted a closing agreement for IRS approval to correct a technical violation which occurred in the spring of 2000. Subsequent to December 31, 2006, we received a draft closing agreement from the IRS. We anticipate signing a final agreement and paying the $950,000 settlement to them in the first quarter of 2007.

Concentrations of Credit Risks.Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, mortgage loans receivable and operating leases on owned properties. Our financial instruments, mortgage loans receivable and operating leases, are subject to the possibility of loss of carrying value as a result of the failure of other parties to perform according to their contractual obligations or changes in market prices which may make the instrument less valuable. We obtain various collateral and other protective rights, and continually monitor these rights, in order to reduce such possibilities of loss. In addition, we provide reserves for potential losses based upon management’s periodic review of our portfolio.


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Discontinued Operations.In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” properties held-for-sale on the balance sheet includes only those properties available for immediate sale in their present condition and for which management believes that it is probable that a sale of the property will be completed within one year. Properties held-for-sale are carried at the lower of cost or fair value less estimated selling costs. No depreciation expense is recognized on properties held-for-sale once they have been classified as such. The operating results of real estate assets designated as held-for-sale are included in discontinued operations in the consolidated statement of operations. In addition, all gains and losses from real estate sold are also included in discontinued operations. As required by SFAS No. 144, gains and losses on prior years related to assets included in discontinued operations in 2006 have been reclassified to discontinued operations in prior years for comparative purposes. See Note 6. Real Estate Investments, for a detail of the components of the net income from discontinued operations. Additionally, we reclass for the prior period balance sheet to reflect properties sold subsequent to that balance sheet date as held-for-sale as required by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Net Income Per Share.   Basic earnings per share is calculated using the weighted-average shares of common stock outstanding during the period excluding common stock equivalents. Diluted earnings per share includes the effect of all dilutive common stock equivalents.

Stock-Based Compensation.   SFAS No. 123(revised 2004), “Share-Based Payment”, is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and amends SFAS No. 95 “Statement of Cash Flows.”  Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. We adopted SFAS No. 123(R), using the “modified prospective” method, effective January 1, 2006. The adoption of SFAS No. 123(R) did not have a significant impact on our consolidated financial statements. We adopted the fair-value-based method of accounting for share-based payments effective January 1, 2003 under SFAS No. 123 using the “prospective method” described in SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure” and therefore have recognized compensation expense related to all employee stock-based awards granted, modified or settled after January 1, 2003.

We use the Black-Scholes-Merton formula to estimate the value of stock options granted to employees. This model requires management to make certain estimates including stock volatility, discount rate and the termination discount factor. If management incorrectly estimates these variables, the results of operations could be affected. Because No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because we adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under SFAS No. 123 were be recognized under SFAS No. 123(R). However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 11. Stockholders’ Equity. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. Because we qualify as a REIT under the Internal Revenue Code of 1986,


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

as amended, we are not subject to Federal income taxation. Therefore, this new reporting requirement did not have an impact on our statement of cash flows.

Segment Disclosures.SFAS No. 131 “Disclosures About Segments of an Enterprise and Related Information” establishes standards for the manner in which public business enterprises report information about operating segments. Management believes that substantially all of our operations comprise one operating segment.

New Accounting Pronouncements.In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (or FIN 48), which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs when a company concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more likely than not to be sustained). Under step two, the tax benefit is measured as the largest amount of benefit (determined on a cumulative probability basis) that is more likely than not to be realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not expect the adoption of FIN 48 to have a significant impact on our financial position or results of operations.


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Major Operators

We have three operators, based on properties subject to lease agreements and secured by mortgage loans that represent between 10% and 20% of our total assets and three operators from each of which we derive over 10% of our rental revenue and interest income. Beginning in forth quarter of 2006, Extendicare Services, Inc. (or EHSI), one of our major operators, effected a reorganization whereby it completed a spin-off of Assisted Living Concepts, Inc (or ALC). ALC is now a NYSE traded public company operating assisted living centers. The remaining EHSI assets and operations were converted into a Canadian REIT (Extendicare REIT) listed on the Toronto Stock Exchange (or TSX). Both Extendicare REIT and ALC continue to be parties to the leases with us. Alterra Healthcare Corporation (or Alterra) is a wholly owned subsidiary of a publicly traded company, Brookdale Senior Living, Inc. (or Brookdale). Our other operator is privately owned and thus no public financial information is available.  The following table summarizes ALC and Brookdale’s assets, stockholders’ equity, interim revenue and net income from continuing operations as of or for the nine months ended September 30, 2006 per the operator’s public filings (unaudited, in thousands):

 

 

Extendicare
REIT & ALC

 

Brookdale

 

 

 

(in thousands)

 

(in thousands)

 

Current assets

 

 

$

26,671

 

 

 

$

274,328

 

 

Non-current assets

 

 

399,113

 

 

 

4,381,328

 

 

Current liabilities

 

 

37,074

 

 

 

527,440

 

 

Non-current liabilities

 

 

160,608

 

 

 

2,295,918

 

 

Stockholders’ equity

 

 

228,102

 

 

 

1,832,298

 

 

Gross revenue

 

 

172,594

 

 

 

877,653

 

 

Operating expenses

 

 

115,355

 

 

 

886,985

 

 

Income(loss) from continuing operations

 

 

5,936

 

 

 

(70,730

)

 

Net income (loss)

 

 

4,438

 

 

 

(70,730

)

 

Cash provided by operations

 

 

27,128

 

 

 

53,677

 

 

Cash used in investing activities

 

 

(12,439

)

 

 

(1,820,597

)

 

Cash provided (used in) by financing activities

 

 

(9,674

)

 

 

1,789,498

 

 

Extendicare REIT and ALC, collectively lease 37 assisted living properties with a total of 1,427 units owned by us representing approximately 11.6%, or $66,027,000, our total assets at December 31, 2006 and 15.1% of rental income received and of interest income recognized in 2006 excluding the effects of straight-line rent.

Alterra, a wholly owned subsidiary of Brookdale, leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 11.5%, or $65,239,000, of our total assets at December 31, 2006 and 14.7% of rental revenue received and of interest income recognized in 2006 excluding the effects of straight-line rent.

Preferred Care, Inc. (or Preferred Care), through various wholly owned subsidiaries, operates 32 skilled nursing properties with a total of 3,871 beds that we own or on which we hold mortgages secured by first trust deeds. This represents approximately 10.9% or $62,126,000 of our total assets as December 31, 2006 and 11.8% of rental revenue received and of interest income recognized in 2006 excluding the effects of straight-line rent.


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our financial position and ability to make distributions may be adversely affected by financial difficulties experienced by Alterra, Extendicare REIT & ALC, Preferred Care, or any of our lessees and borrowers, 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 or our borrowers when it expires.

4. Supplemental Cash Flow Information

 

 

For the year ended
December 31,

 

 

 

2006

 

2005

 

2004

 

 

 

(in thousands)

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

Assumption of mortgage loans payable related to acquisitions of real estate properties

 

$

 

$

 

$

2,098

 

Property exchange

 

3,410

 

 

 

Transfer of REMIC certificates to mortgage loans receivable

 

 

31,120

 

12,025

 

Elimination of loans payable resulting from repurchase of REMIC certificates

 

 

7,125

 

 

Loans receivable settled in connection with real estate acquisitions

 

 

3,029

 

9,492

 

Refinance of notes receivable into mortgage loans receivable

 

 

 

7,059

 

Exchange of limited partnership units for common stock

 

 

 

3,194

 

(Decrease) Increase in short term notes receivable related to the disposition of real estate properties

 

(1,500

)

1,500

 

 

Preferred stock redemption charge relating to the original issuance costs of Series A and Series B preferred stock redeemed

 

 

 

4,029

 

Conversion of preferred stock to common stock

 

3,976

 

5,215

 

40,968

 

Restricted stock issued, net of cancellations

 

 

1,713

 

202

 

Modification of vesting on previously issued restricted stock

 

 

1,435

 

 

Capital expenditure hold back from investments in notes receivable

 

432

 

620

 

 

Application of a prior year capital expenditure funding

 

489

 

 

 

5. Impairment Charge

We periodically perform a comprehensive evaluation of our real estate investment portfolio in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”  We calculate the impairment losses as the excess of the carrying value over the fair value of assets to be held and used, and the carrying value over the fair value less cost to sell in instances where management has determined that we will dispose of the property. In the past the long-term care industry experienced significant adverse changes, which resulted in operating losses by certain of our lessees and borrowers and in some instances the filing by certain lessees and borrowers for bankruptcy protection. As a result we identified certain investments in skilled nursing properties that we determined had been impaired. These assets were determined to be impaired primarily because the estimated undiscounted future cash flows to be received from these investments are less than the carrying values of the investments. We follow the disclosure guidance required by EITF 03-01 “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. See Note 6. Real Estate Investments for discussion of the fair value


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

methodology used in valuing our investment in REMIC Certificates and related disclosures required by EITF 03-1.

No impairment charges were recorded during 2006 or 2005. During 2004, we recorded an impairment charge of $274,000 reclassifying a portion of the fair market value adjustment on available-for-sale interest-only REMIC Certificates from comprehensive income to realized loss to reflect the estimated impact on future cash flows for loan prepayments related to certain subordinated REMIC Certificates we held. As of December 31, 2005, we no longer had any investments in REMIC Certificates.

We believe we have recorded valuation adjustments on all assets for which there are other than temporary impairments. However in past years, the long-term care industry has experienced significant adverse changes which resulted in operating losses by certain of our lessees and borrowers and in some instances the filing by certain lessees and borrowers for bankruptcy protection. Thus, we cannot predict what, if any, impairment charge may be needed in the future.

6. Real Estate Investments

Mortgage Loans.   During the year ended December 31, 2006, we received $26,716,000 related to the payoff of 12 mortgage loans secured by nine skilled nursing properties and three assisted living properties located in various states and two partial principal pay downs on two mortgage loan secured by two skilled nursing properties. We also received $4,793,000 in regularly scheduled principal payments.

During the year ended December 31, 2005, a loan was paid off in the last remaining REMIC pool, REMIC 1998-1, which caused the last third party REMIC Certificate holders entitled to any principal payments to be paid off in full. After this transaction, we became the sole holder of the remaining REMIC Certificates and are therefore entitled to the entire principal outstanding of the loan pool underlying the remaining REMIC Certificates. Under EITF No. 02-9 (“EITF 02-9”) “Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold”, a Special Purpose Entity (“SPE”) may become non-qualified or tainted which generally results in the “repurchase” by the transferor of all the assets sold to and still held by the SPE. Since we were the sole REMIC Certificate holder entitled to principal from the underlying loan pool, we had all the risks and were entitled to all the rewards from the underlying loan pool. As required by EITF 02-9, the repurchase for the transferred assets was accounted for at fair value. Prior to the repurchase, the book value of the REMIC Certificates we owned was $21,553,000 which included a $1,374,000 impairment recorded in 2003 and a fair market value adjustment of $1,855,000 included in Accumulated Comprehensive Loss in prior periods. The fair market value of the loans in the REMIC Pool was $25,296,000. Accordingly a $3,743,000 fair market value adjustment was recorded in Accumulated Comprehensive Income in 2005. This amount, offset by the $1,855,000 Accumulated Comprehensive Loss previously discussed is being amortized to increase interest income over the remaining life of the loans. The 13 loans that were effectively repurchased had a weighted average interest rate of 11.2% and an unamortized principal balance of $25,012,000. The premium of $284,000 is being amortized to reduce interest income over the life of the loans. The maturity dates of the 13 loans ranged from 2006 through 2017.

At December 31, 2006, we had 58 mortgage loans secured by first mortgages on 58 skilled nursing properties with a total of 6,649 beds, 10 assisted living residences with 705 units and one school located in 19 states. At December 31, 2006, the mortgage loans had interest rates ranging from 6.6% to 13.1% and maturities ranging from 2007 to 2019. In addition, the loans contain certain guarantees, provide for certain facility fees and generally have 25-year amortization schedules. The majority of the mortgage loans provide


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points. At December 31, 2006 and 2005, the estimated fair value, based on the net present value of the future cash flows, of the mortgage loans was approximately $129,882,000 and $153,606,000, respectively, with a carrying value of $116,992,000 and $148,052,000, respectively. Scheduled principal payments on mortgage loans are $23,955,000; $7,542,000; $11,831,000; $20,839,000; $12,949,000 and $41,156,000 in 2007, 2008, 2009, 2010, 2011 and thereafter, respectively.

Owned Properties and Lease Commitments.   At December 31, 2006, we owned properties in 23 states consisting of 63 skilled nursing properties with a total of 7,304 beds, 84 assisted living properties with 3,744 units and one school.

During 2006, we sold four assisted living properties in various states with a total of 431 units and one 174-bed skilled nursing property in Arizona. We recognized a gain of $32,557,000 on the two transactions and received total net proceeds of $3,410,000 in property associated with the exchange described above and $54,035,000 in cash, after paying both closing costs and a $3,800,000 8.75% State of Oregon bond obligation related to one of the properties sold. See Note 10. Debt Obligations for further discussion of the debt payoff. In 2005 we sold an option to purchase the four assisted living properties to Sunwest Management Inc. (or Sunwest) for $2,000,000. In exchange for the right to purchase the properties for $58,500,000, we received $500,000 in cash and a note receivable for $1,500,000. The proceeds from the sale of the purchase option were applied to the proceeds of the sale of the four assisted living properties in 2006.

During the year ended December 31, 2006, we acquired five skilled nursing properties with a total of 373 beds for $13,536,000 in cash and $3,410,000 in property in various states. These properties are leased to two third parties under 10-year master leases, each with two five-year renewal options. The combined initial annual rent is approximately $1,932,000, an 11.4% current yield. Additionally, we have signed agreements and begun to renovate eight skilled nursing properties and two assisted living properties operated by seven different operators for a total commitment of $7,160,000, of which $4,968,000 was funded during 2006, at an average yield of approximately 9.7%. At December 31, 2006, $2,192,000 of the total $7,160,000 commitment remained to be funded.

During 2006, we paid $9,500,000 in deferred lease costs related to the termination of our master lease with Centers for Long Term Care, Inc. (or CLC) effective November 1, 2006. Also on that date we entered into a new 15-year master lease with Preferred Care for the 25 skilled nursing properties formerly leased to CLC. The Preferred Care master lease has two five-year renewal options and provided that monthly rent for November and December 2006 would be $551,500 per month. The initial annual minimum rent beginning in January 2007 is $8,188,000 and increases annually by 2.5% on each November 1st thereafter. We committed to provide Preferred Care with up to $3,000,000 for capital improvements and will invest this amount, if requested by Preferred Care, at no additional investment return. This commitment expires March 31, 2010. Additionally, we committed to provide Preferred Care with up to $7,100,000 for capital improvements for specific properties. Preferred Care’s annual minimum rent will increase by an amount equal to 11.0% of our funding of part or all of the $7,100,000 including capitalized interest during any construction project. As part of the new agreement, we agreed to provide $300,000 for inventory and equipment needs during the transition of the 25 properties from CLC to Preferred Care.

Subsequent to December 31, 2006, we sold a closed, previously impaired skilled nursing property to third party for $166,000. As a result of the sale, we will recognize a gain net of all sales expenses of $149,000 in 2007.

58




LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Owned properties are leased pursuant to non-cancelable operating leases generally with an initial term of 10 to 30 years. Many of the leases contain renewal options. The leases provide for fixed minimum base rent during the initial and renewal periods. The majority of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four ways depending on specific provisions of each lease: (i) a specified percentage increase over the prior year, generally 2%; (ii) the higher of (i) or a calculation based on the Consumer Price Index; (iii) as a percentage of facility net patient revenues in excess of base amounts or (iv) specific dollar increases. 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. Contingent rent income for the years ended December 31, 2006, 2005 and 2004 was not significant in relation to contractual base rent income.

Depreciation expense on buildings and improvements, including properties owned under capital leases and properties classified as discontinued operations as required by SFAS No. 144, was $13,581,000, $13,302,000 and $12,586,000 for the years ended December 31, 2006, 2005 and 2004.

Future minimum base rents receivable under the remaining non-cancelable terms of operating leases excluding the effects of straight-line rent are: $53,382,000; $54,673,000; $55,199,000; $51,232,000; $51,739,000 and $430,294,000 for the years ending December 31, 2007, 2008, 2009, 2010, 2011, and thereafter.

Set forth in the table below are the components of the net income from discontinued operations (in thousands):

 

 

For the year ended
December 31,

 

 

 

2006

 

2005

 

2004

 

Rental income

 

$

725

 

$

4,899

 

$

5,060

 

Interest and other income

 

97

 

 

 

Total revenues

 

822

 

4,899

 

5,060

 

Interest expense

 

17

 

338

 

343

 

Depreciation and amortization

 

52

 

960

 

1,104

 

Operating and other expenses

 

7

 

25

 

85

 

Total expenses

 

76

 

1,323

 

1,532

 

Income from discontinued operations

 

$

746

 

$

3,576

 

$

3,528

 

REMIC Certificates.At December 31, 2006 and 2005 we did not have any investments in REMIC Certificates.

During 2005, the 1996-1 REMIC Pool was fully retired. We paid $855,000 in cash and exchanged our remaining interest in the 1996-1 REMIC Certificates with a book value of $9,568,000 and we received five mortgage loans with and estimated fair value of $10,398,000 and an unamortized principal balance of $10,469,000. Accordingly, we recorded a $71,000 discount on these loans which is being amortized as a yield adjustment to increase interest income over the remaining life of the loans. Additionally, we are amortizing the $1,051,000 balance in Other Comprehensive Income that resulted from transferring the loans at fair value as required by SFAS No. 115 “Accounting for Certain Investments in debt and Equity Securities” as a yield adjustment to increase interest income over the life of the related loans. During 2005, a loan was paid off in the 1998-1 REMIC pool, which caused the Senior Certificate holders entitled to any


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

principal payments to be paid off in full. See paragraph two under Mortgage Loans for a description of this event.

Income on the subordinated certificates was as follows for the years ended December 31, 2006, 2005 and 2004 (dollar amounts in thousands):

 

 

2006

 

2005

 

2004

 

1993-1 Pool

 

 

$

 

 

$

 

$

 

1994-1 Pool

 

 

 

 

 

967

 

1996-1 Pool

 

 

 

 

551

 

1,598

 

1998-1 Pool

 

 

 

 

2,929

 

4,777

 

 

 

 

$

 

 

$

3,480

 

$

7,342

 

As sub-servicer for all of the above REMIC pools, we were responsible for performing substantially all of the servicing duties relating to the mortgage loans underlying the REMIC Certificates and acted as the special servicer to restructure any mortgage loans that defaulted.

The REMIC Certificates retained by us, represented the non-investment grade certificates issued in the securitizations. Furthermore, because of the highly specialized nature of the underlying collateral (long-term care properties), there was an extremely limited market for these securities. Because REMIC Certificates of this nature trade infrequently, if at all, market comparability to the certificates we retained was very limited.

At December 31, 2006 and 2005 and we did not have any investment in REMIC Certificates. Unrealized holding gains on available-for-sale certificates of $0, $3,743,000 and $378,000 were included in comprehensive income for the years ended December 31, 2006, 2005 and 2004, respectively. We used certain assumptions and estimates in determining the fair value allocated to the retained interest at the time of initial sale and subsequent measurement dates in accordance with SFAS No. 140. These assumptions and estimates included projections concerning the expected level and timing of future cash flows, current interest rate environment, estimated spreads over the U.S. Treasury Rate at which the retained certificates might trade, expectations regarding credit losses, if any, expected weighted-average life of the underlying collateral and discount rates commensurate with the risks involved. These assumptions were reviewed periodically by management.

During the years we had investments in REMIC Certificates, to the extent there were defaults, unrecoverable losses or prepayments of principal on the underlying mortgages resulting in reduced cash flow, the subordinated REMIC Certificates historically held by us would have borne the first risk of loss. During management’s periodic evaluation of the realizability of expected future cash flows from the mortgages underlying our historical investment in REMIC Certificates there were indications that a portion of the underlying mortgage collateral would not be realized by the REMIC Trust. Accordingly, we recorded impairment charges of $274,000 during 2004 to reflect the estimated impact on future cash flows from loan prepayments occurring during, or expected to occur related to certain subordinated REMIC Certificates we held. No impairment charge was recorded in 2005. See Note 5. Impairment Charge for a discussion of the impairment indicators.


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.  Asset Securitizations

LTC is a REIT and, as such, makes investments with the intent to hold them for long-term purposes. However, we have in the past, transferred mortgage loans to a REMIC (securitization) when a securitization provided us with the best available form of capital to fund additional long-term investments. When contemplating a securitization, consideration is given to our current and expected future interest rate posture and liquidity and leverage position, as well as overall economic and financial market trends. As of December 31, 2006 we had completed four securitization transactions, the last being in 1998. We may again employ this type of financing in the future should we determine the financing environment is appropriate for this type of transaction.

From our past securitizations, we received annual sub-servicing fees, which ranged from 1.0 to 2.0 basis points of the outstanding mortgage loan balances in each of the REMIC pools. Additionally, through the REMIC Certificates historically retained by us from past securitizations, we received cash flows and the rights to future cash flows resulting from cash received on the underlying mortgage loans in the REMIC pools. All of the investors in the REMIC Certificates and the REMIC Trusts themselves had no recourse to our assets for failure by any obligor to the REMIC Trust assets (the mortgages) to pay when due, or comply with any provisions of the mortgage contracts. The REMIC Certificates are classified separately on the balance sheet and interest income earned shown separately on the income statement. Sub-servicing fees and related fees associated with the REMIC Certificates are included in other income.

Certain cash flows received from and paid to REMIC Trusts are as follows: (dollar amounts in thousands):

 

 

Year Ended

 

 

 

2006

 

2005

 

2004

 

Cash flow received on retained REMIC Certificates

 

 

$

 

 

$

7,454

 

$

13,303

 

Servicing and related fees received

 

 

 

 

25

 

109

 

Servicing advances made

 

 

 

 

176

 

544

 

Repayments of servicing advances

 

 

 

 

193

 

480

 

Currently in our portfolio we have no mortgage loans held for securitization. Quantitative information relating to subserviced mortgage loans including delinquencies and net credit losses is as follows: (dollar amounts in thousands)

 

 

Year Ended

 

 

 

2006

 

2005

 

2004

 

Average balance of loans in REMIC pools

 

 

$

 

 

$

39,036

 

$

150,291

 

Year-end balance of loans in REMIC pools

 

 

 

 

 

$

87,351

 

Net credit losses

 

 

 

 

 

$

274

 

Net credit losses to average REMIC pool loans

 

 

 

 

 

0.2

%

Average delinquencies (greater than 30 days) in REMIC pool loans during the year

 

 

 

 

1.2

%

1.4

%

8. Notes Receivable

During 2006, we funded $1,486,000 under various loans and line of credit agreements with certain operators and received $4,180,000 in principal payments. At December 31, 2006, we had 17 loans outstanding with a weighted average interest rate of 8.4%.


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At December 31, 2005, we held a Promissory Note (or Note) from Sunwest in the amount of $1,500,000. During 2005, we sold an option to purchase four of our assisted living properties to Sunwest. The price of the option was $500,000 in cash and the Note. During 2006, the option to purchase the properties was exercised and the proceeds from the payoff of the Note were applied to the purchase price of the four properties. See Note 6. Real Estate Investments for further discussion of this transaction.

During 2005 we received $22,309,000 in cash as payment in full for a note receivable and a related $500,000 mortgage loan, including accrued and unpaid interest through the payoff date. As a result of the payoff, we recognized $3,667,000 in rental income related to past due rents that were not previously accrued, $2,335,000 of interest income related to past due interest that was not previously accrued, a $477,000 reimbursement for certain expenses paid on behalf of an operator in prior years, a $1,000,000 bonus accrual related to the realization of the value of the note receivable and non-operating income of $6,217,000 ($3,610,000 of which was classified as Accumulated Comprehensive Income in the equity section of the balance sheet at December 31, 2004). The $6,217,000 of non-operating income is net of $1,298,000 of legal and investment advisory fees related to the transaction that resulted in the note receivable payoff.

9. Marketable Securities

During 2006 we purchased and sold 60,000 shares of National Health Investors, Inc. (or NHI) common stock. We purchased the shares for a total of $1,440,000, or an average purchase price of $24.00 per share and sold the shares during 2006 for $1,957,000 or an average sales price of $32.62 per share. Accordingly, we recorded a gain on the sale of marketable equity securities of $517,000 and dividend income of $58,000 for the year ended December 31, 2006.

At December 31, 2006 and 2005, we had an investment in $10,000,000 of face value Skilled Healthcare Group, Inc. (or SHG) Senior Subordinated Notes that mature in 2014. The Notes have a stated rate of 11.0% and an effective yield of 11.1%. We recorded $1,148,000 of interest income from our investment in marketable debt securities for the year ended December 31, 2006. Interest on the notes is payable semi-annually in arrears and the notes mature on January 15, 2014. One of our board members is the chief executive officer of SHG.

10. Debt Obligations

Bank Borrowings.   We have an Unsecured Credit Agreement that matures on November 7, 2008 and provides for a revolving line of credit for up to $90,000,000. We can designate, at the time of funding the pricing of the Unsecured Credit Agreement between LIBOR plus 1.50% and LIBOR plus 2.50% or Prime plus 0.50% and Prime plus 1.50%. The spreads are dependent on our leverage ratio. At December 31, 2006, we had no outstanding balances under the Unsecured Credit Agreement. At December 31, 2005, we had $16,000,000 outstanding under this agreement with the interest rate at LIBOR plus 1.50%.

Under financial covenants contained in the Unsecured Credit Agreement which are measured quarterly we are required to maintain, among other things, (i) a ratio, of total indebtedness to total asset value, not greater than .5 to 1.0, (ii) a ratio not greater than .35 to 1.0 of secured debt to total asset value (iii) a ratio not less than 2.5 to 1.0 of EBITDA to interest expense, and (iv) a ratio of not less than 1.50 to 1.0 of EBITDA to fixed charges. Based on our covenant compliance at December 31, 2006, any borrowings under the line could be at the lowest interest rates provided for in the Unsecured Credit Agreement.


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Mortgage Loans Payable.Maturity dates, weighted average interest rates and year-end balances on our mortgage loans payable were (dollar amounts in thousands):

 

 

Total Loan Balance at

 

 

 

Total Loan Balance at

 

 

 

Maturity

 

 

 

December 31, 2006

 

Rate

 

December 31, 2005

 

Rate

 

2007

 

 

$

 

 

 

 

$

 

 

 

2008

 

 

14,813

 

 

7.27

%

 

15,217

 

 

7.27

%

2009

 

 

25,308

 

 

8.68

%

 

25,790

 

 

8.68

%

2010

 

 

8,145

 

 

8.69

%

 

8,274

 

 

8.69

%

2011

 

 

 

 

 

 

 

 

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

$

48,266

 

 

 

 

 

$

49,281

 

 

 

 

As of December 31, 2006 and 2005, the aggregate carrying value of real estate properties securing our mortgage loans payable was $72,491,000 and $88,541,000, respectively.

During 2006, we paid off a mortgage loan at maturity in the amount of $9,225,000. The mortgage loan was secured by two assisted living properties and had an interest rate of 6.3%. During 2005, we paid off a $3,762,000 mortgage loan payable to a REMIC Pool we originated. Additionally in 2005, mortgage loans payable decreased $7,125,000 due to the elimination of two loans payable included in a REMIC pool whose assets were effectively repurchased by us as described in Note 6. Real Estate Investments.

Bonds Payable.At December 31, 2006 and 2005, we had outstanding principal of $5,545,000 and $5,935,000, respectively on multifamily tax-exempt revenue bonds that are secured by five assisted living properties in Washington. These bonds bear interest at a variable rate that is reset weekly and mature during 2015. For the year ended December 31, 2006, the weighted average interest rate, including letter of credit fees, on the outstanding bonds was 6.0%. Additionally, included in liabilities related to properties held-for-sale at December 31, 2005, we had outstanding principal of $3,824,000 on a multi-unit housing tax-exempt revenue bond that bore interest at 8.75% and was secured by one assisted living property in Oregon. During, 2006, this bond was fully prepaid from the proceeds received from the sale of the Sunwest properties as described in Note 6. Real Estate Investments.

As of December 31, 2006 and 2005, the aggregate gross investment in real estate properties securing our bonds payable was $11,280,000 and $19,360,000, respectively.

Senior Mortgage Participation Payable.   In 2002, we completed a loan participation transaction whereby we issued a $30,000,000 Senior Participation interest in 22 of our first mortgage loans that had a total unpaid principal balance of $58,627,000 in the Participation Loan Pool. The Participation Loan Pool had a weighted average interest rate of 11.6% and a weighted average scheduled term to maturity of 77 months. The Senior Participation was secured by the entire Participation Loan Pool. We received net proceeds from the issuance of the Senior Participation of $29,750,000 that was used to reduce commitments and amounts outstanding under our Secured Revolving Credit.

The Senior Participation received interest at a rate of 9.25% per annum, payable monthly in arrears, on the then outstanding principal balance of the Senior Participation. In addition, the Senior Participation received all mortgage principal collected on the Participation Loan Pool until the Senior Participation balance was reduced to zero. We retained interest received on the Participation Loan Pool in excess of the 9.25% paid to the Senior Participation. The ultimate extinguishment of the Senior Participation was tied to


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the underlying maturities of loans in the Participation Loan Pool. We accounted for the participation transaction as a secured borrowing under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

During 2006, the Senior Participation was repaid in full receiving a principal payment of $10,767,000 from the payoff of three mortgage loans and the refinance of six mortgage loans in the Participation Loan Pool. Also during 2006, the Senior Participation received scheduled principal payments of $767,000. We had no Senior Participation balance at December 31, 2006.

Scheduled Principal Payments.Total scheduled principal payments for our mortgage loans payable, and bonds payable as of December 31, 2006 were $1,101,000, $15,102,000, $24,377,000, $8,180,000, $530,000 and $3,200,000 in 2007, 2008, 2009, 2010, 2011 and thereafter.

Fair Value.The estimated fair value of the mortgage loans payable, and bonds payable approximated their carrying values at December 31, 2006 based upon prevailing market interest rates for similar debt arrangements.

11. Stockholders’ Equity

Preferred Stock.Preferred Stock is comprised of the series summarized as follows:

 

 

Shares outstanding at
December 31,

 

Liquidation
Value

 

Dividend

 

Carrying Value at
December 31,

 

Issuance

 

 

 

2006

 

2005

 

Per share

 

Rate

 

2006

 

2005

 

Series C Cumulative Convertible Preferred Stock

 

2,000,000

 

2,000,000

 

 

$

19.25

 

 

 

8.5

%

 

$

18.80

 

$

18.80

 

Series E Cumulative ConvertiblePreferred Stock

 

193,644

 

352,675

 

 

$

25.00

 

 

 

8.5

%

 

$

23.84

 

$

23.84

 

Series F Cumulative Preferred Stock

 

6,640,000

 

6,640,000

 

 

$

25.00

 

 

 

8.0

%

 

$

23.99

 

$

23.99

 

Our Series C Cumulative Convertible Preferred Stock is convertible into 2,000,000 shares of our common stock at $19.25 per share. Dividends are payable quarterly. Total shares reserved for issuance of common stock related to the conversion of Series C Preferred Stock were 2,000,000 shares at December 31, 2006 and 2005.

Our Series E Cumulative Convertible Preferred Stock (or Series E Preferred Stock) is convertible at any time into shares of our common stock at a conversion price of $12.50 per share of common stock, subject to adjustment under certain circumstances. On or after September 19, 2006 and before September 19, 2008, we have the right but not the obligation, upon not less than 30 nor more than 60 days’ written notice, to redeem shares of the Series E Preferred Stock, in whole or in part, if such notice is given within fifteen trading days of the end of the 30 day period in which the closing price of our common stock on the NYSE equals or exceeds 125% of the applicable conversion price for 20 out of 30 consecutive trading days, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends thereon. We may not otherwise redeem the Series E Preferred Stock before September 19, 2008, except in order to preserve our status as a real estate investment trust. Dividends are payable quarterly. During 2006, holders of 159,031 shares of Series E Preferred Stock notified us of their election to convert such shares into 318,062 shares of common stock. During 2005, holders of 208,594 shares of Series E Preferred Stock notified us of their election to convert such shares into 417,188 shares of common stock. During 2004 holders of 1,638,731 shares of Series E Preferred Stock notified us of their election to convert such shares


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

into 3,277,462 shares of common stock. Total shares reserved for issuance of common stock related to the conversion of Series E Preferred Stock were 387,288 at December 31, 2006. Subsequent to December 31, 2006, holders of 2,497 shares of Series E Preferred Stock notified us of their election to convert such shares into 4,994 shares of common stock. Subsequent to this most recent conversion, there are 191,147 shares of our Series E Preferred Stock outstanding.

In February 2004, we sold 4,000,000 shares of our Series F Preferred Stock in a registered direct placement. In July 2004, we issued an additional 2,640,000 shares of Series F Preferred Stock in a registered direct placement. The combined issuances of Series F Preferred Stock generated net cash proceeds of $159,305,000. We used the proceeds to redeem our Series A and Series B Preferred Stock, reduce our mortgage debt and fund new investments. The dividend rate is 8.0% and the liquidation value is $25.00 per share. Dividends are cumulative from the date of original issue and are payable quarterly to stockholders of record on the first day of each quarter. We may not redeem the Series F Preferred Stock prior to February 23, 2009, except as necessary to preserve our status as a real estate investment trust. On or after February 23, 2009, we may, at our option, redeem the Series F Preferred Stock, in whole or from time to time in part, for $25.00 per Series F Preferred Stock in cash plus any accrued and unpaid dividends to the date of redemption.

While outstanding, the liquidation preferences of the preferred stocks are pari passu. None have any voting rights, any stated maturity, nor are they subject to any sinking fund or mandatory redemption.

Common Stock.   During 2005 we sold 1,500,000 shares of common stock in a registered direct placement for $22.08 per share and used net proceeds of $32,626,000 for general corporate purposes including acquisitions, loan originations and debt retirement.

During 2006 we repurchased 71,493 shares of common stock for an aggregate purchase price of $1,476,000 or $20.65 per share. During 2005, we repurchased and retired 184,700 shares of common stock for an aggregate purchase price of $3,296,000 at an average purchase price of $17.85 per share. The shares were purchased on the open market under a Board authorization to purchase up to 5,000,000 shares. Including these purchases, 2,604,393 shares have been purchased under this authorization. Therefore, we continue to have an open Board authorization to purchase an additional 2,395,607 shares. During 2004 we did not repurchase any common stock.

In 2004 we filed a prospectus to cover the possible resale of up to 865,387 shares of our common stock which were contingently issuable under certain partnership agreements. During 2004, partners in seven of our limited partnerships elected to exchange their interests in the partnerships. In accordance with the partnership agreements, at our option, we issued 208,401 shares of our common stock related to five limited partnerships, paid approximately $109,000 for the redemption of 7,027 shares owned by another limited partner and paid approximately $8,387,000 to other limited partners in exchange for their partnership interests. At December 31, 2006, we have only one limited partnership remaining and there remains 201,882 shares of our common stock reserved for this partnership agreement.

Available Shelf Registrations.On March 31, 2004, we filed a Form S-3 “shelf” registration which became effective April 5, 2004 and provides us with the capacity to offer up to $200,000,000 in our debt and/or equity securities. At December 31, 2006 we had $104,761,000 available under the “shelf” registration.


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dividend Distributions.We declared and paid the following cash dividends on our common and preferred stock (in thousands):

 

 

Year ended December 31, 2006

 

Year ended December 31, 2005

 

 

 

Declared

 

Paid

 

Declared

 

Paid

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series C

 

 

$

3,272

 

 

 

$

3,272

 

 

 

$

3,272

 

 

 

$

3,272

 

 

Series E

 

 

605

 

 

 

689

 

 

 

791

 

 

 

902

 

 

Series F

 

 

13,280

 

 

 

13,280

 

 

 

13,280

 

 

 

13,280

 

 

Total Preferred

 

 

17,157

 

 

 

17,241

 

 

 

17,343

 

 

 

17,454

 

 

Common Stock

 

 

25,285

(2)

 

 

33,668

(3)

 

 

37,348

(4)

 

 

28,965

(5)

 

Total

 

 

$

42,442

(1)

 

 

$

50,909

(1)

 

 

$

54,691

(1)

 

 

$

46,419

(1)

 


(1)          Difference between declared and paid is the change in accrued distributions payable on the balance sheet.

(2)          Represents $0.12 per share per month declared for April through December. Dividends for the first quarter of 2006 were declared and accrued during fourth quarter of 2005. Common dividends for the first quarter of 2007 were declared subsequent to December 31, 2006.

(3)          Represents $0.12 per share per month paid for the year ended December 31, 2006.

(4)          Represents $0.30 per share declared and paid in the first quarter, $0.11 per share per month declared and paid in April through December and $0.12 per share per month declared in December and paid in January, February and March 2006.

(5)          Represents $0.30 per share declared and paid in the first quarter, $0.11 per share per month declared and paid in April through December 2005.

Subsequent to December 31, 2006, we increased the monthly common dividend by 4% and we declared a monthly cash dividend of $0.125 per share on our common stock for the months of January, February and March 2007, payable on January 31, February 28, and March 30, 2007, respectively, to stockholders of record on January 23, February 20, and March 22, 2007, respectively.

In 2004, we redeemed of all of the remaining 1,838,520 outstanding shares of Series A Preferred Stock and all of the 1,988,000 outstanding shares of Series B Preferred Stock. Accordingly, in 2004 we recognized the $1,861,000 and $2,168,000 of original issue costs related to the Series A and Series B Preferred Stock, respectively, as a preferred stock redemption charge in the first quarter of 2004.

Other Equity.   Other equity consists of the following (amounts in thousands):

 

 

December 31,

 

 

 

2006

 

2005

 

Notes receivable from stockholders

 

$

 

$

(226

)

Unamortized balance on deferred compensation

 

 

(3,123

)

Accumulated comprehensive income

 

1,693

 

2,408

 

Total Other Equity

 

$

1,693

 

$

(941

)

Notes Receivable from Stockholders.   In 1997, the Board of Directors adopted a loan program designed to encourage executives, key employees, consultants and directors to acquire common stock


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

through the exercise of options. Under the program, we made full recourse, secured loans to participants equal to the exercise price of vested options plus up to 50% of the taxable income resulting from the exercise of options. Such loans bear interest at the then current Applicable Federal Rate (or AFR). In January 2000, the Board of Directors approved a new loan agreement (or New Agreement) for current executives and directors in the amounts of the then remaining principal balance of the original loans.

The new loan agreements provided that the interest rate would be 6.07% (AFR for an equivalent 3 to 9 year instrument) and interest payments were to be paid from dividends received on shares pledged as security for the New Agreements during the quarter in which the interest is due. If the dividend does not fully pay the interest due or if no dividend is paid, the unpaid interest is added to the principal balance. In addition, the notes also require the borrower to reduce principal by one-half of the difference between the most recent dividend received on the pledged shares and the interest paid on the loans from that dividend.

During 2006, the last remaining note receivable from stockholders with a balance of $226,000 was paid in full. During 2005, we received $282,000 in principal payments on a note receivable from stockholders. During 2004, five notes receivable from stockholders with a combined principal balance of $1,722,000 were paid in full. Two of these notes were from current members of our board of directors. Additionally during 2004 we received $563,000 in principal payments on notes receivable from stockholders.

We currently have no loan programs for officers and/or directors and do not provide any guarantee to any officer and/or director or third party relating to purchases and sales of our equity securities.

At December 31, 2006, 2005 and 2004, loans totaling $0, $226,000 and $508,000, respectively were outstanding. At December 31, 2006, 2005 and 2004, the market value of the common stock securing these loans was approximately $0, $1,262,000 and $1,195,000, respectively.

Unamortized Balance on Defined Compensation.Deferred compensation is the value of unvested restricted stock awards granted to employees. See “Stock Based Compensation Plans” below.

Accumulated Comprehensive Income.   This balance represents the net unrealized holding gains on available-for-sale REMIC Certificates recorded in 2005 when we repurchased the loans in the underlying loan pool. This amount is being amortized to increase interest income over the remaining life of the loans that we repurchased from the REMIC Pool. See Note 6. Real Estate Investments for further discussion of the repurchase of the loans underlying our investment in REMIC Certificates.

Stock Based Compensation Plans.During 2004 we adopted and our stockholders approved The 2004 Stock Option Plan under which 500,000 shares of common stock have been reserved for incentive and nonqualified stock option grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under The 2004 Stock Option Plan are set by our compensation committee at its discretion. Total shares available for future grant under The 2004 Stock Option Plan as of December 31, 2006, 2005 and 2004 were 470,000, 470,000 and 470,000, respectively.  All options outstanding that were granted under The 2004 Stock Option Plan vest over three years from the original date of grant.  Unexercised options expire seven years after the date of vesting.

Our stockholders have approved the 1998 Equity Participation Plan under which 500,000 shares of common stock were reserved. The plan provides for the issuance of incentive and nonqualified stock options, restricted stock and other stock based awards to officers, employees, non-employee directors and consultants. The terms of the awards granted under the Plan are set by our compensation committee at its discretion; however, in the case of incentive stock options, the term may not exceed 10 years from the date


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

of grant. Total shares available for future grant under the 1998 Equity Participation Plan as of December 31, 2006, 2005 and 2004 were 99,616, 99,616 and 99,816, respectively. All options outstanding that were granted under the 1998 Equity Participation Plan vest over five years from the original date of grant. Unexercised options expire seven years after the date of vesting.

Nonqualified stock option activity for the years ended December 31, 2006, 2005 and 2004, was as follows:

 

 

Shares

 

Weighted Average Price

 

 

 

2006

 

2005

 

2004

 

2006

 

2005

 

2004

 

Outstanding, January 1

 

110,200

 

200,300

 

285,871

 

$

9.26

 

$

7.15

 

$

5.63

 

Granted

 

 

15,000

 

30,000

 

 

$

19.62

 

$

15.13

 

Exercised

 

(46,200

)

(101,100

)

(99,171

)

$

7.77

 

$

6.68

 

$

5.51

 

Canceled

 

 

(4,000

)

(16,400

)

 

$

7.63

 

$

5.27

 

Outstanding, December 31

 

64,000

 

110,200

 

200,300

 

$

10.33

 

$

9.26

 

$

7.15

 

Exercisable, December 31

 

40,000

 

58,600

 

75,100

 

$

7.07

 

$

5.46

 

$

5.68

 

During 2006 a total of 46,200 options were exercised at a total option value of $359,000 and a total market value as of the exercise dates of $1,087,000. Subsequent to December 31, 2006, a total of 15,000 options were exercised at a total option value of $81,000 and a total market value as of the exercise date of $427,000.

Restricted stock activity for the years ended December 31, 2006, 2005 and 2004 was as follows:

 

 

2006

 

2005

 

2004

 

Outstanding, January 1

 

177,495

 

132,772

 

150,912

 

Granted

 

 

80,000

 

12,100

 

Vested

 

(46,973

)

(24,143

)

 

Canceled

 

 

(11,134

)

(30,240

)

Outstanding, December 31

 

130,522

 

177,495

 

132,772

 

Compensation Expense for the year

 

$

953,000

 

$

540,000

 

$

434,000

 

During 2004, we adopted and our stockholders approved The 2004 Restricted Stock Plan under which 100,000 shares of common stock have been reserved for restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under The 2004 Restricted Stock Plan are set by our compensation committee at its discretion. During 2006 we did not issue any shares of restricted stock. During 2005, we issued 8,000 shares of restricted common stock at $19.62 per share. These shares vest ratably over a three year period. We also issued 72,000 shares of restricted common stock at $21.69 per share. These shares vest ratably over a four year period. Total shares available for future grant under The 2004 Restricted Stock Plan as of December 31, 2006, 2005 and 2004 were 478,234, 478,234 and 557,900, respectively.

During 2005 our board of directors approved a change in the vesting criteria for 89,760 shares of restricted stock outstanding. Prior to the change, these shares vested ratably over five years if we met certain financial objectives and the grantees remained employed by us. Compensation expense was recognized over the service period at the market price per share on the date of vesting. Our board modified the awards so that at December 31, 2005, the 89,760 shares of restricted stock vest ratably over


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

four years. Accordingly, we recorded $1,435,000 in deferred compensation based on the closing market price per share on the date the award was modified. Prior to January 1, 2006, deferred compensation related to the award modification was being amortized to compensation expense over the service period. Effective January 1, 2006, we adopted SFAS No. 123(R) which requires that an equity instrument such as restricted stock, not be recognized until the compensation cost related to that instrument is recognized. This accounting differs from APB Opinion No. 25 “Accounting for Stock Issued to Employees” (or APB 25) whereby we recorded the grant of non-vested restricted stock in capital with an offsetting contra-equity account, deferred compensation, which was amortized to expense over the vesting period. As required by SFAS No. 123(R), we reversed the contra-equity deferred compensation balance (i.e., netted it against additional paid-in capital) on January 1, 2006. Effective January 1, 2006, additional paid-in capital and associated compensation expense related to restricted stock vesting is being recognized over the service period.

Dividends are payable on the restricted shares to the extent and on the same date as dividends are paid on all of our common stock.

Prior to January 1, 2003, we accounted for stock option grants in accordance with APB 25 and related Interpretations. Historically, we granted stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. Under APB 25, because the exercise price of our employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized. Therefore, for options that had been granted prior to January 1, 2003 that vested in 2005 and 2004, no compensation expense was recognized in accordance with APB 25. Effective January 1, 2003, we adopted SFAS No. 123 and SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure,” (or SFAS No. 148) on a “prospective basis” for all employee awards granted, modified or settled on or after January 1, 2003. Therefore, for options granted since January 1, 2003, compensation expense was recognized in accordance with SFAS No. 123 and SFAS No. 148. Effective January 1, 2006, we adopted SFAS No. 123(R) which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Thus, for all options that vested during 2006, regardless of when they were granted, compensation expense was recognized during 2006 according to SFAS No. 123(R).

We use the Black-Scholes-Merton formula to estimate the value of stock options granted to employees. This model requires management to make certain estimates including stock volatility, discount rate and the termination discount factor. If management incorrectly estimates these variables, the results of operations could be affected. Because SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because we adopted SFAS No. 123 using the “prospective” transition method outlined in SFAS No. 148 (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under SFAS No. 123 are recognized under SFAS No. 123(R). However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share below. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as previously required. Because we qualify as a REIT under the Internal Revenue Code of 1986, as amended, we are not subject to Federal income taxation. Therefore, this new reporting requirement does not have an impact on our statement of cash flows.

69




LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table illustrates the effect on net income and earnings per share as if the fair value recognition provision of SFAS No. 123(R) had been applied to all outstanding and unvested stock options in each period presented. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes-Merton option-pricing formula and amortized to expense over the options’ vesting periods (in thousands):

 

 

Year Ended December 31,

 

 

 

2006
(actual)

 

2005
(proforma)

 

2004
(proforma)

 

Net income available to common stockholders, as reported

 

$

61,631

 

 

$

35,366

 

 

 

$

15,003

 

 

Add: Stock-based compensation expense in the period

 

49

 

 

39

 

 

 

17

 

 

Deduct: Total stock-based compensation expense
          determined under fair value method for
          all awards

 

(49

)

 

(54

)

 

 

(30

)

 

Pro forma net income available to common stockholders

 

$

61,631

 

 

$

35,351

 

 

 

$

14,990

 

 

Net income per common share available to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

Basic—as reported

 

$

2.64

 

 

$

1.58

 

 

 

$

0.77

 

 

Basic—pro forma

 

$

2.64

 

 

$

1.58

 

 

 

$

0.77

 

 

Diluted—as reported

 

$

2.51

 

 

$

1.56

 

 

 

$

0.77

 

 

Diluted—pro forma

 

$

2.51

 

 

$

1.56

 

 

 

$

0.77

 

 


Note: Adjustments to compensation expense related to restricted shares have been excluded from this table since expense for restricted shares is already reflected in net income and is the same under APB No. 25 and SFAS No. 123(R). Above pro forma disclosures are provided for 2005 and 2004 because employee stock options issued prior to January 1, 2003, the date we adopted SFAS No. 123 and SFAS No. 148, were not accounted for using the fair value method during that period. Disclosures are provided for 2006 for comparative purposes since share-based payments have been accounted for under SFAS No. 123(R)’s fair value method beginning January 1, 2006.

As of December 31, 2006, 2005 and 2004, there were 64,000, 110,200 and 200,300 options outstanding, respectively. The fair value of these options was estimated utilizing the Black-Scholes-Merton valuation model and assumptions as of each respective grant date. No options were granted in 2006. In determining the estimated fair value for the options granted in 2005, the weighted average expected life assumption was three years, the weighted average volatility was 0.31, the weighted average risk free interest rate was 3.47% and the expected dividend yield was 6.12%. The weighted average fair value of the options granted was estimated to be $2.87. In determining the estimated fair value for the options granted in 2004, the weighted average expected life assumption was three years, the weighted average volatility was 0.39, the weighted average risk free interest rate was 3.18% and the expected dividend yield was 7.27%. The weighted average fair value of the options granted was estimated to be $2.58. The weighted average exercise price of the options was $10.33, $9.26 and $7.15 and the weighted average remaining contractual life was 0.5, 1.1 and 1.2 years as of December 31, 2006, 2005 and 2004, respectively.


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Commitments and Contingencies

It is our current policy and we intend to continue this policy that all borrowers of funds from us and lessees of any of our properties secure adequate comprehensive property and general and professional liability insurance that covers us as well as the borrower and/or lessee. Even though that is our policy, certain borrowers and lessees have been unable to obtain general and professional liability insurance because the cost of such insurance has increased substantially and some insurers have stopped offering such insurance for long termlong-term care facilities. Additionally, insurance companies have filed for bankruptcy protection leaving certain of our borrowers and/or lessees without coverage for periods that were believed to be covered prior to such bankruptcies. The unavailability and associated exposure as well as increased cost of such insurance could have a material adverse effect on the lessees and borrowers, including their ability to make lease or mortgage payments. Although we contend that as a non-possessory landlord we are not generally responsible for what takes place on real estate we do not possess, claims including general and professional liability claims, may still be asserted against us which may result in costs and exposure for which insurance is not available. Certain risks may be uninsurable, not economically insurable or insurance may not be available and there can be no assurance that we, a borrower or lessee will have adequate funds to cover all contingencies. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could be subject to an adverse claim including claims for general or professional liability, could lose the capital that we have invested in the properties, as well as the anticipated future revenue for the properties and, in the case of debt which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the properties. Certain losses such as losses due to floods or seismic activity if insurance is available may be insured subject to certain limitations including large deductibles or co-payments and policy limits.

Employees

We currently employ 16 people. The employees are not members of any labor union, and we consider our relations with our employees to be excellent.

Taxation of Our Company

General. We believe that we have been organized and have operated in such a manner as to qualify for taxation as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 1992. We intend to continue to operate in such a manner, but no assurance can be given that we have operated or will be able to continue to operate in a manner so as to qualify or to remain qualified. This summary is qualified in its entirety by the applicable Internal Revenue Code provisions, rules and regulations, and administrative and judicial interpretations.

If we continue to qualify for taxation as a REIT, we will generally not be subject to federal corporate income taxes as long as we distribute all of our taxable income as dividends. This treatment substantially eliminates the “double taxation” (i.e., at the corporate and stockholder levels) that generally results from investment in a corporation. However, we will continue to be subject to federal income tax as follows:

First, we will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains.
Second, under certain circumstances, we may be subject to the alternative minimum tax, if our dividend distributions are less than our alternative minimum taxable income.
Third, if we have (i) net income from the sale or other disposition of foreclosure property which is held primarily for sale to customers in the ordinary course of business or (ii) other non-qualifying income from foreclosure property, we may elect to be subject to tax at the highest corporate rate on such income, if necessary to maintain our REIT status.
Fourth, if we have net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax.
Fifth, if we fail to satisfy the 75% gross income test or the 95% gross income test, but nonetheless maintain our qualification as a REIT because certain other requirements have been met, we will be subject to a 100% tax on an amount equal to (a) the gross income attributable to the greater of the amount by which we fail the 75% or 95% test multiplied by (b) a fraction intended to reflect our profitability.

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Sixth, if we fail to distribute during each calendar year at least the sum of (i) 85% of our ordinary income for such year, (ii) 95% of our REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed.
Seventh, if we acquire an asset which meets the definition of a built-in gain asset from a corporation which is or has been a C corporation (i.e., generally a corporation subject to full corporate-level tax) in certain transactions in which the basis of the built-in gain asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and if we subsequently recognize gain on the disposition of such asset during the ten-year period, called the recognition period, beginning on the date on which we acquired the asset, then, to the extent of the built-in gain (i.e., the excess of (a) the fair market value of such asset over (b) our adjusted basis in such asset, both determined as of the beginning of the recognition period), such gain will be subject to tax at the highest regular corporate tax rate, pursuant to IRS regulations.

Requirements for Qualification. The Internal Revenue Code defines a REIT as a corporation, trust or association:

(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;
(3) which would be taxable, but for Sections 856 through 860 of the Internal Revenue Code, as a domestic corporation;
(4) which is neither a financial institution; nor, an insurance company subject to certain provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals (including specified entities); and
(7) which meets certain other tests, described below, regarding the amount of its distributions and the nature of its income and assets.

The Internal Revenue Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

Income Tests. There presently are two gross income requirements that we must satisfy to qualify as a REIT:

• First, at least 75% of our gross income (excluding gross income from “prohibited transactions,” as defined below) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property, including rents from real property, or from certain types of temporary investment income.
• Second, at least 95% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from income that qualifies under the 75% test or from dividends, interest and gain from the sale or other disposition of stock or securities.

Cancellation of indebtedness income generated by us is not taken into account in applying the 75% and 95% income tests discussed above. A “prohibited transaction” is a sale or other disposition of property (other than foreclosure property) held for sale to customers in the ordinary course of business. Any gain realized from a prohibited transaction is subject to a 100% penalty tax.

Asset Tests. We, at the close of each quarter of our taxable year, must also satisfy four tests relating to the nature of our assets.

• First, at least 75% of the value of our total assets must be represented by real estate assets (including stock or debt instruments held for not more than one year purchased with the proceeds of a stock offering or long-term (at least five years) public debt offering of our company), cash, cash items and government securities.
• Second, not more than 25% of our total assets may be represented by securities other than those in the 75% asset class.

7


• Third, of the investments included in the 25% asset class, the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets and we may not own more than 10% of any one issuer’s outstanding voting securities.
• Fourth, the Tax Relief Extension Act of 1999 (or 99 Act), provides that, subject to certain exceptions, for taxable years commencing after December 31, 2000, we may not own more than 10% of the total value of the securities of any issuer. See the 99 Act description beginning on page 9.
• Fifth, the 99 Act also provides that not more than 20% of our value may be represented by securities of one or more taxable REIT subsidiaries.

Ownership of a Partnership Interest or Stock in a Corporation. We own interests in various partnerships. In the case of a REIT that is a partner in a partnership, Treasury regulations provide that for purposes of the REIT income and asset tests the REIT will be deemed to own its proportionate share of the assets of the partnership, and will be deemed to be entitled to the income of the partnership attributable to such share. The ownership of an interest in a partnership by a REIT may involve special tax risks, including the challenge by the Internal Revenue Service of the allocations of income and expense items of the partnership, which would affect the computation of taxable income of the REIT, and the status of the partnership as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes.

We also own interests in a number of subsidiaries which are intended to be treated as qualified real estate investment trust subsidiaries. The Internal Revenue Code provides that such subsidiaries will be ignored for federal income tax purposes and all assets, liabilities and items of income, deduction and credit of such subsidiaries will be treated as assets, liabilities and such items of ours.

If any partnership or qualified real estate investment trust subsidiary in which we own an interest were treated as a regular corporation (and not as a partnership or qualified real estate investment trust subsidiary) for federal income tax purposes, we would likely fail to satisfy the REIT asset test prohibiting a REIT from owning greater than 10% of the voting power of the stock or value of securities of any issuer, as described above, and would therefore fail to qualify as a REIT. We believe that each of the partnerships and subsidiaries in which we own an interest will be treated for tax purposes as a partnership or qualified real estate investment trust subsidiary, respectively, although no assurance can be given that the Internal Revenue Service will not successfully challenge the status of any such organization.

REMIC. A regular or residual interest in a REMIC will be treated as a real estate asset for purposes of the REIT asset tests, and income derived with respect to such interest will be treated as interest on an obligation secured by a mortgage on real property, assuming that at least 95% of the assets of the REMIC are real estate assets. If less than 95% of the assets of the REMIC are real estate assets, only a proportionate share of the assets of and income derived from the REMIC will be treated as qualifying under the REIT asset and income tests. All of our REMIC Certificates are secured by real estate assets, therefore we believe that our REMIC interests fully qualify for purposes of the REIT income and asset tests.

Annual Distribution Requirements. In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders annually in an amount at least equal to:

(1) the sum of:

    (A) 90% (95% for taxable years ending prior to January 1, 2001) of our “real estate investment trust taxable income” (computed without regard to the dividends paid deduction and our net capital gain); and

    (B) 90% (95% for taxable years ending prior to January 1, 2001) of the net income, if any (after tax), from foreclosure property; minus

(2) the excess of certain items of non-cash income over 5% of our real estate investment trust taxable income.

These annual distributions are paid in the taxable year to which they relate. Alternatively, they must be declared and payable to stockholders of record in either October, November, or December and paid during January of the following year. In addition, if we elect, the dividends may be declared before the due date of the tax return (including extensions) and paid on or before the first regular dividend payment date after such declaration, and we must specify the dollar amount in our tax returns.

8


Amounts distributed must not be preferential; that is, every stockholder of the class of stock with respect to which a distribution is made must be treated the same as every other stockholder of that class, and no class of stock may be treated otherwise than in accordance with its dividend rights as a class.

To the extent that we do not distribute all of our net long-term capital gain or distribute at least 90% (95% for taxable years ending prior to January 1, 2001), but less than 100%, of our “real estate investment trust taxable income,” as adjusted, it will be subject to tax on such amounts at regular corporate tax rates. Furthermore, if we should fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates in the last three months of the calendar year, by the end of the following January) at least the sum of:

(1) 85% of our real estate investment trust ordinary income for such year;
(2) 95% of our real estate investment trust capital gain net income for such year; and
(3) any undistributed taxable income from prior periods;

we would be subject to a 4% excise tax on the excess of such required distributions over the amounts actually distributed. Any real estate investment trust taxable income and net capital gain on which this excise tax is imposed for any year is treated as an amount distributed during that year for purposes of calculating such tax.

Failure to Qualify. If we fail to qualify for taxation as a REIT in any taxable year, and certain relief provisions do not apply, we will be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to stockholders in any year in which we fail to qualify as a REIT will not be deductible by us, nor will any distributions be required to be made. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances we would be entitled to the statutory relief. Failure to qualify for even one year could substantially reduce distributions to stockholders and could result in our incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes.

99 Act.The 99 Act has made a number of substantial changes to the qualification and tax treatment of REITs. The REIT changes are generally effective for taxable years commencing after December 31, 2000. The following is a brief summary of certain of the significant REIT provisions contained in the 99 Act.

(1) Investment limitations and taxable REIT subsidiaries. The 99 Act modifies the REIT asset test by adding a requirement that except for (I) “Safe Harbor Debt” and (II) the ownership of stock in “taxable REIT subsidiaries”, a REIT cannot own more than 10% of the total value of the securities of any issuer (or 10% Rule). The 10% Rule becomes effective for taxable years commencing after December 31, 2000. “Safe Harbor Debt” is non-contingent, non-convertible debt (or straight-debt) which satisfies one of the following three requirements: (a) the straight-debt is issued by an individual, or (b) all of the securities of the issuer owned by the REIT is straight debt or (c) the issuer is a partnership in which the REIT owns at least 20% of its profits.
(2) For a corporation to qualify as a taxable REIT subsidiary the following requirements must be satisfied.

(1) The REIT must own stock in the subsidiary corporation.
(2) Both the REIT and the subsidiary corporation must join in an election that the subsidiary corporation be treated as a “taxable REIT subsidiary” of the REIT.
(3) The subsidiary corporation cannot directly or indirectly operate or manage either a lodging or health care facility.
(4) The subsidiary corporation generally cannot provide to any person rights to any brand name under which lodging or health care facilities are operated.

A taxable REIT subsidiary can provide a limited amount of services to tenants of REIT property (even if such services were not considered customarily furnished in connection with the rental of real property) and can manage or operate properties, generally for third parties, without causing the rents received by the REIT from such parties not to be treated as rent from real properties. The rule that rents paid to a REIT do not qualify as rental from real property if the REIT owns more than 10% of the corporation paying the rent is modified by excepting rents paid by taxable REIT subsidiaries provided that 90% of the space is leased to third parties at comparable rents for comparable space.

9


Interest paid by a taxable REIT subsidiary to the related REIT is subject to the earnings stripping rules contained in Section 163(j) of the Code and therefore the taxable REIT subsidiary cannot deduct interest in any year that it would exceed 50% of the subsidiary’s adjusted gross income. If any amount of interest, rent, or other deductions of the taxable REIT subsidiary to be paid to the REIT is determined not to be at arm’s length, an excise tax of 100% is imposed on the portion that is determined to be excessive. However, rent received by a REIT shall not fail to qualify as rents from real property by reason of the fact that all or any portion of such rent is redetermined for purposes of the excise tax.
The Act permits a REIT to own up to 100% of the stock of a “taxable REIT subsidiary.” However, the value of all of the securities of taxable REIT subsidiaries owned by the REIT cannot exceed 20% of the value of the REIT’s assets.
The 10% Rule generally will not apply to securities owned by a REIT on July 12, 1999 (or Transition Rule). However, the Transition Rule would cease to apply to securities of an issuer if, after July 12, 1999, the REIT acquires additional securities of such issuer or if such issuer engages in a substantial new line of business, or acquires any substantial assets, other than in a reorganization or in a transaction qualifying under Section 1031 or 1033 of the Code.

(3)Ownership of health care facilities. The 99 Act permits a REIT to own and operate a health care facility for at least two years, and treat it as permitted “foreclosure” property, if the facility is acquired as the result of a default (or imminent default) of a lease or indebtedness.
(4)REIT distribution requirements. The 99 Act reduces the requirement that a REIT must distribute at least 95% of its income as deductible dividends to 90% of its income.
(5)Rents from personal property. A REIT may treat rent from personal property as rent from real property so long as the rent from personal property does not exceed 15% of the total rent from both real and personal property for the taxable year. The Act provides that this determination will be made by comparing the fair market value of the personal property to the fair market value of the real and personal property.

State and local taxation.We may be subject to state or local taxation in various state or local jurisdictions, including those in which we transact business or reside. Our state and local tax treatment may not conform to the federal income tax consequences discussed above.

Investor Information

We make available to the public free of charge through our internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. Our internet website address iswww.ltcproperties.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.

Corporate Governance Guidelines

We have adopted Corporate Governance Policies. The Corporate Governance Policies are posted on our website (www.ltcproperties.com) and are available in print to any stockholder who requests a copy.

Committee Charters

The Board of Directors has an Audit Committee, Compensation Committee and Nominating/ Corporate Governance Committee. The Board of Directors has adopted written charters for each committee, and we have posted them on our website (www.ltcproperties.com) and they are available in print to any stockholder who requests a copy.

Cautionary Statements

Certain information contained in this annual report includes statements that are not purely historical and are “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, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All statements other than historical facts contained in this annual report are forward looking statements. These forward looking statements involve a number of risks and

10


uncertainties. All forward looking statements included in this annual report are based on information available to us on the date hereof, and we assume no obligation to update such forward looking statements. Although we believe that the assumptions and expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. The actual results achieved by us may differ materially from any forward looking statements due to the risks and uncertainties of such statements.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports.

Such risks and uncertainties include, among other things, the following risks including those described in more detail below:

• the status of the economy;
• the status of capital markets, including prevailing interest rates;
• compliance with and changes to regulations and payment policies within the health care industry;
• changes in financing terms;
• competition within the health care and senior housing industries; and
• changes in federal, state and local legislation.

Recently Enacted Tax Legislation Could have an Adverse Effect on the Market Price of our Equity Securities.On May 28, 2003, President Bush signed into law legislation that, for individual taxpayers, will generally reduce the tax rate on corporate dividends to a maximum of 15% for tax years 2003 to 2008. REIT dividends generally will not qualify for this reduced tax rate because a REIT’s income generally is not subject to corporate level tax. This new law could cause stock in non-REIT corporations to be a more attractive investment to individual investors than stock in REITs and could have an adverse effect on the market price or our equity securities.

A Failure to Maintain or Increase our Dividend Could Reduce the Market Price of Our Stock. During calendar 2002 we paid a quarterly dividend of $.10 per common share of stock. During calendar 2003, we paid a $.10 dividend in the first quarter, a $.15 dividend in the second and third quarter and a $.25 dividend in the fourth quarter on our common stock. The ability to maintain or raise our common dividend is dependent, to a large part, on growth of funds from operations. This growth in turn depends upon increased revenues from additional investments and loans, rental increases and mortgage rate increases.

At Times, We May Have Limited Access to Capital Which Will Slow Our Growth. A REIT is required to make dividend distributions and retains little capital for growth. As a result, a REIT is required to grow through the steady investment of new capital in real estate assets. Presently, we believe capital is readily available to us. However, there will be times when we will have limited access to capital from the equity and/or debt markets. During such periods, virtually all of our available capital will be required to meet existing commitments and to reduce existing debt. We may not be able to obtain additional equity or debt capital or dispose of assets on favorable terms, if at all, at the time we require additional capital to acquire health care properties on a competitive basis or meet our obligations.

Income and Returns from Health Care Facilities Can be Volatile. The possibility that the health care properties in which we invest will not generate income sufficient to meet operating expenses, will generate income and capital appreciation, if any, at rates lower than those anticipated or will yield returns lower than those available through investments in comparable real estate or other investments are additional risks of investing in health care related real estate. Income from properties and yields from investments in such properties may be affected by many factors, including changes in governmental regulation (such as zoning laws and government payment), general or local economic conditions (such as fluctuations in interest rates and employment conditions), the available local supply of and demand for improved real estate, a reduction in rental income as the result of an inability to maintain occupancy levels, natural disasters (such as earthquakes and floods) or similar factors.

We Depend on Lease Income and Mortgage Payments from Real Property. Since a substantial portion of our income is derived from mortgage payments and lease income from real property, our income would be adversely affected if a significant number of our borrowers or lessees were unable to meet their obligations to us or if we were unable to lease our properties or make mortgage loans on economically favorable terms. There can be no assurance that any lessee will exercise its option to renew its lease upon the expiration of the initial term or that if such failure to renew were to occur, we could lease the property to others on favorable terms.

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We Rely on a Few Major Operators.

Assisted Living Concepts, Inc. (or ALC) leases 37 assisted living properties with a total of 1,434 units owned by us representing approximately 12.6%, or $72.5 million, of our total assets. In October 2001, ALC filed for reorganization under Chapter 11 of the federal bankruptcy laws. The filing was pre-negotiated with sufficient debt holders to allow ALC to reorganize its debt and equity and emerge from bankruptcy as of 12:01 a.m. on January 1, 2002. At the request of our Board of Directors, we agreed to reduce total rents under the 37 leases by $0.9 million a year, beginning January 1, 2002. Our Chairman, CEO and President, Mr. Andre C. Dimitriadis, became a Board member of ALC as of January 1, 2002.

ALC is a publicly traded company, and as such is subject to the filing requirements of the Securities and Exchange Commission.

Alterra Healthcare Corporation (or Alterra) leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 12.4%, or $71.3 million, of our total assets at December 31, 2003. Alterra announced on January 22, 2003 that it had filed a voluntary petition with the U.S. Bankruptcy Court for the District of Delaware to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Alterra’s Plan of Reorganization was approved in November 2003 and Alterra emerged from bankruptcy in December 2003 as a non-publicly traded company. All of our leases with Alterra were assumed, without change, by the reorganized Alterra.

Our financial position and ability to make distributions may be adversely affected by further financial difficulties experienced by ALC and Alterra or any of our other lessees and borrowers, including additional 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 or our borrowers when it expires.

Our Borrowers and Lessees Face Competition in the Healthcare Industry. The long-term care industry is highly competitive and we expect that it may become more competitive in the future. Our borrowers and lessees are competing with numerous other companies providing similar long-term care services or alternatives such as home health agencies, hospices, life care at home, community-based service programs, retirement communities and convalescent centers. There can be no assurance that our borrowers and lessees will not encounter increased competition in the future which could limit their ability to attract residents or expand their businesses and therefore affect their ability to make their debt or lease payments to us.

The Healthcare Industry is Heavily Regulated by the Government. Our borrowers and lessees who operate health care facilities are subject to heavy regulation by federal, state and local governments. These laws and regulations are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law. These changes may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by both government and other third-party payors. These changes may be applied retroactively. The ultimate timing or effect of these changes cannot be predicted. The failure of any borrower of funds from us or lessee of any of our properties to comply with such laws, requirements and regulations could affect its ability to operate its facility or facilities and could adversely affect such borrower’s or lessee’s ability to make debt or lease payments to us.

Our Borrowers and Lessees Rely on Government and Third Party Reimbursement. The ability of our borrowers and lessees to generate revenue and profit determines the underlying value of that property to us. Revenues of our borrowers and lessees are generally derived from payments for patient care. Sources of such payments include the federal Medicare program, state Medicaid programs, private insurance carriers, health care service plans, health maintenance organizations, preferred provider arrangements, self-insured employers, as well as the patients themselves.

A significant portion of the revenue of our borrowers and lessees is derived from governmentally-funded reimbursement programs, such as Medicare and Medicaid. Because of significant health care costs paid by such government programs, both federal and state governments have adopted and continue to consider various health care reform proposals to control health care costs. In recent years, there have been fundamental changes in the Medicare program that resulted in reduced levels of payment for a substantial portion of health care services. In many instances, revenues from Medicaid programs are already insufficient to cover the actual costs incurred in providing care to those patients, and several states have reduced, or are considering reducing, nursing facility payment rates. Moreover, health care facilities have experienced increasing pressures from private payors attempting to control

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health care costs, and reimbursement from private payors has in many cases effectively been reduced to levels approaching those of government payors.

Governmental and public concern regarding health care costs may result in significant reductions in payment to health care facilities, and there can be no assurance that future payment rates for either governmental or private payors will be sufficient to cover cost increases in providing services to patients. Any changes in reimbursement policies which reduce reimbursement to levels that are insufficient to cover the cost of providing patient care could adversely affect revenues of our borrowers and lessees and thereby adversely affect those borrowers’ and lessees’ abilities to make their debt or lease payments to us. Failure of the borrowers or lessees to make their debt or lease payments would have a direct and material adverse impact on us.

On August 4, 2003, Centers for Medicare & Medicaid Services, commonly known as CMS, published a final rule announcing that it will implement a 3.0% market basket increase in skilled nursing facility prospective payment system rates for fiscal year 2004, which began October 1, 2003. In addition, the rule will adjust fiscal year 2004 rates by an additional 3.26% to reflect cumulative forecast errors since the start of the skilled nursing facility prospective payment system on July 1, 1998.

Congress and the States Have Enacted Healthcare Reform measures. The health care industry is facing various challenges, including increased government and private payor pressure on health care providers to control costs. While the Bush Administration has proposed expanded funding for Medicare prescription drug coverage, it has stated that it intends to offset the cost of this benefit in part from savings from overpayments to other Medicare providers. In addition, the Medicare Payment Advisory Commission, known as the MedPAC, an independent federal body established to advise Congress on issues affecting the Medicare program, recommended in a March 2003 report that Congress adopt additional reductions in skilled nursing facility reimbursement. While the MedPAC recommendations are not binding on Congress, they may affect congressional consideration of future Medicare reimbursement legislation. In June 2003, the U.S. House of Representatives and Senate adopted separate Medicare reform bills, neither of which would reduce Medicare skilled nursing facility rates. Nevertheless, no assurances can be given that legislation ultimately enacted by Congress, if any, would not reduce Medicare reimbursement to skilled nursing facilities or result in additional costs for operators of skilled nursing facilities.

The Balanced Budget Act enacted significant changes to the Medicare and Medicaid programs designed to modernize payment and health care delivery systems while achieving substantial budgetary savings. In seeking to limit Medicare reimbursement for long term care services, Congress established the prospective payment system for skilled nursing facility services to replace the cost-based reimbursement system. Skilled nursing facilities needed to restructure their operations to accommodate the new Medicare prospective payment system reimbursement. Since the skilled nursing facility prospective payment system was enacted, several publicly held operators of long-term care facilities and at least two publicly held operators of assisted living facilities have filed for reorganization under Chapter 11 of the federal bankruptcy laws. While certain long-term care operators and both assisted living operators have emerged from bankruptcy, during their reorganizations and in some instances subsequent thereto, they reduced their operations by rejecting leases and/or defaulting on loans resulting in properties being returned to lessors or lenders. There can be no assurances given that the remainder of 2004 and future years will not include additional bankruptcies of skilled nursing and assisted living operators.

In addition, comprehensive reforms affecting the payment for and availability of health care services have been proposed at the federal and state levels and major reform proposals have been adopted by certain states. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodology may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third party payors.

Moreover, many states are facing significant budget shortfalls, and most states are taking steps to implement cost controls within their Medicaid programs. On May 28, 2003, President Bush signed into law legislation providing $20.0 billion in temporary assistance to the states, $10.0 billion of which is earmarked for state Medicaid programs. However, in light of forthcoming regulations and continuing state Medicaid program reform and budget cuts, no assurance can be given that the implementation of such regulations and reform will not have a material adverse effect on our financial condition or results of operations.

We Could Incur More Debt.We operate with a policy of incurring debt when, in the opinion of our directors, it is advisable. We may incur additional debt by issuing debt securities in a public offering or in a private transaction.

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Accordingly, we could become more highly leveraged. The degree of leverage could have important consequences to stockholders, including affecting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes and making us more vulnerable to a downturn in business or the economy generally.

A Failure to Reinvest Cash Available to Us Could Adversely Affect Our Future Revenues and Our Ability to Increase Dividends to Stockholders; There is Considerable Competition in Our Market for Attractive Investments. From time to time, we will have cash available from (1) proceeds of sales of shares of securities, (2) proceeds from new debt issuances, (3) principal payments on our mortgages and other investments, (4) sale of properties, and (5) funds from operations. We may reinvest this cash in health care investments in accordance with our investment policies, repay outstanding debt or invest in qualified short-term investments. We compete for real estate investments with a broad variety of potential investors. The competition for attractive investments negatively affects our ability to make timely investments on acceptable terms. Delays in acquiring properties or making loans will negatively impact revenues and perhaps our ability to increase distributions to our stockholders.

Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences to Our Stockholders. We intend to operate so as to qualify as a REIT under the Code. We believe that we have been organized and have operated in a manner which would allow us to qualify as a REIT under the Code beginning with our taxable year ended December 31, 1992. However, it is possible that we have been organized or have operated in a manner which would not allow us to qualify as a REIT, or that our future operations could cause us to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must pay dividends to stockholders aggregating annually at least 90% (95% for taxable years ending prior to January 1, 2001) of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding capital gains). Legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. However, we are not aware of any pending tax legislation that would adversely affect our ability to operate as a REIT.

If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless we are entitled to relief under statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year during which we lost qualification. If we lose our REIT status, our net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved. In addition, we would no longer be required to make distributions to stockholders.

Our Properties are Subject to Licensing, Certification and Accreditation. In addition to the requirements to be met by skilled nursing facilities for participation in the Medicare and Medicaid programs, skilled nursing facilities are subject to regulatory and licensing requirements of federal, state and local authorities. We have no direct control over our borrowers’ or tenants’ ability to meet the numerous state and federal regulatory requirements. If a borrower or tenant does not continue to meet all regulatory requirements, such borrower or tenant may lose its ability to provide or bill for health care services. If we cannot attract another health care provider on a timely basis or on acceptable terms, our revenues would be adversely impacted. In addition, our properties are special purpose properties that may not be easily adaptable to uses unrelated to health care. Transfers of operations of health care facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and real estate.

Our Remedies May Be Limited When Mortgage Loans Default. To the extent we invest in mortgage loans, such mortgage loans may or may not be recourse obligations of the borrower and generally will not be insured or guaranteed by governmental agencies or otherwise. In the event of a default under such obligations, we may have to foreclose on the property underlying the mortgage or protect our interest by acquiring title to a property and thereafter make substantial improvements or repairs in order to maximize the property’s investment potential. Borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against such enforcement and/or bring claims for lender liability in response to actions to enforce mortgage obligations. If a borrower seeks bankruptcy protection, the Bankruptcy Court may impose an automatic stay that would preclude us from enforcing foreclosure or other remedies against the borrower. Relatively high “loan to value” ratios and declines in the value of the property may prevent us from realizing an amount equal to our mortgage loan upon foreclosure.

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Investments in Commercial Mortgage Backed Securities are Subject to Real Estate Risks Relating to the Underlying Properties. We retain subordinated portions of the REMIC Certificates issued in our securitizations. These REMIC Certificates are a form of mortgage backed securities and as such, we are subject to the same risks associated with investing directly in the underlying mortgage loans. This is especially true in our case due to the nature of the collateral properties securing the underlying mortgages in our securitizations. All of these properties are special purpose properties used for the delivery of long-term care services. Any risks associated with investing in these types of properties could impact the value of our investment in the REMIC Certificates we retain.

Investments in Commercial Mortgage-Backed Securities are Subject to Risks Associated with Prepayment of the Underlying Mortgages. As with many interest bearing mortgage-backed instruments, prepayments of the underlying mortgages may expose us to the risk that an equivalent rate of return is not available in the current market and that new investment of equivalent risk will have lower rates of return. Certain types of investments in commercial mortgage-backed securities may be interest only securities which expose the holder to the risk that the underlying mortgages may prepay at a faster rate than anticipated at acquisition. Faster than anticipated prepayments may cause the investment in interest only commercial mortgage-backed securities to have a lower than anticipated rate of return and could result in a loss of the initial investment under extreme prepayment scenarios.

Subordinated Securities may not be Repaid Upon Default. We invest in subordinated tranches of commercial mortgage backed securities (our retained REMIC Certificates). In general, subordinated tranches of commercial mortgage backed securities are entitled to receive repayment of principal only after all principal payments have been made on more senior tranches and also have subordinated rights as to receipt of interest distributions. In addition, an active secondary market for such subordinated securities is not as well developed as the market for other mortgage backed securities. Accordingly, such subordinated commercial mortgage backed securities may have limited marketability and there can be no assurance that a more efficient secondary market will develop.

We are Subject to Risks and Liabilities in Connection with Properties Owned Through Limited Liability Companies and Partnerships. We have ownership interests in limited liability companies and/or partnerships. We may make additional investments through these ventures in the future. Partnership or limited liability company investments may involve risks such as the following:

• our partners or co-members might become bankrupt (in which event we and any other remaining general partners or members would generally remain liable for the liabilities of the partnership or limited liability company);
• our partners or co-members might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals;
• our partners or co-members may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT; and
• agreements governing limited liability companies and partnerships often contain restrictions on the transfer of a member’s or partner’s interest or “buy-sell” or other provisions which may result in a purchase or sale of the interest at a disadvantageous time or on disadvantageous terms.

We will, however, generally seek to maintain sufficient control of our partnerships and limited liability companies to permit us to achieve our business objectives. Our organizational documents do not limit the amount of available funds that we may invest in partnerships or limited liability companies. The occurrence of one or more of the events described above could have a direct and adverse impact on us.

Item 2.     PROPERTIES

Investment Portfolio

At December 31, 2003, our “direct real estate investment portfolio” (properties that we own or on which we hold promissory notes secured by first mortgages) consisted of investments in 83 skilled nursing properties with 9,728 beds, 96 assisted living properties with 4,551 units and one school in 30 states. We had approximately $456.0 million (before accumulated depreciation of $73.4 million) invested in properties we own and lease to lessees, approximately $72.7 million invested in mortgage loans (before allowance for doubtful accounts of $1.3 million), and investments in REMIC Certificates with a carrying value of approximately $61.7 million ($63.1 million at amortized cost, prior to any adjustment of available-for-sale certificates to fair market value).

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Skilled nursing facilities provide restorative, rehabilitative and nursing care for people not requiring the more extensive and sophisticated treatment available at acute care hospitals. Many skilled nursing facilities provide ancillary services that include occupational, speech, physical, respiratory and IV therapies, as well as provide sub-acute care services which are paid either by the patient, the patient’s family, or through federal Medicare or state Medicaid programs. Assisted living facilities serve elderly persons who require assistance with activities of daily living, but do not require the constant supervision skilled nursing facilities provide. Services are usually available 24-hours a day and include personal supervision and assistance with eating, bathing, grooming and administering medication. The facilities provide a combination of housing, supportive services, personalized assistance and health care designed to respond to individual needs.

The school in our real estate investment portfolio is a charter school. Charter schools provide an alternative to the traditional public school. Charter schools are generally autonomous entities authorized by the state or locality to conduct operations independent from the surrounding public school district. Laws vary by state, but generally charters are granted by state boards of education either directly or in conjunction with local school districts or public universities. Operators are granted charters to establish and operate schools based on the goals and objectives set forth in the charter. Upon receipt of a charter, schools receive an annuity from the state for each student enrolled.

Owned Properties.At December 31, 2003, we owned 53 skilled nursing properties with a total of 6,047 beds, 88 assisted living properties with a total of 4,182 units and one school in 23 states, representing a gross investment of approximately $456.0 million. The properties are leased pursuant to non-cancelable leases generally with an initial term of 10 to 30 years. The leases provide for a fixed minimum base rent during the initial and renewal periods. Most of the leases provide for annual fixed rent increases or increases based on consumer price indices over the term of the lease. In addition, certain of our leases provide for additional rent through revenue participation (as defined in the lease agreement) in incremental revenues generated by the facilities over a defined base period, effective at various times during the term of the lease. Each lease is a triple net lease which requires the lessee to pay additional charges including all taxes, insurance, assessments, maintenance and repair (capital and non-capital expenditures), and other costs necessary in the operation of the facility. Many of the leases contain renewal options and one contains a limited period option that permits the operator to purchase the property.

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The following table sets forth certain information regarding our owned properties as of December 31, 2003 (dollar amounts in thousands):

                              
No. ofNo. ofNo. ofNo. ofLeaseCurrent
LocationSNFsALFsSchoolsBeds/Units(1)EncumbrancesTerm(2)Investment








Alabama  3   1      458  $3,587   93  $16,228 
Arizona  4   3      1,026   12,827   152   45,854 
California  1   3      436   17,513   97   36,713 
Colorado  1   6      325   6,625   189   20,383 
Florida  3   6      776   2,243   197   31,597 
Georgia  3   1      364   5,002   84   7,113 
Idaho     4      148      63   9,756 
Indiana     2      78      72   5,070 
Iowa  7   1      645   8,933   321   16,380 
Kansas  4   4      447   8,907   236   16,597 
Nebraska     4      156      64   9,332 
New Jersey     1   1   39      117   12,195 
New Mexico  6   1      604   11,157   101   30,913 
N. Carolina     5      210      204   13,096 
Ohio     11      487   20,983   126   44,718 
Oklahoma     6      221   4,476   204   12,315 
Oregon  1   4      324   3,961   65   17,812 
Pennsylvania     1      69   5,440   172   8,327 
South Carolina     3      128      204   7,610 
Tennessee  3         201      238   3,866 
Texas  12   13      2,147   19,706   172   55,521 
Virginia  3         443      358   9,467 
Washington  2   8      497   6,640   114   25,138 
   
   
   
   
   
       
 
 TOTAL  53   88   1   10,229  $138,000(3)     $456,001(4)
   
   
   
   
   
       
 


1. Number of beds/ units applies to skilled nursing properties and assisted living residences only.
2. Weighted average remaining months in lease term.
3. Consists of: i) $123,314 of non-recourse mortgages payable by us secured by 22 skilled nursing properties containing a total of 2,691 beds, 18 assisted living properties with 961 units, ii) $6,640 of tax-exempt bonds secured by five assisted living properties in Washington with 188 units, iii) $4,085 of non-recourse capital lease obligations on four assisted living properties in Kansas with 134 units, and iv) $3,961 of multi-unit housing non-recourse tax-exempt revenue bonds on one assisted living property in Oregon with 112 units. As of December 31, 2003 our gross investment in properties encumbered by mortgage loans, bonds and capital leases was $171,429.
4. Of the total, $165,785 relates to investments in skilled nursing properties, $280,946 relates to investments in assisted living properties and $9,270 relates to an investment in a school.

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Mortgage Loans.At December 31, 2003, we had 37 mortgage loans secured by first mortgages on 30 skilled nursing properties with a total of 3,681 beds and eight assisted living residences with 369 units located in 19 states. See Item 8.     FINANCIAL STATEMENTS —Note 6.     Real Estate Investmentsfor further description.

The following table sets forth certain information regarding our mortgage loans as of December 31, 2003 (dollar amounts in thousands):

                                  
AverageCurrent
No. ofNo. ofNo. ofInterestMonths toFace Amount ofCurrent Amount ofAnnual Debt
LocationSNFsALFsBeds/UnitsRate %MaturityMortgage LoansMortgage LoansService(1)









Alabama  1      40   10.63   175  $500  $450  $61 
Arizona  1      144   12.40   10   2,400   2,186   315 
Arkansas  2      274   10.88-11.08   87   3,400   2,811   418 
California  5      756   10.40-12.40   125   11,371   9,926   1,417 
Colorado  3      263   11.00-12.00   27   7,042   6,685   892 
Florida  2   1   384   10.52-12.55   73   9,990   8,064   1,269 
Georgia  1      63   11.80   37   1,200   1,126   150 
Illinois  1      120   10.21   51   1,950   1,829   217 
Iowa  1   1   143   11.91-12.50   47   4,400   4,218   557 
Missouri  1      90   9.51   173   1,500   1,312   167 
Montana     1   34   12.15   118   2,346   2,284   292 
Nebraska     4   163   10.73-11.91   58   10,911   10,521   1,314 
Nevada  1      100   11.25   79   1,200   970   150 
Ohio  1      150   10.89   27   5,200   4,761   610 
Oklahoma  1      161   11.78   90   1,300   1,101   168 
S. Dakota     1   34   11.91   63   2,346   2,290   287 
Texas  5      780   10.90-12.32   107   7,995   7,097   1,036 
Washington  3      236   11.90-12.38   58   3,500   3,185   454 
Wisconsin  1      115   11.00   158   2,200   1,929   272 
   
   
   
           
   
   
 
 TOTAL  30   8   4,050          $80,751  $72,745(2) $10,046 
   
   
   
           
   
   
 


1.Includes principal and interest payments.
2.Of the total current principal balance, $52,242 and $20,503 relate to investments in skilled nursing properties and assisted living properties, respectively. This balance is gross of allowance for doubtful accounts.

In general, the mortgage loans may not be prepaid except in the event of the sale of the collateral property to a third party that is not affiliated with the borrower, although partial prepayments (including the prepayment premium) are often permitted where a mortgage loan is secured by more than one property upon a sale of one or more, but not all, of the collateral properties to a third party which is not an affiliate of the borrower. The terms of the mortgage loans generally impose a premium upon prepayment of the loans depending upon the period in which the prepayment occurs, whether such prepayment was permitted or required, and certain other conditions such as upon the sale of the property under a pre-existing purchase option, destruction or condemnation, or other circumstances as approved by us. On certain loans, such prepayment amount is based upon a percentage of the then outstanding balance of the loan, usually declining ratably each year. For other loans, the prepayment premium is based on a yield maintenance formula. In addition to a lien on the mortgaged property, the loans are generally secured by certain non-real estate assets of the properties and contain certain other security provisions in the form of letters of credit, pledged collateral accounts, security deposits, cross-default and cross-collateralization features and certain guarantees.

See Item 8.     FINANCIAL STATEMENTS —Note 11.     Debt Obligationsfor a description of our Senior Mortgage Participation Payable which is secured by certain of our mortgage loans receivable.

REMIC Certificates. At December 31, 2003, we had investments in REMIC Certificates with a carrying value of $61.7 million ($63.1 million at amortized cost prior to any adjustment of available-for-sale certificates to fair market value).

The REMIC Certificates we retain are subordinate in rank and right of payment to the REMIC Certificates sold to third-party investors and as such would bear the first risk of loss in the event of an impairment to any of the

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underlying mortgages. The REMIC Certificates are collateralized by three pools consisting of 69 first mortgage loans secured by 103 skilled nursing properties with a total of 11,823 beds in 19 states. Each mortgage loan, all of which we originated, is evidenced by a promissory note and secured by a mortgage, deed of trust, or other similar instrument that creates a first mortgage lien on a fee simple estate in real property. The $213.3 million current principal amount of mortgage loans represented by the REMIC Certificates have a weighted average interest rate of approximately 11.0%, and scheduled maturities ranging from 2004 to 2028.

The following table sets forth certain information regarding the mortgage loans securing the REMIC Certificates as of December 31, 2003 (dollar amounts in thousands):

                      
Original PrincipalCurrent Principal
Number ofNumber ofAmount of RemainingAmount of RemainingCurrent Annual
LocationPropertiesBedsMortgage LoansMortgage Loans (1)Debt Service






Alabama  3   405  $8,100  $7,328  $1,028 
Arizona  3   587   18,305   16,622   1,981 
California  18   1,816   36,545   23,831   3,863 
Colorado  1   177   2,000   1,852   247 
Florida  7   945   32,310   27,846   3,658 
Georgia  11   1,203   24,472   22,312   3,088 
Iowa  7   508   10,938   10,685   1,204 
Louisiana  1   127   1,600   1,394   208 
Michigan  1   236   3,000   2,481   386 
Mississippi  3   400   14,050   10,124   1,209 
Missouri  1   100   1,500   1,398   164 
Montana  2   163   5,600   5,226   697 
Nebraska  2   256   4,700   4,433   576 
New Mexico  4   443   15,821   14,764   1,526 
Ohio  1   50   1,100   700   155 
Oklahoma  1   112   1,300   1,088   173 
Tennessee  6   550   16,827   15,450   2,123 
Texas  29   3,645   52,858   43,993   6,115 
Washington  2   100   1,900   1,764   227 
   
   
   
   
   
 
 TOTAL  103   11,823  $252,926  $213,291  $28,628 
   
   
   
   
   
 


1.Included in the balances of the mortgages underlying the REMIC Certificates are $56,457 of non-recourse mortgages payable by our subsidiaries. We originated these mortgages, which were subsequently transferred to the REMIC. The properties and the mortgage debt are reflected in our balance sheet.

The mortgage loans underlying the REMIC Certificates generally have 25-year amortization schedules with final maturities ranging from 2004 to 2028. Contractual principal and interest distributions with respect to the $63.1 million amortized cost basis, of REMIC Certificates (excluding unrealized losses on changes in estimated fair value of $1.4 million) we retained are subordinated to distributions of interest and principal with respect to the $150.4 million of REMIC Certificates held by third parties. Thus, based on the terms of the underlying mortgages and assuming no unscheduled prepayments occur nor are any maturities extended as a result of the inability of the borrower to refinance, scheduled principal distributions on the REMIC Certificates we retained will commence in March 2004 with final distributions in April 2028. Distributions on any of the REMIC Certificates will depend, in large part, on the amount and timing of payments, collections, delinquencies and defaults with respect to the mortgage loans represented by the REMIC Certificates, including the exercise of certain purchase options under existing property leases or the sale of the mortgaged properties. Each of the mortgage loans securing the REMIC Certificates contains similar prepayment and security provisions as our mortgage loans.

As part of the REMIC transactions discussed above, we serve as the sub-servicer and, in such capacity, are responsible for performing substantially all of the servicing duties relating to the mortgage loans represented by the REMIC Certificates. We receive monthly fees equal to a fixed percentage of the then outstanding mortgage loan balance in the REMIC, which in our opinion represented then prevailing terms for similar transactions at that time.

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In addition, we will act as the special servicer to restructure any mortgage loans in the REMIC that default. As noted previously, we assume the first dollar of any losses on the defaulted loans.

At December 31, 2003, the REMIC Certificates we held had an effective interest rate of approximately 15.4% based on the expected future cash flows with no unscheduled prepayments.

Item 3.LEGAL PROCEEDINGS

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.

Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5.MARKET FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) Our common stock is listed on the New York Stock Exchange (or NYSE). Set forth below are the high and low reported sale prices for our common stock as reported on the NYSE.

                 
20032002


HighLowHighLow




First Quarter $7.170  $5.250  $7.950  $6.050 
Second Quarter $9.550  $6.000  $8.540  $7.450 
Third Quarter $11.760  $9.130  $8.700  $5.470 
Fourth Quarter $15.000  $11.500  $8.500  $5.850 

(b) As of December 31, 2003 we had approximately 552 stockholders of record of our common stock.

(c) We declared total cash distributions on common stock as set forth below:

         
20032002


First Quarter $0.10  $0.10 
Second Quarter  0.15   0.10 
Third Quarter  0.15   0.10 
Fourth Quarter  0.25   0.10 
   
   
 
  $0.65  $0.40 
   
   
 

On March 10, 2004, we declared a $0.25 per common share dividend payable on March 31, 2004, to stockholders of record on March 19, 2004. We intend to distribute to our stockholders an amount at least sufficient to satisfy the distribution requirements of a REIT. Cash flows from operating activities available for distribution to stockholders will be derived primarily from interest and rental payments from our real estate investments. All distributions will be made subject to approval of the Board of Directors and will depend on our earnings, our financial condition and such other factors as the Board of Directors deem relevant. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Internal Revenue Code, we are required to make distributions to holders of our shares equal to at least 90% (95% for years ending prior to January 1, 2001) of our REIT taxable income. (See “Annual Distribution Requirements” beginning on page 8.)

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(d) Securities authorized for issuance under equity compensation plans as of December 31, 2003 is as follows:

              
Equity Compensation Plan Information

(a)(b)(c)



Number of securities remaining
Number of securities toWeighted-averageavailable for future issuance
be issued upon exerciseexercise price ofunder equity compensation plans
of outstanding optionsoutstanding options,(excluding securities reflected
Plan Categorywarrants and rightswarrants and rightsin column (a))




Equity compensation plans approved by security holders  285,871  $5.63   53,176 
Equity compensation plans not approved by security holders         
   
   
   
 
 Total  285,871  $5.63   53,176 

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Item 6.SELECTED FINANCIAL INFORMATION

The following table of selected financial information should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

                       
20032002200120001999





(In thousands, except per share amounts)
Operating Information:
                    
Revenues $63,447  $68,137  $67,591  $82,204  $82,923 
Expenses:                    
 Interest expense  20,877   21,322   21,435   26,871   21,716 
 Depreciation and amortization  12,489   13,705   12,216   13,744   12,122 
 Impairment charge  1,260   7,097   16,671   5,337   14,939 
 Legal expenses  1,078   803   289   478   405 
 Operating and other expenses  6,561   6,044   8,702   5,303   5,453 
   
   
   
   
   
 
  Total expenses  42,265   48,971   59,313   51,733   54,635 
   
   
   
   
   
 
Income before non-operating income and minority interest  21,182   19,166   8,278   30,471   28,288 
 Non-operating income  1,970            1,304 
 Minority interest  (1,300)  (1,308)  (973)  (982)  (1,018)
   
   
   
   
   
 
Income from continuing operations  21,852   17,858   7,305   29,489   28,574 
Discontinued Operations:                    
 Gain (loss) from discontinued operations  168   (538)  (11,773)  (6,842)  3,253 
 Gain on sale of assets, net  2,299   14,483   1,560   8,990    
   
   
   
   
   
 
Net income (loss) from discontinued operations  2,467   13,945   (10,213)  2,148   3,253 
Net income (loss)  24,319   31,803   (2,908)  31,637   31,827 
Preferred stock redemption charge  (1,241)            
Preferred stock dividends  (16,596)  (15,042)  (15,077)  (15,087)  (15,087)
   
   
   
   
   
 
Net income (loss) available to common stockholders $6,482  $16,761  $(17,985) $16,550  $16,740 
   
   
   
   
   
 
Per share Information:
                    
Basic net income (loss) available to common stockholders $0.36  $0.91  $(0.75) $0.63  $0.61 
   
   
   
   
   
 
Diluted net income (loss) available to common stockholders $0.36  $0.91  $(0.75) $0.63  $0.61 
   
   
   
   
   
 
Common Stock Distributions declared $0.65  $0.40  $0.00  $0.87  $1.56 
   
   
   
   
   
 
Balance Sheet Information:
                    
Real estate investments, net $515,752  $552,434  $604,306  $622,428  $683,736 
Total assets  574,924   599,925   648,568   676,585   721,811 
Total debt  156,250   227,837   284,634   262,560   292,274 
Total liabilities  192,741   239,113   294,785   272,546   303,300 
Minority interest  13,401   13,399   13,404   9,912   9,894 
Total stockholders’ equity  368,782   347,413   340,379   394,127   408,617 
Other Information:
                    
Cash flows provided by operating activities $36,218  $42,903  $43,852  $45,307  $60,785 
Cash flows provided by (used in) investing activities  20,707   19,320   46,772   45,697   (48,156)
Cash flows used in financing activities  (47,007)  (60,544)  (86,172)  (91,789)  (11,477)

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Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating Results

Year ended December 31, 2003 compared to year ended December 31, 2002

Revenues for the year ended December 31, 2003 were $63.4 million compared to $68.1 million for the same period in 2002. Rental income decreased $0.9 million primarily as a result of the effect of classifying eight properties leased to Sun Healthcare Group, Inc. (or Sun) as non-accrual rents ($3.3 million) and the elimination of rents from sold properties not subject to Statement of Financial Accounting Standard (or SFAS ) No. 144“Accounting for the Impairment or disposal of Long-Lived Assets”reclassification ($0.9 million), partially offset by the receipt of past due rent that we had not accrued due to collectibility uncertainties ($0.5 million), the receipt of rent from properties formerly operated by CLC Healthcare Inc. (or CLC) see Item 8. FINANCIAL STATEMENTS —Note 8. CLC Healthcare, Inc.($1.5 million), security deposits applied to past due rents ($0.5 million), acquisitions ($0.1 million) and new leases and rental increases provided for in existing lease agreements ($0.7 million). Same store rental income, (rental income from properties owned for both years ended December 31, 2003 and 2002) decreased $1.8 million due to the effect of classifying rents on eight properties leased to Sun as non-accrual rents, partially offset by the receipt of past due rent that we had not accrued due to collectibility uncertainties and new leases and normal rental rate increases, as set forth in the lease agreements.

Interest income from mortgage loans and notes receivable decreased $0.9 million primarily as a result of the early payoff of four mortgage loans (one in 2003 and three in 2002) and the receipt of past due interest on CLC’s line of credit in September 2002. Interest income from REMIC Certificates for the year ended December 31, 2003 decreased $3.0 million compared to 2002 due to the amortization of the related asset and the early payoff of certain mortgage loans underlying our investment in REMIC Certificates. Interest and other income increased $0.1 million in 2003 from the prior year due primarily to the receipt of interest on our investment in secured notes of ALC.

Interest expense decreased $0.4 million in 2003 from the prior year. Included in interest expense for 2003 was a $2.1 million write-off of debt issue costs related to our early retirement of our Secured Revolving Credit. Interest expense decreased due to a decrease in average borrowings outstanding during the year and a decrease in interest rates on our Secured Revolving Credit partially offset by an increase in our overall weighted average interest rate related to our Senior Participation Payable. See Item 8. FINANCIAL STATEMENTS —Note 11. Debt Obligationsfor a description and further discussion of our Secured Revolving Credit and Senior Mortgage Participation Payable.

Depreciation and amortization expense for 2003 decreased $1.2 million from the prior year due to properties sold in 2002 not subject to SFAS No. 144 reclassification and a lower basis of certain assets due to impairment charges taken in 2002.

We perform periodic comprehensive evaluations of our investments. During our evaluation of the realizability of expected future cash flows from the mortgages underlying our REMIC Certificates, there were indications that certain expected future cash flows would not be realized by the REMIC Trust. Accordingly, we recorded a $1.3 million impairment charge to reflect the estimated impact on future cash flows from loan prepayments occurring during, or expected to occur subsequent to, the first quarter of 2003 related to certain subordinated REMIC Certificates we hold. During 2002 we recorded impairments of $1.7 million in one skilled nursing property and one assisted living property ($0.7 million of which is included in net loss from discontinued operations). Of this $1.7 million, $1.0 million applied to a skilled nursing property where we agreed to a rent reduction that required an impairment adjustment and $0.7 million was for an assisted living property we agreed to sell at less than net book value. We recorded a $1.6 million impairment for mortgage loans on two skilled nursing properties. Of this amount, $0.6 million was for a skilled nursing property that had closed and the borrower defaulted on the loan and $1.0 million was for a loan on a skilled nursing property whose operator was reporting losses from operations and requesting temporary loan payment modifications. Additionally, we recorded a $4.5 million impairment on investments in REMIC Certificates. Of this $4.5 million charge, $1.2 million was for loans paying off prior to maturity and reducing the value of our interest only REMIC Certificates, $0.5 million was for one skilled nursing property that closed, $1.3 million was for one skilled nursing facility that we, as loan servicing agent for the REMIC Trust, agreed could pay the loan off at a $1.0 million reduction in principal and $1.5 million was for one skilled nursing property whose operator advised us they were considering either closing the facility or attempting to convert the building to an alternative use.

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Legal expenses were $0.3 million higher in 2003 than in 2002 due to higher legal costs for general litigation defense. Operating and other expenses increased $0.5 million due to higher property tax payments made on behalf of operators in 2003 as compared to 2002.

Non-operating income of $2.0 million was recognized in 2003 as a result of ALC’s early redemption of its secured notes that we owned. No non-operating income was recognized in the prior year.

For the year ended December 31, 2003, net income from discontinued operations was $2.5 million. During 2003 we sold eight skilled nursing facilities, one of which was formerly operated by Sun and three were formerly operated by CLC. We recognized a $2.3 million gain on these sales and received $15.7 million in net proceeds which we used to pay $3.8 million in mortgage debt related to these properties, $2.6 million to repay outstanding borrowings under the Secured Revolving Credit and the remaining net proceeds were used to fund the partial redemption of our Series A Preferred Stock. During 2003 we reported income from discontinued operations of $0.2 million. This reclassification was made in accordance with SFAS No. 144 which requires that the financial results of properties meeting certain criteria be reported on a separate line item called “Discontinued Operations.” During 2002 we recognized a $14.5 million gain related to sale of 15 skilled nursing properties and one assisted living property and reported a $0.5 million loss from discontinued operations.

During 2003 we announced the redemption of 40% of the outstanding shares of our Series A Preferred Stock. This redemption was completed January 30, 2004, and as a result, we recognized original issuance costs of $1.2 million that were related to the shares we redeemed as a preferred stock redemption charge. We did not redeem any preferred stock in 2002. Preferred stock dividends increased $1.6 million due to the issuance of 2.2 million shares of 8.5% Series E Convertible Preferred Stock (or Series E Preferred Stock) in September of 2003.

Net income available to common stockholders for the year ended December 31, 2003 was $6.5 million compared to $16.8 million for the year ended December 31, 2002. This decrease is due primarily to gains on asset sales in 2002 as previously discussed.

Year ended December 31, 2002 compared to year ended December 31, 2001

Revenues for the year ended December 31, 2002 were $68.1 million compared to $67.6 million for the same period in 2001. Rental income increased $4.2 million primarily as a result of the acquisition of properties in December 2001, new leases and rental increases provided for in the existing lease agreements, partially offset by the elimination of rents from sold properties and closed properties and a reduction in rents due from ALC. Specifically “same store” rental income, (rental income from properties owned for both years ended December 31, 2002 and 2001) increased $0.9 million due to rental rate increases provided for in the leases partially offset by decreases in rents due from ALC. Properties acquired in December 2001 and a loan that converted to an owned property in 2002 resulted in a $5.8 million increase in rental income during 2002 while properties sold in 2001 and 2002 resulted in a $2.5 million decrease in rental income.

Interest income from mortgage loans and notes receivable decreased $1.9 million primarily as a result of the early payoff of five mortgage loans (three in 2002 and two in the second half of 2001), the conversion of one mortgage loan to an owned property, a receipt of delinquent interest related to a bankruptcy order in the prior year and the effect of not accruing interest on one mortgage loan.

Interest income from REMIC Certificates decreased $2.1 million due to the amortization of the related asset, the early payoff of certain mortgage loans underlying our investment in REMIC Certificates and the sale of REMIC Certificates in the third quarter of 2001.

Interest and other income increased $0.4 million due primarily to the receipt of interest income from our investment in secured ALC notes.

Interest expense decreased $0.1 million due to lower debt outstanding along with a decrease in the interest rate on our Secured Revolving Credit, partially offset by a higher interest rate on our Senior Mortgage Participation Payable.

Depreciation and amortization expense increased $1.5 million due to the acquisition of properties in December 2001 and the conversion of mortgage loans into owned properties, partially offset by properties sold not subject to SFAS No. 144 reclassification and a lower basis of certain assets due to impairment charges taken in 2001 and 2002.

We perform periodic comprehensive evaluations of our investments. As a result, we determined certain investments in long term care properties were impaired. During 2002 we recorded impairments of $1.7 million in one skilled nursing property and one assisted living property ($0.7 million of which is included in net loss from discontinued

24


operations). Of this $1.7 million, $1.0 million applied to a skilled nursing property where we agreed to a rent reduction that required an impairment adjustment and $0.7 million was for an assisted living property we agreed to sell at less than net book value. We recorded a $1.6 million impairment for mortgage loans on two skilled nursing properties. Of this amount, $0.6 million was for a skilled nursing property that had closed and defaulted on the loan and $1.0 million was for a loan on a skilled nursing property whose operator was reporting losses from operations and requesting temporary loan payment modifications. Additionally, we recorded a $4.5 million impairment on investments in REMIC Certificates. Of this $4.5 million charge, $1.2 million was for loans paying off prior to maturity and reducing the value of our I/ O REMIC Certificates, $0.5 million was for one skilled nursing property that closed, $1.3 million was for one skilled nursing facility that we, as loan servicing agent for the REMIC Trust, agreed could pay the loan off at a $1.0 million reduction in principal and $1.5 million was for one skilled nursing property whose operator advised us they were considering either closing the facility or attempting to convert the building to an alternative use. During 2001 we recorded net impairments of $16.7 million ($11.9 million of which is included in loss from discontinued operations) for 14 skilled nursing properties; $0.5 million in lease termination costs; $1.5 million on a note receivable and $9.8 million on ALC’s pre-bankruptcy convertible subordinated debentures.

Legal expenses increased $0.5 million in 2002 from 2001 due to the increased costs of general litigation defense. Operating and other expenses decreased by $2.6 million due primarily to a $2.5 million charge for an adjustment to stockholder loans in 2001.

The loss from discontinued operations was $11.2 million lower due to impairment charges recorded in 2001 on properties that were sold in 2002. During 2002 we sold 15 skilled nursing properties and one assisted living property resulting in a net gain of $14.5 million. During 2001, we sold three skilled nursing properties, three assisted living properties and three schools resulting in a net gain of $3.2 million. Additionally, we sold certain REMIC Certificates with a net book value of $19.0 million resulting in a $1.1 million loss. We also sold other miscellaneous assets during 2001 which resulted in an aggregate $0.5 million loss.

The year ended December 31, 2002, resulted in net income available to common stockholders of $16.8 million compared to a net loss after preferred dividends of $18.0 million for the year ended December 31, 2001. This increase is due primarily to gains on asset sales in 2002, impairment charges in 2001 and the charge for an adjustment to stockholder loans in 2001.

Critical Accounting Policies

Preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. See Item 8. FINANCIAL STATEMENTS —Note 2. Summary of Significant Accounting Policiesfor a description of the significant accounting policies we followed in preparing the consolidated financial statements for all periods presented. We have identified the following significant accounting policies as critical accounting policies in that they require significant judgment and estimates and have the most impact on financial reporting.

Impairments. Impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses the impairment of properties individually and impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be held and used, and the carrying amount over the fair value less cost to sell in instances where management has determined that we will dispose of the property, as per SFAS No. 121“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” for years prior to 2002 and as per SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets” beginning January 1, 2002. In determining fair value, we use current appraisals or other third party opinions of value and other estimates of fair value such as estimated undiscounted future cash flows.

To the extent there are defaults or unrecoverable losses on the underlying mortgages of the REMIC Certificates resulting in reduced cash flows, the subordinated certificates we hold would, in general bear the first risk of loss. In accordance with EITF 99-20, management evaluates the realizability of expected future cash flows periodically. Management includes in its evaluation such factors as actual and/or expected loan prepayments, actual and/or expected credit losses, and other factors that may impact the amount and timing of REMIC Certificate future cash flows. An impairment is recorded in current period earnings when management believes that it is likely that a portion of the underlying mortgage collateral would not be realized by the REMIC Trust.

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Securitization Transactions.We are a REIT and, as such, make investments with the intent to hold them for long-term purposes. However, mortgage loans may be transferred to a REMIC, a qualifying special-purpose entity, when a securitization provides us with the best available form of capital to fund additional long-term investments. When contemplating a securitization, consideration is given to our current and expected future interest rate posture and liquidity and leverage position, as well as overall economic and financial market trends.

A securitization is completed in a two-step process. First, a wholly owned special-purpose bankruptcy remote corporation (or REMIC Corp.) is formed and selected mortgage loans are sold to the REMIC Corp. without recourse. Second, the REMIC Corp. transfers the loans to a trust (or REMIC Trust) in exchange for commercial mortgage pass-through certificates (or REMIC Certificates) which represent beneficial ownership interests in the REMIC Trust assets (the underlying mortgage loans). Under this structure, the REMIC Trust is a qualifying special purpose entity from which the mortgages are isolated from us and the REMIC Corp. Holders of REMIC Certificates issued by the REMIC Trust have the right free of any conditional constraints to pledge or exchange those interests, and neither we or the REMIC Corp. maintain effective control over the transferred assets (the mortgages). The REMIC Trust is administered by a third-party trustee solely for the benefit of the REMIC Certificate holders.

Under the securitization structure described above, we account for the transfer of the mortgages as a sale and any gain or loss is recorded in earnings. The gain or loss is equal to the excess or deficiency of the cash proceeds and fair market value of any subordinated certificates received when compared with the carrying value of the mortgages sold, net of any transaction costs incurred and any gains or losses associated with an underlying hedge. Subordinated certificates received by us are recorded at their fair value at the date of the transaction. We have no controlling interest in the REMIC since the majority of the beneficial ownership interests (in the form of REMIC Certificates) are sold to third-party investors. Consequently, the financial statements of the REMIC Trust are not consolidated with those of our company for financial reporting purposes.

REMIC Certificates retained by us as consideration for the mortgages sold are accounted for at fair value. In determining fair value on the date of sale, management considers various factors including, pricing of the certificates sold relative to the certificates retained as evaluated by the underwriters, discount rates and applicable spreads at the time of issuance for similar securities (or adjustments thereto if no comparable securities are available), assumptions regarding prepayments including the weighted-average life of prepayable assets, if any, and estimates relating to potential realized credit losses.

The REMIC Certificates issued by the REMIC Trust include various levels of senior, subordinated, interest only and residual classes. The subordinated REMIC Certificates generally provide a level of credit enhancement to the senior REMIC Certificates. The senior REMIC Certificates (which historically have represented 66% of the total REMIC Certificates) were then sold to outside third-party investors through a private placement under Rule 144A of the Securities Act of 1933, as amended. The subordinated REMIC Certificates along with the cash proceeds from the sale of the senior REMIC Certificates were retained by the REMIC Corp. as consideration for the initial transfer of the mortgage loans to the REMIC Trust. Neither we, nor the REMIC Corp. is obligated to purchase any of the REMIC Trust assets or assume any liabilities.

Description of the REMIC Certificates.REMIC Certificates represent beneficial ownership interests in the REMIC Trust and can be grouped into three categories; senior, subordinated and subordinated interest only (or I/ O). The REMIC Certificates sold to third-party investors are the senior certificates and those retained by us are the subordinated certificates. The senior and the subordinated certificates have stated principal balances and stated interest rates (or pass-through rates). The I/ O REMIC Certificates have no stated principal but are entitled to interest distributions. Interest distributions on the I/ O REMIC Certificates are typically based on the spread between the monthly interest received by the REMIC Trust on the underlying mortgage collateral and the monthly pass-through interest paid by the REMIC Trust on the outstanding pass-through rate REMIC Certificates. Interest and principal distributions are made in order of REMIC Certificate seniority. As such, to the extent there are defaults or unrecoverable losses on the underlying mortgages resulting in reduced cash flows, the subordinated certificates held by us would in general bear the first risk of loss. Management evaluates the realizability of expected future cash flows periodically. An impairment is recorded in current period earnings when management believes that it is probable that a portion of the underlying mortgage collateral would not be realized by the REMIC Trust.

In addition to the risk from credit losses, the I/ O Certificates are also subject to prepayment risk, in that prepayments of the underlying mortgages reduce future interest payments of which a portion flows to the I/ O Certificates, thus, reducing their effective yield. The Certificates’ fair values are estimated, in part, based on a spread over the applicable U.S. Treasury rate, and consequently, are inversely affected by increases or decreases in such interest

26


rates. There is no active market in these securities from which to readily determine their value. The estimated fair values of both classes of Certificates are subject to change based on the estimate of future prepayments and credit losses, as well as fluctuations in interest rates and market risk. Although we are required to report our REMIC Certificate investments available for sale at fair value, many of the factors considered in estimating their fair value are difficult to predict and are beyond the control of our management, consequently, changes in the reported fair values may vary widely and may not be indicative of amounts immediately realizable if our company was forced to liquidate any of the Certificates.

On January 1, 1999, we adopted SFAS No. 134“Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.”Upon adoption of SFAS No. 134, we, based on our ability and intent to hold our investments in REMIC Certificates, transferred our I/O REMIC Certificates and certificates with an investment rating of “BB” or higher from the trading category to the available-for-sale category and our certificates with an investment rating of “B” or lower to the held-to-maturity category. The transfer was recorded at fair value on the date of the transfer.

Mortgage Loans Receivable. Mortgage loans receivable are recorded on an amortized costs basis. We maintain a valuation allowance based upon the expected collectibility of our mortgage loans receivable. Changes in the valuation allowance are included in current period earnings. In accordance with SFAS No. 114“Accounting by Creditors for Impairment of a Loan”we evaluate the carrying values of our mortgage loans receivable on an individual basis. Management periodically evaluates the realizability of future cash flows from the mortgages when events or circumstances, including the non-receipt of principal and interest payments and/or significant deteriorations of the financial conditions of the borrowers indicate that the carrying amount of the mortgage loan receivable may not be recoverable. An impairment charge is recognized in current period earnings and is calculated as the difference between the carrying amount of the mortgage loan receivable and the discounted cash flows expected to be received, or if foreclosure is probable, the fair value of the collateral securing the mortgage.

Mortgage Servicing Rights. We sub-service mortgage loans that are collateral for REMIC Certificates issued in our securitization transactions for which we receive servicing fees, based on market rates for such services at the time the securitization is completed, equal to a fixed percentage of the outstanding principal on the collateral loans. A separate asset for servicing rights is not recognized since the servicing fees received only adequately compensate us for the cost of servicing the loans. The fair value of servicing rights for mortgage loans originated and retained by us are estimated based on the fees received for servicing mortgage loans that serve as collateral for REMIC Certificates. All costs to originate mortgage loans are allocated to the mortgage loans since the fair value of servicing rights only sufficiently covers the servicing costs.

Revenue Recognition.Interest income on mortgage loans and REMIC Certificates is recognized using the effective interest method. We follow a policy related to mortgage interest whereby we consider a loan to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid mortgage interest income from that loan until the amounts have been received. Base rents under operating leases are accrued as earned over the terms of the leases. Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four methods depending on specific provisions of each lease as follows: (i) a specified annual increase over the prior year’s rent, generally 2%; (ii) an increase based on the change in the Consumer Price Index from year to year; (iii) an increase derived as a percentage of facility net patient revenues in excess of base revenue amounts or (iv) specific dollar increases over prior years. SEC Staff Bulletin No. 101Revenue Recognition in Financial Statements (or SAB 101) does not provide for the recognition of such contingent revenue until all possible contingencies have been eliminated. We consider the operating history of the lessee and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. We follow a policy related to rental income whereby we consider a lease to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid rental income from that lease until the amounts have been received.

Rental revenues relating to leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis when we believe that all of the rent related to a particular lease will be collected according to the terms of the lease. In evaluating whether we believe all the rent will be collected all of the following conditions must be met: (i) the property has been operated by the same operator for at least six months (adding a new property to a master lease with an operator that otherwise qualifies does not disqualify the lease from being straight-lined); (ii) payments for any monetary obligations due under the lease, or any other lease such operator has with us have been received late no more than (four) times during last eight fiscal quarters; (iii) the operator of the property has not during the last eight fiscal quarters (a) been under the protection of any Bankruptcy court; (b) admitted in writing its

27


inability to pay it debts generally as they come due; (c) made an assignment for the benefit of creditors; or, (d) been under the supervision of a trustee, receiver or similar custodian; and (iv) the property operating income has covered the applicable lease payment in each of the prior four fiscal quarters.

We will discontinue booking rent on a straight-line basis if the lessee becomes delinquent in rent owed under the terms of the lease and has been put on “non-accrual” status (i.e. we have stopped booking rent on an accrual basis for a particular lease because the collection of rent is uncertain). Once a lease is on “non-accrual” status, we will evaluate the collectibility of the related straight-line rent asset. If it is determined that the collection problem is temporary, we will resume booking rent on a straight-line basis once payment is received for past due rents. If it appears that we will not collect future rent under the “non-accrual lease” we will record an impairment charge related to the straight-line rent asset.

Management periodically evaluates the realizability of future cash flows from the mortgages underlying our REMIC Certificates. Included in our evaluation, management considers such factors as actual and/or expected loan prepayments, actual and/or expected credit losses, and other factors that may impact the amount and timing of REMIC Certificate future cash flows. Impairments are recorded when an adverse change in cash flows is evident and is determined to be other than temporary in nature. Additionally, interest recognition amortization schedules are adjusted periodically to reflect changes in expected future cash flows from the REMIC Certificates, thus, accordingly adjusting future interest income recognized.

Transactions with Affiliate. See Item 8. FINANCIAL STATEMENTS —Note 8. CLC Healthcare, Inc., for a description of our transactions with CLC Healthcare, Inc. and the accounting policies we followed related to those transactions.

Liquidity and Capital Resources

Financing Activities:

In the third quarter of 2003 we issued 2,200,000 shares of our Series E Preferred Stock that generated net cash proceeds of approximately $52.4 million. Each share of Series E Preferred Stock has a liquidation value of $25.00 per share and is convertible at anytime into shares of our common stock at a conversion price of $12.50 per share of common stock, subject to adjustment under certain circumstances. The cash proceeds and cash on hand were used to fully repay amounts outstanding under our Secured Revolving Credit. Following this repayment, in December 2003 we cancelled our Secured Revolving Credit a year early and entered into a new three-year Unsecured Credit Agreement that provides for $45.0 million of total commitments with no scheduled maturities other than the three-year term and provides for the inclusion of additional banks and an expansion of the Unsecured Credit Agreement under certain terms and conditions. The Unsecured Credit Agreement pricing varies between LIBOR plus 2.75% and LIBOR plus 3.25% (4.1% at December 31, 2003) depending on our leverage ratio. The Unsecured Credit Agreement contains financial covenants customary to an unsecured line of credit.

Subsequent to December 31, 2003, we borrowed $21.0 million under the Unsecured Credit Agreement in January 2004 and used $4.5 million to pay, prior to maturity, mortgage debt that was due in January 2005 and used $16.5 million to fund the partial redemption of our Series A Preferred Stock described below. During February 2004, we repaid the $21.0 million from the proceeds of the redemption of ALC Senior and Junior Secured Notes and some of the proceeds from the issuance of our 8% Series F Cumulative Preferred Stock (or Series F Preferred Stock), both described below. At present, we have no outstanding amounts under the Unsecured Credit Agreement.

On December 31, 2003, we announced that we would be receiving approximately $12.3 million plus accrued interest in January 2004 from the early redemption of ALC Senior and Junior Secured Notes we owned. On that same day we announced a partial (40% or 1,225,680 shares) redemption of our Series A Preferred Stock. The redemption price of the Series A Preferred Stock per share, including accrued and unpaid dividends, was $25.1914. On January 29, 2004, we distributed $30.9 million to redeem the 1,225,680 shares. Funds were provided from cash on hand, primarily from asset sales described below and the draw under our Unsecured Credit Agreement. As a result of this redemption we recorded a $1.2 million non-cash preferred stock redemption charge which represented 40% of the original issuance costs of the Series A Preferred Stock.

During the year ended December 31, 2003, we purchased and retired 482,800 shares of common stock for an aggregate purchase price of $3.2 million, an average of $6.72 per share. The shares were purchased on the open market under a Board authorization to purchase up to 5,000,000 shares. Including the shares purchased in 2003, 2,348,200 shares have been purchased under this authorization; therefore, we continue to have an open Board

28


authorization to purchase an additional 2,651,800 shares of common stock. Also during 2003 we purchased 5,000 each of our Series A Preferred Stock and our 9.0% Series B Cumulative Preferred Stock (or Series B Preferred Stock) for a total purchase price of approximately $0.2 million.

Additionally during 2003, we received $4.4 million from principal payments (including the pay-off price to maturity of one officer loan) on stockholder loans and $1.3 million for the exercise by employees of stock options. In February 2004 two loans to Board members were paid in full. As a result, subsequent to the February 2004 payments, we have no outstanding loans to employees or Board members. The two loans paid in February 2004 to two Board members who sold shares of our common stock to repay the loans. These sales were made in accordance with our policy regarding “Securities Trades by Company Personnel” and both Board members timely filed Forms 4 with the Securities and Exchange Commission.

In 2003 we distributed $11.6 million in common dividends and $15.2 million in preferred dividends. We declared preferred dividends of $16.6 million in 2003 not including the preferred stock redemption charge recorded relating to the 40% redemption of the Series A Preferred Stock. As a result of the redemption of our Series A and Series B Preferred Stock, issuance of our Series E Preferred Stock described above, the issuance of our 8.0% Series F Cumulative Preferred Stock (or Series F Preferred Stock), described below, and assuming no conversion of our Series E Preferred Stock, our preferred dividends in 2004 will be approximately $17.1 million (excluding a preferred stock redemption charge related to the original issuance costs associated with the Series A and Series B Preferred Stock redeemed in the first quarter of 2004 as discussed below).

During 2003, we borrowed $7.5 million and repaid $55.9 million under our now terminated Secured Revolving Credit. Funds were provided for this net reduction from a combination of cash on hand at the beginning of 2003, the net proceeds from the issuance of our Series E Preferred Stock, asset sales described below and net cash provided from operations.

We paid the Senior Mortgage Participation holder approximately $11.4 million from the proceeds of principal payments on mortgage loans described below and we paid approximately $14.3 million ($3.8 million from net proceeds from asset sales) in principal payments on non-participated mortgage loans.

As of December 31, 2003,2006, we are obligated in 2004 to make approximately $3.0 million in scheduled principal payments on our mortgage loans payable, bonds payable and capital lease obligations (there are no 2004 maturities) and in 2005 through 2008had the total scheduled principal payments and debt maturities are approximately $16.3 million, $47.4 million, $2.2 million and $16.3 million, respectively. Subsequent to December 31, 2003, $5.8 million of the 2005 maturities were prepaid.

In February 2004 we announced the sale of a total of 4,000,000 shares of our Series F Preferred Stock that generated net proceeds of approximately $98.5 million. This stock was issued at $25.00 per share prior to expenses and fees. Also in February we announced the redemption of the remaining 1,838,520 outstanding shares of our Series A Preferred Stock and the redemption of all of the outstanding 1,988,000 shares of our Series B Preferred Stock. Of the $98.5 million net proceeds, approximately $96.3 million will be used to fund these two redemptions including the accrued and unpaid dividends. In the first quarter of 2004 we will have a non-cash preferred stock redemption charge of $4.0 million related to the remaining original issuance costs of the Series A and Series B Preferred Stock.

Subsequent to December 31, 2003 we purchased for $3.4 million a 120 bed skilled nursing property in Texas. We have entered into a 20 year lease with an operator which begins March 3, 2004 and for an annual amount of $0.4 million in the first year and increasing 2% every year thereafter.

Available Shelf Registrations:following commitments outstanding:

Issuance of both the Series E Preferred Stock and the Series F Preferred Stock reduced the capacity under our currently effective shelf registration to $45.0 million. In anticipation of acquisitions or other refinancings in 2004, we intend to file a new Form S-3 that will increase our available securities offering capacity to a total of $200.0 million and anticipate that the registration statement will become effective in the first or second quarter of 2004. We may from time to time raise capital under our currently effective shelf registration or the anticipated new shelf registration by issuing, in public or private transactions, our equity and debt securities, but the availability and terms of such issuance will depend upon then prevailing market and other conditions.

29


Operating and Investing Activities:

During the year ended December 31, 2003, net cash provided by operating activities was $36.2 million. We completed the placement of a mortgage loan of $1.7 million, acquired two skilled nursing properties for approximately $1.2 million and invested approximately $2.3 million in building improvements and furniture and equipment leased to operators.

We received during 2003 approximately $12.9 million from principal payments on mortgage loans receivable and paid to the holder of the Senior Mortgage Participation approximately $11.4 million in principal payments as discussed above.

In 2003 we sold eight skilled nursing properties for a total gross sales price of $16.2 million. We received net proceeds of $15.7 million which we used to repay $3.8 million in mortgage debt related to these sold properties, $2.6 million was used to repay borrowings under our Secured Revolving Credit and we used the remaining net proceeds to redeem 40% of our outstanding Series A Preferred Stock.

Subsequent to December 2003, we sold a 72 bed skilled nursing property in Georgia for $1.5 million and used $1.3 million of the proceeds to pay a mortgage note payable.

In addition to the $3.8 million paydown of mortgage debt related to asset sales, we also repaid five loans payable to REMIC Pools originated by us totaling $7.7 million and made $2.8 million in scheduled principal payments on mortgage loans, notes payable and capital leases.

We also invested approximately $2.0 million in 2003 to purchase additional ALC Senior and Junior Secured Notes that have subsequently been redeemed as discussed above.

New Leases in 2003:

In the first quarter of 2003 Sun advised us that they would no longer make lease payments on nine properties they leased from us and stopped paying rent in February 2003. Additionally, we did not collect or record rental revenue on 19 properties leased to CLC for the first eight months of 2003 before these properties were turned over by CLC to a management company who subsequently began paying us rent on these 19 properties in September 2003. These 19 properties, along with one former Sun property are now leased under a master lease with Center Healthcare, Inc. (or Center Healthcare) providing for lease revenue in 2004 of approximately $4.6 million. Of the remaining eight Sun properties, one was sold as described above and the remaining seven properties were leased during the fourth quarter of 2003 to three separate operators. Taking into consideration the rental revenue generated in 2003 from the sold properties, the former Sun properties and the former CLC properties, we anticipate rental income will increase in 2004 by approximately $3.4 million as a result of these new leases offset by the reduction in rental revenues as a result of properties sold in 2003. Subsequent to December 31, 2003, at our election, we paid $3.7 million to acquire a defaulted mortgage loan in the 1994 REMIC pool. The amount paid represents the outstanding balance on the loan which approximated the fair value.

REMIC Revenue and Cash Flow:

Loans within certain REMIC Certificate pools have amortized, are scheduled to mature or have paid off early. As a result, we anticipate REMIC interest income in 2004 will be approximately $1.0 million less than 2003, absent any modifications of the underlying loans. As of December 31, 2003, scheduled maturities on REMIC Certificates we hold are $6.7 million, $8.1 million, $9.8 million, $6.5 million, $3.2 million and $27.2 million for the years ending December 31, 2004, 2005, 2006, 2007, 2008 and thereafter.

Commitments:

As of December 31, 2003, we had committed to provide to Alterra $2.5 million$2,500,000 over three years to invest in leasehold improvements to properties they lease from us and an additional $2.5 million over three yearsending December 4, 2009 to expand the 35 properties they lease from us. Both of these investmentsThis investment would be made at a 10% annual return to us.

30


Contractual Obligations: To date, Alterra has not requested any funds under this agreement.

We monitor our contractual obligationscommitted to ensureprovide Extendicare REIT & ALC up to $5,000,000 per year, under certain conditions, for expansion of the 37 properties they lease from us under certain conditions. Should we expend such funds, are availableExtendicare REIT & ALC’s monthly minimum rent would increase by an amount equal to meet obligations when due. The following table represents our long-term contractual obligations as of December 31, 2003 and excludes(a) 9.5% plus the effects of interest (amounts in thousands):

                     
TotalLess than 1 year1-2 years3-5 yearsAfter 5 years





Mortgage loans payable $123,314  $2,304  $62,088  $16,614  $42,308 
Bonds payable and capital lease obligations  14,686   719   1,612   1,855   10,500 
   
   
   
   
   
 
  $138,000  $3,023  $63,700  $18,469  $52,808 
   
   
   
   
   
 

Off-Balance Sheet Arrangements:

We had no off-balance sheet arrangements as of December 31, 2003.

Liquidity:

We believe we have sufficient liquidity and financing capability to fund additional investments in 2004, maintain our preferred dividend payments, pay common dividends at least sufficient to maintain our REIT status and repay borrowings at orpositive difference, if any, between the average yield on the U.S. Treasury 10-year note for the five days prior to their maturity through our generation offunding, minus 420 basis points (expressed as a percentage), multiplied by (b) the amounts funded. To date, Extendicare REIT & ALC have not requested any funds from operation, borrowings under our Unsecured Credit Agreement, asset sales, proceeds from mortgage notes receivable, principal payments from REMIC certificates we hold or additional financings. this agreement.

We believe our liquidity and sources ofcommitted to provide Preferred Care $3,000,000 for capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to us in sufficient amounts to meet our liquidity needs.

Item 7a.     Quantitative and Qualitative Disclosures About Market Risk

Readers are cautioned that statements contained in this section “Quantitative and Qualitative Disclosures About Market Risk” are forward looking and should be read in conjunction with the disclosure under the heading “Statement Regarding Forward Looking Disclosure” set forth above.

We are exposed to market risks associated with changes in interest rates as they relate to our mortgage loans receivable, investments in REMIC Certificates and debt. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.

We do not utilize interest rate swaps, forward or option contracts or foreign currencies or commodities, or other types of derivative financial instruments nor do we engage in “off-balance sheet” transactions. The purposeimprovements on 25 of the following disclosure isskilled nursing properties they lease from us under a new master lease. During 2006, we funded $96,000 under this agreement. Subsequent to 2006, we funded $213,000 under this agreement. We also committed to invest up to $7,100,000 on specific projects on five skilled nursing properties they lease from us. The $7,100,000 commitment includes interest capitalized at 11% on each advance made from each disbursement date until final distribution by specific project. Upon final distribution for each specific project, minimum rent shall increase by the total project cost multiplied by 11%. To date no funds have been requested under this agreement. These commitments expire on March 31, 2010. We also committed to provide Preferred Care with a framework to understand our sensitivity to hypothetical changes in interest rates as of December 31, 2003.

Our future earnings, cash flows and estimated fair values relating to financial instruments are dependent upon prevalent market rates of interest, such as LIBOR or term rates of U.S. Treasury Notes. Changes in interest rates generally impact the fair value, but not future earnings or cash flows, of mortgage loans receivable, our investment in REMIC Certificates and fixed rate debt. For variable rate debt, such as our revolving line of credit, changes in interest rates generally do not impact the fair value, but do affect future earnings and cash flows.

At December 31, 2003, based on the prevailing interest rates$500,000 capital allowance for comparable loans and estimates made by management, the fair value of our mortgage loans receivable was approximately $74.5 million. A 1% increase in such rates would decrease the estimated fair value of our mortgage loans by approximately $2.8 million while a 1% decrease in such rates would increase their estimated fair value by approximately $3.0 million. A 1% increase or decrease in applicable interest rates would not haveskilled nursing property they lease from us under a material impact on the fair value of our investment in REMIC Certificates or fixed rate debt.separate lease. This

We had no borrowings outstanding under our Unsecured Credit Agreement at December 31, 2003. Thus, an increase or decrease in interest rates would have no impact on annual interest expense on our Unsecured Credit Agreement.

The estimated impact of changes in interest rates discussed above are determined by considering the impact of the hypothetical interest rates on our borrowing costs, lending rates and current U.S. Treasury rates from which our financial instruments may be priced. We do not believe that future market rate risks related to our financial

31


instruments will be material to our financial position or results of operations. These analyses do not consider the effects of industry specific events, changes in the real estate markets, or other overall economic activities that could increase or decrease the fair value of our financial instruments. If such events or changes were to occur, we would consider taking actions to mitigate and/or reduce any negative exposure to such changes. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.

32


Item 8.     FINANCIAL STATEMENTS

Page

Report of Independent Auditors34
Consolidated Balance Sheets as of December 31, 2003 and 200235
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2003, 2002 and 200136
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2003, 2002 and 200137
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 200138
Notes to Consolidated Financial Statements39

33


REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

LTC Properties, Inc.

We have audited the accompanying consolidated balance sheets of LTC Properties, Inc. as of December 31, 2003 and 2002 and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the index at Item 15(a). These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LTC Properties, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Los Angeles, California

February 9, 2004
except for Notes 8, 10, 11 and 12
as to which the date is
March 5, 2004

34


LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)
           
December 31,

20032002


ASSETS
Real Estate Investments:        
 Buildings and improvements, net of accumulated depreciation and amortization: 2003 — $73,376; 2002 — $61,101 $357,282  $366,679 
 Land  25,343   24,996 
 Properties held for sale, net of accumulated depreciation and amortization: 2003 — $0; 2002 — $3,215     13,665 
 Mortgage loans receivable, net of allowance for doubtful accounts: 2003 — $1,280; 2002 — $1,280  71,465   82,675 
 REMIC Certificates  61,662   64,419 
   
   
 
  Real estate investments, net  515,752   552,434 
Other Assets:        
 Cash and cash equivalents  17,919   8,001 
 Debt issue costs, net  1,496   5,309 
 Interest receivable  3,809   3,764 
 Prepaid expenses and other assets  4,495   2,069 
 Prepaid expenses and other assets related to properties held for sale     2,037 
 Notes receivable (includes $9,292 due from CLC Healthcare, Inc. in 2003 and $7,836 in 2002)  19,172   18,343 
 Marketable debt securities  12,281   7,968 
   
   
 
   59,172   47,491 
   
   
 
  Total assets $574,924  $599,925 
   
   
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank borrowings $  $48,421 
Mortgage loans payable  123,314   134,388 
Bonds payable and capital lease obligations  14,686   15,361 
Senior mortgage participation payable  18,250   29,667 
Accrued interest  952   1,267 
Accrued expenses and other liabilities  2,514   4,419 
Accrued expenses and other liabilities related to properties held for sale     4,609 
Liability for 9.5% Series A Preferred Stock redemption — 1,226 shares  30,642    
Distributions payable  2,383   981 
   
   
 
  Total liabilities  192,741   239,113 
Minority interests  13,401   13,399 
Stockholders’ Equity:        
Preferred stock $0.01 par value: 2003 — 15,000 shares authorized; shares issued and outstanding: 2003 — 8,026; 2002 — 7,062  189,163   165,183 
Common stock $0.01 par value; 2003 — 35,000 shares authorized; shares issued and outstanding: 2003 — 17,807; 2002– 18,055  178   181 
Capital in excess of par value  250,055   253,050 
Cumulative net income  274,948   250,629 
Other  (638)  (6,112)
Cumulative distributions  (344,924)  (315,518)
   
   
 
  Total stockholders’ equity  368,782   347,413 
   
   
 
  Total liabilities and stockholders’ equity $574,924  $599,925 
   
   
 

See accompanying notes.

35


LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share amounts)
               
Years ended December 31,

200320022001



Revenues:            
 Rental income $40,554  $41,440  $37,259 
 Interest income from mortgage loans and notes receivable  9,814   10,718   12,593 
 Interest income from REMIC Certificates  9,964   12,970   15,116 
 Interest and other income  3,115   3,009   2,623 
   
   
   
 
  Total revenues  63,447   68,137   67,591 
   
   
   
 
Expenses:            
 Interest expense  20,877   21,322   21,435 
 Depreciation and amortization  12,489   13,705   12,216 
 Impairment charge  1,260   7,097   16,671 
 Legal expenses  1,078   803   289 
 Operating and other expenses  6,561   6,044   8,702 
   
   
   
 
  Total expenses  42,265   48,971   59,313 
   
   
   
 
Income before non-operating income and minority interest  21,182   19,166   8,278 
 Non-operating income  1,970       
 Minority interest  (1,300)  (1,308)  (973)
   
   
   
 
Income from continuing operations  21,852   17,858   7,305 
Discontinued operations:            
 Income (loss) from discontinued operations  168   (538)  (11,773)
 Gain on sale of assets, net  2,299   14,483   1,560 
   
   
   
 
Net income (loss) from discontinued operations  2,467   13,945   (10,213)
   
   
   
 
Net income (loss)  24,319   31,803   (2,908)
 Preferred stock redemption charge  (1,241)      
 Preferred stock dividends  (16,596)  (15,042)  (15,077)
   
   
   
 
Net income (loss) available to common stockholders $6,482  $16,761  $(17,985)
   
   
   
 
Net Income (Loss) per Common Share from Continuing Operations Net of Preferred Stock Dividends:            
 Basic $0.22  $0.15  $(0.45)
   
   
   
 
 Diluted $0.22  $0.15  $(0.45)
   
   
   
 
Net Income (Loss) Per Common Share from Discontinued Operations:            
 Basic $0.14  $0.76  $(0.30)
   
   
   
 
 Diluted $0.14  $0.75  $(0.30)
   
   
   
 
Net Income (Loss) Per Common Share Available to Common Stockholders:            
 Basic $0.36  $0.91  $(0.75)
   
   
   
 
 Diluted $0.36  $0.91  $(0.75)
   
   
   
 
Basic weighted average shares outstanding  17,836   18,371   23,924 
   
   
   
 
Comprehensive Income:            
 Net income (loss) available to common stockholders $6,482  $16,761  $(17,985)
 Unrealized (loss) gain on available-for-sale securities  (427)  (1,435)  2,807 
 Reclassification adjustment  1,303   276   1,376 
   
   
   
 
Comprehensive income (loss) $7,358  $15,602  $(13,802)
   
   
   
 

See accompanying notes.

36


LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except per share amounts)
                                  
Shares

Capital in
PreferredCommonPreferredCommonExcess ofCumulativeCumulative
StockStockStockStockPar ValueNet IncomeOtherDistributions








Balance — December 31, 2000  7,080   26,031  $165,500  $260  $296,568  $221,734  $(11,872) $(278,063)
 Interest added to stockholder note balance                    (369)   
Adjustment to stockholder note balance                    2,453    
Reclassification adjustment                    1,376    
Unrealized gain on available-for-sale securities                    2,807    
Repurchase of stock  (18)  (7,588)  (317)  (75)  (41,661)         
Net loss                 (2,908)      
Preferred stock dividends                       (15,077)
Vested restricted stock              23          
Canceled restricted stock     (50)                  
   
   
   
   
   
   
   
   
 
Balance — December 31, 2001  7,062   18,393   165,183   185   254,930   218,826   (5,605)  (293,140)
   
   
   
   
   
   
   
   
 
Interest added to stockholder note balance                    (62)   
Payments on stockholder notes                    877    
Reclassification adjustment   ��                276    
Unrealized loss on available-for-sale securities                    (1,435)   
Repurchase of stock     (338)     (4)  (2,329)         
Net income                  31,803       
Preferred stock dividends                       (15,042)
Vested restricted stock              286          
Reclassification of unvested restricted stock              163      (163)   
Common stock cash distributions ($0.40 per share)                       (7,336)
   
   
   
   
   
   
   
   
 
Balance — December 31, 2002  7,062   18,055   165,183   181   253,050   250,629   (6,112)  (315,518)
   
   
   
   
   
   
   
   
 
Interest added to stockholder note balance                    (9)   
Payments on stockholder notes                    4,444    
Stock option exercises     246      2   1,325          
Reclassification adjustment                    1,303    
Unrealized loss on available-for-sale securities                    (427)   
Repurchase of stock  (10)  (483)  (250)  (5)  (3,188)         
9.5% Series A Preferred Stock redemption  (1,226)     (30,642)     1,241         (1,241)
8.5% Series E Preferred Stock offering  2,200      55,000      (2,562)         
Net income                 24,319       
Preferred stock dividends                       (16,596)
Accelerated vesting of stock options              23          
Vested restricted stock                    132    
Canceled restricted stock     (11)        (31)     31    
Other        (128)     197          
Common stock cash distributions ($0.65 per share)                       (11,569)
   
   
   
   
   
   
   
   
 
Balance — December 31, 2003  8,026   17,807  $189,163  $178  $250,055  $274,948  $(638) $(344,924)
   
   
   
   
   
   
   
   
 

See accompanying notes.

37


LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except per share amounts)
               
Year ended December 31,

200320022001



OPERATING ACTIVITIES:            
Net income (loss) $24,319  $31,803  $(2,908)
Adjustments to reconcile net income to net cash provided by operating activities:            
 Depreciation and amortization  12,998   14,400   13,866 
 Gain on sale of real estate and other investments, net  (2,299)  (14,483)  (1,560)
 Write-off of debt issue costs related to early retirement of bank debt  2,075       
 Gain on redemption of investment in marketable debt securities, net  (1,970)      
 Non-cash impairment charge  1,260   7,807   28,584 
 Adjustment to stockholder notes receivable        2,453 
 Other non-cash charges, net  4,584   4,475   4,639 
(Increase) decrease in interest receivable  (28)  (621)  32 
(Increase) decrease in prepaid, other assets and allowance  (2,639)  11   (1,068)
(Decrease) increase in accrued interest  (309)  119   (1,279)
(Decrease) increase in accrued expenses and other liabilities  (1,773)  (608)  1,093 
   
   
   
 
  Net cash provided by operating activities  36,218   42,903   43,852 
INVESTING ACTIVITIES:            
Investment in real estate mortgages  (1,707)      
Acquisition of real estate properties and capital improvements, net  (3,467)  (1,422)  (1,689)
Proceeds from sale of real estate investments, net  15,664   12,090   43,493 
Principal payments on mortgage loans receivable  12,886   6,022   9,291 
Investment in debt securities  (2,015)  (26)  (2,909)
Proceeds from redemption of investment in debt securities  281   903    
Advances to CLC Healthcare, Inc.   (1,452)  (792)  (5,537)
Repayment of advances to CLC Healthcare, Inc.   2,146   1,393   1,149 
Other  (1,629)  1,152   2,974 
   
   
   
 
  Net cash provided by investing activities  20,707   19,320   46,772 
FINANCING ACTIVITIES:            
Debt issue costs  (1,064)  (3,335)  (1,187)
Distributions paid  (26,763)  (23,200)  (14,259)
Proceeds from stock offering  52,438       
Repayment of stockholder loans  4,444       
Bank borrowings  7,500   10,000   50,000 
Repayment of bank borrowings  (55,921)  (55,561)  (64,000)
Proceeds from issuance of senior mortgage participation     30,000    
Repayment of senior mortgage participation  (11,417)  (333)   
Mortgage loan borrowings        11,500 
Principal payments on mortgage loans, notes payable and capital leases  (14,332)  (14,537)  (3,966)
Redemption of convertible subordinated debentures     (2,408)  (22,230)
Repurchase of common and preferred stock  (3,443)  (2,332)  (42,054)
Other  1,551   1,162   24 
   
   
   
 
  Net cash used in financing activities  (47,007)  (60,544)  (86,172)
   
   
   
 
Increase in cash and cash equivalents  9,918   1,679   4,452 
Cash and cash equivalents, beginning of year  8,001   6,322   1,870 
   
   
   
 
Cash and cash equivalents, end of year $17,919  $8,001  $6,322 
   
   
   
 
Supplemental disclosure of cash flow information:            
 Interest paid $16,612  $19,946  $22,184 
Non-cash investing and financing transactions:            
 
SeeNote 4: Supplemental Cash Flow Informationfor further discussion.
            

See accompanying notes.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     The Company

LTC Properties, Inc. (LTC), a Maryland corporation, commenced operations on August 25, 1992. LTC is a real estate investment trust (or REIT) that invests primarily in long-term care properties through mortgage loans, property lease transactions and other investments.

2.     Summary of Significant Accounting Policies

Basis of Presentation.The accompanying consolidated financial statements include the accounts of LTC, our wholly-owned subsidiaries and our controlled partnerships. All intercompany investments, accounts and transactions have been eliminated. Control over those partnerships is based on the provisions of the partnership agreements that provide us with a controlling financial interest in the partnerships. Under the terms of the partnership agreements, we are responsible for the management of the partnerships’ assets, business and affairs. Our rights and duties in management of the partnerships include making all operating decisions, setting the capital budgets, executing all contracts, making all employment decisions, and the purchase and disposition of assets, among others. The general partner is responsible for the ongoing, major, and central operations of the partnership and makes all management decisions. In addition, the general partner assumes the risk for all operating losses, capital losses, and is entitled to substantially all capital gains (appreciation).

The limited partners have virtually no rights and are precluded from taking part in the operation, management or control of the partnership. The limited partners are also precluded from transferring their partnership interests without the expressed permission of the general partner. However we can transfer our interest without consultation or permission of the limited partners.

In January 2003, the Financial Accounting Standards Board (or FASB) issued Interpretation No. 46“Consolidation of Variable Interest Entities”(or FIN 46) to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Accounting guidance prior to FIN 46 required that we include another entity in our consolidated financial statements only if we controlled the entity through voting interests. FIN 46 changes that guidance by requiring that we consolidate a “variable interest entity” if we are subject to a majority of the risk of loss from the “variable interest entity’s” activities, or are entitled to receive a majority of the entity’s residual returns, or both. FIN 46 also requires disclosure about “variable interest entities” that we are not required to consolidate but in which we have a significant variable interest. In December 2003, FIN 46 was revised and the effective date of applying FIN 46 to certain variable interests was deferred. The revised FIN 46 requires us to apply the provision of FIN 46 immediately to any special purpose entities and to any “variable interest entities” created after January 31, 2003. Application of the provisions will be required for all other “variable interest entities” in financial statements for periods ending after March 15, 2004. We have evaluated the requirements of FIN 46 and we believe that as of December 31, 2003, we do not have investments in any entities that meet the definition of a “variable interest entity.”

Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation as required by Statement of Financial Accounting Standards (or SFAS) No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets.”

Use of Estimates.Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents.Cash equivalents consist of highly liquid investments with a maturity of three months or less when purchased and are stated at cost which approximates market.

Land, Buildings and Improvements.Land, buildings and improvements are recorded at cost. Depreciation is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Estimated useful lives for financial reporting purposes range from 3 years on computers to 7 years for equipment and 35 to 40 years for buildings.

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LTC PROPERTIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Impairments. Impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generatedcommitment expires on June 30, 2007. Monthly minimum rent increases by the asset are less than its carrying amount. Management assessesprevious month’s capital funding multiplied by 10%. To date no funds have been requested under this agreement.

We committed to provide a lessee of a skilled nursing property an accounts receivable financing. The loan has a credit limit not to exceed $150,000 and an interest rate of 10%. The commitment expires on July 31, 2007. To date $125,000 has been funded under this agreement. We also committed to invest $1,150,000 in capital improvements for this property. During 2006, we funded $698,000 under this agreement.

We committed to provide a lessee of a skilled nursing property an accounts receivable financing. The loan has a credit limit not to exceed $75,000 and an interest rate of 10%. The commitment expires on June 30, 2007. To date $25,000 has been requested under this agreement. We have also committed to replace the impairmentroof and install a fire sprinkler system for this property. The lessee’s monthly minimum rent will increase by an amount equal to 11% of our investment in these capital improvements. During 2006, we funded $95,000 under this agreement.

We committed to provide a lessee of three skilled nursing properties individually and impairment losses are calculated aswith the excessfollowing:  up to $260,000 to invest in capital improvements to a property they lease from us; up to $735,000 to invest in capital improvements on two properties they lease from us, however, under this commitment, the monthly minimum rent will increase by the amount of the carryingcapital funding multiplied by 11%; and up to $3,000,000 to purchase land, construct and equip a new property in the general vicinity of an existing property they lease from us with a corresponding increase in the monthly minimum rent of 11% multiplied by the amount overfunded plus capitalized interest costs associated with the fair value of assets to be held and used, and carrying amount over the fair value less cost to sell in instances where management has determined that we will disposeconstruction of the new property. To date no funds have been requested under these agreements.

We committed to provide a lessee with a $410,000 capital improvement allowance for two skilled nursing properties and an assisted living property per SFAS No. 121“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” for years prior to 2002 and per SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets” beginning January 1, 2002. In determining fair value, we use current appraisals or other third party opinions of value and other estimates of fair value such as estimated discounted future cash flows.

To the extent there are defaults or unrecoverable lossesthey lease from us. The commitment includes interest capitalized at 10% on the underlying mortgageseach advance made from each disbursement date until final distribution of the REMIC Certificates resulting in reduced cash flows, the subordinated certificates held by us would, in general, bear the first risk of loss. In accordance with EITF 99-20, management evaluates the realizability of expected future cash flows periodically. Management includes in its evaluation such factors as actual and/or expected loan prepayments, actual and/or expected credit losses, and other factors that may impact the amount and timing of REMIC Certificates’ future cash flows. An impairment is recorded in current period earnings when management believes that it is probable that a portioncommitment. The commitment expires on March 31, 2007. Upon final distribution of the underlying mortgage collateral would not be realizedcapital allowance, minimum rent shall increase by the REMIC Trust.total commitment multiplied by 10%. During 2006, we funded $238,000 under these agreements.

Securitization Transactions.LTC isWe committed to provide a REIT and, as such, makes investmentslessee with a $200,000 capital improvement allowance for three skilled nursing properties they lease from us. The commitment includes interest capitalized at 10.3% on each advance made from each disbursement date until final distribution of the intentcommitment. The commitment expires on June 30, 2007. Upon final distribution of the capital allowance, minimum rent shall increase by the total commitment multiplied by 10.3%. During 2006, we funded $175,000 under this agreement.

We committed to hold them for long-term purposes. However, mortgage loans may be transferredprovide a lessee of a skilled nursing property $1,700,000 to a REMIC, a qualifying special-purpose entity, when a securitization provides us with the best available form of capital to fund additional long-term investments. When contemplating a securitization, consideration is given to our current and expected future interest rate posture and liquidity and leverage position, as well as overall economic and financial market trends.

A securitization is completedinvest in a two-step process. First, a wholly owned special-purpose bankruptcy remote corporation (or REMIC Corp.) is formed and selected mortgage loans are soldleasehold improvements to the REMIC Corp. without recourse. Second,property they lease from us. The commitment includes interest capitalized at 10% on each advance made from each disbursement date until final distribution of the REMIC Corp. transferscommitment. The leasehold improvements must be completed by March 31, 2007. Upon final distribution of the loans to a trust (or REMIC Trust) in exchange for commercial mortgage pass-through certificates (or REMIC Certificates) which represent beneficial ownership interests in the REMIC Trust assets (the underlying mortgage loans). Under this structure, the REMIC Trust is a qualifying special purpose entity from which the mortgages are isolated from us and the REMIC Corp. Holders of REMIC Certificates issuedcapital allowance, minimum rent shall increase by the REMIC Trust havetotal commitment multiplied by 10%. During 2006, we funded $920,000 under this agreement. Subsequent to December 31, 2006, we funded an additional $111,000 under this agreement.

We committed to provide a lessee of an assisted living property with a $1,000,000 capital improvement allowance for a property they lease from us. Monthly minimum rent increases by the right free of any conditional constraints to pledge or exchange those interests, and neither we or the REMIC Corp. maintain effective control over the transferred assets (the mortgages)previous month’s capital funding multiplied by 8%. The REMIC Trust is administered by a third-party trustee solely for the benefit of the REMIC Certificate holders.

Under the securitization structure described above,commitment will mature in February 2008. During 2006, we accounted for the transfer of the mortgages as a sale with any gain or loss recorded in earnings. The gain or loss is equal to the excess or deficiency of the cash proceeds and fair market value of any subordinated certificates received when compared with the carrying value of the mortgages sold, net of any transaction costs incurred and any gains or losses associated with an underlying hedge. Subordinated certificates received by us are recorded at their fair value at the date of the transaction. We have no controlling interest in the REMIC since the majority of the beneficial ownership interests (in the form of REMIC Certificates) are sold to third-party investors. Consequently, the financial statements of the REMIC Trust are not consolidated with those of our company for financial reporting purposes. The securitization transactions and the related transaction structures used therein were completed during or prior to 1998 and prior to the implementation of SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 140 modified some of the requirements that previously existed under prior accounting principles that provided for the transfer of mortgages in securitization transactions to be accounted for as sales. Should we complete future securitizations, we anticipate that such securitization structure would comply with the sales accounting provisions of SFAS No. 140.funded


REMIC Certificates retained by us as consideration for the mortgages sold are accounted for at fair value. In determining fair value on the date of sale, management considers various factors including, pricing of the certificates sold relative to the certificates retained as evaluated by the underwriters, discount rates and applicable spreads at the time of issuance for similar securities (or adjustments thereto if no comparable securities are available), assumptions regarding prepayments including the weighted-average life of prepayable assets, if any, and estimates relating to potential realized credit losses.

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LTC PROPERTIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The REMIC Certificates issued by the REMIC Trust include various levels of senior, subordinated, interest only and residual classes. The subordinated REMIC Certificates generally provide a level of credit enhancement to the senior REMIC Certificates. The senior REMIC Certificates (which historically have represented 66% of the total REMIC Certificates) were then sold to outside third-party investors through a private placement$351,000 under Rule 144A of the Securities Act of 1933, as amended. The subordinated REMIC Certificates along with the cash proceeds from the sale of the senior REMIC Certificates were retained by the REMIC Corp. as consideration for the initial transfer of the mortgage loans to the REMIC Trust. Neither we, nor the REMIC Corp. is obligated to purchase any of the REMIC Trust assets or assume any liabilities.

Description of the REMIC Certificates.REMIC Certificates represent beneficial ownership interests in the REMIC Trust and can be grouped into three categories; senior, subordinated and subordinated interest only (or I/O). The REMIC Certificates sold to third-party investors are the senior certificates and those retained by us are the subordinated certificates. The senior and the subordinated certificates have stated principal balances and stated interest rates (or pass-through rates). The I/O REMIC Certificates have no stated principal but are entitled to interest distributions. Interest distributions on the I/O REMIC Certificates are typically based on the spread between the monthly interest received by the REMIC Trust on the underlying mortgage collateral and the monthly pass-through interest paid by the REMIC Trust on the outstanding pass-through rate REMIC Certificates. Interest and principal distributions are made in order of REMIC Certificate seniority. As such, to the extent there are defaults or unrecoverable losses on the underlying mortgages resulting in reduced cash flows, the subordinated certificates held by us would in general bear the first risk of loss. Management evaluates the realizability of expected future cash flows periodically. An impairment is recorded in current period earnings when management believes that it is probable that a portion of the underlying mortgage collateral would not be realized by the REMIC Trust.

On January 1, 1999, we adopted SFAS No. 134“Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.”Upon adoption of SFAS No. 134, based on our ability and intent to hold our investments in REMIC Certificates, we transferred our I/O REMIC Certificates and certificates with an investment rating of “BB” or higher from the trading category to the available-for-sale category and our certificates with an investment rating of “B” or lower to the held-to-maturity category. The transfer was recorded at fair value on the date of the transfer.

The I/O REMIC Certificates’ fair values are estimated, in part, based on a spread over the applicable U.S. Treasury Rate, and consequently, are inversely affected by increases or decreases in such interest rates. There is no active market in these securities from which to readily determine their value. The estimated fair values of both classes of certificates are subject to change based on the estimate of the current interest rate environment, estimated spreads over the U.S. Treasury Rate at which the retained certificates might trade, expectations regarding credit losses, if any, expected weighted-average life of the underlying collateral and discount rates commensurate with the risks involved.

Because of the nature of the underlying mortgage collateral of our REMIC Certificate investments, many market and/or industry specific factors may affect the treasury rate spreads or discount rates used in estimating the fair value of the REMIC Certificates. Such factors may include, but are not limited to uncertainty surrounding proposed or pending changes in federal and/or state reimbursement programs for long-term care which may be subject to among other things, budgetary constraints, perceptions surrounding the future supply of long-term care beds, changes in regulations surrounding the operation of long-term care facilities and the associated costs therewith, and operating factors including, but not limited to, labor costs, insurance costs and other costs. Additionally, the general interest rate environment and the availability and demand of higher yielding investments also are factors that impact the spreads and/or yields used in estimating the fair value of the REMIC Certificates. Investor sentiment towards any one or more of these factors can impact where our REMIC Certificate investments would be priced by a potential investor at any given point in time. Because there are a limited number of securities similar to the REMIC Certificates held by us, which trade infrequently, if at all, we balance our fair value estimates with valuations of more traditional types of asset-backed securities that have similar rating characteristics with REMIC Certificates held by us. Differences between the carrying amounts of our REMIC Certificate investments and the estimated fair value of those certificates, are due in large part to current market sentiments towards the long-term care industry and various factors cited above. Changes in market sentiments are difficult to predict, at best, thus, management endeavors to

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

utilize its understanding of the underlying collateral and the expected cash flows therefrom, to determine whether changes in values are other than market related.

Mortgage Loans Receivable. Mortgage loans receivable are recorded on an amortized cost basis. We maintain a valuation allowance based upon the expected collectibility of the mortgage loans receivable. Changes in the valuation allowance are included in current period earnings. In accordance with SFAS No. 114“Accounting by Creditors for Impairment of a Loan”we evaluate the carrying values of mortgage loans receivable on an individual basis. Management periodically evaluates the realizability of future cash flows from the mortgages when events or circumstances, including the non-receipt of principal and interest payments and/or significant deteriorations of the financial conditions of the borrowers indicate that the carrying amount of the mortgage loan receivable may not be recoverable. An impairment charge is recognized in current period earnings and is calculated as the difference between the carrying amount of the mortgage loan receivable and the discounted cash flows expected to be received, or if foreclosure is probable, the fair value of the collateral securing the mortgage.

Mortgage Servicing Rights.We subservice mortgage loans that are collateral for REMIC Certificates issued in our securitization transactions for which we receive servicing fees, based on market rates for such services at the time the securitization is completed, equal to a fixed percentage of the outstanding principal on the collateral loans. A separate asset for servicing rights is not recognized since the servicing fees received only adequately compensates us for the cost of servicing the loans. The fair value of servicing rights for mortgage loans originated and retained by us are estimated based on the fees received for servicing mortgage loans that serve as collateral for REMIC Certificates. All costs to originate mortgage loans are allocated to the mortgage loans since the fair value of servicing rights only sufficiently covers the servicing costs.

Investments. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, reported in other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in net income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest and other income.

Revenue Recognition.Interest income on mortgage loans and REMIC Certificates is recognized using the effective interest method. We follow a policy related to mortgage interest whereby we consider a loan to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid mortgage interest income from that loan until the past due amounts have been received. Base rents under operating leases are accrued as earned over the terms of the leases. Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four methods depending on specific provisions of each lease as follows: (i) a specified annual increase over the prior year’s rent, generally 2%; (ii) an increase based on the change in the Consumer Price Index from year to year; (iii) an increase derived as a percentage of facility net patient revenues in excess of base revenue amounts or (iv) specific dollar increases over prior years. SEC Staff Bulletin No. 101Revenue Recognition in Financial Statements (or SAB 101) does not provide for the recognition of such contingent revenue until all possible contingencies have been eliminated. We consider the operating history of the lessee and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. We follow a policy related to rental income whereby we consider a lease to be non-performing after 60 days of non-payment of past due amounts and do not recognize unpaid rental income from that lease until the amounts have been received.

Rental revenues relating to leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis when we believe that all of the rent related to a particular lease will be collected according to the terms of the lease. In evaluating whether we believe all the rent will be collected all of the following conditions must be met: (i) the property has been operated by the same operator for at least six months (adding a new property to a master lease with an operator that otherwise qualifies does not disqualify the lease from being straight-lined); (ii) payments for any monetary obligations due under the lease, or any other lease such operator has with us have been received late no more than four times during last eight fiscal quarters; (iii) the operator of the property has not during the last eight fiscal quarters (a) been under the protection of any Bankruptcy court; (b) admitted in writing its inability to pay it debts generally as they come due; (c) made an assignment for the benefit of creditors; or, (d) been

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

under the supervision of a trustee, receiver or similar custodian; and (iv) the property operating income has covered the applicable lease payment in each of the prior four fiscal quarters.

We will discontinue booking rent on a straight-line basis if the lessee becomes delinquent in rent owed under the terms of the lease and has been put on “non-accrual” status (i.e. we have stopped booking rent on an accrual basis for a particular lease because the collection of rent is uncertain). Once a lease is on “non-accrual” status, we will evaluate the collectibility of the related straight-line rent asset. If it is determined that the collection problem is temporary, we will resume booking rent on a straight-line basis once payment is received for past due rents. If it appears that we will not collect future rent under the “non-accrual lease” we will record an impairment charge related to the straight-line rent asset.

Management periodically evaluates the realizability of future cash flows from the mortgages underlying our REMIC Certificates. Included in our evaluation, management considers such factors as actual and/or expected loan prepayments, actual and/or expected credit losses, and other factors that may impact the amount and timing of Certificate future cash flows. Impairments are recorded when an adverse change in cash flows is evident and is determined to be other than temporary in nature. Additionally, interest recognition amortization schedules are adjusted periodically to reflect changes in expected future cash flows from the REMIC certificates, thus, accordingly adjusting future interest income recognized.

Transactions with Affiliate. SeeNote 8. CLC Healthcare, Inc.for a description of our transactions with CLC Healthcare, Inc. (or CLC) and the accounting policies we followed related to those transactions.

Federal Income Taxes.LTC qualifies as a REIT under the Internal Revenue Code of 1986, as amended and as such, no provision for Federal income taxes has been made. A REIT may deduct distributions to its stockholders from its taxable income. If at least 90% (95% for taxable years ending prior to January 1, 2001) of a REIT’s taxable income is distributed to its stockholders and it complies with other Internal Revenue Code requirements, a REIT generally is not subject to Federal income taxation.

For Federal tax purposes, depreciation is generally calculated at a rate of 3.6% based on the assets’ tax basis (which approximates cost) using the straight-line method over a period of 27.5 years. Earnings and profits, which determine the taxability of distributions to stockholders, differ from net income for financial statement purposes principally due to the treatment of certain interest income and expense items, the non-deductibility of impairment charges, and the depreciable lives and basis of assets under the Internal Revenue Code. At December 31, 2003, the book basis of our net assets exceeded the tax basis by approximately $8,212,000 due primarily to additional depreciation taken for tax purposes.

Concentrations of Credit Risks.Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, REMIC Certificates, mortgage loans receivable and operating leases on owned properties. Our financial instruments, principally REMIC Certificates, mortgage loans receivable and operating leases, are subject to the possibility of loss of carrying value as a result of the failure of other parties to perform according to their contractual obligations or changes in market prices which may make the instrument less valuable. We obtain various collateral and other protective rights, and continually monitor these rights, in order to reduce such possibilities of loss. In addition, we provide reserves for potential losses based upon management’s periodic review of our portfolio.

Our REMIC Certificates are subordinate in rank and right of payment to the certificates sold to third-party investors and as such, in most cases, would bear the first risk of loss in the event of an impairment to any of the underlying mortgages. The returns on the REMIC Certificates are subject to uncertainties and contingencies including, without limitation, the level of prepayment, prevailing interest rates and the timing and magnitude of credit losses on the mortgages underlying the securities that are a result of the general condition of the real estate market or long-term care industry. These uncertainties and contingencies are difficult to predict and are subject to future events that may alter management’s estimations and assumptions therefore, no assurance can be given that current yields will not vary significantly in future periods. In general, the mortgage loans underlying the REMIC Certificates generally prohibit prepayment unless the property is sold to an unaffiliated third party (with respect to the borrower).

Certain of the REMIC Certificates retained by us have designated certificate principal balances and a stated certificate interest “pass-through” rate. These REMIC Certificates are subject to credit risk to the extent that there

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

are estimated or realized credit losses on the underlying mortgages, and as such their effective yield would be negatively impacted by such losses. We also retain the I/ O REMIC Certificates. In addition to the risk from credit losses, the I/ O REMIC Certificates are also subject to prepayment risk, in that prepayments of the underlying mortgages reduce future interest payments of which a portion flows to the I/ O REMIC Certificates, thus, reducing their effective yield.

Discontinued Operations.In August 2001, the Financial Accounting Standards Board (or FASB) issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets,” which was required to be adopted in fiscal years beginning after December 15, 2001. SFAS No. 144 supercedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and provides a single accounting model for long-lived assets to be disposed of. Subsequent to January 1, 2002, and in accordance with SFAS No. 144, properties held-for-sale on the balance sheet includes only those properties available for immediate sale in their present condition and for which management believes that it is probable that a sale of the property will be completed within one year. Properties held-for-sale are carried at the lower of cost or fair value less estimated selling costs. No depreciation expense is recognized on properties held-for-sale once they have been classified as such. In accordance with the implementation provisions of SFAS No. 144, the operating results of real estate assets designated as held-for-sale subsequent to January 1, 2002 are included in discontinued operations in the consolidated statement of operations. In addition, all gains and losses from real estate sold are also included in discontinued operations. As prescribed by SFAS No. 144, gains and losses on prior years related to assets included on discontinued operations in 2002 have been reclassified to discontinued operations for comparative purposes. Assets designated as held-for-sale prior to January 1, 2002, have been accounted for under SFAS No. 121 and accordingly, gains and losses from these assets have not been included in discontinued operations. SeeNote 6. Real Estate Investments, for a detail of the components of the net loss from discontinued operations.

Net Income Per Share. Basic earnings per share is calculated using the weighted-average shares of common stock outstanding during the period excluding common stock equivalents. Diluted earnings per share includes the effect of all dilutive common stock equivalents.

Stock-Based Compensation. Effective January 1, 2003, we adopted SFAS No. 148“Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123“Accounting for Stock-Based Compensation” to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28“Interim Financial Reporting” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy for stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123 for stock-based employee compensation. In addition to the prospective method originally provided under SFAS No. 123, SFAS No. 148 provides for a modified prospective method and a retroactive restatement method. We have adopted the prospective method and therefore will recognize compensation expense related to all employee stock-based awards granted, modified or settled after January 1, 2003. No options were granted in 2003.

We use the Black-Scholes model for calculating stock option expense. This model requires management to make certain estimates including stock volatility, discount rate and the termination discount factor. If management incorrectly estimates these variables, the results of operations could be affected. Prior to January 1, 2003, we accounted for stock option grants in accordance with APB Opinion No. 25,“Accounting for Stock Issued to Employees” (APB 25) and related Interpretations. Historically, we granted stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. Under APB 25, because the exercise price of our employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized.

Fair Value of Financial Instruments.SFAS No. 107“Disclosures about Fair Value of Financial Instruments”requires the disclosure of fair value information about financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be

44


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair market value amounts presented in the footnotes to these financial statements do not represent our underlying value in financial instruments.

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments. The fair value of investments in marketable debt securities in 2002 is based upon quotes from a broker who trades in those securities and in 2003 it is based on face value due to the issuer’s announcement of early redemption The fair values of mortgage loans receivable, REMIC Certificates and long-term debt obligations are based upon the estimates of management and on rates currently prevailing for comparable loans, and instruments of comparable maturities.

Segment Disclosures.SFAS No. 131“Disclosures About Segments of an Enterprise and Related Information”establishes standards for the manner in which public business enterprises report information about operating segments. Management believes that substantially all of our operations comprise one operating segment.

New Accounting Pronouncements. The following accounting pronouncements became effective or were issued in 2003 and have no material effect on our financial statements:

• SFAS No. 149“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”requires that contracts with comparable characteristics be accounted for similarly and clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component and amends the definition of an underlying investment to conform it to language used in other FASB promulgations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. At December 31, 2003, we did not have any derivative instruments or contracts outstanding nor were we involved in any hedging relationships. If in the future we enter into any derivative contracts or hedging relationships we will follow the guidelines set forth in SFAS No. 149;
• SFAS No. 150“Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. Many of these instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and to all other instruments that existed as of the beginning of the first interim financial reporting period beginning after June 15, 2003. In October 2003 portions of SFAS No. 150 that apply to non-controlling (minority) interests in finite-life entities were deferred indefinitely. Also in October 2003 the FASB clarified that any non-controlling minority interest that may be redeemed with equity of any entity (including equity of an entity other than the subsidiary) does not meet the definition of a mandatorily redeemable financial instrument and thus does not fall under SFAS No. 150 guidelines. Since the partnership agreements with our limited partners (minority interests) specify that the limited partners’ exchange rights may be settled in our common stock or cash at our option the adoption of SFAS No. 150 does not have an impact on the financial statement presentation or accounting for our minority interests. However, our adoption of SFAS No. 150 did require that the Series A Preferred Stock we called for redemption on December 31, 2003 be classified as a liability.
• FIN 45“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also outlines additional disclosures that a guarantor must make in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. During 2003 we did not enter into any guarantees nor did we have any guarantees outstanding at December 31, 2003.

45


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.Major Operators

We have two lessees, based on properties subject to lease agreements and secured by mortgage loans that represent between 10% and 20% of our total assets. The following table summarizes our major lessees’ assets, stockholders’ equity, interim revenue and net income (loss) from continuing operations as of or for the nine months ended September 30, 2003 per the lessees’ public filings:

         
Assisted Living Concepts, Inc.Alterra Healthcare Corporation


(unaudited, in thousands)
Current assets $26,828  $83,674 
Non-current assets  187,256   458,487 
Current liabilities  25,711   348,541 
Non-current liabilities  155,895   748,172 
Redeemable preferred stock      
 
Gross revenue  125,519   309,018 
Operating expenses  112,144   313,846 
Income (loss) from continuing operations  2,276   (32,641)
Net income (loss)  2,770   (65,624)
 
Cash provided by operations  7,332   184 
Cash provided by investing activities  5,067   82,568 
Cash used in financing activities  (8,660)  (81,498)

Assisted Living Concepts, Inc. (or ALC) leases 37 assisted living properties with a total of 1,434 units owned by us representing approximately 12.6%, or $72,486,000, our total assets at December 31, 2003. In October 2001, ALC filed for reorganization under Chapter 11 of the federal bankruptcy laws. The filing was pre-negotiated with sufficient debt holders to allow ALC to reorganize its debt and equity and emerge from bankruptcy as of 12:01 a.m. on January 1, 2002. The final order affirming the reorganization was made in December 2001, consequently we reflected the transaction as of December 31, 2001. We agreed to reduce total rents under the 37 leases by $875,000 a year, beginning January 1, 2002, and received a lease rejection claim of $2,500,000 for this concession. Under the provisions of ALC’s Plan, we would have been entitled to receive, due to our ownership of pre-bankruptcy convertible subordinated debentures and the lease rejection claim, $7,986,000 of ALC’s new Senior Secured Notes (or Senior Notes) bearing interest at 10% per annum, payable semi-annually in arrears, $3,026,000 new Junior Secured Notes (or Junior Notes) bearing interest payable in additional new Junior Notes for three years at 8% and thereafter payable in cash at 12% per annum, payable semi-annually in arrears and 1,238,076 shares of ALC common stock. Provisions of the Revenue Code governing REITs prohibit REITs from owning debt and/or equity securities representing more than 10% of the value or voting power of any one issuer. Without qualifying as safe harbor debt, the Senior Notes and the Junior Notes would have been included in the calculation of 10% of the value of ALC. In order to qualify as safe harbor debt and retain our REIT status we were able to hold only the debt. For REIT income test purposes, provisions would also disqualify income from any entity in which a REIT owns 10% or more of the total combined voting power of all classes of stock or 10% or more of the total value of shares of all classes of a corporate tenant. And as a result, we could not be owners of the ALC common stock. In December 2001, we entered into an Assignment and Assumption Agreement with Healthcare Holdings, Inc. (or HHI), a wholly owned subsidiary of CLC, allowing HHI to purchase the right to receive the common stock of ALC. SeeNote 8. CLC Healthcare, Inc. andNote 10. Marketable Debt Securitiesfor further discussions. At the request of LTC’s Board of Directors, our Chairman, CEO and President, Mr. Andre C. Dimitriadis, became a Board member of ALC as of January 1, 2002. During the bankruptcy and since emergence, ALC has been current on all lease payments to us.

Alterra leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 12.4%, or $71,281,000, of our total assets at December 31, 2003. Alterra announced on January 22, 2003, that it had filed a voluntary petition with the U.S. Bankruptcy Court for the District of Delaware to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Alterra’s Plan of Reorganization was approved in November 2003 and Alterra

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

emerged from bankruptcy in December 2003 as a non-publicly traded company. All of our leases with Alterra were assumed, without change, by the reorganized Alterra. Alterra is no longer a publicly traded company.

ALC is a publicly traded company, and as such is subject to the filing requirements of the Securities and Exchange Commission. Our financial position and ability to make distributions may be adversely affected by further financial difficulties experienced by ALC and Alterra or any of our other lessees and borrowers, including additional 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 or our borrowers when it expires.

4.Supplemental Cash Flow Information
             
For the year ended December 31,

200320022001



(in thousands)
Non-cash investing and financing transactions:            
Assumption of mortgage loans payable related to acquisitions of real estate properties $  $1,357  $50,774 
Assumption of minority interest liability related to acquisition of general partnership interest        3,518 
Assumption of accrued interest related to acquisitions of real estate properties        229 
Conversion of mortgage loans and secured lines of credit into owned properties     3,832   3,899 
Reduction in receivables from CLC related to the acquisition of debt securities        7,800 
Exchange of third party debt securities related to the acquisitions of real estate properties        7,925 
Reduction in receivables from CLC related to the acquisitions of real estate properties        9,285 
Increase in short term notes receivable related to the disposition of real estate properties     2,631   8,483 
Preferred stock redemption charge relating to the original issuance costs of the 40% of Series A Preferred Stock redeemed  1,241       
5.Impairment Charge

We periodically perform a comprehensive evaluation of our real estate investment portfolio. During 2002, we adopted SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets” and therefore calculate the impairment losses as the excess of the carrying value over the fair value of assets to be held and used, and the carrying value over the fair value less cost to sell in instances where management has determined that we will dispose of the property. Prior to 2002, we calculated impairment losses using the same methodology as per SFAS No. 121“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” In recent years the long-term care industry experienced significant adverse changes, which have resulted in operating losses by certain of our lessees and borrowers and in some instances the filing by certain lessees and borrowers for bankruptcy protection. As a result we have identified certain investments in skilled nursing properties that we determined had been impaired. These assets were determined to be impaired primarily because the estimated undiscounted future cash flows to be received from these investments are less than the carrying values of the investments.

During 2003, we recorded an impairment charge of $1,260,000. Of this charge, $31,000 was to fully reserve a mortgage loan on one skilled nursing facility that was closed in 2002 and not reopened or sold. Additionally, we recorded a $1,303,000 impairment related to certain interest only REMIC Certificates net of a $74,000 adjustment of an impairment loss, recognized in the fourth quarter of 2002, related to our investment in REMIC Certificates. This

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$1,303,000 impairment charge had been previously recognized in comprehensive income as a fair market value adjustment on available-for-sale REMIC Certificates as described inNote 6. Real Estate Investments.As more fully described inNote 2. Summary of Significant Accounting Policies, to the extent there are defaults, unrecoverable losses or prepayments of principal on the underlying mortgages resulting in reduced cash flows, the subordinated REMIC Certificates we hold would bear the first risk of loss. During management’s periodic evaluation of the realizability of expected future cash flows from the mortgages underlying our investment in REMIC certificates, there were indications that certain expected future cash flows would not be realized by the REMIC Trust. Accordingly, we recorded a net $1,229,000 impairment charge during 2003, to reflect the estimated impact on future cash flows from loan prepayments occurring during, or expected to occur subsequent to, the first quarter of 2003 related to certain subordinated REMIC Certificates we held.

During 2002, we recorded an impairment charge of approximately $7,807,000 ($710,000 of which is included in net loss from discontinued operations). The impairment charge included the write-down of $1,000,000 for one owned skilled nursing property as a result of our agreeing to a rent reduction and $710,000 for one assisted living property that was subsequently sold at less than net book value, a $1,600,000 write-down of two mortgages on two skilled nursing properties and a $4,497,000 valuation adjustment of the subordinated REMIC Certificates held by us. Of the $1,600,000 write-down, $600,000 was for a skilled nursing property that had closed and defaulted on the loan and $1,000,000 was for a loan on a skilled nursing property whose operator was reporting losses from operations and requesting temporary loan payment modifications. Relative to the $4,497,000 charge and as more fully described inNote 2. Summary of Significant Accounting Policiesto the extent there are defaults, unrecoverable losses or prepayments of principal on the underlying mortgages resulting in reduced cash flows, the subordinated REMIC Certificates held by us would bear the first risk of loss. As a result, during 2002 we recorded this $4,497,000 charge of which, $1,215,000 was for loans paying off prior to maturity and reducing the value of our I/ O REMIC Certificates, $500,000 was for one skilled nursing property that closed, $1,282,000 was for a loan on one skilled nursing property that we, as loan servicing agent for the REMIC Trust, agreed could pay the loan off at a $1,000,000 reduction in principal and $1,500,000 was for one skilled nursing property whose operator advised us that the operator was considering either closing the property or attempting to convert the building to an alternative use. During management’s periodic evaluation of the realizability of expected future cash flows from the mortgages underlying our REMIC Certificates, there were indications that a portion of the underlying mortgage collateral would not be realized by the REMIC Trust. Accordingly, we recorded an impairment charge in current period earnings.

During 2001, we recorded an impairment charge of approximately $28,584,000, ($8,937,000 of which is included in net loss from discontinued operations in accordance with SFAS No. 144). The impairment charge included the write-down of the carrying value to the estimated fair value, less cost to sell, of 14 owned skilled nursing properties of $16,755,000, notes receivable determined to be uncollectable of $1,500,000, pre-bankruptcy debt securities of ALC of $9,829,000 and $500,000 in lease termination costs. Of the $16,755,000 charge, $13,677,000 was for nine closed properties, $2,484,000 was for three properties that were leased at reduced lease values and $594,000 was for two properties that were sold. The fair values were based on current appraisals or other third-party opinions of value and other estimates of fair value such as estimated discounted future cash flows.

We believe we have recorded valuation adjustments on all assets for which there are permanent impairments. However, the long-term care industry has experienced significant adverse changes which have resulted in operating losses by certain of our lessees and borrowers and in some instances the filing by certain lessees and borrowers for bankruptcy protection. Thus, we cannot predict what, if any, impairment charge may be needed in the future.

6.Real Estate Investments

Mortgage Loans. During the year ended December 31, 2003, we received principal repayments totaling $11,422,000 on two mortgage loans, and scheduled principal payments of $1,464,000. One mortgage loan with an outstanding principal balance of $1,707,000 that was secured by one long-term care property was purchased from the REMIC Trust for cash of $1,707,000 in connection with the termination of the 1993-1 REMIC Pool.

At December 31, 2003, we had 37 mortgage loans secured by first mortgages on 30 skilled nursing properties with a total of 3,681 beds and eight assisted living residences with 369 units located in 19 states. At December 31, 2003,

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the mortgage loans had interest rates ranging from 9.5% to 12.6% and maturities ranging from 2004 to 2018. In addition, the loans contain certain guarantees, provide for certain facility fees and generally have 25-year amortization schedules. The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points. At December 31, 2003 and 2002, the estimated fair value, based on the net present value of the future cash flows discounted at 10.5%, of the mortgage loans was approximately $74,511,000 and $85,429,000, respectively. Scheduled principal payments on mortgage loans are $7,021,000, $3,538,000, $9,223,000, $11,753,000, $12,680,000 and $28,530,000 in 2004, 2005, 2006, 2007, 2008 and thereafter.

Owned Properties and Lease Commitments. During 2003, we purchased two skilled nursing properties with a total of 98 beds from CLC. We paid cash of $1,215,000 for the two properties which CLC used to repay the outstanding loan balance due to a REMIC pool originated by us.

During 2003, we sold eight skilled nursing properties for a total sales price of $16,227,000. We recognized a $2,299,000 gain on these sales and used $3,758,000 of proceeds to pay down mortgage loans and $2,595,000 of proceeds to repay outstanding borrowings under our Secured Revolving Credit. The remaining $9,311,000 of net proceeds was used to fund the partial redemption of our Series A Preferred Stock.

agreement. Subsequent to December 31, 20032006, we purchased a 120 bed skilled nursing property in Texas for a total of $3,389,000 in cash. Additionally, we sold a 72 bed skilled nursing property in Georgia for $1,500,000 and will recognize a $975,000 gain in the first quarter of 2004. We used $1,250,000 of the net proceeds to pay down a mortgage note payable.

Owned properties are leased pursuant to non-cancelable operating leases generally withfunded an initial term of 10 to 30 years. Many of the leases contain renewal options and one contains an option for a limited time that permits the operator to purchase three properties. The leases provide for fixed minimum base rent during the initial and renewal periods. The majority of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four ways depending on specific provisions of each lease: (i) a specified percentage increase over the prior year, generally 2%; (ii) the higher of (i) or a calculation based on the Consumer Price Index; (iii) as a percentage of facility net patient revenues in excess of base amounts or (iv) specific dollar increases. 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. Contingent rent income for the years ended December 31, 2003, 2002 and 2001 was not significant in relation to contractual base rent income.

Depreciation expense on buildings and improvements, including properties owned under capital leases and properties classified as discontinued operations as required by SFAS No. 144, was $12,783,000, $14,197,000, and $13,695,000 for the years ended December 31, 2003, 2002 and 2001.

Future minimum base rents receivable under the remaining non-cancelable terms of operating leases are: $45,160,000, $45,569,000, $46,645,000, $47,640,000, $46,354,000 and $384,189,000 for the years ending December 31, 2004, 2005, 2006, 2007, 2008 and thereafter.

In August 2001, the Financial Accounting Standards Board (or FASB) issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets,” which was required to be adopted in fiscal years beginning after December 15, 2001. SFAS No. 144 on asset impairment supercedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,”and provides a single accounting model for long-lived assets to be disposed of. Subsequent to January 1, 2002, and in accordance with SFAS No. 144, properties held-for-sale on the balance sheet includes only those properties available for immediate sale in their present condition and for which management believes that it is probable that a sale of the property will be completed within one year. Properties held-for-sale are carried at the lower of cost or fair value less estimated selling costs. No depreciation expense is recognized on properties held-for-sale once they have been classified as such. In accordance with the implementation provisions of SFAS No. 144, the operating results of real estate assets designated as held-for-sale subsequent to January 1, 2002, are included in discontinued operations in the consolidated statement of operations. In addition, all gains and losses from real estate sold are also included in discontinued operations. As required by SFAS No. 144, gains and losses on prior years related to assets included on discontinued operations in 2002 have been reclassified to discontinued operations for comparative purposes. Assets designated as held-for-sale

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

prior to January 1, 2002 have been accounted for under SFAS No. 121 and accordingly, gains and losses from these assets have not been included in discontinued operations.

Set forth in the table below are the components of the net loss from discontinued operations (in thousands):

              
For the year ended December 31,

200320022001



Rental income $772  $1,425  $2,253 
Interest income from mortgage loans        10 
Interest and other income  149   226   258 
   
   
   
 
 Total revenues  921   1,651   2,521 
Interest expense  271   311   475 
Depreciation and amortization  509   695   1,650 
Impairment charge     710   11,913 
Legal expenses  8   (37)   
Operating and other (income) expenses  (35)  510   256 
   
   
   
 
 Total expenses  753   2,189   14,294 
   
   
   
 
Income (loss) from discontinued operations $168  $(538) $(11,773)
   
   
   
 

REMIC Certificates. The outstanding principal balance and the weighted-average pass through rate for the senior certificates (held by third parties) and the carrying value of the subordinated certificates (held by us) as of December 31, 2003 and 2002 were as follows(dollar amounts in thousands):

                         
20032002


SeniorSenior
CertificatesSubordinatedCertificatesSubordinated

Certificates
Certificates
PrincipalRateCarrying ValuePrincipalRateCarrying Value






1993-1 Pool(1) $     $  $28   7.1% $238 
1994-1 Pool  3,184   10.0%  19,029   16,796   10.0%  19,308 
1996-1 Pool  67,895   7.6%  9,560   74,812   7.5%  9,754 
1998-1 Pool  79,358   6.5%  33,073   89,978(2)  6.4%  35,119 
           
           
 
          $61,662          $64,419 
           
           
 


(1) The 1993-1 Pool was fully retired through mortgage payments at maturity in 2003 with no realized credit losses during its term.
(2) Included in the 1998-1 Pool assets are $0 at December 31, 2003 and $7,879,000 at December 31, 2002 of certificates originated in the 1993-1 Pool that are excluded from the amount outstanding presented for the 1993-1 Pool.

At December 31, 2003 and 2002, the aggregate effective yield of the subordinated certificates, based on expected future cash flows with no unscheduled prepayments, was 15.4% and 17.04%, respectively. Income on the subordinated certificates was as follows for the years ended December 31, 2003, 2002 and 2001 (dollar amounts in thousands):

             
200320022001



1993-1 Pool $22  $736  $929 
1994-1 Pool  2,085   2,510   3,847 
1996-1 Pool  1,991   2,614   3,128 
1998-1 Pool  5,866   7,110   7,212 
   
   
   
 
  $9,964  $12,970  $15,116 
   
   
   
 

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As sub-servicer for all of the above REMIC pools, we are responsible for performing substantially all of the servicing duties relating to the mortgage loans underlying the REMIC Certificates and act as the special servicer to restructure any mortgage loans that default.

The REMIC Certificates retained by us, represent the non-investment grade certificates issued in the securizations. Furthermore, because of the highly specialized nature of the underlying collateral (long-term care properties), there is an extremely limited market for these securities. Because REMIC Certificates of this nature trade infrequently, if at all, market comparability to the certificates we retain is very limited.

We use certain assumptions and estimates in determining the fair value allocated to the retained interest at the time of initial sale and each subsequent measurement date in accordance with SFAS No. 140. These assumptions and estimates include projections concerning the expected level and timing of future cash flows, current interest rate environment, estimated spreads over the U.S. Treasury Rate at which the retained certificates might trade, expectations regarding credit losses, if any, expected weighted-average life of the underlying collateral and discount rates commensurate with the risks involved. These assumptions are reviewed periodically by management. If these assumptions change, the related asset and income would be affected. Key economic assumptions used in measuring the retained interests at December 31, 2003, were as follows: a U.S. Treasury Rate of 4.3%, market spread on “B” rated certificates of 950 basis points over the applicable U.S. Treasury Rate, a weighted average discount rate on unrated and interest only certificates of 29.0%, weighted-average life of 151 months and no expected annual credit losses. At December 31, 2003, key economic assumptions and the sensitivity of the current fair value of cash flows on the REMIC Certificates retained by us to immediate 10% and 20% adverse changes in those assumptions are as follows: (dollar amounts in thousands):

         
EstimatedCarrying
Retained Interests in REMIC Securitizations:Fair ValueAmount



Available-for-sale REMIC Certificates $9,778  $9,778 
Held-to-maturity REMIC Certificates  38,395   51,884 
   
   
 
Totals $48,173  $61,662 
   
   
 
         
10% Adverse20% Adverse
Change DeclineChange Decline
Key Assumption Sensitivity Analysis:in Fair Valuein Fair Value



Average Spread and Discount Rate Assumption        
Average Spread on “B” rated certificates – 950 basis points $264  $521 
Average discount rate on Unrated and I/ O Certificates – 29.0%  2,010   3,799 
   
   
 
Total $2,274  $4,320 
   
   
 
U.S. Treasury Rate Assumption (4.3%) $120  $235 
   
   
 
Weighted-Average Life Assumption (151 Months) $1,712  $3,096 
   
   
 
Expected Credit Loss Assumption (No Expected Losses) $4,571  $9,142 
   
   
 

As more fully described inNote 2. Summary of Significant Accounting Policies, to the extent there are defaults, unrecoverable losses or prepayments of principal on the underlying mortgages resulting in reduced cash flow, the subordinated REMIC Certificates held by us would bear the first risk of loss. During management’s periodic evaluation of the realizability of expected future cash flows from the mortgages underlying our REMIC Certificates there were indications that a portion of the underlying mortgage collateral would not be realized by the REMIC Trust. Accordingly, we recorded a net $1,229,000 impairment charge during 2003, to reflect the estimated impact on future cash flows from loan prepayments occurring during, or expected to occur subsequent to, the first quarter of 2003 related to certain subordinated REMIC Certificates we held. We recorded an impairment charge in 2002 of $4,497,000 related to the valuation adjustment of the subordinated REMIC Certificates held by us. SeeNote 5. Impairment Chargefor a discussion of the impairment indicators.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Subsequent to December 31, 2003, at our election, we paid $3,661,000 to acquire a mortgage loan that was in default in the 1994 REMIC pool. The amount paid represents the outstanding balance of the loan which approximated the fair value.

During 2001, we sold certain REMIC Certificates classified as available-for-sale, with a net book value of $19,035,000 prior to a valuation reserve of $1,010,000. The sale resulted in net proceeds of $17,894,000 and a realized loss of $1,141,000.

As of December 31, 2003 and 2002, available-for-sale certificates were recorded at their fair value of approximately $9,778,000 and $13,073,000, respectively. Unrealized holding losses on available-for-sale certificates of $427,000, $1,435,000 and $803,000 were included in comprehensive income for the years ended December 31, 2003, 2002 and 2001, respectively.

7.     Asset Securitizations

LTC is a REIT and, as such, makes investments with the intent to hold them for long-term purposes. However, mortgage loans may be transferred to a REMIC (securitization) when a securitization provides us with the best available form of capital to fund additional long-term investments. When contemplating a securitization, consideration is given to our current and expected future interest rate posture and liquidity and leverage position, as well as overall economic and financial market trends. As of December 31, 2003 we had completed four securitization transactions, the last being in 1998. We may again employ this type of financing in the future should we determine the financing environment is appropriate for this type of transaction.

From our past securitizations, we receive annual sub-servicing fees, which range from 1.0 to 2.0 basis points of the outstanding mortgage loan balances in each of the REMIC pools. Additionally, through the REMIC Certificates retained by us from past securitizations, we receive cash flows and the rights to future cash flows resulting from cash received on the underlying mortgage loans in the REMIC pools. All of the investors in the REMIC Certificates and the REMIC Trusts themselves have no recourse to our assets for failure by any obligor to the REMIC Trust assets (the mortgages) to pay when due, or comply with any provisions of the mortgage contracts. The REMIC Certificates are classified separately on the balance sheet and interest income earned shown separately on the income statement. Sub-servicing fees and related fees associated with the REMIC Certificates are included in other income.

Certain cash flows received from and paid to REMIC Trusts are as follows (dollar amounts in thousands):

         
Year Ended

20032002


Cash flow received on retained REMIC Certificates $12,515  $16,624 
Servicing and related fees received $186  $298 
Servicing advances made $690  $725 
Repayments of servicing advances $782  $618 

At December 31, 2003 scheduled distributions of principal on REMIC Certificates retained by us are: $6,689,000, $8,138,000, $9,799,000, $6,540,000, $3,239,000 and $27,230,000 for the years ending December 31, 2004, 2005, 2006, 2007, 2008 and thereafter. These amounts are based upon the scheduled remaining amortization periods of the underlying mortgages, which may be subject to change. Currently in our portfolio we have no mortgage loans held

52


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for securitization. Quantitative information relating to subserviced mortgage loans including delinquencies and net credit losses is as follows(dollar amounts in thousands):

             
Year Ended

200320022001



Average balance of loans in REMIC pools $224,742  $294,984  $340,607 
Year-end balance of loans in REMIC pools $213,291  $245,248  $334,394 
Net credit losses $2,157  $1,284  $0 
Net credit losses to average REMIC pool loans  1.0%  0.4%  0%
Delinquencies (greater than 30 days) to year-end REMIC pool loans  0.8%  1.3%  0.7%

8.     CLC Healthcare, Inc.

In 2002 LTC Healthcare, Inc. changed its name to CLC Healthcare, Inc.

During 1998, we completed the spin-off of all CLC voting common stock through a taxable dividend distribution to the holders of our common stock, Cumulative Convertible Series C Preferred Stock and Convertible Subordinated Debentures. Upon completion of the distribution, CLC began operating as a separate public company. Beginning in September 1999, CLC began leasing skilled nursing properties owned or financed by us and from that date assumed certain leases of additional properties and closed certain properties owned by us. These properties were previously financed or leased to lessees and borrowers who experienced financial difficulties to such extent that the lessees and borrowers were not able to comply with lease provisions or debt provisions underlying the properties. As such, CLC assumed the leases of troubled facilities and was not able to pay, nor did we record as income, rent under CLC leases with us since 2000.

On October 6, 2003, CLC announced that it had signed an Agreement and Plan of Merger (or Agreement) with Center Healthcare and Center Healthcare’s wholly owned subsidiary, CHMS, Inc. The Agreement provided that in the merger, holders of each outstanding share of CLC’s common stock would receive in cash $1.00 per share of common stock. CLC held a special meeting of its stockholders on November 12, 2003, and the merger was approved by the required sixty-six and two thirds percent of CLC common stockholders. After the merger, CLC became a wholly owned subsidiary of Center Healthcare and ceased to be a publicly traded company. Center Healthcare is owned by an individual who was operating (under the management agreement discussed below) 19 skilled nursing properties owned by us and under lease to CLC. During 2003, we entered into a 30 year, triple-net master lease with Center Healthcare for these 19 properties and one property formerly operated by Sun. This new lease provides for rental payments of approximately $4,567,000 in the first year with a 3% escalation each year for the next 10 years, 2% each year for the following 10 years and 1% each year for the remaining 9 years. In 2003, we advanced Center Healthcare $2,300,000 for capital improvements to the 19 facilities to be expended within a 36 month period.

Our Chairman, President and Chief Executive Officer, Chief Financial Officer and Chief Investment Officer were Board members of CLC through the effective date of the merger at which time they were no longer CLC board members. Additionally, we have an indemnification agreement covering these officers who served as Board members of CLC and one former independent director of CLC.

In 2002, we sold a wholly owned subsidiary, LTC-Fort Tucum, Inc. to CLC for a $500,000 note (or Fort Tucum Note) bearing no interest for one year and thereafter interest at 8% annually for two years. LTC-Fort Tucum, then acquired two skilled nursing facilities in New Mexico subject to a mortgage loan payable to a REMIC pool originated by us. During 2003, we acquired these two facilities for $1,215,000 in cash and forgave the $500,000 note, which we had previously fully reserved. CLC used the $1,215,000 to repay the outstanding loan balance that was due to a REMIC pool originated by us. We leased these facilities, along with two other facilities in New Mexico previously operated by Sun, to a third party operator under a triple-net master lease beginning July 1, 2003. This master lease provided for rents of $763,000 in the initial year with 2.0% increases annually for 15 years. We also entered into a triple-net master lease beginning July 1, 2003, with a third party operator for four skilled nursing properties in Georgia, all of which subsequently have been sold. These Georgia properties were formerly operated by CLC.

53


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In 2003, we purchased from CLC all the furniture, fixtures and equipment in 19 properties for $1,843,000. Additionally, we purchased all the furniture, fixtures and equipment at CLC’s corporate office for $967,000. We have included the furniture, fixtures and equipment at the 19 properties and the corporate office in the master lease with Center Healthcare.

During 2003 and 2002 we did not recognize any rental income from CLC. During 2003 CLC did not owe us any rent due to a forbearance agreement effective March 1, 2003. During 2002 CLC owed us $3,000,000 in rent that they were unable to pay. However in 2003, Center Healthcare paid us rent of $1,465,000 after they began operating the 19 properties in September 2003.

Effective October 19, 2003, we amended the secured line of credit with CLC waiving the change of control provisions in this line of credit and in the Promissory Note discussed below, to allow CLC to satisfy certain conditions of the Agreement and Plan of Merger dated October 6, 2003 (discussed above). The amendment also changed the nature of the loan from a secured revolving line of credit to a secured term loan and extended the maturity date to October 1, 2008. The initial principal amount of the note is $8,867,000 which represented the balance due on the secured line of credit including unpaid interest, and rents due and unpaid through April 30, 2003. Additionally, the amendment reduced the interest rate to 8.0% compounded monthly and accruing to the principal balance from October 1, 2003 through September 30, 2004, and 8.0% compounded monthly payable in cash quarterly in arrears beginning October 2004. The book value of the note was $4,046,000 at December 31, 2003. At December 31, 2002 there was $4,741,000 outstanding under the line of credit. During 2003 we did not record any accrued interest on this note. During 2002, CLC paid, and we recorded as income, interest on its line of credit with us totaling $540,000. In 2001, we did not receive or record as income interest on this line of credit.

Additionally, we hold a Promissory Note (or Note) issued by HHI in the face amount of $9,150,000. The original Note was received in December 2001 in exchange for our right to receive 1,238,076 shares of ALC common stock distributed concurrently with ALC’s emergence from bankruptcy on December 31, 2001. The Note is for a term of five years and bears interest at 5.0%, compounded annually and accruing to the principal balance plus interest at 2.0% on the principal payable in cash annually. The Note is a full recourse obligation of HHI and is secured by all of the assets owned now or in the future by HHI and contains a provision for acceleration should there be a change of control of HHI or CLC. We agreed to waive this provision to allow CLC to enter into the Agreement and Plan of Merger (discussed above). During 2003, we purchased from HHI $1,177,000 face value of ALC Senior Notes for $1,177,000 plus accrued interest and $566,000 face value of ALC Junior Notes for $566,000. SeeNote 10. Marketable Debt Securitiesfor discussion of ALC’s redemption of these notes. At December 31, 2003, HHI owned 1,452,794 shares of ALC common stock with a fair market value based on the closing price of ALC stock at December 31, 2003 of $11,259,000 and a market value of $11,622,000 based upon a third party Security and Exchange Commissions Form 4 filing reporting a bulk purchase of 557,209 shares at $8.00 per share. At December 31, 2003, the book value of the $9,150,000 Note was $5,245,000 which represented the fair market value of the 1,238,076 shares acquired by HHI on December 31, 2001 including a $2,150,000 increase in the Note during 2003 which we allowed HHI to upstream to CLC. CLC returned $1,200,000 to us which was applied as a reduction in the line of credit with CLC. In January 2003, we received, in accordance with the terms of the Note, $140,000 from CLC representing the 2.0% interest on the then outstanding principal balance which is payable in cash in arrears. During 2003 we did not accrue any interest income on the Note. In March 2004, we received $196,000 from CLC representing the 2.0% interest on the outstanding principal balance at December 31, 2003 in accordance with the terms of the Note.

All of the aforementioned transactions between and CLC and us were approved by the respective disinterested and/or independent members of the Board of Directors of each company. All interested and/or non-independent Board members abstained from any such vote.

During 2001, we sold all 180,000 shares of CLC common stock we owned at December 31, 2000. The shares were sold to CLC for $225,000, excluding selling commissions, which was the fair market value as of the date of sale. We recognized a loss of $386,000 on the sale of these shares. We sold these shares because the Tax Relief Extension Act of 1999 (or 99 Act) provided that, subject to certain exceptions for taxable years commencing after December 31, 2000, a REIT may not own more than 10% of the total value of the securities of any corporation. Without qualifying

54


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

as safe harbor debt, securities under the 99 Act include the line of credit provided by us to CLC. In order to qualify as safe harbor debt and retain REIT status, we were required to hold only such debt or the shares.

9.     Notes Receivable

During 2003 we received $2,843,000 in principal re-payments prior to maturity on three notes. $2,000,000 of the notes paid off represented the down payment on a property that was sold in the fourth quarter of 2003. During 2003 we advanced $2,150,000 under the Note with HHI and $1,200,000 was repaid by CLC as discussed inNote 8. CLC Healthcare, Inc.

During 2002, in conjunction with the sale of five skilled nursing properties, we received a 10-year, $3,550,000 note with a face rate of 7.0%, which we discounted to $2,631,000 for an effective rate of 13.0%. In addition, we advanced $468,000 to an operator under a line of credit. We received $1,736,000 in principal re-payments at maturity on three notes related to properties sold in previous years.

10.     Marketable Debt Securities

During 2003 we purchased $1,383,000 face value of ALC Senior Notes and $670,000 face value of ALC Junior Notes. $1,177,000 face value of the Senior Notes and $566,000 face value of the Junior Notes were purchased from CLC as discussedin Note 8. CLC Healthcare Inc.Additionally we purchased from a third party $206,000 face value of the Senior Notes for $186,000 plus accrued interest and $103,000 face value of the Junior Notes for $85,000. During 2003 $281,000 of the Senior Notes were mandatorily redeemed by ALC as a result of ALC’s sale of assets securing the notes. The notes were redeemed at face value plus accrued interest. Also during 2003, we received $279,000 face value of Junior Notes representing paid-in-kind interest.

At December 31, 2003, we owned $8,186,000 face value of ALC Senior Notes with a face rate of 10%, payable semi-annually in arrears and maturing on January 1, 2009. At December 31, 2003, we also owned $4,095,000 face value of ALC Junior Notes with a face rate of 8% payable in additional new Junior Notes through 2004 and thereafter payable in cash, payable semi-annually in arrears and maturing on January 1, 2012. On December 31, 2003, ALC announced the mandatory redemption of all of the outstanding Senior and Junior Notes and deposited with the trustee of the notes an amount sufficient to pay the redemption amount and all interest due. In the fourth quarter of 2003, we recognized non-operating income of $1,970,000 related to the reversal of the discount recorded on the Senior and Junior Notes redeemed, and in January 2004 received cash in the amount of $12,374,000 as full redemption of these securities including accrued and unpaid interest.

11.     Debt Obligations

Bank Borrowings. On December 26, 2003, we entered into a new three year Unsecured Credit Agreement with three banks. The Unsecured Credit Agreement provides for a revolving line of credit for up to $45,000,000 and for the inclusion of additional banks and an expansion of the line under certain circumstances. There are no scheduled maturities other than the three year term.

The pricing of the Unsecured Credit agreement varies between LIBOR plus 2.75% and LIBOR plus 3.25% depending on our leverage ratio. We had no outstanding balances$282,000 under this agreement as of December 31, 2003, however, had we borrowed our interest rate would have been LIBOR plus 3.00%.

In January 2004 we borrowed $21,000,000 under the Unsecured Credit Agreement and used $4,500,000 to pay early, mortgage debt that was due in January 2005 and used $16,500,000 to fund the partial redemption of our Series A Preferred Stock. In February 2004 we repaid the $21,000,000 from proceeds from the redemption of ALC Senior and Junior Notes and from some of the proceeds from the issuance of our Series F Preferred Stock. SeeNote 10. “Marketable Debt Securities”andNote 12. “Stockholders Equity.”

Under financial covenants contained in the Unsecured Credit Agreement which are measured quarterly we are required to maintain, among other things, (i) a ratio, of total indebtedness to total asset value, not greater than .5 to 1.0, (ii) a ratio not greater than .35 to 1.0 of secured debt to total asset value (iii) a ratio not less than 2.5 to 1.0 of EBITDA to interest expense, and (iv) a ratio of not less than 1.45 to 1.0 for quarters ending through June 30, 2004, and then not less than 1.50 to 1.0 of EBITDA to fixed charges. We were in compliance with all covenants when we

55


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

first drew under this agreement in 2004 and currently have no amounts outstanding under the Unsecured Credit Agreement.

For 2002 and 2001 we had a Secured Revolving Credit that was scheduled to expire on October 2, 2004. We cancelled this credit on December 30, 2003, and expensed as additional interest expense $2,075,000 of the remaining unamortized debt issuance costs. The credit facility required us to pay an additional fee of 4% of the outstanding available commitment level as of October 2, 2002. Accordingly, we paid a fee of $3,000,000 (4% of the commitment balance of $75,000,000 on October 2, 2002) to extend the Secured Revolving Credit to October 2, 2004. It was primarily the remaining unamortized portion of this fee that we expensed when we cancelled the credit. Another provision of this agreement required certain levels of commitment reductions as a result of asset sales, financings, equity offerings and repayment of mortgages.

In addition, on October 2, 2002, we issued 1,500,000 book value units (or BVU), to the lenders under the Secured Revolving Credit. The BVUs have been disclosed as a contingent liability at December 31, 2003 and 2002. The number of BVUs issued represented 20,000 BVUs for each $1,000,000 of outstanding commitment ($75,000,000) as October 2, 2002. For the BVUs to have value to the lenders our book value per common share at September 30, 2004, would have to be in excess of $10.92. As an example, should our book value per common share at September 30, 2004, be $11.00, the lenders would receive a total of $120,000 representing $.08 per share times 1,500,000 BVUs. At December 31, 2003, our book value per common share was $10.09 and as a result, the BVUs have no current value and we recognized no expense in the periods presented for the BVUs. Should the BVUs have an intrinsic value at a future reporting period, we will recognize as expense the intrinsic value over the remaining life of the BVUs, adjusted for any change in the intrinsic value at subsequent future reporting periods. We are obligated to pay the lenders any amounts due to them relating to the BVUs as of September 30, 2004, even though we have terminated the Secured Revolving Credit.

Mortgage Loans Payable

Maturity dates, weighted average interest rates and amounts due at maturity on our mortgage loans payable were(dollar amounts in thousands):

                 
MaturityDecember 31, 2003RateDecember 31, 2002Rate





2004 $     $4,161   11.70%
2005  13,412   10.41%  28,249   8.63%
2006  47,673   8.63%  37,831   9.25%
2007            
2008  15,938   7.27%  16,262   7.27%
Thereafter  46,291   8.55%  46,903   8.55%
   
       
     
  $123,314      $133,406     
   
       
     

As of December 31, 2003 and 2002, the aggregate carrying value of real estate properties securing our mortgage loans payable was $171,429,000 and $187,481,000, respectively.

Subsequent to December 31, 2003, we paid off a mortgage loan payable to a REMIC Pool we originated in the amount of $4,525,000 and $1,250,000 on another mortgage loan. Both loans had scheduled maturities in 2005.

Bonds Payable and Capital Leases.At December 31, 2003 and 2002, we had outstanding principal of $6,640,000 and $6,960,000, respectively on multifamily tax-exempt revenue bonds that are secured by five assisted living properties in Washington. These bonds bear interest at a variable rate that is reset weekly and matures during 2015. For the year ended December 31, 2003, the weighted average interest rate, including letter of credit fees, on the outstanding bonds was 4.4%. Additionally, at December 31, 2003 and 2002, we had outstanding principal of $3,961,000 and $4,021,000, respectively on a multi-unit housing tax-exempt revenue bond that bears interest at 8.75% and matures in 2025 and is secured by one assisted living property in Oregon.

56


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 31, 2003 and 2002, we had outstanding principal of $4,085,000 and $4,380,000, respectively, under capital lease obligations. The capital leases are secured by four assisted living residences, have a weighted average interest rate of 7.6% and mature at various dates through 2013.

As of December 31, 2003 and 2002, the aggregate gross investment in real estate properties securing our bonds payable and capital leases was $26,078,000 and $26,078,000, respectively.

Senior Mortgage Participation Payable. In 2002, we completed a loan participation transaction whereby we issued a $30,000,000 Senior Participation interest in 22 of our first mortgage loans that had a total unpaid principal balance of $58,627,000 in the Participation Loan Pool. The Participation Loan Pool had a weighted average interest rate of 11.6% and a weighted average scheduled term to maturity of 77 months. The Senior Participation is secured by the entire Participation Loan Pool. We received net proceeds from the issuance of the Senior Participation of $29,750,000 that was used to reduce commitments and amounts outstanding under our Secured Revolving Credit.

The Senior Participation receives interest at a rate of 9.25% per annum, payable monthly in arrears, on the then outstanding principal balance of the Senior Participation. In addition, the Senior Participation receives all mortgage principal collected on the Participation Loan Pool until the Senior Participation balance has been reduced to zero. We retain interest received on the Participation Loan Pool in excess of the 9.25% paid to the Senior Participation. The ultimate extinguishment of the Senior Participation is tied to the underlying maturities of loans in the Participation Loan Pool which range from 14 to 176 months. As of December 31, 2003, there are 21 loans remaining in the Participation Loan Pool, the Senior Participation balance was $18,250,000 and the weighted average interest rate was 11.58%. We have accounted for the participation transaction as a secured borrowing under SFAS No. 140“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

Liability for 9.5% Series A Preferred Stock Redemption. As required by SFAS No. 150, we classified the Series A Preferred Stock that was mandatorily redeemable on December 31, 2003 as a liability as a result of our December 2003 announced redemption of 1,225,680 shares of Series A Preferred Stock.

Scheduled Principal Payments.Total scheduled principal payments for our mortgage loans payable, bonds payable and capital lease obligations as of December 31, 2003 were $3,023,000, $16,312,000, $47,388,000, $2,190,000, $16,279,000 and $52,808,000 in 2004, 2005, 2006, 2007, 2008 and thereafter. To the extent we receive principal payments on the mortgage loans securing the Senior Participation Payable, scheduled principal payments at December 31, 2003 were $860,000, $2,899,000, $1,018,000, $10,278,000 and $3,195,000 in 2004, 2005, 2006, 2007 and 2008.

Fair Value.The estimated fair value of the Senior Participation Payable was $19,133,000 at December 31, 2003 based on the net present value of the future cash flows discounted at 7.0%. The estimated fair value of the mortgage loans payable, bonds payable and capital lease obligations approximated their carrying values at December 31, 2003.

12.     Stockholders’ Equity

Preferred stock.Preferred Stock is comprised of four series of cumulative redeemable preferred stock summarized as follows:

                         
Shares outstanding atCarrying Value at
December 31,LiquidationDecember 31,

Value PerDividend
Issuance20032002shareRate20032002







Series A Cumulative Preferred Stock  1,838,520   3,069,200  $25.00   9.5% $23.99  $23.98 
Series B Cumulative Preferred Stock  1,988,000   1,993,000  $25.00   9.0% $23.91  $23.90 
Series C Cumulative Convertible Preferred Stock  2,000,000   2,000,000  $19.25   8.5% $18.80  $18.80 
Series E Cumulative Convertible Preferred Stock  2,200,000     $25.00   8.5% $23.84    

Dividends on the Series A Preferred Stock and Series B Preferred Stock are cumulative from the date of original issue and are payable monthly to stockholders of record on the first day of each month. In December 2003 we announced the redemption of 40% of our outstanding Series A Preferred Stock or 1,225,680 shares. Accordingly, we

57


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

recognized a preferred stock redemption charge of $1,241,000 related to the original issue costs of the shares we redeemed. In 2004, we announced the redemption of all of the remaining 1,838,520 outstanding shares of Series A Preferred Stock and all of the 1,988,000 outstanding shares of Series B Preferred Stock. Accordingly, we will recognize the $1,861,000 and $2,168,000 of original issue costs related to the Series A and Series B Preferred Stock, respectively, as a preferred stock redemption charge in the first quarter of 2004. During 2003, we purchased and retired 5,000 shares of Series A Preferred Stock for a total cost of $100,000 and 5,000 shares of Series B Preferred Stock for a total cost of $97,000. No preferred shares were purchased during 2002.

Our Series C Cumulative Convertible Preferred Stock is convertible into 2,000,000 shares of our common stock at $19.25 per share. Dividends are payable quarterly. Total shares reserved for issuance of common stock related to the conversion of Series C Preferred Stock were 2,000,000 shares at December 31, 2003 and 2002.

In September 2003, we sold 2,200,000 shares of our Series E Preferred Stock in a public offering. We received $52,438,000 in net proceeds which we used to pay in full our Secured Revolving Credit. Our Series E Preferred Stock is convertible at any time into shares of our common stock at a conversion price of $12.50 per share of common stock, subject to adjustment under certain circumstances. On or after September 19, 2006 and before September 19, 2008, we have the right but not the obligation, upon not less than 30 nor more than 60 days’ written notice, to redeem shares of the Series E Preferred Stock, in whole or in part, if such notice is given within fifteen trading days of the end of the 30 day period in which the closing price of our common stock on the NYSE equals or exceeds 125% of the applicable conversion price for 20 out of 30 consecutive trading days, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. On or after September 19, 2008, we, at our option, upon not less than 30 nor more than 60 days’ written notice, may redeem shares of the Series E Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends thereon. We may not otherwise redeem the Series E Preferred Stock before September 19, 2008, except in order to preserve our status as a real estate investment trust. Dividends are payable quarterly. Total shares reserved for issuance of common stock related to the conversion of Series E Preferred Stock were 4,400,000 at December 31, 2003.

In February 2004, we sold 4,000,000 shares of our Series F Preferred Stock in a registered direct placement. Dividends will be payable quarterly, beginning April 15, 2004. We may not redeem the Series F Preferred Stock prior to February 23, 2009, except as necessary to preserve our status as a real estate investment trust. On or after February 23, 2009, we may, at our option, redeem the Series F Preferred Stock, in whole or from time to time in part, for $25.00 per Series F Preferred Stock in cash plus any accrued and unpaid dividends to the date of redemption. We received $98,795,000 in net proceeds and we will use approximately $96,500,000 of the proceeds to redeem all remaining outstanding shares of our Series A and Series B Preferred Stock.

While outstanding, the liquidation preferences of the preferred stocks in the table above and our Series F Preferred Stock arepari passu. None have any voting rights, any stated maturity, nor are they subject to any sinking fund or mandatory redemption.

Common Stock. During the year ended December 31, 2003, we repurchased and retired 482,800 shares of common stock for an aggregate purchase price of approximately $3,246,000, an average of $6.72 per share. The shares were purchased on the open market under a Board authorization to purchase up to 5,000,000 shares. Including these purchases, 2,348,200 shares have been purchased under this authorization. Therefore, we continue to have an open Board authorization to purchase an additional 2,651,800 shares.

During 2002 and 2001 we repurchased and retired 338,200 and 7,588,196 shares of common stock, respectively, for an aggregate purchase price of $2,333,000 and $41,737,000, respectively. Of the shares repurchased in 2001, 6,060,996 were purchased pursuant to a tender offer for 6,000,000 shares, plus up to 2% of outstanding shares as allowed by tender offer regulations, at $5.75 per share plus costs.

Subsequent to December 31, 2003, two of our limited partners exercised their conversion rights and exchanged their interests in five of our limited partnerships. In accordance with the partnership agreements, at our option, we issued 175,392 shares of our common stock. Since the market value of the common stock issued was greater than the book value of the partnership interests received, we will recognize in the first quarter of 2004 a $295,000 increase in the basis on the properties underlying the limited partnership interest acquired.

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other Equity. Other equity consists of the following(amounts in thousands):

          
December 31,

20032002


Notes receivable from stockholders $(2,792) $(7,227)
Unamortized balance on deferred compensation     (163)
Accumulated comprehensive income  2,154   1,278 
   
   
 
 Total Other Equity $(638) $(6,112)
   
   
 

Deferred compensation is the value of restricted stock awards granted to employees. See“Stock Based Compensation Plans”below.

Accumulated comprehensive income represents the net increase in fair market value over the carrying value of our available-for-sale securities.

Stock Based Compensation Plans.During 1998 we adopted and our stockholders approved the 1998 Equity Participation Plan under which 500,000 shares of common stock have been reserved for stock based compensation awards. The 1998 Equity Participation Plan and our Restated 1992 Stock Option Plan under which 500,000 shares of common stock were reserved (collectively “the Plans”) provide for the issuance of incentive and nonqualified stock options, restricted stock and other stock based awards to officers, employees, non-employee directors and consultants. The terms of the awards granted under the Plans are set by our compensation committee at its discretion; however, in the case of incentive stock options, the term may not exceed 10 years from the date of grant. Total shares available for grant under the Plans as of December 31, 2003, 2002 and 2001 were 53,176, 4,276 and 28,776, respectively. All options outstanding vest over five years from the original date of grant. Unexercised options expire seven years after the date of vesting.

Nonqualified stock option activity for the years ended December 31, 2003, 2002 and 2001, was as follows:

                         
SharesWeighted Average Price


200320022001200320022001






Outstanding, January 1  569,500   545,000   509,000  $5.63  $5.41  $5.74 
Granted     30,000   102,000     $7.63  $5.29 
Exercised  (245,629)       $5.40       
Canceled  (38,000)  (5,500)  (66,000) $5.61  $5.26  $7.73 
   
   
   
             
Outstanding, December 31  285,871   569,500   545,000  $5.63  $5.53  $5.41 
   
   
   
             
Exercisable, December 31  85,671   214,300   102,000  $5.59  $5.47  $5.55 
   
   
   
             

Restricted stock activity for the years ended December 31, 2003, 2002 and 2001 was as follows:

              
200320022001



Outstanding, January 1  202,664   209,164   265,560 
 Granted         
 Vested  (40,852)  (6,500)  (6,500)
 Canceled  (10,900)     (49,896)
   
   
   
 
Outstanding, December 31  150,912   202,664   209,164 
   
   
   
 
Compensation Expense $132,000  $245,000  $24,000 
   
   
   
 

All restricted stock outstanding at December 31, 2003, vests ratably over six years if we meet certain financial objectives and the grantee remains employed by us. If, in any given year, we do not meet the stated financial objectives then the shares scheduled to vest in that year will not vest and the vesting period will be extended by one year. Future compensation expense will be recognized over the service period at the market price per share on the date of vesting. On January 1, 2003, 26,352 shares of restricted stock vested and during the year 14,500 vested as a

59


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

result of an employee termination. Since the January 1, 2003, vesting was predicated on reaching certain financial targets at December 31, 2002, we recorded $180,000 compensation expense in 2002, which represented the number of shares vested multiplied by the closing stock price of $6.83 on January 2, 2003. Compensation expense of $132,000 was recognized in 2003 related to shares vesting ratably over five years. Of the $245,000 restricted stock compensation expense recognized in 2002, $180,000 related to shares vesting on January 1, 2003 as previously discussed and $65,000 related to shares vesting ratably over five years. Restricted stock compensation expense in 2001 of $24,000 related to shares vesting ratably over five years.

Dividends are payable on the restricted shares to the extent and on the same date as dividends are paid on all of our common stock.

As of December 31, 2003, 2002, and 2001, there were 285,871, 569,500 and 545,000, options outstanding, respectively, subject to the disclosure requirements of SFAS No. 123. The fair value of these options was estimated utilizing the Black-Scholes valuation model and assumptions as of each respective grant date. No options were granted in 2003. In determining the estimated fair value for the options granted in 2002, the weighted average expected life assumption was five years, the weighted average volatility was 0.49 and the weighted average risk free interest rate was 3.80%. The weighted average fair value of the options granted was estimated to be $1.44. In determining the estimated fair value for the options granted in 2001, the weighted average expected life assumption was five years, the weighted average volatility was 0.49 and the weighted average risk free interest rate was 4.48%. The weighted average fair value of the options granted was estimated to be $1.46. There was no material pro-forma effect on net income or earnings per share for the years ending December 31, 2003, 2002, and 2001. The weighted average exercise price of the options was $5.63, $5.46, and $5.34 and the weighted average remaining contractual life was 1.6, 2.5, and 3.4, years as of December 31, 2003, 2002, and 2001, respectively.

During 2003 a total of 245,629 options were exercised at a total option value of $1,327,000 and a total market value as of the exercise dates of $1,772,000. Subsequent to December 31, 2003, a total of 23,200 options were exercised at a total option value of $125,000 and a total market value as of the exercise dates of $343,000.

Effective January 1, 2003, we adopted SFAS No. 148“Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123“Accounting for Stock-Based Compensation” to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28“Interim Financial Reporting” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy for stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123 for stock-based employee compensation. In addition to the prospective method originally provided under SFAS No. 123, SFAS No. 148 provides for a modified prospective method and a retroactive restatement method. We have adopted the prospective method and therefore will recognize compensation expense related to all employee stock-based awards granted, modified or settled after January 1, 2003.

Notes Receivable from Stockholders. In 1997, the Board of Directors adopted a loan program designed to encourage executives, key employees, consultants and directors to acquire common stock through the exercise of options. Under the program, we made full recourse, secured loans to participants equal to the exercise price of vested options plus up to 50% of the taxable income resulting from the exercise of options. Such loans bear interest at the then current Applicable Federal Rate (or AFR). In January 2000, the Board of Directors approved a new loan agreement (or New Agreement) for current executives and directors in the amounts of the then remaining principal balance of the original loans.

The new loan agreements provided that the interest rate would be 6.07% (AFR for an equivalent 3 to 9 year instrument) and interest payments were to be paid from dividends received on shares pledged as security for the New Agreements during the quarter in which the interest is due. If the dividend does not fully pay the interest due or if no dividend is paid, the unpaid interest is added to the principal balance. In addition, the notes also require the borrower to reduce principal by one-half of the difference between the most recent dividend received on the pledged shares and the interest paid on the loans from that dividend. During the first quarter of 2003 and all of 2002, the difference between the dividend paid and the current interest due on the outstanding loan balances was added to the loan

60


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

balance in accordance with the loan agreements. No dividend was paid on our common shares in 2001 and all interest due on these loans was added to the principal balances.

During 2001, we granted a stock price adjustment of the loans to officers and Board Members with such loans. The loans were adjusted to the sum of the shares collateralizing the notes times the net book value (or NBV) of a share of common stock as of September 30, 2001. The NBV per share at that date was $8.60 and the closing price as reported by the NYSE was $5.13. This total adjustment amounted to a non-cash charge of $2,453,000. We accounted for the shares underlying the loans that were modified under variable plan accounting as required by SFAS No. 123“Accounting for Stock Based Compensation.”

During 2003, one officer loan was repaid in full and in February 2004 the two additional loans were paid in full. As a result, subsequent to the February 2004 payments, we have no outstanding loans to employees or Board members. The two loans paid in February 2004 were to two Board members who sold shares of our common stock to repay the loans.

At December 31, 2003 we had three notes due from two former officers and the estate of a former Board member. These notes were not modified in 2003, 2002 or 2001 and the interest is paid quarterly and is current on all of these notes. These remaining original notes provide for the same calculation of the periodic principal reductions; however, interest is payable every quarter, regardless of receipt of a dividend. The original notes converted to fully amortizing loans with 16 quarterly payments in 2002. We received $4,444,000 in principal repayments on all notes during 2003. The original notes bear interest rates ranging from 5.77% to 6.63%. In February 2004 one note due from a former officer was repaid in full.

We currently have no loan programs for officers and/or directors and do not provide any guarantee to any officer and/or director or third party relating to purchases and sales of our equity securities.

At December 31, 2003, 2002 and 2001, loans totaling $2,792,000, $7,227,000 and $8,042,000, respectively were outstanding. At December 31, 2003, 2002 and 2001, the market value of the common stock securing these loans was approximately $4,392,520, $5,168,000 and $4,972,000, respectively.agreement.

13. Commitments and Contingencies

It is our current policy and we intend to continue this policy that all borrowers of funds from us and lessees of any of our properties secure adequate comprehensive property and general and professional liability insurance that covers us as well as the borrower and/or lessee. Even though that is our policy, certain borrowers and lessees have been unable to obtain general and professional liability insurance because the cost of such insurance has increased substantially and some insurers have stopped offering such insurance for long term care facilities. Additionally, insurance companies have filed for bankruptcy protection leaving certain of our borrowers and/or lessees without coverage for periods that were believed to be covered prior to such bankruptcies. The unavailability and associated exposure as well as increased cost of such insurance could have a material adverse effect on the lessees and borrowers, including their ability to make lease or mortgage payments. Although we contend that as a non-possessory landlord we are not generally responsible for what takes place on real estate we do not possess, claims including general and professional liability claims, may still be asserted against us which may result in costs and exposure for which insurance is not available. Certain risks may be uninsurable, not economically insurable or insurance may not be available and there can be no assurance that we, a borrower or lessee will have adequate funds to cover all contingencies. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could be subject to an adverse claim including claims for general or professional liability, could lose the capital that we have invested in the properties, as well as the anticipated future revenue for the properties and, in the case of debt which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the properties. Certain losses such as losses due to floods or seismic activity if insurance is available may be insured subject to certain limitations including large deductibles or co-payments and policy limits.

At December 31, 2003, we had a contingent commitment to provide Alterra $2,500,000 to be spent on improvements to properties we own and lease to Alterra. The money is to be spent over a three year period and will result in a rental rate increase equal to 10% of the amount funded. The agreement also provides for an additional $2,500,000

61


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

funding by us over the following three years to be spent on mutually agreed upon property expansion with a rental rate increase equal to 10% of the amount funded. SeeNote 3. Major Operatorsfor further discussions.

14.     Distributions

We must distribute at least 90% of our taxable income in order to continue to qualify as a REIT. This distribution requirement can be satisfied by current year distributions or, to a certain extent, by distributions in the following year.

For federal tax purposes, distributions to stockholders are treated as ordinary income, capital gains, return of capital or a combination thereof. Distributions for 20032006, 2005 and 20022004 were cash distributions. There were no distributions to common stockholders in 2001.

The federal income tax classification of the per share common stock distributions are ((unaudited)unaudited):

              
Year Ended

200320022001



Ordinary income $  $0.379  $ 
Non-taxable distribution  0.650       
Section 1250 capital gain     0.021    
Long term capital gain         
   
   
   
 
 Total $0.650  $0.400  $ 
   
   
   
 

 

 

Year Ended

 

 

 

2006

 

2005

 

2004

 

Ordinary income

 

$

0.405

 

$

0.920

 

$

0.615

 

Non-taxable distribution

 

 

0.370

 

0.510

 

Section 1250 capital gain

 

0.243

 

 

 

Long term capital gain

 

0.792

 

 

 

Total

 

$

1.44

 

$

1.29

 

$

1.125

 

15.14. Net (Loss) Income Per Common Share

Basic and diluted net income (loss) per share were as follows(in thousands except per share amounts):

             
For the year ended December 31,

200320022001



Net income (loss) $24,319  $31,803  $(2,908)
Preferred stock redemption  (1,241)      
Preferred dividends  (16,596)  (15,042)  (15,077)
   
   
   
 
Net income (loss) for basic net income per share  6,482   16,761   (17,985)
7.75% debentures due 2002         
Other dilutive securities         
   
   
   
 
Net income (loss) for diluted net income (loss) per share $6,482  $16,761  $(17,985)
   
   
   
 
Shares for basic net income per share  17,836   18,371   23,924 
Stock options  139   143    
7.75% debentures due 2002         
Other dilutive securities         
   
   
   
 
Shares for diluted net income per share  17,975   18,514   23,924 
   
   
   
 
Basic net income (loss) per share $0.36  $0.91  $(0.75)
   
   
   
 
Diluted net income (loss) per share $0.36  $0.91  $(0.75)
   
   
   
 

 

 

For the year ended December 31,

 

 

 

2006

 

2005

 

2004

 

Net income

 

$

78,788

 

$

52,709

 

$

36,388

 

Preferred stock redemption

 

 

 

(4,029

)

Preferred dividends

 

(17,157

)

(17,343

)

(17,356

)

Net income for basic net income per common share

 

61,631

 

35,366

 

15,003

 

Other dilutive securities

 

4,219

(3)

790

(2)

(1)

Net income for diluted net income per common share

 

$

65,850

 

$

36,156

 

$

15,003

 

Shares for basic net income per common share

 

23,366

 

22,325

 

19,432

 

Stock options

 

50

 

73

 

135

 

Other dilutive securities

 

2,770

(3)

744

(2)

(1)

Shares for diluted net income per common share

 

26,186

 

23,142

 

19,567

 

Basic net income per common share

 

$

2.64

 

$

1.58

 

$

0.77

 

Diluted net income per common share

 

$

2.51

 

$

1.56

 

$

0.77

 


62(1)          The Series C Cumulative Convertible Preferred Stock, the Series E Cumulative Convertible Preferred Stock and the convertible limited partnership units have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.



LTC PROPERTIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(2)          The Series C Cumulative Convertible Preferred Stock and the convertible limited partnership units have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.

(3)          Includes Series C Cumulative Convertible Preferred Stock, the Series E Cumulative Convertible Preferred Stock and the convertible limited partnership units.

16.15. Quarterly Financial Information (Unaudited)

                  
For the quarter ended

March 31,June 30,September 30,December 31,




(in thousands except per share amounts)
2003
                
Revenues(1) $15,860  $15,751  $15,920  $15,916 
Net (loss) income from discontinued operations $(24) $663  $(185) $2,013 
Net income available to common stockholders(2) $123  $2,624  $2,129  $1,606 
Net (loss) income per common share from continuing operations net of preferred dividends:                
 Basic $0.01  $0.11  $0.13  $(0.02)
 Diluted $0.01  $0.11  $0.13  $(0.02)
Net income (loss) per common share from discontinued operations:                
 Basic $  $0.04  $(0.01) $0.11 
 Diluted $  $0.04  $(0.01) $0.11 
Net income (loss) per common share available to common stockholders:                
 Basic $0.01  $0.15  $0.12  $0.09 
 Diluted $0.01  $0.15  $0.12  $0.09 
Dividends per share $0.10  $0.15  $0.15  $0.25 
2002
                
Revenues(1) $16,973  $16,780  $17,306  $17,078 
Net income (loss) from discontinued operations $(80) $13,204  $232  $589 
Net income available to common stockholders(3) $2,423  $10,601  $2,792  $945 
Net income (loss) per common share from continuing operations net of preferred dividends:                
 Basic $0.14  $(0.14) $0.14  $0.02 
 Diluted $0.14  $(0.14) $0.14  $0.02 
Net income per common share from discontinued operations:                
 Basic $  $0.72  $0.01  $0.03 
 Diluted $  $0.67  $0.01  $0.03 
Net income per common share available to common stockholders:                
 Basic $0.13  $0.58  $0.15  $0.05 
 Diluted $0.13  $0.55  $0.15  $0.05 
Dividends per share $0.10  $0.10  $0.10  $0.10 

 

 

For the quarter ended

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

 

 

(in thousands except per share amounts)

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues(1)

 

 

$

18,034

 

 

$

18,646

 

 

$

18,131

 

 

 

$

18,352

 

 

Net income from discontinued operations

 

 

32,504

 

 

122

 

 

677

 

 

 

 

 

Net income available to common stockholders

 

 

39,432

 

 

7,683

 

 

6,809

 

 

 

7,707

 

 

Net income per common share from continuing operations net of preferred dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.30

 

 

$

0.32

 

 

$

0.26

 

 

 

$

0.33

 

 

Diluted

 

 

$

0.30

 

 

$

0.32

 

 

$

0.26

 

 

 

$

0.33

 

 

Net income per common share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

1.39

 

 

$

0.01

 

 

$

0.03

 

 

 

$

 

 

Diluted

 

 

$

1.28

 

 

$

0.01

 

 

$

0.03

 

 

 

$

 

 

Net income per common share available to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

1.69

 

 

$

0.33

 

 

$

0.29

 

 

 

$

0.33

 

 

Diluted

 

 

$

1.55

 

 

$

0.33

 

 

$

0.29

 

 

 

$

0.33

 

 

Dividends per share declared

 

 

$

0.36

(6)

 

$

(7)

 

$

0.36

 

 

 

$

0.36

 

 

Dividend per share paid

 

 

$

0.36

 

 

$

0.36

 

 

$

0.36

 

 

 

$

0.36

 

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues(1)

 

 

$

21,634

 

 

$

15,783

 

 

$

16.965

 

 

 

$

18,026

 

 

Net income from discontinued operations

 

 

897

 

 

905

 

 

40

 

 

 

230

 

 

Net income available to common stockholders

 

 

17,157

(2)

 

5,793

 

 

5,927

 

 

 

6,489

 

 

Net income per common share from continuing operations net of preferred dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.76

 

 

$

0.23

 

 

$

0.26

 

 

 

$

0.27

 

 

Diluted

 

 

$

0.71

 

 

$

0.23

 

 

$

0.26

 

 

 

$

0.27

 

 

Net income per common share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.04

 

 

$

0.04

 

 

$

 

 

 

$

0.01

 

 

Diluted

 

 

$

0.04

 

 

$

0.04

 

 

$

 

 

 

$

0.01

 

 

Net income per common share available to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.80

 

 

$

0.27

 

 

$

0.26

 

 

 

$

0.28

 

 

Diluted

 

 

$

0.74

 

 

$

0.27

 

 

$

0.26

 

 

 

$

0.28

 

 

Dividends per share declared

 

 

$

0.30

 

 

$

0.66

(3)

 

$

0.33

(4)

 

 

$

0.36

(5)

 

Dividend per share paid

 

 

$

0.30

 

 

$

0.33

 

 

$

0.33

 

 

 

$

0.33

 

 



(1) As required by SFAS No. 144, revenues related to properties sold in 2003 and 2002(1)As required by SFAS No. 144, revenues related to properties sold in 2006 and 2005 have been reclassified to discontinued operations for all periods presented.
(2) Includes impairment charges totaling $1,260.See Note 5. Impairment Charge for further discussion.
(3) Includes impairment charges totaling $7,807.See Note 5. Impairment Charge for further discussion.

NOTE: Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with the per share amounts for the year. Computations of per share amounts from continuing operations, discontinued operations and net income (loss) are made independently. Therefore, the sum of per share amounts from continuing operations and discontinued operations may not agree with the per share amounts from net income (loss) available to common stockholders.

63


Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

(2)Includes $11,696 in income related to the collection of a note receivable. See Note 8. Notes Receivable for further discussion.

(3)Represents second and third quarter 2005 dividends.

(4)Represents fourth quarter 2005 dividends.

(5)Represents first quarter 2006 dividends.

(6)Represents second quarter 2006 dividends. First quarter 2006 dividends were declared in the fourth quarter 2005.


LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(7)Second quarter 2006 dividends were declared in first quarter 2006. Third quarter 2006 dividends were declared in third quarter 2006.

NOTE:Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with the per share amounts for the year. Computations of per share amounts from continuing operations, discontinued operations and net income (loss) are made independently. Therefore, the sum of per share amounts from continuing operations and discontinued operations may not agree with the per share amounts from net income (loss) available to common stockholders.

75




Item 9.                        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.Controls and Procedures

Item 9A.                CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and procedures:Procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (or Exchange Act”). 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 are effective in recording, processing, summarizing and reporting, on a timely basis,to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act.Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms and that it is accumulated and communicated to management, including the Chief Executive Officer, Chief Financial Officer and Audit Committee, as appropriate to allow timely decisions regarding required disclosure.

InDesign and Evaluation of Internal Control Over Financial Reporting.

Management Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon are set forth on pages 77 and 78.

Changes in Internal Control Over Financial Reporting.

There has been no change in our internal control over financial reporting during the fourth fiscal quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

76




MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of 2003, we engaged IC Consulting Services, LLC, an independent risk consultingLTC Properties, Inc. is responsible for establishing and maintaining adequate internal audit firm,control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to assist usprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in evaluatingaccordance with generally accepted accounting principles and documenting our controlsincludes those policies and procedures.

Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
procedures that:

·       Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

·       Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

·       Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2006. In making this assessment, the company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment, management believes that, as of December 31, 2006, the company’s internal control over financial reporting is effective based on those criteria.

The company’s independent auditors have issued an audit report on our assessment of the company’s internal control over financial reporting. This report appears on the following page.

77




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of LTC Properties, Inc.

We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that LTC Properties, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). LTC Properties, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that LTC Properties, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, LTC Properties, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LTC Properties, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 of LTC Properties, Inc. and our report dated February 21, 2007 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California
February 21, 2007

78




Item 10.                 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information with respect to directors, set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held May 18, 200415, 2007 under the caption “Election of Directors” is incorporated herein by reference. Our executive officers as of February 22, 2007 are:

Name

Name

Age

Position




Andre C. Dimitriadis

63

66

Chairman, Chief Executive Officer, President and Director

Wendy L. Simpson

54

57

Vice Chairman,

President, Chief Operating Officer, Chief Financial Officer,
Treasurer and Director

Christopher T. Ishikawa

40Executive Vice President and Chief Investment Officer
Alex J. Chavez39Senior Vice President and Treasurer

Andre C. Dimitriadis founded LTC Properties in 1992 and has been our Chairman and Chief Executive Officer since inception. In 2000 Mr. Dimitriadis also assumed the position of President. In October 2005, Mr. Dimitriadis is a directorresigned from the position of Assisted Living Concepts, Inc.President but remains Chairman and Chief Executive Officer.

Wendy L. Simpson has been a director since 1995, Vice Chairman sincefrom April 2000 and Vice Chairman andthrough October 2005, Chief Financial Officer since July 2000. Prior to that she was a financial advisor to Coram Healthcare Corporation, a health care organization, from November 1999 through March 31, 2000. Ms. Simpson joined Coram as Executive Vice2000, Treasurer since January 2005 and President and Chief FinancialOperating Officer in March 1998since October 2005.

Subsequent to December 31, 2006, Andre C. Dimitriadis was appointed Executive Chairman of our Board of Directors and resigned in November 1999. Prior to joining Coram, Ms.Wendy L. Simpson was appointed Chief Executive Vice President, Chief Financial Officer, Chief Operating Officer and director of Transitional Hospitals Corporation from December 1994 to August 1997 and Senior Vice President and Chief Financial Officer from July 1994 to December 1994. Coram Healthcare commenced bankruptcy proceedings in August 2000. Ms. SimpsonDirector, effective March 1, 2007.

The following person has been a director since 1995.appointed by our Board of Directors to be an executive officer effective March 1, 2007:

Name

Age

Position

Pamela Shelley-Kessler

41

Senior Vice President and Chief Financial Officer

Christopher T. Ishikawa has served as Executive Vice President and Chief Investment Officer since February 2001. Mr. Ishikawa served as Senior Vice President and Chief Investment Officer from September 1997 through January 2001 and prior to that, he servedPamela Shelley-Kessler joined our company as Vice President and TreasurerController in July 2000.

The other information required by this Item 10 is incorporated by reference to our definitive Proxy Statement relating to the Annual Meeting of LTC Properties since April 1995.

Alex J. Chavez has served as Senior Vice President and Treasurer since February 2001 and Vice President and Treasurer since December 1999. PriorStockholders to that, he served as Director of Finance since June 1996 and became Vice President in September 1997. Prior to joining LTC, he was employed by the international accounting firm of Ernst & Young LLP, where he served as an Audit Manager specializing in the health care and real estate industries from 1990 to 1996.be held on May 15, 2007.

Code of Ethics

We have adopted aInformation relating to our Code of Business Conduct and Ethics (or Code of Ethics) that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions as well as directors, officers and employees. The Codeis included in Part I, Item 1 of Ethics is posted on our website(www.ltcproperties.com)

64


and is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request for a printed copy of the code of Ethics to: Investor Relations. LTC Properties, Inc., 22917 Pacific Coast Hwy. Suite 350, Malibu, California 90265. We intend to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics for our principal executive officer, principal financial officer or controller, or persons performing similar functions by posting such information on our website.
this report.

Section 16(a) Beneficial Ownership Reporting Compliance

Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 18, 200415, 2007 under the caption “Security Ownership of Certain Beneficial Owners and Management — Management—Section 16(a) Beneficial Ownership Reporting Compliance,” is incorporated herein by reference.

Item 11.EXECUTIVE COMPENSATION

Item 11.                 EXECUTIVE COMPENSATION

Information relating to executive compensation, set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 18, 200415, 2007, under the caption “Executive Compensation,” is incorporated herein by reference. The Comparative Performance Graph and the Compensation Committee Report on Executive Compensation also included in the Proxy Statement areis expressly not incorporated herein by reference.


Item 12.

Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
                 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information relating to the security ownership of management and certain beneficial owners, set forth our Proxy Statement relating to the Annual Meeting of Stockholders to be held May 18, 200415, 2007 under the caption “Security Ownership of Certain Beneficial Owners and Management,” is incorporated herein by reference.

Information relating to securities authorized for issuance under our equity compensation plans, is set forth in Part I, Item 5 of this report under the caption “Equity Compensation Plan Information,Information. is incorporated herein by reference.

Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Item 13.                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information relating to certain relationships and related transactions, set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 18, 200415, 2007 under the caption “Certain Relationships and Related Transactions,”Transactions” and “Director Independence” is incorporated herein by reference.

Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

Item 14.                 PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information relating to the fees paid to our accountant, set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 18, 200415, 2007, under the caption “Audit Committee — Committee—Audit and Non-Audit Fees,” is incorporated herein by reference.

Item 15.

Item 15.FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
                 FINANCIAL STATEMENT SCHEDULES AND EXHIBITS

(a)   Financial Statement Schedules

The financial statement schedules listed in the accompanying index to financial statement schedules are filed as part of this annual report.

(b)   Exhibits

The exhibits listed in the accompanying index to exhibits are filed as part of this annual report.

(c) Reports on Form 8-K80

None.

65




LTC PROPERTIES, INC.


INDEX TO FINANCIAL STATEMENT SCHEDULES


(Item 15(a))

All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule.

6681




LTC PROPERTIES, INC.


SCHEDULE II


VALUATION AND QUALIFYING ACCOUNTS


(in thousands)

             
Balance atCharge toBalance at
Beginning of PeriodOperationsEnd of Period



Allowance for Doubtful Accounts:            
2003 $1,280  $  $1,280 
2002 $1,250  $30  $1,280 
2001 $1,250  $  $1,250 

 

 

Balance at
Beginning of Period

 

Charge to
Operations

 

Balance at
End of Period

 

Allowance for Doubtful Accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

 

$

1,280

 

 

 

$

 

 

 

$

1,280

 

 

2005

 

 

$

1,280

 

 

 

$

 

 

 

$

1,280

 

 

2004

 

 

$

1,280

 

 

 

$

 

 

 

$

1,280

 

 

6782




LTC PROPERTIES, INC.


SCHEDULE III


REAL ESTATE AND ACCUMULATED DEPRECIATION

(in thousands)

                                         
Initial Cost toGross Amount at which Carried at
CompanyCostsDecember 31, 2003

Capitalized
Construction/
Building andSubsequentBuilding andAccum.RenovationAcq.
EncumbrancesLandImprovementsto AcquisitionLandImprovementsTotal(1)Deprec.(2)DateDate










Skilled Nursing Facilities:                                        
Alamogordo, NM $4,559  $210  $2,590  $3  $210  $2,593  $2,803  $143   1985   Dec-01 
Altoona, IA   (3)  105   2,309   186   105   2,495   2,600   655   1973   Jan-96 
Atlanta, GA  4,525(7)  175   1,282   3   175   1,285   1,460   259   1968   Sep-99 
Atmore, AL   (4)  131   2,877      131   2,877   3,008   766   1967/1974   Jan-96 
Bedford, TX(13)   (3)  283   511   404   283   915   1,198   706   1960/2002   Jan-96 
Bradenton, FL     330   2,720   87   330   2,807   3,137   897   1989/2002   Sep-93 
Canyon, TX(13)     196   506   211   196   717   913   166   1985/86   Jun-00 
Carroll, IA   (3)  47   1,033   95   47   1,128   1,175   285   1969   Jan-96 
Chesapeake, VA     388   3,469   8   388   3,477   3,865   1,127   1977/2002   Oct-95 
Clovis, NM     561   5,539      561   5,539   6,100   331   1970   Dec-01 
Clovis, NM  2,744   598   5,902      598   5,902   6,500   352   1969/95   Dec-01 
Coffeyville, KS(13)     100   (100)     100   (100)        1962   May-97 
Des Moines, IA(13)     115   2,096   1,308   115   3,404   3,519   542   1972   Sep-99 
Dresden, TN     31   1,529   123   31   1,652   1,683   190   1966/2002   Nov-00 
Gardendale, AL     84   6,316      84   6,316   6,400   1,572   1976/1984   May-96 
Gardner, KS  5,300(10)  896   4,478   316   896   4,794   5,690   632   1961/1974   Dec-99 
Grapevine, TX     431   1,449   100   431   1,549   1,980   121       Jan-02 
Granger, IA   (3)  62   1,356   80   62   1,436   1,498   369   1979   Jan-96 
Griffin, GA  (7)  500   2,900      500   2,900   3,400   480   1969   Sep-99 
Hereford, TX(13)     106   (106)  2   106   (104)  2   2   1985   Oct-01 
Holyoke, CO     211   1,513   257   211   1,770   1,981   309   1963   Nov-00 
Houston, TX  6,742(6)  202   4,458   612   202   5,070   5,272   1,324   1961   Jun-96 
Houston, TX  5,688   365   3,769   545   365   4,314   4,679   1,226   1964/1968   Jun-96 
Houston, TX   (6)  202   4,458   612   202   5,070   5,272   1,324   1967   Jun-96 
Jefferson, IA  9,998(3)  86   1,883   176   86   2,059   2,145   523   1968/1972   Jan-96 
Jacksonville, FL      486   1,981   30   486   2,011   2,467   144       Mar-02 
Jessup, GA  (10)  35   465   63   35   528   563   77   1953   Dec-99 
Lecanto, FL     351   2,665   2,251   351   4,916   5,267   1,430   1988   Sep-93 
Manchester, TN     50   954   87   50   1,041   1,091   157   1957/67/78/2002   Nov-00 
Mesa, AZ     305   6,909   1,695   305   8,604   8,909   1,975   1975/1996   Jun-96 
Mesa, AZ(13)      420   3,258   36   420   3,294   3,714   739   1972   Oct-97 
Midland, TX  1,934   33   2,285      33   2,285   2,318   644   1973   Feb-96 
Montgomery, AL  3,587(4)  242   5,327      242   5,327   5,569   1,418   1967/1974   Jan-96 
Nacogdoches, TX     100   1,738   74   100   1,812   1,912   418   1973   Oct-97 
Norwalk, IA   (3)  47   1,033   70   47   1,103   1,150   283   1975   Jan-96 
Olathe, KS     520   1,872   43   520   1,915   2,435   288   1968   Sep-99 
Phoenix, AZ  6,951   300   9,703   50   300   9,753   10,053   1,185   1985   Aug-00 
Polk City, IA   (3)  63   1,376   41   63   1,417   1,480   369   1976   Jan-96 
Portland, OR     100   1,925   457   100   2,382   2,482   582   1956/1974   Jun-97 
Richland Hills, TX     144   1,656   181   144   1,837   1,981   106   1976   Dec-01 
Richmond, VA     356   3,180   300   356   3,480   3,836   1,053  1970/1975/ 1980/2002  Oct-95 
Ripley, TN     20   985   87   20   1,072   1,092   148   1951/2002   Nov-00 
Roswell, NM  3,853   568   5,232   3   568   5,235   5,803   288   1975   Dec-01 
Rusk, TX     34   2,399   115   34   2,514   2,548   873   1969   Mar-94 
Sacramento, CA     220   2,929      220   2,929   3,149   774   1968   Feb-97 
Salina, KS     100   1,153   502   100   1,655   1,755   385   1985   May-97 
Tappahannock, VA(13)     375   1,327   65   375   1,392   1,767   847   1977/1978   Oct-95 
Toppenish, WA     67   2,719      67   2,719   2,786   811   1960/1970   Jun-95 
Tucson, AZ  5,876   276   8,924   50   276   8,974   9,250   1,090   1985/92   Aug-00 
Tucumcari, NM     122   1,144      122   1,144   1,266   15   1976   Jun-03 
Vancouver, WA      133   3,017   122   133   3,139   3,272   901   1952/1994   Jun-95 
Whitewright, TX(13)      100   1,457   3   100   1,460   1,560   760   1962/1964/1965   Jan-96 
   
   
   
   
   
   
   
   
         
Skilled Nursing Facilities  61,757   11,982   142,350   11,453   11,982   153,803   165,785   32,061         
   
   
   
   
   
   
   
   
         

 

 

 

 

Initial Cost to
Company

 

Costs
Capitalized
Subsequent

 

Gross Amount at which
Carried
at December 31, 2006

 

 

 

Construction/

 

 

 

 

 

Encumbrances

 

Land

 

Building and
Improvements

 

to
Acquisition

 

Land

 

Building and
Improvements

 

Total(1)

 

Accum.
Deprec.(2)

 

Renovation
Date

 

Acq.
Date

 

Skilled Nursing Properties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alamogordo, NM

 

 

 

 

$    210

 

 

$   2,590

 

 

 

$        3

 

 

$    210

 

 

$   2,593

 

 

$   2,803

 

 

$      355

 

 

1985

 

Dec-01

 

Albuquerque, NM

 

 

 

 

1,696

 

 

3,891

 

 

 

6

 

 

1,696

 

 

3,897

 

 

5,593

 

 

191

 

 

1967

 

Sep-05

 

Albuquerque, NM

 

 

 

 

2,414

 

 

8,910

 

 

 

10

 

 

2,414

 

 

8,920

 

 

11,334

 

 

437

 

 

1982

 

Sep-05

 

Albuquerque, NM

 

 

 

 

2,463

 

 

7,647

 

 

 

9

 

 

2,463

 

 

7,656

 

 

10,119

 

 

375

 

 

1970

 

Sep-05

 

Altoona, IA

 

 

 

 

105

 

 

2,309

 

 

 

398

 

 

105

 

 

2,707

 

 

2,812

 

 

924

 

 

1973

 

Jan-96

 

Aransas Pass, TX

 

 

 

 

154

 

 

1,276

 

 

 

38

 

 

154

 

 

1,314

 

 

1,468

 

 

74

 

 

1973

 

Dec-04

 

Atlanta, GA

 

 

 

 

175

 

 

1,282

 

 

 

3

 

 

175

 

 

1,285

 

 

1,460

 

 

433

 

 

1968

 

Sep-99

 

Atmore, AL

 

 

 

 

131

 

 

2,877

 

 

 

196

 

 

131

 

 

3,073

 

 

3,204

 

 

1,010

 

 

1967/1974

 

Jan-96

 

Beaumont, TX

 

 

 

 

370

 

 

1,160

 

 

 

177

 

 

370

 

 

1,337

 

 

1,707

 

 

53

 

 

1950

 

Dec-05

 

Beeville, TX

 

 

 

 

186

 

 

1,197

 

 

 

32

 

 

186

 

 

1,229

 

 

1,415

 

 

68

 

 

1974

 

Dec-04

 

Benbrook, TX

 

 

 

 

503

 

 

2,121

 

 

 

102

 

 

503

 

 

2,223

 

 

2,726

 

 

168

 

 

1976

 

Jan-05

 

Bradenton, FL

 

 

 

 

330

 

 

2,720

 

 

 

136

 

 

330

 

 

2,856

 

 

3,186

 

 

1,125

 

 

1989/2002

 

Sep-93

 

Brownsville, TX

 

 

 

 

302

 

 

1,856

 

 

 

32

 

 

302

 

 

1,888

 

 

2,190

 

 

184

 

 

1968

 

Apr-04

 

Canyon, TX(7)

 

 

 

 

196

 

 

506

 

 

 

211

 

 

196

 

 

717

 

 

913

 

 

297

 

 

1985/86

 

Jun-00

 

Carroll, IA

 

 

 

 

47

 

 

1,033

 

 

 

201

 

 

47

 

 

1,234

 

 

1,281

 

 

407

 

 

1969

 

Jan-96

 

Chesapeake, VA

 

 

 

 

388

 

 

3,469

 

 

 

133

 

 

388

 

 

3,602

 

 

3,990

 

 

1,360

 

 

1977/2002

 

Oct-95

 

Clovis, NM

 

 

 

 

561

 

 

5,539

 

 

 

250

 

 

561

 

 

5,789

 

 

6,350

 

 

827

 

 

1970/2006

 

Dec-01

 

Clovis, NM

 

 

 

 

598

 

 

5,902

 

 

 

 

 

598

 

 

5,902

 

 

6,500

 

 

876

 

 

1969/95

 

Dec-01

 

Commerce City, CO

 

 

 

 

236

 

 

3,217

 

 

 

91

 

 

236

 

 

3,308

 

 

3,544

 

 

304

 

 

1964

 

Jun-04

 

Commerce City, CO

 

 

 

 

161

 

 

2,160

 

 

 

21

 

 

161

 

 

2,181

 

 

2,342

 

 

200

 

 

1967

 

Jun-04

 

Del Norte, CO

 

 

 

 

103

 

 

930

 

 

 

97

 

 

103

 

 

1,027

 

 

1,130

 

 

53

 

 

1955/2006

 

Jun-05

 

Des Moines, IA(7)

 

 

 

 

115

 

 

2,096

 

 

 

1,384

 

 

115

 

 

3,480

 

 

3,595

 

 

982

 

 

1972

 

Sep-99

 

Dresden, TN

 

 

 

 

31

 

 

1,529

 

 

 

123

 

 

31

 

 

1,652

 

 

1,683

 

 

374

 

 

1966/2002

 

Nov-00

 

Gardendale, AL

 

 

 

 

84

 

 

6,316

 

 

 

 

 

84

 

 

6,316

 

 

6,400

 

 

2,083

 

 

1976/1984

 

May-96

 

Gardner, KS

 

 

 

 

896

 

 

4,478

 

 

 

757

 

 

896

 

 

5,235

 

 

6,131

 

 

1,197

 

 

1961/1974

 

Dec-99

 

Granger, IA

 

 

 

 

62

 

 

1,356

 

 

 

163

 

 

62

 

 

1,519

 

 

1,581

 

 

502

 

 

1979

 

Jan-96

 

Grapevine, TX

 

 

 

 

431

 

 

1,449

 

 

 

170

 

 

431

 

 

1,619

 

 

2,050

 

 

350

 

 

1974

 

Jan-02

 

Griffin, GA

 

 

 

 

500

 

 

2,900

 

 

 

 

 

500

 

 

2,900

 

 

3,400

 

 

805

 

 

1969

 

Sep-99

 

Hereford, TX(7)

 

 

 

 

106

 

 

(106

)

 

 

11

 

 

106

 

 

(95

)

 

11

 

 

2

 

 

1985

 

Oct-01

 

Holyoke, CO

 

 

 

 

211

 

 

1,513

 

 

 

257

 

 

211

 

 

1,770

 

 

1,981

 

 

607

 

 

1963

 

Nov-00

 

Houston, TX

 

 

 

 

202

 

 

4,458

 

 

 

1,061

 

 

202

 

 

5,519

 

 

5,721

 

 

1831

 

 

1961

 

Jun-96

 

Houston, TX

 

 

 

 

365

 

 

3,769

 

 

 

1,525

 

 

365

 

 

5,294

 

 

5,659

 

 

1,697

 

 

1964/1968

 

Jun-96

 

Houston, TX

 

 

 

 

202

 

 

4,458

 

 

 

921

 

 

202

 

 

5,379

 

 

5,581

 

 

1,804

 

 

1967

 

Jun-96

 

Jacksonville, FL

 

 

 

 

486

 

 

1,981

 

 

 

30

 

 

486

 

 

2,011

 

 

2,497

 

 

382

 

 

1986 — 1987

 

Mar-02

 

Jefferson, IA

 

 

 

 

86

 

 

1,883

 

 

 

256

 

 

86

 

 

2,139

 

 

2,225

 

 

704

 

 

1968/1972

 

Jan-96

 

Lecanto, FL

 

 

 

 

351

 

 

2,665

 

 

 

2,729

 

 

351

 

 

5,394

 

 

5,745

 

 

1,835

 

 

1988/2006

 

Sep-93

 

Manchester, TN

 

 

 

 

50

 

 

954

 

 

 

87

 

 

50

 

 

1,041

 

 

1,091

 

 

308

 

 

1957/67/78/2002

 

Nov-00

 

Marion, OH

 

 

 

 

119

 

 

1,156

 

 

 

715

 

 

119

 

 

1,871

 

 

1,990

 

 

87

 

 

1950/2006

 

May-05

 

Marion, OH

 

 

 

 

48

 

 

2,466

 

 

 

 

 

48

 

 

2,466

 

 

2,514

 

 

53

 

 

1997

 

May-06

 

Mesa, AZ

 

 

 

 

305

 

 

6,909

 

 

 

1,876

 

 

305

 

 

8,785

 

 

9,090

 

 

2,696

 

 

1975/1996

 

Jun-96

 

Mesa, AZ(8)

 

 

 

 

1,095

 

 

2,330

 

 

 

 

 

1,095

 

 

2,330

 

 

3,425

 

 

37

 

 

1979

 

Aug-06

 

Midland, TX

 

 

 

 

33

 

 

2,285

 

 

 

26

 

 

33

 

 

2,311

 

 

2,344

 

 

825

 

 

1973

 

Feb-96

 

Montgomery, AL

 

 

 

 

242

 

 

5,327

 

 

 

115

 

 

242

 

 

5,442

 

 

5,684

 

 

1,852

 

 

1967/1974

 

Jan-96

 

Nacogdoches, TX

 

 

 

 

100

 

 

1,738

 

 

 

108

 

 

100

 

 

1,846

 

 

1,946

 

 

580

 

 

1973

 

Oct-97

 

Norwalk, IA

 

 

 

 

47

 

 

1,033

 

 

 

139

 

 

47

 

 

1,172

 

 

1,219

 

 

392

 

 

1975

 

Jan-96

 

Olathe, KS

 

 

 

 

520

 

 

1,872

 

 

 

203

 

 

520

 

 

2,075

 

 

2,595

 

 

514

 

 

1968

 

Sep-99

 

Orrville, OH

 

 

 

 

107

 

 

1,946

 

 

 

86

 

 

107

 

 

2,032

 

 

2,139

 

 

36

 

 

1956

 

Jun-06

 

Phoenix, AZ

 

 

 

 

334

 

 

3,383

 

 

 

297

 

 

334

 

 

3,680

 

 

4,014

 

 

381

 

 

1982

 

Apr-04

 

Phoenix, AZ

 

 

 

 

300

 

 

9,703

 

 

 

92

 

 

300

 

 

9,795

 

 

10,095

 

 

2,224

 

 

1985

 

Aug-00

 

Polk City, IA

 

 

 

 

63

 

 

1,376

 

 

 

124

 

 

63

 

 

1,500

 

 

1,563

 

 

501

 

 

1976

 

Jan-96

 

Portland, OR

 

 

 

 

100

 

 

1,925

 

 

 

1,378

 

 

100

 

 

3,303

 

 

3,403

 

 

781

 

 

1956/1974/2006

 

Jun-97

 

Richland Hills, TX

 

 

 

 

144

 

 

1,656

 

 

 

324

 

 

144

 

 

1,980

 

 

2,124

 

 

353

 

 

1976

 

Dec-01

 

Richmond, VA

 

 

 

 

356

 

 

3,180

 

 

 

2,839

 

 

356

 

 

6,019

 

 

6,375

 

 

1,506

 

 

1970/75/80/2002/2006

 

Oct-95

 

Ripley, TN

 

 

 

 

20

 

 

985

 

 

 

87

 

 

20

 

 

1,072

 

 

1,092

 

 

291

 

 

1951/2002

 

Nov-00

 

Roswell, NM

 

 

 

 

568

 

 

5,232

 

 

 

3

 

 

568

 

 

5,235

 

 

5,803

 

 

716

 

 

1975

 

Dec-01

 

Rusk, TX

 

 

 

 

34

 

 

2,399

 

 

 

335

 

 

34

 

 

2,734

 

 

2,768

 

 

1,110

 

 

1969

 

Mar-94

 

Sacramento, CA

 

 

 

 

220

 

 

2,929

 

 

 

 

 

220

 

 

2,929

 

 

3,149

 

 

1,003

 

 

1968

 

Feb-97

 

Salina, KS(7)

 

 

 

 

100

 

 

1,153

 

 

 

601

 

 

100

 

 

1,754

 

 

1,854

 

 

553

 

 

1985

 

May-97

 

Tacoma, WA

 

 

 

 

723

 

 

6,401

 

 

 

 

 

723

 

 

6,401

 

 

7,124

 

 

98

 

 

1993

 

Aug-06

 

Tappahannock, VA(7)

 

 

 

 

375

 

 

1,327

 

 

 

102

 

 

375

 

 

1,429

 

 

1,804

 

 

933

 

 

1977/1978

 

Oct-95

 

Tucson, AZ

 

 

 

 

276

 

 

8,924

 

 

 

112

 

 

276

 

 

9,036

 

 

9,312

 

 

2,047

 

 

1985/92

 

Aug-00

 

Tyler, TX

 

 

 

 

300

 

 

3,071

 

 

 

22

 

 

300

 

 

3,093

 

 

3,393

 

 

275

 

 

1974

 

Mar-04

 

Wooster, OH

 

 

 

 

118

 

 

1,711

 

 

 

90

 

 

118

 

 

1,801

 

 

1,919

 

 

32

 

 

1952/62/71

 

Jun-06

 

Skilled Nursing Properties

 

 

 

 

$ 22,154

 

 

$ 186,708

 

 

 

$ 21,294

 

 

$ 22,154

 

 

$ 208,002

 

 

$ 230,156

 

 

$ 45,060

 

 

 

 

 

 


68


LTC PROPERTIES, INC.


SCHEDULE III


REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

(in thousands)

                                      ��  
Initial Cost toGross Amount at which Carried at
CompanyCostsDecember 31, 2003

Capitalized
Construction/
Building andSubsequentBuilding andAccum.RenovationAcq.
EncumbrancesLandImprovementsto AcquisitionLandImprovementsTotal(1)Deprec.(2)DateDate










Assisted Living Residences:                                        
Ada, OK     100   1,650      100   1,650   1,750   324   1996   Dec-96 
Arlington, OH   (12)  629   6,973      629   6,973   7,602   381   1993   Dec-01 
Arvada, CO  6,626(8)  100   2,810   276   100   3,086   3,186   519   1997   Aug-97 
Athens, TX     96   1,510   1   96   1,511   1,607   332   1995   Jan-96 
Bakersfield, CA  9,013   834   11,986   20   834   12,006   12,840   755   1998/2002   Dec-01 
Battleground, WA     100   2,500      100   2,500   2,600   479   1996   Nov-96 
Beatrice, NE     100   2,173      100   2,173   2,273   371   1997   Oct-97 
Bexley, OH  15,938(12)  306   4,196      306   4,196   4,502   229   1992   Dec-01 
Bullhead City, AZ     100   2,500      100   2,500   2,600   428   1997   Aug-97 
Burley, ID     100   2,200      100   2,200   2,300   381   1997   Sep-97 
Caldwell, ID     100   2,200      100   2,200   2,300   381   1997   Sep-97 
Camas, WA   (5)  100   2,175      100   2,175   2,275   447   1996   May-96 
Central, SC     100   2,321      100   2,321   2,421   280   1998   Mar-99 
Cordele, GA     153   1,455   82   153   1,537   1,690   211   1987/88/2002   Jul-00 
Denison, IA     100   2,713      100   2,713   2,813   401   1998   Jun-98 
Dodge City, KS  1,208   84   1,666      84   1,666   1,750   397   1995   Dec-95 
Durant, OK     100   1,769      100   1,769   1,869   329   1997   Apr-97 
Edmond, OK   (9)  100   1,365   526   100   1,891   1,991   326   1996   Aug-97 
Elkhart, IN     100   2,435      100   2,435   2,535   396   1997   Dec-97 
Erie, PA   (11)  850   7,477      850   7,477   8,327   1,070   1998   Oct-99 
Eugene, OR     100   2,600      100   2,600   2,700   445   1997   Sep-97 
Fremont,OH     100   2,435      100   2,435   2,535   423   1997   Aug-97 
Ft. Collins, CO     100   2,961      100   2,961   3,061   387   1998   Mar-99 
Ft. Collins, CO     100   3,400      100   3,400   3,500   398   1999   Jul-99 
Ft. Meyers, FL     100   2,728   9   100   2,737   2,837   423   1998   Mar-98 
Gardendale, AL     16   1,234      16   1,234   1,250   307   1988   May-96 
Goldsboro, NC     100   2,385   1   100   2,386   2,486   261   1998   Mar-99 
Grandview, WA   (5)  100   1,940      100   1,940   2,040   415   1996   Mar-96 
Great Bend, KS  1,008   80   1,570   17   80   1,587   1,667   380   1995   Dec-95 
Greeley, CO     100   2,310   270   100   2,580   2,680   443   1997   Aug-97 
Greenville, NC     100   2,478   2   100   2,480   2,580   315   1998   Mar-99 
Greenville, TX     42   1,565      42   1,565   1,607   343   1995   Jan-96 
Greenwood, SC     100   2,638       100   2,638   2,738   340   1998   Mar-99 
Hayden, ID     100   2,450   243   100   2,693   2,793   508   1996   Dec-96 
Hoquiam, WA     100   2,500      100   2,500   2,600   435   1997   Aug-97 
Jacksonville, TX     100   1,900      100   1,900   2,000   410   1996   Mar-96 
Kelso, WA     100   2,500      100   2,500   2,600   536   1996   Nov-96 
Kennewick. WA   (5)  100   1,940      100   1,940   2,040   419   1996   Feb-96 
Klamath Falls, OR     100   2,300      100   2,300   2,400   439   1996   Dec-96 
Lake Havasu, AZ     100   2,420      100   2,420   2,520   421   1997   Aug-97 
Lakeland, FL     519   2,313   82   519   2,395   2,914   342   1968/74/96/2002   Jul-00 
Longmont, CO   (8)  100   2,640      100   2,640   2,740   397   1998   Jun-98 
Longview, TX     38   1,568   1   38   1,569   1,607   350   1995   Oct-95 
Loveland, CO   (8)  100   2,865   270   100   3,135   3,235   519   1997   Sep-97 
Lufkin, TX     100   1,950      100   1,950   2,050   413   1996   Apr-96 
Madison, IN     100   2,435      100   2,435   2,535   412   1997   Oct-97 
Marshall, TX     38   1,568   451   38   2,019   2,057   435   1995   Oct-95 
McPherson, KS  862   79   1,571      79   1,571   1,650   376   1994   Dec-95 
Millville, NJ     100   2,825      100   2,825   2,925   487   1997   Aug-97 
Nampa, ID     100   2,240   23   100   2,263   2,363   431   1997   Jan-97 
New Bern, NC     100   2,427   1   100   2,428   2,528   271   1998   Mar-99 
Newark, OH     100   2,435      100   2,435   2,535   412   1997   Oct-97 
Newport Richey, FL     100   5,845   296   100   6,140   6,241   1,066   1986/1995   Jan-98 

69

Assisted Living Properties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ada, OK

 

 

$      —

 

 

100

 

 

1,650

 

 

 

 

 

100

 

 

1,650

 

 

1,750

 

 

443

 

 

1996

 

Dec96

 

Arlington, OH

 

 

(6)

 

629

 

 

6,973

 

 

 

 

 

629

 

 

6,973

 

 

7,602

 

 

947

 

 

1993

 

Dec01

 

Arvada, CO

 

 

6,294

(4)

 

100

 

 

2,810

 

 

 

276

 

 

100

 

 

3,086

 

 

3,186

 

 

749

 

 

1997

 

Aug97

 

Athens, TX

 

 

 

 

96

 

 

1,510

 

 

 

1

 

 

96

 

 

1,511

 

 

1,607

 

 

441

 

 

1995

 

Jan96

 

Bakersfield, CA

 

 

8,567

 

 

834

 

 

11,986

 

 

 

20

 

 

834

 

 

12,006

 

 

12,840

 

 

1,878

 

 

1998/2002

 

Dec01

 

Battleground, WA

 

 

 

 

100

 

 

2,500

 

 

 

 

 

100

 

 

2,500

 

 

2,600

 

 

661

 

 

1996

 

Nov96

 

Beatrice, NE

 

 

 

 

100

 

 

2,173

 

 

 

 

 

100

 

 

2,173

 

 

2,273

 

 

534

 

 

1997

 

Oct97

 

Bexley, OH

 

 

14,814

(6)

 

306

 

 

4,196

 

 

 

 

 

306

 

 

4,196

 

 

4,502

 

 

571

 

 

1992

 

Dec01

 

Bullhead City, AZ

 

 

 

 

100

 

 

2,500

 

 

 

 

 

100

 

 

2,500

 

 

2,600

 

 

615

 

 

1997

 

Aug97

 

Burley, ID

 

 

 

 

100

 

 

2,200

 

 

 

 

 

100

 

 

2,200

 

 

2,300

 

 

545

 

 

1997

 

Sep97

 

Caldwell, ID

 

 

 

 

100

 

 

2,200

 

 

 

 

 

100

 

 

2,200

 

 

2,300

 

 

545

 

 

1997

 

Sep97

 

Camas, WA

 

 

(3)

 

100

 

 

2,175

 

 

 

 

 

100

 

 

2,175

 

 

2,275

 

 

605

 

 

1996

 

May96

 

Central, SC

 

 

 

 

100

 

 

2,321

 

 

 

 

 

100

 

 

2,321

 

 

2,421

 

 

442

 

 

1998

 

Mar99

 

Cordele, GA

 

 

 

 

153

 

 

1,455

 

 

 

82

 

 

153

 

 

1,537

 

 

1,690

 

 

396

 

 

1987/88/2002

 

Jul00

 

Denison, IA

 

 

 

 

100

 

 

2,713

 

 

 

 

 

100

 

 

2,713

 

 

2,813

 

 

609

 

 

1998

 

Jun98

 

Dodge City, KS

 

 

 

 

84

 

 

1,666

 

 

 

4

 

 

84

 

 

1,670

 

 

1,754

 

 

514

 

 

1995

 

Dec95

 

Durant, OK

 

 

 

 

100

 

 

1,769

 

 

 

 

 

100

 

 

1,769

 

 

1,869

 

 

458

 

 

1997

 

Apr97

 

Edmond, OK

 

 

(5)

 

100

 

 

1,365

 

 

 

526

 

 

100

 

 

1,891

 

 

1,991

 

 

467

 

 

1996

 

Aug97

 

Elkhart, IN

 

 

 

 

100

 

 

2,435

 

 

 

 

 

100

 

 

2,435

 

 

2,535

 

 

579

 

 

1997

 

Dec97

 

Erie, PA

 

 

 

 

850

 

 

7,477

 

 

 

 

 

850

 

 

7,477

 

 

8,327

 

 

1,796

 

 

1998

 

Oct99

 

Eugene, OR

 

 

 

 

100

 

 

2,600

 

 

 

 

 

100

 

 

2,600

 

 

2,700

 

 

638

 

 

1997

 

Sep97

 

Fremont, OH

 

 

 

 

100

 

 

2,435

 

 

 

 

 

100

 

 

2,435

 

 

2,535

 

 

604

 

 

1997

 

Aug97

 

Ft. Collins, CO

 

 

 

 

100

 

 

2,961

 

 

 

 

 

100

 

 

2,961

 

 

3,061

 

 

611

 

 

1998

 

Mar99

 

Ft. Collins, CO

 

 

 

 

100

 

 

3,400

 

 

 

 

 

100

 

 

3,400

 

 

3,500

 

 

664

 

 

1999

 

Jul99

 

Ft. Meyers, FL

 

 

 

 

100

 

 

2,728

 

 

 

9

 

 

100

 

 

2,737

 

 

2,837

 

 

631

 

 

1998

 

Mar98

 

Gardendale, AL

 

 

 

 

16

 

 

1,234

 

 

 

 

 

16

 

 

1,234

 

 

1,250

 

 

407

 

 

1988

 

May96

 

Goldsboro, NC

 

 

 

 

100

 

 

2,385

 

 

 

1

 

 

100

 

 

2,386

 

 

2,486

 

 

419

 

 

1998

 

Mar99

 

Grandview, WA

 

 

(3)

 

100

 

 

1,940

 

 

 

 

 

100

 

 

1,940

 

 

2,040

 

 

555

 

 

1996

 

Mar96

 

Great Bend, KS

 

 

 

 

80

 

 

1,570

 

 

 

21

 

 

80

 

 

1,591

 

 

1,671

 

 

513

 

 

1995

 

Dec95

 

Greeley, CO

 

 

 

 

100

 

 

2,310

 

 

 

270

 

 

100

 

 

2,580

 

 

2,680

 

 

634

 

 

1997

 

Aug97

 

Greenville, NC

 

 

 

 

100

 

 

2,478

 

 

 

2

 

 

100

 

 

2,480

 

 

2,580

 

 

494

 

 

1998

 

Mar99

 

Greenville, TX

 

 

 

 

42

 

 

1,565

 

 

 

 

 

42

 

 

1,565

 

 

1,607

 

 

455

 

 

1995

 

Jan96

 

Greenwood, SC

 

 

 

 

100

 

 

2,638

 

 

 

 

 

100

 

 

2,638

 

 

2,738

 

 

536

 

 

1998

 

Mar99

 

Hayden, ID

 

 

 

 

100

 

 

2,450

 

 

 

243

 

 

100

 

 

2,693

 

 

2,793

 

 

704

 

 

1996

 

Dec96

 

Hoquiam, WA

 

 

 

 

100

 

 

2,500

 

 

 

 

 

100

 

 

2,500

 

 

2,600

 

 

620

 

 

1997

 

Aug97

 

Jacksonville, TX

 

 

 

 

100

 

 

1,900

 

 

 

 

 

100

 

 

1,900

 

 

2,000

 

 

547

 

 

1996

 

Mar96

 

Kelso, WA

 

 

 

 

100

 

 

2,500

 

 

 

 

 

100

 

 

2,500

 

 

2,600

 

 

717

 

 

1996

 

Nov96

 

Kennewick. WA

 

 

(3)

 

100

 

 

1,940

 

 

 

 

 

100

 

 

1,940

 

 

2,040

 

 

559

 

 

1996

 

Feb96

 

Klamath Falls, OR

 

 

 

 

100

 

 

2,300

 

 

 

 

 

100

 

 

2,300

 

 

2,400

 

 

606

 

 

1996

 

Dec96

 

Lake Havasu, AZ

 

 

 

 

100

 

 

2,420

 

 

 

 

 

100

 

 

2,420

 

 

2,520

 

 

601

 

 

1997

 

Aug97

 

Lakeland, FL

 

 

 

 

519

 

 

2,313

 

 

 

433

 

 

519

 

 

2,746

 

 

3,265

 

 

641

 

 

1968/74/96/02/06

 

Jul00

 

Longmont, CO

 

 

(4)

 

100

 

 

2,640

 

 

 

 

 

100

 

 

2,640

 

 

2,740

 

 

599

 

 

1998

 

Jun98

 

Longview, TX

 

 

 

 

38

 

 

1,568

 

 

 

1

 

 

38

 

 

1,569

 

 

1,607

 

 

463

 

 

1995

 

Oct95

 

Loveland, CO

 

 

(4)

 

100

 

 

2,865

 

 

 

270

 

 

100

 

 

3,135

 

 

3,235

 

 

752

 

 

1997

 

Sep97

 

Lufkin, TX

 

 

 

 

100

 

 

1,950

 

 

 

 

 

100

 

 

1,950

 

 

2,050

 

 

554

 

 

1996

 

Apr96

 

Madison, IN

 

 

 

 

100

 

 

2,435

 

 

 

 

 

100

 

 

2,435

 

 

2,535

 

 

594

 

 

1997

 

Oct97

 

Marshall, TX

 

 

 

 

38

 

 

1,568

 

 

 

451

 

 

38

 

 

2,019

 

 

2,057

 

 

587

 

 

1995

 

Oct95

 

McPherson, KS

 

 

 

 

79

 

 

1,571

 

 

 

4

 

 

79

 

 

1,575

 

 

1,654

 

 

507

 

 

1994

 

Dec95

 

Millville, NJ

 

 

 

 

100

 

 

2,825

 

 

 

 

 

100

 

 

2,825

 

 

2,925

 

 

696

 

 

1997

 

Aug97

 

Nampa, ID

 

 

 

 

100

 

 

2,240

 

 

 

23

 

 

100

 

 

2,263

 

 

2,363

 

 

596

 

 

1997

 

Jan97

 

New Bern, NC

 

 

 

 

100

 

 

2,427

 

 

 

1

 

 

100

 

 

2,428

 

 

2,528

 

 

434

 

 

1998

 

Mar99

 

Newark, OH

 

 

 

 

100

 

 

2,435

 

 

 

 

 

100

 

 

2,435

 

 

2,535

 

 

594

 

 

1997

 

Oct97

 

Newport Richey, FL

 

 

 

 

100

 

 

5,845

 

 

 

652

 

 

100

 

 

6,497

 

 

6,597

 

 

1,607

 

 

1986/1995

 

Jan98

 

Newport, OR

 

 

 

 

100

 

 

2,050

 

 

 

 

 

100

 

 

2,050

 

 

2,150

 

 

612

 

 

1996

 

Dec96

 

Niceville, FL

 

 

 

 

100

 

 

2,680

 

 

 

 

 

100

 

 

2,680

 

 

2,780

 

 

607

 

 

1998

 

Jun98

 

Norfolk, NE

 

 

 

 

100

 

 

2,123

 

 

 

 

 

100

 

 

2,123

 

 

2,223

 

 

535

 

 

1997

 

Jun97

 

Rocky Mount, NC

 

 

 

 

100

 

 

2,494

 

 

 

1

 

 

100

 

 

2,495

 

 

2,595

 

 

463

 

 

1998

 

Mar99

 

Rocky River, OH

 

 

 

 

760

 

 

6,963

 

 

 

 

 

760

 

 

6,963

 

 

7,723

 

 

1,606

 

 

1998

 

Oct99

 

Salina, KS

 

 

 

 

79

 

 

1,571

 

 

 

4

 

 

79

 

 

1,575

 

 

1,654

 

 

507

 

 

1994

 

Dec95

 

San Antonio, TX

 

 

(5)

 

100

 

 

1,900

 

 

 

 

 

100

 

 

1,900

 

 

2,000

 

 

490

 

 

1997

 

May97

 

San Antonio, TX

 

 

(5)

 

100

 

 

2,055

 

 

 

 

 

100

 

 

2,055

 

 

2,155

 

 

523

 

 

1997

 

Jun97

 

Shelby, NC

 

 

 

 

100

 

 

2,805

 

 

 

2

 

 

100

 

 

2,807

 

 

2,907

 

 

634

 

 

1998

 

Jun98

 

Spring Hill, FL

 

 

 

 

100

 

 

2,650

 

 

 

 

 

100

 

 

2,650

 

 

2,750

 

 

601

 

 

1998

 

Jun98

 

Springfield, OH

 

 

 

 

100

 

 

2,035

 

 

 

270

 

 

100

 

 

2,305

 

 

2,405

 

 

565

 

 

1997

 

Aug97

 

Sumter, SC

 

 

 

 

100

 

 

2,351

 

 

 

 

 

100

 

 

2,351

 

 

2,451

 

 

461

 

 

1998

 

Mar99

 

Tallahassee, FL

 

 

(5)

 

100

 

 

3,075

 

 

 

 

 

100

 

 

3,075

 

 

3,175

 

 

698

 

 

1998

 

Apr98

 



LTC PROPERTIES, INC.


SCHEDULE III


REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

(in thousands)

                                         
Initial Cost toGross Amount at which Carried at
CompanyCostsDecember 31, 2003

Capitalized
Construction/
Building andSubsequentBuilding andAccum.RenovationAcq.
EncumbrancesLandImprovementsto AcquisitionLandImprovementsTotal(1)Deprec.(2)DateDate










Newport, OR     100   2,050      100   2,050   2,150   394   1996   Dec-96 
Niceville, FL     100   2,680      100   2,680   2,780   403   1998   Jun-98 
Norfolk, NE     100   2,123      100   2,123   2,223   378   1997   Jun-97 
Portland, OR  3,961   100   7,622   359   100   7,981   8,081   1,112   1986/2002   Jun-98 
Rio Rancho, NM     100   8,300   40   100   8,340   8,440   1,232   1998   Mar-98 
Rocky Mount, NC     100   2,494   1   100   2,495   2,595   292   1998   Mar-99 
Rocky River, OH  10,485(11)  760   6,963      760   6,963   7,723   955   1998   Oct-99 
Roseville, CA     100   7,300   8   100   7,308   7,408   1,037   1998/2002   Jun-98 
Salina, KS  1,006   79   1,571      79   1,571   1,650   376   1994   Dec-95 
San Antonio, TX   (9)  100   1,900      100   1,900   2,000   351   1997   May-97 
San Antonio, TX   (9)  100   2,055      100   2,055   2,155   372   1997   Jun-97 
Shelby, NC     100   2,805   2   100   2,807   2,907   420   1998   Jun-98 
Spring Hill, FL     100   2,650      100   2,650   2,750   398   1998   Jun-98 
Springfield, OH     100   2,035   270   100   2,305   2,405   393   1997   Aug-97 
Sumter, SC     100   2,351      100   2,351   2,451   293   1998   Mar-99 
Tallahassee, FL  (9)  100   3,075      100   3,075   3,175   466   1998   Apr-98 
Tiffin, OH     100   2,435      100   2,435   2,535   423   1997   Aug-97 
Troy, OH     100   2,435   306   100   2,741   2,841   483   1997   May-97 
Tulsa, OK   (9)  200   1,650      200   1,650   1,850   317   1997   Feb-97 
Tulsa, OK   (9)  100   2,395      100   2,395   2,495   428   1997   Jun-97 
Tucson, AZ     100   8,700   8   100   8,708   8,808   1,230   1998/2002   Jun-98 
Tyler, TX  10,996(9)  100   1,800      100   1,800   1,900   351   1996   Dec-96 
Vacaville, CA  8,500   1,662   11,634   19   1,662   11,653   13,315   743   1998/2002   Dec-01 
Vancouver, WA   (5)  100   2,785      100   2,785   2,885   571   1996   Jun-96 
Waco, TX     100   2,235      100   2,235   2,335   402   1997   Jun-97 
Wahoo, NE     100   2,318      100   2,318   2,418   405   1997   Jul-97 
Walla Walla, WA  6,640(5)  100   1,940      100   1,940   2,040   411   1996   Apr-96 
Watauga, TX     100   1,668      100   1,668   1,768   296   1996   Aug-97 
Wetherford, OK     100   1,669   592   100   2,261   2,361   384   1996   Aug-97 
Wheelersburg, OH     100   2,435      100   2,435   2,535   413   1997   Sep-97 
Wichita Falls, TX     100   1,850      100   1,850   1,950   359   1996   Dec-96 
Wichita Falls, TX     100   2,750      100   2,750   2,850   469   1997   Sep-97 
Worthington, OH   (12)     6,102         6,102   6,102   323   1993   Dec-01 
Worthington, OH   (12)     3,402         3,402   3,402   199   1995   Dec-01 
York, NE     100   2,318      100   2,318   2,418   405   1997   Aug-97 
   
   
   
   
   
   
   
   
         
Assisted Living Residences  76,243   13,265   263,505   4,176   13,265   267,681   280,946   39,880         
   
   
   
   
   
   
   
   
         
Schools Trenton, NJ     100   6,000   3,170   100   9,170   9,270   1,435   1930/1998   Dec-98 
   
   
   
   
   
   
   
   
         
Schools     100   6,000   3,170   100   9,170   9,270   1,435         
   
   
   
   
   
   
   
   
         
  $138,000  $25,347  $411,855  $18,799  $25,347  $430,654  $456,001  $73,376         
   
   
   
   
   
   
   
   
         

Tiffin, OH

 

 

 

 

100

 

 

2,435

 

 

 

 

 

100

 

 

2,435

 

 

2,535

 

 

604

 

 

1997

 

Aug97

 

Troy, OH

 

 

 

 

100

 

 

2,435

 

 

 

306

 

 

100

 

 

2,741

 

 

2,841

 

 

685

 

 

1997

 

May97

 

Tulsa, OK

 

 

(5)

 

200

 

 

1,650

 

 

 

 

 

200

 

 

1,650

 

 

1,850

 

 

436

 

 

1997

 

Feb97

 

Tulsa, OK

 

 

(5)

 

100

 

 

2,395

 

 

 

 

 

100

 

 

2,395

 

 

2,495

 

 

605

 

 

1997

 

Jun97

 

Tyler, TX

 

 

10,446

(5)

 

100

 

 

1,800

 

 

 

 

 

100

 

 

1,800

 

 

1,900

 

 

481

 

 

1996

 

Dec96

 

Vacaville, CA

 

 

8,145

 

 

1,662

 

 

11,634

 

 

 

19

 

 

1,662

 

 

11,653

 

 

13,315

 

 

1,848

 

 

1998/2002

 

Dec01

 

Vancouver, WA

 

 

(3)

 

100

 

 

2,785

 

 

 

 

 

100

 

 

2,785

 

 

2,885

 

 

773

 

 

1996

 

Jun96

 

Waco, TX

 

 

 

 

100

 

 

2,235

 

 

 

 

 

100

 

 

2,235

 

 

2,335

 

 

566

 

 

1997

 

Jun97

 

Wahoo, NE

 

 

 

 

100

 

 

2,318

 

 

 

 

 

100

 

 

2,318

 

 

2,418

 

 

577

 

 

1997

 

Jul97

 

Walla Walla, WA

 

 

5,545

(3)

 

100

 

 

1,940

 

 

 

 

 

100

 

 

1,940

 

 

2,040

 

 

551

 

 

1996

 

Apr96

 

Watauga, TX

 

 

 

 

100

 

 

1,668

 

 

 

 

 

100

 

 

1,668

 

 

1,768

 

 

420

 

 

1996

 

Aug97

 

Wetherford, OK

 

 

 

 

100

 

 

1,669

 

 

 

592

 

 

100

 

 

2,261

 

 

2,361

 

 

553

 

 

1996

 

Aug97

 

Wheelersburg, OH

 

 

 

 

29

 

 

2,435

 

 

 

 

 

29

 

 

2,435

 

 

2,464

 

 

594

 

 

1997

 

Sep97

 

Wichita Falls, TX

 

 

 

 

100

 

 

1,850

 

 

 

 

 

100

 

 

1,850

 

 

1,950

 

 

493

 

 

1996

 

Dec96

 

Wichita Falls, TX

 

 

 

 

100

 

 

2,750

 

 

 

 

 

100

 

 

2,750

 

 

2,850

 

 

673

 

 

1997

 

Sep97

 

Worthington, OH

 

 

(6)

 

 

 

6,102

 

 

 

 

 

 

 

6,102

 

 

6,102

 

 

1,267

 

 

1993

 

Dec01

 

Worthington, OH

 

 

(6)

 

 

 

3,402

 

 

 

 

 

 

 

3,402

 

 

3,402

 

 

748

 

 

1995

 

Dec01

 

York, NE

 

 

 

 

100

 

 

2,318

 

 

 

 

 

100

 

 

2,318

 

 

2,418

 

 

577

 

 

1997

 

Aug97

 

Assisted Living Properties

 

 

53,811

 

 

12,794

 

 

231,583

 

 

 

4,484

 

 

12,794

 

 

236,067

 

 

248,861

 

 

54,687

 

 

 

 

 

 

School

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trenton, NJ

 

 

 

 

100

 

 

6,000

 

 

 

3,170

 

 

100

 

 

9,170

 

 

9,270

 

 

2,344

 

 

1930/1998

 

Dec98

 

School

 

 

 

 

100

 

 

6,000

 

 

 

3,170

 

 

100

 

 

9,170

 

 

9,270

 

 

2,344

 

 

 

 

 

 

 

 

 

$ 53,811

 

 

$ 35,048

 

 

$ 424,291

 

 

 

$ 28,948

 

 

$ 35,048

 

 

$ 453,239

 

 

$ 488,287

 

 

$ 102,091

 

 

 

 

 

 


(1)The aggregate cost for federal income tax purposes.

(1) The aggregate cost for federal income tax purposes.
(2) Depreciation for building is calculated using a 35 year life for skilled nursing facilities and 40 year life for assisted living residences and additions to facilities. Depreciation for furniture and fixtures is calculated based on a 7 year life for all facilities.
(3) Single note backed by six facilities in Iowa and one facility in Texas.
(4) Single note backed by two facilities in Alabama.
(5) Single note backed by five facilities in Washington.
(6) Single note backed by two facilities in Texas.
(7) Single note backed by two facilities in Georgia
(2)Depreciation for building is calculated using a 35 to 40 year life for buildings and additions to properties. Depreciation for furniture and fixtures is calculated based on a 5 to 10 year life for all properties.

70(3)Single note backed by five facilities in Washington.


(4)Single note backed by three facilities in Colorado

(5)Single note backed by one facility in Florida, three facilities in Oklahoma, and three facilities in Texas

(6)Single note backed by four facilities in Ohio.

(7)An impairment charge totaling $4,587 was taken against 5 facilities based on the Company’s estimate of the excess carrying value over the fair value of assets to be held and used, and the carrying value over the fair value


LTC PROPERTIES, INC.


SCHEDULE III


REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

(in thousands)

(8) Single note backed by three facilities in Colorado
(9) Single note backed by one facility in Florida, three facilities in Oklahoma, and three facilities in Texas

(10) Single note backed by one facility in Kansas and two facilities in Georgia
(11) Single note backed by one facility in Ohio and one facility in Pennsylvania.
(12) Single note backed by four facilities in Ohio.
(13) An impairment charge totaling $9,643 was taken against 8 facilities based on our estimate of the excess carrying value over the fair value of assets to be held and used, and the carrying value over the fair value less cost to sell in instances where management has determined that the company will dispose of the property as required by Statement of Accounting Standard No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”

71


LTC PROPERTIES, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

(in thousands)

Activity for the years ended December 31, 2001, 20022004, 2005 and 20032006 is as follows:

          
Real EstateAccumulated
& EquipmentDepreciation


Balance at December 31, 2000 $468,498  $47,181 
 Additions  73,107   13,695 
 Conversion of mortgage loans into owned properties  3,899    
 Impairment Charges  (16,755)   
 Cost of real estate sold  (32,625)  (2,293)
   
   
 
Balance at December 31, 2001(1)  496,124   58,583 
 Additions  2,893   14,197 
 Conversion of mortgage loans into owned properties  3,967    
 Impairment Charges  (1,710)   
 Cost of real estate sold  (31,618)  (8,464)
   
   
 
Balance at December 31, 2002 $469,656  $64,316 
 Additions  2,075   12,711 
 Additions purchased form Center Healthcare, Inc.  1,612   72 
 Conversion of mortgage loans into owned properties      
 Impairment Charges      
 Cost of real estate sold  (17,342)  (3,723)
   
   
 
Balance at December 31, 2003 $456,001  $73,376 
   
   
 

 

 

Real Estate

 

Accumulated

 

 

 

& Equipment

 

Depreciation

 

Balance at December 31, 2003

 

 

$ 456,001

 

 

 

$ 73,376

 

 

Additions

 

 

9,541

 

 

 

12,376

 

 

Conversion of mortgage loans into owned properties

 

 

9,492

 

 

 

191

 

 

Increase due to step up in basis resulting from partnership conversions

 

 

2,288

 

 

 

18

 

 

Impairment charges

 

 

 

 

 

 

 

Cost of real estate sold

 

 

(8,205

)

 

 

(2,592

)

 

Balance at December 31, 2004

 

 

$ 469,117

 

 

 

$ 83,369

 

 

Additions

 

 

30,979

 

 

 

13,255

 

 

Conversion of mortgage loans into owned properties

 

 

3,636

 

 

 

45

 

 

Impairment charges

 

 

 

 

 

 

 

Cost of real estate sold

 

 

(3,009

)

 

 

(898

)

 

Balance at December 31, 2005

 

 

$ 500,723

 

 

 

$ 95,771

 

 

Additions

 

 

24,016

 

 

 

13,581

 

 

Conversion of mortgage loans into owned properties

 

 

 

 

 

 

 

Impairment charges

 

 

 

 

 

 

 

Cost of real estate sold

 

 

(36,452

)

 

 

(7,261

)

 

Balance at December 31, 2006

 

 

$ 488,287

 

 

 

$ 102,091

 

 

86



(1) Includes amounts classified as properties held for sale as required by SFAS No. 144.

72



LTC PROPERTIES, INC.


SCHEDULE IV


MORTGAGE LOANS ON REAL ESTATE


(dollars in thousands)

                                     
Principal
Amount
of Loans
CurrentCarryingSubject to
Number ofFinalMonthlyFaceAmount ofDelinquent

InterestMaturityBalloonDebtAmount ofMortgagesPrincipal or
StatePropertiesBeds/UnitsRate(1)DateAmount(2)ServiceMortgagesDecember 31, 2003Interest










CO  2   230   12.00   2007  $5,412  $64  $6,000  $5,661    
OH  1   150   10.89   2006   4,579   51   5,200   4,761    
CA  1   212   10.66   2018      35   3,500   3,137    
NE  1   47   11.91   2008   3,071   33   3,243   3,159    
FL  1   94   10.52   2007   2,879   31   3,290   3,065    
FL  1   191   12.25   2017      50   4,500   2,977    
NE  1   44   11.91   2008   2,875   31   3,036   2,957    
CA  1   151   10.40   2018      32   3,171   2,851    
NE  1   44   10.73   2008   2,343   26   2,700   2,517    
IA  1   44   11.91%   2009   2,273   24   2,400   2,342    
SD  1   34   11.91%   2009   2,221   24   2,346   2,291    
MT  1   34   12.15%   2013   2,078   24   2,346   2,284    
AZ  1   144   12.40%   2004   2,174   26   2,400   2,186    
Various  24   2,631   9.51%-12.55%   2003-2018   18,835   9,595   36,619   31,277    
   
   
           
   
   
   
   
 
   38(3)  4,050          $48,740  $10,046  $80,751  $71,465    
   
   
           
   
   
   
   
 

 

 

Number of

 

Interest

 

Final
Maturity

 

Balloon

 

Current
Monthly
Debt

 

Face
Amount of

 

Carrying
Amount of
Mortgages
December 31, 

 

Principal
Amount
of Loans
Subject to
Delinquent
Principal or

 

State

 

 

 

Facilities

 

Units/Beds(4)

 

Rate(1)

 

Date

 

Amount(2)

 

Service

 

Mortgages

 

2006

 

Interest

 

MT, NE, IA

 

 

4

 

 

 

305

(3)

 

12.12%

 

2007

 

 

8,752

 

 

 

106

 

 

 

10,000

 

 

 

8,847

 

 

 

 

 

FL

 

 

3

 

 

 

256

 

 

11.20%

 

2009

 

 

6,557

 

 

 

69

 

 

 

6,850

 

 

 

6,748

 

 

 

 

 

GA

 

 

1

 

 

 

104

 

 

10.13%

 

2010

 

 

4,760

 

 

 

46

 

 

 

5,000

 

 

 

4,935

 

 

 

 

 

TX

 

 

1

 

 

 

140

 

 

11.00%

 

2007

 

 

4,412

 

 

 

44

 

 

 

4,510

 

 

 

4,446

 

 

 

 

 

TX

 

 

5

 

 

 

583

 

 

12.70%

 

2011

 

 

904

 

 

 

91

 

 

 

8,000

 

 

 

4,440

 

 

 

 

 

MN

 

 

1

 

 

 

0

 

 

6.64%

 

2019

 

 

3,751

 

 

 

21

 

 

 

3,751

 

 

 

3,751

 

 

 

 

 

AL

 

 

1

 

 

 

120

 

 

9.63%

 

2010

 

 

3,589

 

 

 

33

 

 

 

3,788

 

 

 

3,730

 

 

 

 

 

FL

 

 

1

 

 

 

191

 

 

12.63%

 

2007

 

 

3,366

 

 

 

51

 

 

 

4,500

 

 

 

3,568

 

 

 

 

 

Various

 

 

52

 

 

 

5,655

 

 

6.64% - 13.1%

 

2007 - 2019

 

 

43,415

 

 

 

1,064

 

 

 

100,058

 

 

 

76,527

 

 

 

 

 

 

 

 

69

 

 

 

7,354

(5)

 

 

 

 

 

 

$

79,506

 

 

 

$

1,525

 

 

 

$

146,457

 

 

 

$

116,992

 

 

 

 

 


(1)Represents current stated interest rate. Generally, the loans have 25-year amortization with principal and interest payable at varying amounts over the life to maturity with annual interest adjustments through specified fixed rate increases effective either on the first anniversary or calendar year of the loan.


(2)Balloon payment is due upon maturity, generally the 10th year of the loan, with various prepayment penalties (as defined in the loan agreement).

(3)Includes four facilities secured by one loan in three different states.

(4)See Item 1. Business General—Owned Properties for discussion of bed/unit count.

(5)Includes 58 first-lien mortgage loans as follows:

(1) Represents current stated interest rate. Generally, the loans have 25-year amortization with principal and interest payable at varying amounts over the life to maturity with annual interest adjustments through specified fixed rate increases effective either on the first anniversary or calendar year of the loan.
(2) Balloon payment is due upon maturity, generally the 10th year of the loan, with various prepayment penalties (as defined in the loan agreement).
(3) Includes 37 first-lien mortgage loans as follows:

# of Loans

Original Loan Amountsloan amounts

31


$   500 - $  2,000


12

19

$2,001 - $  3,000

 $247-$2,000

8

10

$3,001 - $  4,000

$2,001-$3,000

4

5

$4,001 - $  5,000

$3,001-$4,000

0

1

$5,001 - $  6,000

$4,001-$5,000

1

2

$6,001 - $  7,000

$5,001-$6,000

2

0

$7,001 - $10,000

 $6,001-$11,250

73


Activity for the years ended December 31, 2001, 20022004, 2005 and 20032006 is as follows:

      
Balance at 2000 $107,399(1)
 Conversion of notes to owned properties  (3,288)
 Impairment charges  (1,250)
 Collections of principal  (9,250)
   
 
Balance at 2001  93,611 
 Conversion of notes to owned properties  (3,832)(1)
 Conversion of other notes to mortgage notes  518 
 Impairment charges  (1,600)
 Collections of principal  (6,022)
   
 
Balance at 2002  82,675 
 Acquisition of mortgage note  1,707 
 Impairment charges  (31)
 Collections of principal  (12,886)
   
 
Balance at 2003 $71,465 
   
 

Balance at December 31, 2003

 

$

71,465

 

Conversion of notes to owned properties

 

(9,277

)

Conversion of other notes to mortgage notes

 

3,751

 

Conversion of REMIC certificates to loans

 

12,025

 

Investment in real estate mortgages

 

22,817

 

Mortgage premium

 

(60

)

Collections of principal

 

(9,843

)

Balance at December 31, 2004

 

$

90,878

 

Conversion of notes to owned properties

 

(3,029

)

Conversion of REMIC certificates to loans

 

35,694

 

Investment in real estate mortgages

 

38,500

 

Mortgage premium

 

(131

)

Loan prepayments/payoffs

 

(10,320

)

Collections of principal

 

(3,540

)

Balance at December 31, 2005

 

$

148,052

 

Mortgage premium

 

449

 

Loan prepayments/payoffs

 

(26,496

)

Collections of principal

 

(5,013

)

Balance at December 31, 2006

 

$

116,992

 

87



(1) As required by SFAS No. 144, a mortgage loan of $1,500 that converted to an owned property and was sold in 2002 has been reclassified to discontinued operations for all periods presented.

74



LTC PROPERTIES, INC.


INDEX TO EXHIBITS


(Item 15(b))

     
Exhibit
NumberDescription


 3.1 Amended and Restated Articles of Incorporation of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Current Report on Form 8-K dated June 19, 1997)
 3.2 Amended and Restated By-Laws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Form 10-Q for the quarter ended June 30, 1996)
 3.3 Articles Supplementary Classifying 3,080,000 shares of 9.5% Series A Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.’s Current Report on Form 8-K dated June 19, 1997)
 3.4 Articles of Amendment of LTC Properties, Inc. (incorporated by reference to Exhibit 3.3 to LTC Properties, Inc.’s Current Report on Form 8-K dated June 19, 1997)
 3.5 Articles Supplementary Classifying 2,000,000 Shares of 9.0% Series B Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 2.5 to LTC Properties, Inc.’s Registration Statement on Form 8-A filed on December 15, 1997)
 3.6 Certificate of Amendment to Amended and Restated Bylaws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
 3.7 Articles Supplementary Classifying 2,000,000 Shares of 8.5% Series C Cumulative Convertible Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
 3.8 Articles Supplementary Classifying 40,000 shares of Series D Junior Participating Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 4.7 to LTC Properties, Inc.’s Registration Statement on Form 8-A filed on May 9, 2000)
 3.9 Articles Supplemental reclassifying 5,000,000 shares of Common Stock into Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Registration Statement on Form S-3 filed June 27, 2003)
 3.10 Certificate of Amendment to Amended and Restated Bylaws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.10 to LTC Properties, Inc.’s Registration Statement on Form S-3, Amendment No. 2 filed August 29, 2003)
 3.11 Articles Supplementary Classifying 2,200,000 shares of 8.5% Series E Cumulative Convertible Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.’s Registration Statement on Form 8-K filed September 16, 2003)
 4.1 Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee (incorporated by reference to Exhibit 4.2 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1994)
 4.2 Second Supplemental Indenture dated as of September 21, 1995 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $51,500,000 in principal amount of 8.5% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 10.17 to LTC Properties, Inc.’s Form 10-Q for the quarter ended September 30, 1995)
 4.3 Third Supplemental Indenture dated as of September 26, 1995 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 (incorporated by reference to Exhibit 10.19 to LTC Properties, Inc.’s Form 10-Q for the quarter ended September 30, 1995)
 4.4 Fourth Supplemental Indenture dated as of February 5, 1996 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $30,000,000 in principal amount of 7.75% Convertible Subordinated Debentures due 2002 (incorporated by reference to Exhibit 4.6 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1995)
 4.5 Fifth Supplemental Indenture dated as of August 23, 1996 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $30,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 4.5 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998)

Exhibit
Number

Description

3.1

Amended and Restated Articles of Incorporation of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Current Report on Form 8-K dated June 19, 1997)

3.2

Amended and Restated By-Laws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Form 10-Q for the quarter ended June 30, 1996)

3.3

Articles of Amendment of LTC Properties, Inc. (incorporated by reference to Exhibit 3.3 to LTC Properties, Inc.’s Current Report on Form 8-K dated June 19, 1997)

3.4

Certificate of Amendment to Amended and Restated Bylaws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)

3.5

Articles Supplementary Classifying 2,000,000 Shares of 8.5% Series C Cumulative Convertible Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)

3.6

Articles Supplemental reclassifying 5,000,000 shares of Common Stock into Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Registration Statement on Form S-3 filed June 27, 2003)

3.7

Certificate of Amendment to Amended and Restated Bylaws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.10 to LTC Properties, Inc.’s Registration Statement on Form S-3, Amendment No. 2 filed August 29, 2003)

3.8

Articles Supplementary Classifying 2,200,000 shares of 8.5% Series E Cumulative Convertible Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.’s Registration Statement on Form 8-K filed September 16, 2003)

3.9

Articles Supplementary Classifying 4,000,000 shares of 8.0% Series F Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.’s Current Report on Form 8-K filed February 19, 2004)

3.10

Articles Supplementary Reclassifying 40,000 Shares of Series D Junior Participating Preferred Stock into unclassified shares of Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.’s Current Report on Form 8-K filed on March 19, 2004)

3.11

Articles Supplementary Reclassifying 3,080,000 Shares of 9.5% Series A Cumulative Preferred Stock and 2,000,000 Shares of 9% Series B Cumulative Preferred Stock into unclassified shares of Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Form 10-Q for the quarter ended March 31, 2004)

3.12

Articles of Amendment replacing Section 7.1 regarding authorized shares of stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.12 to LTC Properties, Inc.’s Form 10-Q for the quarter ended July 31, 2004)


3.13

Articles Supplementary Classifying an Additional 2,640,000 shares of 8.0% Series F Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.13 to LTC Properties, Inc.’s Form 10-Q for the quarter ended July 31, 2004)

3.14

Certificate of Correction to Articles of Amendment filed on June 24, 2004. (incorporated by reference to Exhibit 3.14 to LTC Properties, Inc.’s Form 10-Q for the quarter ended September 30, 2004)

4.1

Rights Agreement dated as of May 2, 2000 (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.’s Registration Statement on Form 8-A filed on May 9, 2000)

4.2

Amendment No. 1 to Rights Agreement dated as of March 19, 2004 (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.’s Current Report on Form 8-K filed on March 19, 2004)

4.3

Amended and Restated Agreement of Limited Partnership of LTC Partners I, L.P. and Exchange Rights Agreement dated June 30, 1995 (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.’s Form S-3 filed on May 28, 2004)

4.4

Amended and Restated Agreement of Limited Partnership of LTC Partners II, L.P. and Exchange Rights Agreement dated May 1, 1996 (incorporated by reference to Exhibit 4.2 to LTC Properties, Inc.’s Form S-3 filed on May 28, 2004)

4.5

Amended and Restated Agreement of Limited Partnership of LTC Partners III, L.P. and Exchange Rights Agreement dated January 30, 1996 (incorporated by reference to Exhibit 4.3 to LTC Properties, Inc.’s Form S-3 filed on May 28, 2004)

4.6

Amended and Restated Agreement of Limited Partnership of LTC Partners IV, L.P. and Exchange Rights Agreement dated January 30, 1996 (incorporated by reference to Exhibit 4.4 to LTC Properties, Inc.’s Form S-3 filed on May 28, 2004)

4.7

Amendment to Agreement of Limited Partnership dated January 1, 1999 and Amendment No. 1 to Amended and Restated Agreement of Limited Partnership dated January 30, 1998 and Amended and Restated Agreement of Limited Partnership of LTC Partners V, L.P. dated June 13, 1996 and Amendment No. 1 to Exchange Rights Agreement dated January 30, 1998 and Exchange Rights Agreement dated June 14, 1996 (incorporated by reference to Exhibit 4.5 to LTC Properties, Inc.’s Form S-3 filed on May 28, 2004)

4.8

Amended and Restated Agreement of Limited Partnership of LTC Partners VI, L.P. and Exchange Rights Agreement dated June 14, 1996 (incorporated by reference to Exhibit 4.6 to LTC Properties, Inc.’s Form S-3 filed on May 28, 2004)

4.9

Amended and Restated Agreement of Limited Partnership of LTC Partners VII, L.P. dated June 14, 1996 and Amendment No. 1 to Exchange Rights Agreement dated January 30, 1998 and Exchange Rights Agreement dated June 14, 1996 (incorporated by reference to Exhibit 4.7 to LTC Properties, Inc.’s Form S-3 filed on May 28, 2004)

4.10

Amended and Restated Agreement of Limited Partnership of LTC Partners IX, L.P. and Exchange Rights Agreement dated February 11, 1998 (incorporated by reference to Exhibit 4.8 to LTC Properties, Inc.’s Form S-3 filed on May 28, 2004)

Certain instruments defining the rights of holders of long-term debt securities are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.


10.1+

The 2004 Stock Option Plan (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.’s Form S-8 dated May 25, 2004)

10.2+

The 2004 Restricted Stock Plan (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.’s Form S-8 dated May 25, 2004)

10.3+

Form of Stock Option Agreement under the 2004 Stock Option Plan (incorporated by reference to Exhibit 10.50 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004)

10.4+

Form of Restricted Stock Agreement under the 2004 Restricted Stock Plan (incorporated by reference to Exhibit 10.50 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004)

10.5

Form of Purchase Agreement dated as of July 12, 2005 by and between LTC Properties, Inc. and the purchasers of certain shares of common stock of LTC Properties, Inc. (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Current Report on Form 8-K dated July 12, 2005)

10.6

Placement Agent Agreement dated July 12, 2005 between LTC Properties, Inc. and Cohen & Steers Capital Advisors, LLC (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.’s Current Report on Form 8-K dated July 12, 2005)

10.7

Amended and Restated Credit Agreement dated as of November 7, 2005 among LTC Properties, Inc. and Bank of Montreal, Chicago Branch, as Administrative Agent, Harris Nesbitt Corp. Co-Lead Arranger and Book Manager and Key Bank National Association as Co-Lead Arranger and Syndication Agent. (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Current Report on Form 8-K dated November 8, 2005)

10.8+

Amended and Restated Employment Agreement of Wendy Simpson dated May 22, 2006 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Form 10-Q for the quarter ended June 30, 2006)

10.9+

Amended and Restated Employment Agreement of Pamela Shelley-Kessler dated December 5, 2006

10.10+

Amended and Restated Employment Agreement of Peter Lyew dated December 5, 2006

10.11+

Amended and Restated Employment Agreement of Clint Malin dated December 5, 2006

10.12+

2007 Amended and Restated Employment Agreement of Wendy Simpson, effective as of March 1, 2007 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Current Report on Form 8-K dated February 6, 2007)

10.13+

2007 Amended and Restated Employment Agreement of Andre Dimitriadis, effective as of March 1, 2007 (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.’s Current Report on Form 8-K dated February 6, 2007)

10.14+

Second Amended and Restated Employment Agreement of Pamela Kessler, effective as of March 1, 2007 (incorporated by reference to Exhibit 10.3 to LTC Properties, Inc.’s Current Report on Form 8-K dated February 6, 2007)

10.15+

First Amendment to 2007 Amended and Restated Employment Agreement of Wendy Simpson, dated February 21, 2007


10.16+

First Amendment to 2007 Amended and Restated Employment Agreement of Andre Dimitriadis, dated February 21, 2007

21.1

List of subsidiaries

23.1

Consent of Ernst & Young LLP with respect to the financial information of the Company

24.1

Powers of Attorney (included on signature page)

31.1

Certification of the Chief Executive Officer of LTC Properties, Inc. pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2

Certification of the Chief Financial Officer of LTC Properties, Inc. pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002 (furnished herewith).


+                Management contract or compensatory plan or arrangement in which an executive officer or director of the Company participates.

7591




LTC PROPERTIES, INC.

INDEX TO EXHIBITS — Continued

     
Exhibit
NumberDescription


 4.6 Sixth Supplemental Indenture dated as of December 30, 1998 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 (incorporated by reference to Exhibit 4.6 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998)
 4.7 Seventh Supplemental Indenture dated as of January 14, 1999 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 (incorporated by reference to Exhibit 4.7 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998)
 4.8 Rights Agreement dated as of May 2, 2000 (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.’s Registration Statement on Form 8-A filed on May 9, 2000)
 10.1 Pooling and Servicing Agreement, dated as of July 20, 1993, among LTC REMIC Corporation, as depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc., as Special Servicer and originator and Union Bank, as trustee (incorporated by reference to Exhibit 10.11 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1994)
 10.2 Pooling and Servicing Agreement, dated as of November 1, 1994, among LTC REMIC Corporation, as depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc., as Special Servicer and originator and Marine Midland Bank, as trustee (incorporated by reference to Exhibit 10.13 to LTC Properties, Inc.’s Form 10-K dated December 31, 1994)
 10.3 Amended Deferred Compensation Plan (incorporated by reference to Exhibit 10.17 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1995)
 10.4 Pooling and Servicing Agreement dated as of March 1, 1996, among LTC REMIC Corporation, as depositor, GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc., as Special Servicer and Originator, LaSalle National Bank, as Trustee and ABN AMRO Bank, N.V., as fiscal agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Form 10-Q for the quarter ended March 31, 1996)
 10.5 Amended and Restated 1992 Stock Option Plan (incorporated by reference to Exhibit 10.22 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1996)
 10.6 Subservicing Agreement dated as July 20, 1993 by and between Bankers Trust Company, as Master Servicer and LTC Properties, Inc., as Special Servicer (incorporated by reference to Exhibit 10.25 to LTC Properties, Inc.’s Form 10-K/A for the year ended December 31, 1996)
 10.7 Custodial Agreement dated as of July 20, 1993 by and among Union Bank, as Trustee, LTC REMIC Corporation, as Depositor, and Bankers Trust Company as Master Servicer and Custodian (incorporated by reference to Exhibit 10.26 to LTC Properties, Inc.’s Form 10-K/A for the year ended December 31, 1996)
 10.8 Form of Certificates as Exhibit as filed herewith to the Pooling and Servicing Agreement dated as of July 20, 1993 among LTC REMIC Corporation, as Depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and Union Bank as Trustee (incorporated by reference to Exhibit 10.11 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1994)
 10.9 Form of Certificates, Form of Custodial Agreement and Form of Subservicing Agreement as Exhibits as filed herewith to the Pooling and Servicing Agreement dated as of November 1, 1994 among LTC REMIC Corporation, as Depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and Marine Midland Bank as Trustee (incorporated by reference to Exhibit 10.13 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1994)
 10.10 Form of Certificates, Form of Custodial Agreement and Form of Subservicing Agreement as Exhibits as filed herewith to the Pooling and Servicing Agreement dated as of March 1, 1996 among LTC REMIC Corporation, as Depositor, GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and LaSalle National Bank as Trustee and ABN AMRO Bank N.V., as Fiscal Agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Form 10-Q for the quarter ended March 31, 1996)
 10.11 Subservicing Agreement dated as of May 14, 1998, by and between GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc. as Subservicer (incorporated by reference to Exhibit 10.3 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)

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LTC PROPERTIES, INC.

INDEX TO EXHIBITS — Continued

     
Exhibit
NumberDescription


 10.12 Pooling and Servicing Agreement dated as of April 20, 1998 among LTC REMIC IV Corporation, LaSalle National Bank and LTC Properties, Inc. (incorporated by reference to Exhibit 10.4 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
 10.13 Distribution Agreement, dated as of September 30, 1998, by and between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.5 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
 10.14 Intercompany Agreement, dated as of September 30, 1998, by and between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.7 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
 10.15 Tax Sharing Agreement, dated as of September 30, 1998, by and between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.8 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
 10.16 LTC Properties, Inc. 1998 Equity Participation Plan (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998)
 10.17 Second Amended and Restated Employment Agreement between Andre C. Dimitriadis and LTC Properties, Inc. dated March 26, 1999 (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998), as amended by Amendment No. 1 thereto dated June 23, 2000
 10.18 Amended and Restated Employment Agreement between James J. Pieczynski and LTC Properties, Inc. dated March 26, 1999 (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998), as superceded by Separation Agreement effective July 1, 2000
 10.19 Amended and Restated Employment Agreement between Christopher T. Ishikawa and LTC Properties, Inc. dated March 26, 1999 (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998), as amended by Amendment No. 1 thereto dated June 23, 2000
 10.20 Amended and Restated Employment Agreement between Julia L. Kopta and LTC Properties, Inc. dated January 1, 2000 (incorporated by reference to Exhibit 10.33 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1999), as amended by Amendment No. 1 thereto dated June 23, 2000
 10.21 Amended and Restated Employment Agreement between Wendy L. Simpson and LTC Properties, Inc. dated April 10, 2000, as amended by Amendment No. 1 thereto dated June 23, 2000 (incorporated by reference to Exhibit 10.22 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000)
 10.22 Promissory Note dated January 1, 2000, executed by Andre C. Dimitriadis in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.23 to LTC Properties, Inc.’s Annual Report on Form 10-K for the
 10.23 year ended December 31, 2000) Promissory Note dated January 1, 2000, executed by James J. Pieczynski in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.24 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000)
 10.24 Promissory Note dated January 1, 2000, executed by Wendy L. Simpson in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.25 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000)
 10.25 Promissory Note dated January 1, 2000, executed by Christopher T. Ishikawa in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.26 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000)
 10.26 Promissory Note dated January 1, 2000, executed by Edmund C. King in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.27 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000)
 10.27 Promissory Note dated January 1, 2000, executed by Sam Yellen in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000)

77


LTC PROPERTIES, INC.

INDEX TO EXHIBITS — Continued

     
Exhibit
NumberDescription


 10.28 Senior Secured Revolving Credit Agreement dated October 31, 2000 (incorporated by reference to Exhibit 10.29 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000)
 10.29 First Amendment to Revolving Credit Agreement dated March 23, 2001 (incorporated by reference to Exhibit 10 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)
 10.30 Second Amendment to Revolving Credit Agreement dated May 29, 2001 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)
 10.31 Secured Term Loan with Heller Healthcare Financial, Inc. dated June 29, 2001 (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)
 10.32 Second Amended and Restated Promissory Note with LTC Healthcare, Inc. dated June 8, 2001 (incorporated by reference to Exhibit 10.3 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)
 10.33 Security Agreement with LTC Healthcare, Inc. dated June 8, 2001 (incorporated by reference to Exhibit 10.4 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)
 10.34 Form of Individual Indemnity Agreements between LTC Properties and Andre Dimitriadis; Christopher Ishikawa; Julia Kopta; Wendy Simpson; Bary Bailey and Steven Stuart dated March 18, 2001 (incorporated by reference to Exhibit 10.34 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001)
 10.35 Employment Agreement between Alex J. Chavez and LTC Properties, Inc. dated September 4, 2001 (incorporated by reference to Exhibit 10.35 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001)
 10.36 Promissory Note between LTC Properties, Inc. and Healthcare Holdings, Inc. dated December 31, 2001 (incorporated by reference to Exhibit 10.36 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001)
 10.37 Security Agreement between LTC Properties, Inc. and Healthcare Holdings, Inc. dated December 31, 2001 (incorporated by reference to Exhibit 10.37 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001)
 10.38 Promissory Note dated January 30, 2002 between LTC Properties, Inc. and LTC-Fort Tucum, Inc. (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)
 10.39 Security Agreement dated January 30, 2002 between LTC Properties, Inc. and LTC-Fort Tucum, Inc. (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)
 10.40 Stock Purchase Agreement dated January 30, 2002 between LTC Properties, Inc. and LTC-Fort Tucum, Inc. (incorporated by reference to Exhibit 10.3 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)
 10.41 First Amendment to Second Amended and Restated Promissory Note dated October 1, 2002 between LTC Properties, Inc. and CLC Healthcare, Inc. (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002)
 10.42 Purchases, Warranties, Participation and Servicing Agreement dated August 1, 2002 between Beal Bank, SSB and LTC BBCO, Inc. (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002)
 10.43 Severance Agreement between LTC Properties, Inc. and Julia Kopta dated April 1, 2003 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003)
 10.44 Amended and Restated Promissory Note between LTC Properties, Inc. and Healthcare Holdings, Inc. dated July 9, 2003 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)

78


LTC PROPERTIES, INC.

INDEX TO EXHIBITS — Continued

     
Exhibit
NumberDescription


 10.45 Amended and Restated Security Agreement between LTC Properties, Inc. and Healthcare Holdings, Inc. dated July 9, 2003 (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)
 10.46 Second Amendment to Second Amended and Restated Promissory Note between LTC Properties, Inc. and CLC Healthcare, Inc. dated September 30, 2003 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003)
 10.47 Credit Agreement dated as of December 26, 2003 among LTC Properties, Inc. and Bank of Montreal, Chicago Branch, as Administrative Agent, Harris Nesbitt Corp. as Co-Lead Arranger and Book Manager and Key Corporate Capital, Inc. as Co-Lead Arranger and Syndication Agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Current Report on Form 8-K dated January 26, 2004)
 21.1 List of subsidiaries
 23.1 Consent of Ernst & Young LLP with respect to the financial information of the Company
 31.1 Certification of the Chief Executive Officer of LTC Properties, Inc. pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 31.2 Certification of the Chief Financial Officer of LTC Properties, Inc. pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 32  Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002 (furnished herewith).

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LTC PROPERTIES, INC.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the securitiesSecurities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LTC Properties, Inc.

Registrant

Dated: March 12, 2004

Dated: February 22, 2007

By: 

By:

/s/ WENDY L. SIMPSON


Wendy L. Simpson

WENDY L. SIMPSON

Vice Chairman,

President, Chief Operating Officer,
Chief Financial

Officer, Treasurer and Director
(Principal Financial Officer)

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andre C. Dimitriadis and Wendy L. Simpson, and each of them severally, his true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with the Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ ANDRE C. DIMITRIADIS


ANDRE C. DIMITRIADIS

Chairman of the Board,

February 22, 2007

Andre C. Dimitriadis

Chief Executive Officer and Director
(Principal Executive Officer)

March 12, 2004

/s/ WENDY L. SIMPSON


WENDY L. SIMPSON

Vice Chairman,

President, Chief FinancialOperating Officer,
and Director Chief

March 12, 2004

February 22, 2007

Wendy L. Simpson

Financial Officer, Treasurer and Director (Principal Financial Officer)

/s/ BOYD HENDRICKSON

Director

February 22, 2007

Boyd Hendrickson

/s/ EDMUND C. KING


EDMUND C. KING

Director

March 12, 2004

February 22, 2007

Edmund C. King

/s/ TIMOTHY J. TRICHE


TIMOTHY TRICHE

Director

March 12, 2004

February 22, 2007

Timothy Triche

/s/ SAM YELLEN


SAM YELLEN

Director

March 12, 2004

February 22, 2007

Sam Yellen

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