LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

revenue recognition. ~~We evaluated the provisions of ASU 2014-09 and its related additional guidance to determine the potential impact of the new standard.~~ We concluded that adoption of this standard did not have an impact on our results of operations or financial condition, as our revenue consists of rental income from leasing arrangements and interest income from loan arrangements, both of which are specifically excluded from ~~ASU 2014-09. We adopted this standard using the modified retrospective adoption method on January 1, 2018.~~ASC 606.

Leases ASC Topic 842. In February 2016, the FASB issued ~~ASU~~Accounting Standards Update (“ASU”) No. 2016-02 (“ASU 2016-02”), Leases ~~(Topic 842)~~. ASU 2016-02 and its amendments have now formally entered into the FASB codification as ASC Topic 842, Leases (“ASC 842”). The objective of ~~this ASU~~ASC842 is to establish the principles ~~that~~for lessees and lessors ~~shall~~to apply ~~to report~~for reporting useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. ~~ASU 2016-02 modifies existing guidance by requiring~~

ASC 842 requires lessees to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance of operating leases.~~ASU 2016-02~~

ASC 842 requires the lessors to identify lease and non-lease components of a lease agreement. ~~ASU 2016-02 will govern the recognition of revenue for lease components.~~ Revenue related to non-lease components under lease agreements will be subject to the revenue recognition standard, upon adoption of this ~~ASU. Entities~~standard. Also, the new standard narrows definition of initial direct costs. Accordingly, upon adoption of the new standard, certain costs (primarily legal costs related to lease negotiations) should be expensed rather than capitalized.

Further, per ASC 842, lessors are required to ~~use a modified retrospective approach for leases that exist or are entered into after January 1, 2017,~~assess the ~~beginning~~probability of collecting substantially all of the ~~earliest comparative~~lease payments. The standard defines collectibility as lessee’s ability and intent to pay. If collectibility of substantially all of the lease payments through maturity is not probable, the lease income recorded during the period ~~presented in~~would be limited to lesser of the ~~2019 consolidated financial statements with~~income that would have been recognized if collection were probable, and the lease payments received. If the assessment of collectibility changes, any difference between the lease income that would have been recognized and the lease payments should be recognized as an adjustment to lease income. At adoption, lessors are required to perform a lease-by-lease analysis for collectibility of all lease payments through maturity. If at adoption, it is not probable that substantially all of the lease obligations through maturity will be collected, a cumulative adjustment to equity should be made to reflect all of the ~~opening balance of retained earnings.~~lease obligations which are not probable to be collected.

Additionally, ~~in July 2018, the FASB issued ASU No. 2018-11,~~ ~~Leases - Targeted Improvements~~ ~~(“ASU 2018-11”), which~~ASC 842 provides lessors with the option to elect a practical expedient allowing them to not separate lease and non-lease components and instead, to account for those components as a single lease component. This practical expedient is limited to circumstances in which: (i) the timing and pattern of transfer are the same for the non-lease component and the related lease component and (ii) the lease

8

~~Table of Contents~~

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

component, if accounted for separately, would be classified as an operating lease. This practical expedient causes an entity to assess whether a contract is predominantly lease-based or service-based and recognize the entire contract under the relevant accounting guidance (i.e., predominantly lease-based would be accounted for under ~~ASU 2016-02~~ASC 842 and predominantly service-based would be accounted for under the ~~Revenue ASUs)~~ASC 606). This practical expedient option is available as a single election that must be consistently applied to all existing leases at the date of adoption. ~~ASU 2018-11 also~~Also, ASC 842 provides a practical expedient that allows companies to use an optional transition method. Under the optional transition method, a cumulative adjustment to ~~retained earnings~~equity during the period of adoption is recorded and prior periods would not require restatement. Consequently, entities that elect both the practical expedient and the optional transitional method will apply the new lease ~~ASU~~ASC prospectively to leases commencing or modified after January 1, 2019 and will not be required to apply the disclosures under the new lease ~~ASU~~standard to comparative periods.

Consistent with present standards, we will continue to account for lease revenue on a straight-line basis when applicable. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements from both the lessee and lessor perspective. As a result of the adoption of this guidance, we may be required to increase our revenue and expense for lessor costs paid directly by lessees under triple-net leases, if the amount paid is readily determinable (i.e. real estate taxes). Additionally, we have begun our process for implementing this guidance, including identifying any non-lease components in our lease arrangements. We plan to finalize our assessment during the fourth quarter of 2018.

~~In August 2016, FASB issued ASU No. 2016-15 (“ASU 2016-15”),~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the Emerging Issues Task Force)~~. ASU 2016-15 provides guidance that reduces the diversity in practice of the classification of certain cash receipts and cash payments within the statement of cash flows. This guidance is effective for fiscal periods beginning after December 15, 2017. We adopted this standard on January 1, 2018. The adoption of this guidance did not have a material impact on our financial statements.

~~In January 2017, the FASB issued ASU No. 2017-01(“ASU 2017-01”),~~ ~~Business Combinations (Topic 805): Clarifying Definition of a Business~~. ASU 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements. We adopted ASU 2017-01 during the second quarter of 2017. Historically, our acquisitions qualified as either a business combination or asset acquisition. The adoption of this ASU did not have a material impact on the company’s results of operations or financial condition as most of our acquisitions of investment properties will continue to qualify as asset acquisitions.

~~In February 2017, the FASB issued ASU No. 2017-05 (“ASU 2017-05”),~~ ~~Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets.~~ ~~ASU 2017-05 defines an in-substance nonfinancial asset and clarifies guidance related to partial sales of nonfinancial assets. This standard is~~

98

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

the level of collectibility certainty required by the standard to record the straight-line rent receivable. Accordingly, we wrote-off the straight-line rent receivable and lease incentive balances associated with these leases. Also, we wrote-off our 1% general straight-line rent receivable reserve. These balances totaled $42,808,000 and were written-off to equity effective January 1, 2019 as required by ASC 842.

During the six months ended June 30, 2019, we received cash rent from Anthem, Thrive, Preferred Care and Senior Care. The total amount of rental income received from these operators was $18,000,000 and is included in Rental Income on the ~~consolidated financial statements~~Consolidated Statements of Income and ~~related notes.~~Comprehensive Income. Of the $18,000,000 received, $17,000,000 is comprised of cash payments received for amounts previously written-off in transition to ASC 842 (“Recoveries”) totaling $9,600,000 for the three months ended March 31, 2019 and $7,400,000 for the three months ended June 30, 2019. The $9,600,000 of cash rent received from Anthem, Thrive, Preferred Care and Senior Care for the three months ended March 31, 2019 represents a reclassification of Recoveries that were previously recorded as contra-expense in the Consolidated Statements of Income and Comprehensive Income. During the three months ended June 30, 2019, the $9,600,000 was reclassified from contra-expense to Rental Income to align with our classification of Recoveries associated with write-offs post the adoption of ASC 842 as Rental Income.

New Accounting Standards Not Yet Adopted by Our Company

In 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard requires a new forward looking “expected loss” model to be used for receivables, held-to-maturity debt, loans, and other instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

.

2.~~Real Estate Investments~~
2.
Real Estate Investments

Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification ~~(or collectively ALF)~~(collectively “ALF”).

Any reference to the number of properties or facilities, number of units, number of beds, number of operators and yield on investments in real estate are unaudited and outside the scope of our independent registered public accounting firm’s review of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.

Owned Properties. ~~The following table summarizes our investments in owned properties at September 30, 2018~~ ~~(dollar amounts in thousands)~~:

Average

Percentage

Number

Number of

Investment

Gross

of

of

SNF

ALF

per

Type of Property

Investment

Investment

Properties (1)

Beds

Units

Bed/Unit

Assisted Living

$
802,484

56.8
%
103

—

5,885

$
136.36

Skilled Nursing

569,141

40.2
%
73

8,919

261

$
62.00

Under Development (2)

31,602

2.2
%
—

—

—

—

Other (3)

11,040

0.8
%
1

118

—

—

Total

$
1,414,267

100.0
%
177

9,037

6,146

⁽¹⁾

~~We own properties in 28 states that are leased to 29 different operators.~~

⁽²⁾

~~Represents three development projects, consisting of a 143-bed SNF in Kentucky, a 78-unit ALF/MC located in Oregon and a 110-unit ILF/ALF/MC in Wisconsin.~~

⁽³⁾

~~Includes three parcels of land held-for-use, and one behavioral health care hospital.~~

Our Owned properties are leased pursuant to non-cancelable operating leases generally with an initial term of 10 to 15 years. Each lease is a triple net lease which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and non-capital expenditures and other costs necessary in the operations of the facilities. Many of the leases contain renewal options. The 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 that are generally computed in one of four ways depending on specific provisions of each lease:

~~(i)~~

~~a specified percentage increase over the prior year’s rent, generally between 2.0% and 3.0%;~~

(i)a specified percentage increase over the prior year’s rent, generally between 2.0% and 3.0%;

~~(ii)~~

~~a calculation based on the Consumer Price Index;~~

~~(iii)~~

~~as a percentage of facility net patient revenues in excess of base amounts; or~~

10

(ii)a calculation based on the Consumer Price Index;

10

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

(iii)as a percentage of facility net patient revenues in excess of base amounts; or

(iv)specific dollar increases.

Our leases that contain fixed annual rental escalations and/or have annual rental escalations that are contingent upon changes in the Consumer Price Index, 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 gross operating revenues of the property. This revenue is not recognized until the appropriate contingencies have been resolved.

~~(Unaudited)~~The following table summarizes our investments in owned properties at June 30, 2019 (dollar amounts in thousands):


								Average
			Percentage		Number	Number of		Investment
	Gross		of		of	SNF	ALF	per
Type of Property	Investment		Investment		Properties ⁽¹⁾	Beds	Units	Bed/Unit
Assisted Living	$	843,682	58.1	%	105	—	6,070	$	138.99
Skilled Nursing		589,581	40.5	%	72	8,893	261	$	64.41
Under Development ⁽²⁾		8,167	0.6	%	—	—	—		—
Other ⁽³⁾		11,239	0.8	%	1	118	—		—
Total	$	1,452,669	100.0	%	178	9,011	6,331

(1)	We own properties in 28 states that are leased to 30 different operators.

(2)	Represents a 78-unit ALF/MC located in Oregon.

(3)	Includes three parcels of land held-for-use, and one behavioral health care hospital.

Future minimum base rents receivable under the remaining non-cancelable terms of operating leases excluding the effects of straight-line rent receivable, amortization of lease incentives and renewal options are as follows (in thousands):


	Annual Cash
	Rent ⁽¹⁾
2019	$	68,450
2020		143,029
2021		133,232
2022		120,952
2023		122,235
Thereafter		682,320

(1)	Represents contractual annual cash rent, except for four master leases which are based on agreed upon cash rents. See below for more information.

During 2017, we issued a notice of default to Anthem Memory Care (“Anthem”) resulting from Anthem’s partial payment of minimum rent. Anthem operates 11 memory care communities under a master lease. We currently estimate that Anthem will pay $7,500,000 of annual cash rent during 2019. This amount represents approximately 50% of the contractual amount due under the lease in 2019. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Anthem and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as of January 1, 2019, as required by the ASC 842 transition guidance.

11

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

During 2017, Preferred Care, Inc. (“Preferred Care”) and affiliated entities filed for Chapter 11 bankruptcy as a result of a multi-million-dollar judgment in a lawsuit in Kentucky against Preferred Care and certain affiliated entities. The affiliated entities named in the lawsuit operate properties in Kentucky and New Mexico. Preferred Care leases 24 properties under two master leases from us and none of the 24 properties are located in Kentucky or New Mexico. Those 24 properties are in Arizona, Colorado, Iowa, Kansas and Texas. The Preferred Care operating entities that sublease those properties did not file for bankruptcy. The court ordered deadline for affirmation or rejection of the lease has passed without action by Preferred Care. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Preferred Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as of January 1, 2019, as required by the ASC 842 transition guidance. We are working with Preferred Care on options for the portfolio which may include re-leasing or selling some or all of the properties.

On December 4, 2018, Senior Care Centers, LLC. and affiliates and subsidiaries (“Senior Care”) filed for Chapter 11 bankruptcy as a result of lease terminations from certain landlords and on-going operational challenges. Senior Care did not pay us December 2018 rent, but has paid us January to July 2019 rent, real estate property tax and maintenance deposits. In December 2018, we placed Senior Care on a cash basis. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Senior Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as of January 1, 2019, as required by the ASC 842 transition guidance.

Pursuant to the U.S. Bankruptcy Code, Senior Care had an initial period of 120 days from the petition date to assume or reject the lease. However, the Bankruptcy Code also provides that the court may extend this initial 120-day period for an additional 90 days. Accordingly, Senior Care requested, and the court approved an additional 90 days, which ended on July 2, 2019, to assume or reject the lease. In July 2019, Senior Care filed a motion attempting to affirm the lease. We have subsequently filed an objection in opposition to Senior Care’s motion.

During the three months ended March 31, 2019, we placed Thrive Senior Living, LLC. (“Thrive”) on a cash basis due to short-payment of contractual rent in November 2018 and non-payment of rent in December 2018 totaling $700,000. This rent was subsequently received in 2019. Thrive did not pay January to July 2019 rent. In April 2019, we issued a notice of default to Thrive. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Thrive and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as of January 1, 2019, as required by the ASC 842 transition guidance.

We completed the following for all of the properties in the Thrive portfolio:

●

Transitioned two memory care communities located in Ohio and Kentucky with a total of 120-units to a new operator during the second quarter of 2019. The memory care communities are under a 10-year lease term with initial cash rent of $1,250,000 in year one, $1,500,000 in year two, $1,975,000 in year three and $2,150,000 in year four. Rent may increase subject to a

12

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

~~(iv)~~

contingent escalation formula commencing in year five and annually thereafter. The lease provides the lessee with a purchase option available between 2028-2029;

~~specific dollar increases.~~●

Transitioned a 56-unit memory care community located in Texas to an existing operator and added the memory care community to an existing master lease during the second quarter of 2019. As a result of this transition, annual cash rent under the existing master lease was increased by $400,000 effective June 1, 2019 and will increase by an additional $300,000 on June 1, 2020 and 2.5% annually thereafter. Additionally, LTC will be entitled to incremental rent calculated as a percentage of increase in gross revenues generated by the property above an established threshold;

●

Transitioned two memory care communities in Georgia and South Carolina with a total of 159-units to an existing operator subsequent to June 30, 2019. The new 2-year lease agreement has an initial annual cash rent of $1,762,000. The lease provides the lessee one month free rent and the option to defer up to 50% of contractual rent for the next 5 months. Rent increases 3.5% in year two; and

●

Transitioned the remaining 60-unit memory care community located in Florida to an existing operator effective August 1, 2019. The new 10-year lease provides the lessee twelve months free rent increasing to $450,000 in year two and $600,000 in year three and thereafter. In year two the lessee has the option to defer rent in an amount not to exceed $150,000. Rent may increase subject to a contingent escalation formula commencing in year three and annually thereafter. Additionally, the lease provides the lessee with a purchase option available in 2029.

The following table summarizes components of our rental income for the three and six months ended June 30, 2019 and 2018 (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
Rental Income		2019			2018			2019			2018
Base cash rental income	$	33,019	⁽¹⁾	$	32,312		$	66,933	⁽¹⁾	$	63,767
Variable cash rental income		4,077	⁽²⁾		169	⁽²⁾		8,562	⁽²⁾		319	⁽²⁾
Straight-line rent		1,275	⁽³⁾		2,000			2,513	⁽³⁾		5,440
Adjustment for collectibility of rental income		—			—			(1,926)	⁽⁴⁾		—
Amortization of lease incentives		(94)			(551)			(181)			(1,091)
Total	$	38,277		$	33,930		$	75,901		$	68,435

(1)	Increased due to acquisitions, developments and capital improvements partially offset due to reduced rent from properties sold in 2018.

(2)

The three months ended June 30, 2019 variable rental income includes $167 related to contingent rental income and $3,910 related to our real estate taxes which were reimbursed by our operators. The six months ended June 30, 2019 variable rental income includes $317 related to contingent rental income and $8,245 related to our real estate taxes which were reimbursed by our operators. Per the provisions of ASC 842, any lessor cost, paid by the lessor and reimbursed by the lessee, must be included as a lease payment. As discussed above, we adopted ASC 842 using a modified retrospective approach as of the adoption date of January 1, 2019. Accordingly, we are not required to report this revenue stream for periods prior to January 1, 2019.

(3)

In accordance with ASC 842 lease accounting guidance, we evaluated the collectibility of lease payments through maturity and determined that it was not probable that we would collect substantially all of the contractual obligations from Anthem, Thrive, Preferred Care and Senior Care leases through maturity. Decreased due to these leases being accounted for on cash-basis as of January 1, 2019.

(4)

During the first quarter of 2019, we terminated a lease agreement and transitioned two operating seniors housing communities under the lease agreement to a new operator. As a result of the lease termination, we wrote-off $1,926 straight-line rent receivable to contra-revenue in accordance with ASC 842.

13

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

Some of our lease agreements provide purchase options allowing the lessees to purchase the properties they currently lease from us. The following table summarizes information about purchase options included in our lease agreements (dollar amount in thousands):


	Type	Number
	of	of		Gross		Carrying	Option
State	Property	Properties		Investments		Value ⁽¹⁾	Window
California	ALF/MC	2	$	38,895	$	37,013	2024-2029
California	ALF	2		28,099		15,565	2021-TBD	⁽²⁾
Kansas	MC	2		25,692		23,549	2019-2021
Kentucky and Ohio	MC	2		30,087		28,192	2028-2029
Texas	MC	2		25,265		24,645	2025-2027
Virginia	ALF/MC	1		16,895		16,723	2025-2029
Total			$	164,933	$	145,687

(1)	Subsequent to June 30, 2019, we entered into two master lease agreements that provide the lessees with purchase options. The purchase options are available in 2029.

(2)	The option window ending date will be either 24 months or 48 months after the option window commences, based on certain contingencies.

Acquisitions and Developments: The following table summarizes our acquisitions for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 ~~and 2017~~ (dollar amounts in thousands):


						Total		Number	Number
		Purchase		Transaction		Acquisition		of	of
Year ⁽¹⁾	Type of Property	Price		Costs ⁽²⁾		Costs		Properties	Beds/Units
2019	Assisted Living ⁽³⁾	$	16,719	$	176	$	16,895	1	74
	Land ⁽⁴⁾		110		26		136	—	—
Total		$	16,829	$	202	$	17,031	1	74

2018	Assisted Living ⁽⁵⁾	$	25,200	$	66	$	25,266	2	88
	Land ⁽⁶⁾		600		36		636	—	—
Total		$	25,800	$	102	$	25,902	2	88

Total

Number

Number

Purchase

Transaction

Acquisition

of

of
Year

Type of Property

Price

Costs (1)

Costs

Properties

Beds/Units
2018

Assisted Living (2) (3)

$
39,600

$
65

$
39,665

3

177

Land (3)

695

48

743

—

—
Total

$
40,295

$
113

$
40,408

3

177

2017

Assisted Living (4)

$
54,463

$
341

$
54,804

3

240
Total

$
54,463

$
341

$
54,804

3

240

(1)

⁽¹⁾Subsequent to June 30, 2019, we entered into a purchase and sale agreement for the acquisition of a newly constructed 90-bed skilled nursing center located in Missouri for approximately $19,500. Additionally, we entered into a separate purchase and sale agreement for the acquisition of a parcel of land and development of a 90-bed skilled nursing center in Missouri. The commitment totals approximately $18,400. These transactions are expected to close in the third quarter of 2019.

(2)

Represents cost associated with our acquisitions; however, upon adoption of ASU 2017-01, our acquisitions meet the definition of an asset acquisition resulting in capitalization of transaction costs to the properties’ basis. For our land purchases with forward development commitments, transaction costs are capitalized as part of construction in progress. Transaction costs per our ~~consolidated statements~~Consolidated Statements of ~~income~~Income and ~~comprehensive income~~Comprehensive Income represents current and prior year transaction costs due to timing and terminated transactions.

(3)

⁽²⁾

~~We acquired two MC in Texas.~~

⁽³⁾

We entered into a joint venture (“JV”) ~~to develop, purchase~~ and ~~own senior housing properties. During the second quarter of 2018,~~we consolidated the JV ~~purchased~~on our financial statements, to purchase an existing operational 74-unit ALF/MC community. The non-controlling partner contributed $919 of equity and we contributed $15,971 in cash. Our economic interest in the real estate JV is approximately 95%.

(4)	We acquired a parcel of land ~~for~~adjacent to an existing SNF in California.

(5)	We acquired MCs in Texas.

(6)

We entered into a JV and we consolidated the ~~development of~~JV on our financial statements, to own the real estate and develop a 78-unit ALF/MC in ~~Oregon~~Medford, OR for ~~a total anticipated project cost of $18,108. The non-controlling partner contributed $1,081 of cash~~$18,108 and we committed to ~~fund the remaining $17,027 project cost. During the third quarter of 2018, in a sale-leaseback transaction, the JV purchased~~purchase an existing operational 89-unit ILF ~~adjacent to the 78-unit ALF/MC we are developing for $14,400.~~in Oregon. The ~~non-controlling partner contributed $2,857 of equity and we contributed $11,543 in cash. Upon completion of the development project, our combined economic interest~~ILF was acquired in the ~~JV will be approximately 88%. We account for the JV on a consolidated basis. See~~ ~~Note 7. Equity~~ ~~for further discussion related to our partnerships and non-controlling interests.~~

third quarter of 2018.

14

⁽⁴⁾

~~We acquired an ALF and a MC in California. Additionally, we acquired a MC in Ohio.~~

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

During the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, we invested ~~the~~the following in development and improvement projects (in thousands):


	Nine months ended September 30, 2018				Nine months ended September 30, 2017

									Six Months Ended June 30,
									2019				2018
Type of Property	Developments		Improvements		Developments			Improvements	Developments		Improvements		Developments			Improvements
Assisted Living Communities	$	19,251	$	1,131	$	10,366	$	951	$	8,520	$	893	$	14,653	$	1,048
Skilled Nursing Centers		6,466		500		3,573		1,357		4,492		—		3,970		500
Other		—		432		—		—		—		175		—		215
Total	$	25,717	$	2,063	$	13,939	$	2,308	$	13,012	$	1,068	$	18,623	$	1,763

Completed Developments. The following table summarizes our completed developments during the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 (dollar amounts in thousands):

Number

Type

Number

of

of

of

Total
Type of Project

Properties

Property

Beds/Units

State

Investment
Development

1

MC

66

Illinois

$
13,974


		Number	Type	Number
		of	of	of			Total
Year	Type of Project	Properties	Property	Beds/Units	State	Investment
2019	Development	1	SNF	143	Kentucky	$	24,493
	Development	1	ILF/ALF/MC	110	Wisconsin		21,872
Total		2		253		$	46,365

2018	Development	1	MC	66	Illinois	$	13,974
Total		1		66		$	13,974

11

~~Table of Contents~~

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

Properties held-for-sale. The following table summarizes our ~~properties~~property held-for-sale as of ~~September~~June 30, ~~2018~~ 2019 (dollar amounts in thousands):

Type

Number

Number

of

of

Gross

Accumulated

of
State

Property

Properties

Investment

Depreciation

Beds/units
Florida (1)

SNF

1

$
2,497

$
971

60
Texas

ILF

1

5,746

1,916

140
Totals

2

$
8,243

$
2,887

200

⁽¹⁾

~~Subsequent to September 30, 2018, we sold this 60-bed SNF for $5,000 and will recognize a gain of approximately $3,400.~~

Type

Number

of

Gross

Accumulated

of

State

Property

Properties

Investment

Depreciation

Beds/units

Texas

ILF

1

$

5,746

$

1,916

140

Properties ~~sold.~~ Sold. The following table summarizes property sales during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017(dollar~~2018 (dollar amounts in thousands):

Type

Number

Net

of

Sales

Carrying

Gain

Year

State

Properties

Beds

Price

Value

(Loss)

2019

n.a

—

$

—

$

—

$

500

⁽¹⁾

2018

Ohio and Pennsylvania

ALF

6

320

67,500

16,352

48,345

Type

Number

Number

of

of

of

Sales

Carrying

Net
Year

State

Properties

Properties

Beds

Price

Value

Gain
2018

Alabama

SNF

2

285

$
17,525

$
3,272

$
14,253

Kansas

ALF
(1)
—

—

350

346

—

Ohio and Pennsylvania

ALF

6

320

67,500

16,352

48,445
Total 2018

8

605

$
85,375

$
19,970

$
62,698

2017

Indiana and Iowa

ALF

4

175

$
14,250

$
8,726

$
5,054
Total 2017

4

175

$
14,250

$
8,726

$
5,054

(1)

⁽¹⁾

WeGain recognized due to the receipt of funds held in escrow related to a portfolio of six ALFs sold ~~land adjacent to an existing ALF community in Kansas.~~

during the second quarter of 2018.

15

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at ~~September~~June 30, ~~2018~~ 2019 (dollar amounts in thousands):


				Type	Percentage		Number of			Investment
		Gross		of	of				SNF	per
Interest Rate ⁽¹⁾	Maturity	Investment		Property	Investment		Loans ⁽²⁾	Properties ⁽³⁾	Beds	Bed/Unit
9.7%	2043	$	186,226	SNF	73.2	%	1	15	2,029	$	91.78
9.2%	2045		34,195	SNF	13.4	%	1	4	501	$	68.25
9.4%	2045		14,950	SNF	5.9	%	1	1	157	$	95.22
9.4%	2045		19,184	SNF	7.5	%	1	2	205	$	93.58
Total		$	254,555		100.0	%	4	22	2,892	$	88.02

Type

Percentage

Number of

Investment

Gross

of

of

SNF

per
Interest Rate (1)

Maturity

Investment

Property

Investment

Loans (2)

Properties (3)

Beds

Bed/Unit
9.5%

2043

$
186,495

SNF

76.1
%
1

15

2,029

$
91.91
9.2%

2045

33,028

SNF

13.5
%
1

4

501

$
65.92
9.4%

2045

14,797

SNF

6.0
%
1

1

157

$
94.25
9.5%

2020

10,733

SNF

4.4
%
1

2

205

$
52.36
Total

$
245,053

100.0
%
4

22

2,892

$
84.73

(1)

⁽¹⁾

The majority of the mortgage loans provide for annual increases in the interest rate after a certain time period based upon a specified increase of 2.25%.

(2)

⁽²⁾

Some loans contain certain guarantees, provide for certain facility fees and the majority of the mortgage loans have a 30-year term.

(3)

⁽³⁾

~~We have investments in~~The properties securing these mortgage loans are located in one state ~~that includes mortgages to~~and are operated by one operator.

12

~~Table of Contents~~

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

The following table summarizes our mortgage loan activity for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 ~~and 2017~~ (in thousands):


	Six Months Ended June 30,
	2019			2018
Originations and funding under mortgage loans receivable	$	9,736	⁽¹⁾	$	11,654	⁽²⁾
Pay-offs received		—			(1,086)
Scheduled principal payments received		(565)			(550)
Mortgage loan (premiums)		(2)			(2)
Provision for loan loss reserve		(92)			(100)
Net increase in mortgage loans receivable	$	9,077		$	9,916

Nine months ended September 30,

2018

2017
Originations and funding under mortgage loans receivable

$
20,530
(1)
$
9,333
Pay-offs received

(1,086)

(16,665)
Scheduled principal payments received

(550)

(686)
Net increase (decrease) in mortgage loans receivable

$
18,894

$
(8,018)

(1)	⁽¹⁾During 2019, we funded an additional $7,500 under an existing mortgage loan. The incremental funding bears interest at 9.41%, fixed for two years, and escalating by 2.25% thereafter.

(2)

During 2018, we funded an additional $7,400 under an existing mortgage loan for the purchase of a 112-bed ~~skilled nursing center~~SNF in Michigan. The incremental funding bears interest at 8.7%, fixed for five years, and escalating by 2.25% thereafter. ~~Also, we funded additional loan proceeds of $7,125 under an existing mortgage loan for the purchase of a 126-bed skilled nursing center~~

16

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

3.	Investment in ~~Michigan. This incremental funding bears interest at 9.41%, fixed for five years, and escalating by 2.25% thereafter.~~Unconsolidated Joint Ventures

~~3.Investment in Unconsolidated Joint Ventures~~

Our investment in unconsolidated joint ventures consists of a preferred equity investment and ~~two~~a mezzanine ~~loans~~loan which ~~are~~is accounted for as unconsolidated joint ventures in accordance with GAAP. The following table summarizes our investment in unconsolidated joint ventures (dollar amounts in thousands):

Type

Total

Currently

Number

of

Preferred

Paid in

of

Investment

Carrying

State

Properties

Investment

Return

Cash

Beds/ Units

Commitment

Value

Arizona

ALF/MC/ILF

Preferred Equity

⁽¹⁾

15

%

8

%

⁽²⁾

585

$

25,650

$

24,324

Florida

ALF/ILF/MC

Mezzanine

⁽³⁾

15

%

15

%

99

2,900

⁽⁴⁾

3,197

⁽⁴⁾

Total

684

$

28,550

$

27,521

Type

Type

Total

Currently

Number

of

of

Preferred

Paid in

of

Investment

Carrying

State

Properties

Investment

Return

Cash

Beds/ Units

Commitment

Value

Arizona

ALF/MC/ILF

Preferred Equity
(1)
15
%

7
%

585

$
25,650

$
23,942

Florida

ALF/IL/MC

Mezzanine
(2)
15
%

12
%

99

2,900
(3)

3,169
(3)
Florida

UDP-ALF/MC

Mezzanine
(2)
15
%

10
%

127

3,400

3,400

Total

811

$
31,950

$
30,511

(1)

⁽¹⁾

We have concluded that the JV is a variable interest entity (“VIE”) in accordance with GAAP. However, because we do not control the entity, nor do we have any role in the day-to-day management, we are not the primary beneficiary of the JV. Therefore, we account for the JV investment using the equity method.

(2)	⁽²⁾Effective second quarter of 2019, this JV was placed on cash basis due to delinquency of our preferred return.

(3)

We evaluated ~~these~~this acquisition, development and construction (“ADC”) ~~arrangements~~arrangement and determined that the characteristics are similar to jointly-owned investments or partnerships, and accordingly, ~~these investments are~~this investment is accounted for as unconsolidated joint ~~ventures~~venture under the equity method of accounting instead of loan accounting.

(4)

⁽³⁾

Since interest payments were deferred and no interest was recorded for the first twelve months of the loan, we used the effective interest method in accordance with GAAP to recognize interest income and recorded the difference between the effective interest income and cash interest income to the loan principal balance.

13

~~Table of Contents~~

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

The following table summarizes our capital contributions, income recognized, and cash interest received related to our investments in unconsolidated joint ventures (in thousands):


	Type
	of			Capital			Income			Cash Interest
Year	Properties			Contribution			Recognized			Received
2019	ALF/MC/ILF		$	293		$	553		$	727
	ALF/ILF/MC			—			256			243
	ALF/MC	⁽¹⁾		—	⁽¹⁾		404	⁽¹⁾		432	⁽¹⁾
Total			$	293		$	1,213		$	1,402

2018	ALF/MC/ILF			497			951			1,062
	ALF/ILF/MC			—			255			194
	ALF/MC	⁽¹⁾		—	⁽¹⁾		151	⁽¹⁾		—	⁽¹⁾
Total			$	497		$	1,357		$	1,256

Nine Months Ended September 30,

Type

2018

2017

of

Capital

Income

Cash Interest

Capital

Income

Cash Interest

Properties

Contribution

Recognized

Received

Contribution

Recognized

Received

ALF/MC/ILF

$
580

$
1,490

$
1,436

$
1,100

$
1,134

$
1,020

ALF/IL/MC

—

383

291

—

383

216

UDP-ALF/MC

—

230

—
(1)

2,747

118

—
(1)
Total

$
580

$
2,103

$
1,727

$
3,847

$
1,635

$
1,236

(1)

We had a $3,400 mezzanine loan commitment for the development of a 127-unit seniors housing community in Florida with a total preferred return of 15%. The mezzanine loan was an ADC arrangement which we determined it to have characteristics similar to a jointly-owned arrangement and recorded it as an unconsolidated joint venture. During the first quarter of 2019, the mezzanine loan was paid off.

17

~~(1)~~ ~~We withheld $653 at the time~~Table of ~~loan origination which is being applied to interest. As of September 30, 2018, we still hold $257 which will be applied to future interest.~~Contents

LTC PROPERTIES, INC.

4.~~Notes Receivable~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

4.	Notes Receivable

Notes receivable consists of mezzanine loans and other loan arrangements. The following table is a summary of our notes receivable components as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~ 2018 (in thousands):

At September 30, 2018

At December 31, 2017
Mezzanine loans
$
9,869

$
13,700
Other loans

2,901

2,868
Notes receivable reserve

(128)

(166)
Total
$
12,642

$
16,402


	At June 30, 2019		At December 31, 2018
Mezzanine loans	$	16,692	$	9,868
Other loans		3,669		2,975
Notes receivable reserve		(204)		(128)
Total	$	20,157	$	12,715

The following tables summarizes our notes receivable activity for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 ~~and 2017~~ (dollar amounts in thousands):


	Six Months Ended June 30,
		2019			2018
Advances under notes receivable	$	7,766	⁽¹⁾	$	—
Principal payments received under notes receivable		(49)			(2,352)
Reclassified to lease incentives ⁽²⁾		(200)			—
Notes receivable reserve		(75)			24
Total	$	7,442		$	(2,328)

Nine months ended September 30,

2018

2017
Advances under notes receivable
$
50

$
—
Principal payments received under notes receivable

(3,848)

(25)
Total
$
(3,798)

$
(25)

(1)

We originated a $6,800 mezzanine loan commitment for the development of a 204-unit ILF/ALF/MC in Georgia. The mezzanine loan has a five-year term and a 12.0% return, a portion of which is paid in cash, and the remaining portion of which is deferred during the first 46 months. Additionally, we originated a $1,400 note agreement, funding $582 with a commitment to fund $818. The note bears interest at 7.0%. Further, we originated a $550 note agreement, funding $200 with a commitment to fund $350. The note bears interest at 7.5%.

(2)	Represents an interim working capital loan related to a development project which matured upon completion of the development project and commencement of the lease.

5.	Lease Incentives

14

~~Table of Contents~~

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

~~5.Lease Incentives~~

The following summarizes lease incentives by component as of ~~September~~June 30, ~~2018 and December 31, 2017~~ 2019(in thousands):

At September 30, 2018

At December 31, 2017
Non-contingent lease incentives

$
14,883

$
14,904
Contingent lease incentives

6,219

6,577
Total

$
21,102

$
21,481


		At June 30, 2019		At December 31, 2018
Non-contingent lease incentives	$	2,652	$	14,443

The following table summarizes our lease incentive activity for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018(in thousands):


	Six Months Ended June 30,
	2019							2018
		Funding		Amortization		Adjustment			Funding		Amortization
Non-contingent lease incentives	$	283	$	(181)	$	(11,893)	⁽¹⁾	$	1,017	$	(852)
Contingent lease incentives		—		—		—			—		(239)
Net increase (decrease) in lease incentives	$	283	$	(181)	$	(11,893)		$	1,017	$	(1,091)

Nine months ended September 30,

2018

2017

Funding

Amortization

Funding

Amortization

Write off

Non-contingent lease incentives
$
1,272

$
(1,292)

$
5,713

$
(1,181)

$
(1,205)
(1)
Contingent lease incentives (3)

—

(359)

—

(500)

(2,634)
(2)
Total
$
1,272

$
(1,651)

$
5,713

$
(1,681)

$
(3,839)

(1)

⁽¹⁾

~~Represents the write-off of~~In accordance with ASC 842 lease standard adopted on January 1, 2019, we wrote-off $12,093 lease incentives related to ~~two MC communities due to negotiations to transition these properties to another operator in our portfolio.~~

⁽²⁾

Represents the write-off of lease incentive related to an ALF community due to change to the business model at the property that resulted in lower net operating income and the improbability of paying the earn-out.

⁽³⁾

~~Subsequent to September 30, 2018,~~leases for which we ~~entered into an amended master lease agreement with Senior Lifestyle Management, LLC (“Senior Lifestyle”). Among the provisions~~determined it is not probable we will collect substantially all of the ~~amendment, the contingent~~contractual lease ~~incentive payable to Senior Lifestyle was removed. Therefore, subsequent to September 30, 2018,~~obligation through maturity. See Note 1. General for further discussion. Additionally, we ~~will write-off the Senior Lifestyle contingent~~reclassified a $200 interim working capital loan as lease ~~incentive of $6,219 and the related earn-out liability of $9,292 which will result in income of approximately $3,000.~~

incentive. See Note 4. Notes Receivable for further discussion.

18

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

Non-contingent lease incentives represent payments made to our lessees for various reasons including entering into a new lease or lease amendments and extensions. Contingent lease incentives represent potential contingent earn-out payments that may be made to our lessees in the future, as part of our lease agreements. From time to time, we may commit to provide contingent payments to our lessees, upon our properties achieving certain rent coverage ratios. Once the contingent payment becomes probable and estimable, the contingent payment is recorded as a lease incentive. Lease incentives are amortized as a yield adjustment to rental income over the remaining life of the lease.

6.	Debt Obligations

15

~~Table of Contents~~

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

6.~~Debt Obligations~~

Bank Borrowings. During 2018, weamended and restated our unsecured credit agreement to replace the previous unsecured credit agreement, prior to its expiration on October 14, 2018. The amended credit agreement maintains the $600,000,000 aggregate commitment of the lenders under the prior agreement and provides for the opportunity to increase the commitment size of the credit agreement up to a total of $1,000,000,000. The amended credit agreement extends the maturity of the credit agreement to June 27, 2022 and provides for a one-year extension option at our discretion, subject to customary conditions. Additionally, the amended credit agreement decreases the interest rate margins and converts from the payment of unused commitment fees to a facility fee. Based on our leverage at ~~September~~June 30, ~~2018,~~2019, the facility provides for interest annually at LIBOR plus 115 basis points and a facility fee of 20 basis points. At ~~September~~June 30, ~~2018,~~2019, we were in compliance with all covenants.

Senior Unsecured Notes. ~~During 2017, we amended our~~We have a $337,500,000 shelf agreement with affiliates and managed accounts of Prudential Investment Management, Inc. (“Prudential”) ~~to increase our shelf commitment to $337,500,000.~~.

The debt obligations by component as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are as follows (dollar amounts in thousands):


		At June 30, 2019					At December 31, 2018
	Applicable			Available		��			Available
	Interest	Outstanding		for			Outstanding		for
Debt Obligations	Rate ⁽¹⁾	Balance		Borrowing			Balance		Borrowing
Bank borrowings ⁽²⁾	3.74%	$	146,900	$	453,100		$	112,000	$	488,000
Senior unsecured notes, net of debt issue costs ⁽³⁾	4.49%		528,938		98,000			533,029		93,833
Total	4.33%	$	675,838	$	551,100		$	645,029	$	581,833

At September 30, 2018

At December 31, 2017

Applicable

Available

Available

Interest

Outstanding

for

Outstanding

for

Debt Obligations

Rate (1)

Balance

Borrowing

Balance

Borrowing

Bank borrowings (2)

3.38%

$
120,000

$
480,000

$
96,500

$
503,500

Senior unsecured notes, net of debt issue costs

4.49%

550,986

79,833

571,002

63,667

Total

4.29%

$
670,986

$
559,833

$
667,502

$
567,167

(1)

⁽¹⁾

Represents weighted average of interest rate as of ~~September~~June 30, ~~2018.~~

2019.

(2)

⁽²⁾

Subsequent to ~~September~~June 30, ~~2018,~~2019, we ~~paid down $20,000~~borrowed $12,000 under our unsecured revolving line of credit. Accordingly, we have ~~$100,000~~$158,900 outstanding under our ~~unsecured~~ revolving line of credit with ~~$500,000~~$441,100 available for borrowing.

(3)	Subsequent to June 30, 2019, we paid $8,500 in scheduled principal payments. Accordingly, we have $520,438 outstanding and $105,500 available under our senior unsecured notes.

Our borrowings and repayments are as follows (in thousands):

Nine months ended September 30,

2018

2017
Debt Obligations

Borrowings

Repayments

Borrowings

Repayments
Bank borrowings

$
96,500

$
(73,000)

$
64,500

$
(116,600)
Senior unsecured notes

—

(20,166)

100,000
(1)

(19,167)
Total

$
96,500

$
(93,166)

$
164,500

$
(135,767)

⁽¹⁾

During 2017, we sold 15-year senior unsecured notes in the aggregate amount of $100,000 to a group of investors, which included Prudential, in a private placement transaction. The notes bear interest at an annual rate of 4.5%, have scheduled principal payments and mature on February 16, 2032.


	Six Months Ended June 30,
	2019				2018
Debt Obligations		Borrowings		Repayments	Borrowings		Repayments
Bank borrowings	$	36,900	$	(2,000)	$	54,000	$	(65,000)
Senior unsecured notes		—		(4,167)		—		(4,166)
Total	$	36,900	$	(6,167)	$	54,000	$	(69,166)

16

19

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

7.	Equity

~~7.Equity~~

Common Stock. We have anseparate equity distribution ~~agreement~~agreements (collectively, “Equity Distribution Agreement”) to ~~issue~~offer and sell, from time to time, up to $200,000,000 in aggregate offering price of ~~our company common shares. During the nine months ended September 30, 2018 and 2017, under our equity distribution agreement, we sold 22,244~~ shares of our common ~~stock for $1,005,000 in net proceeds and 312,881~~stock. As of June 30, 2019, no shares ~~of common stock for $14,578,000 in net proceeds, respectively. In conjunction with~~had been issued under the ~~sale of common stock, during the nine months ended September~~Equity Distribution Agreement. Accordingly, at June 30, 2018 and 2017, we paid $18,000 and $260,000, respectively, as compensation to our sales agents and we reclassified $76,000 and $49,000, respectively, of accumulated costs associated with this agreement to capital in excess of par value. At September 30, 2018, and 2017,2019, we had ~~$184,139,000 and $185,162,000, respectively,~~$200,000,000 available under ~~our equity distribution agreement.~~the Equity Distribution Agreement.

During the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, we acquired ~~31,326~~44,543 shares and ~~41,592~~30,839 shares, respectively, of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.

Non-controlling Interests. ~~During 2018 and 2017, we~~We have entered into partnerships to develop and/or own real estate. Given that our limited members do not have the substantive kick-out rights, liquidation rights, or participation rights, we have concluded that the partnerships are VIEs. ~~And since~~As we exercise power over and receive benefits from the VIEs, we are considered the primary beneficiary. Accordingly, we consolidate the VIEs and record the non-controlling interests at cost.

As of ~~September~~June 30, ~~2018,~~2019, we have the following consolidated VIEs (dollar amounts in thousands):

Gross

Investment

Property

Consolidated

Non-Controlling

Year

Purpose

Type

State

Assets

Interests

2019

Owned real estate

ALF/MC

VA

$

16,895

$

919

2018

Owned real estate

ILF

OR

14,400

⁽¹⁾

2,857

⁽¹⁾

2018

Owned real estate and development

UDP

OR

8,166

⁽¹⁾

1,081

⁽¹⁾

2017

Owned real estate and development

ILF/ALF/MC

WI

21,872

⁽²⁾

2,318

⁽²⁾

2017

Owned real estate

ALF/MC

SC

11,585

1,264

Total

$

72,918

$

8,439

Gross

Investment

Property

Consolidated

Non-Controlling

Year

Purpose

Type

State

Assets

Interests

2018

Owned real estate

ILF

OR

$
14,400
(1)
$
2,857
(1)
2018

Owned real estate and development

UDP

OR

2,881
(1)

1,081
(1)
2017

Owned real estate and development

UDP

WI

10,316
(2)

2,272
(2)
2017

Owned real estate

ALF

SC

10,571

1,241

Total

$
38,168

$
7,451

(1)

⁽¹⁾

We entered into a ~~joint venture (“JV”)~~JV to develop, purchase and own ~~senior~~seniors housing properties. During the second quarter of 2018, the JV purchased land for the development of a 78-unit ALF/MC for a total anticipated project cost of $18,108. The non-controlling partner contributed $1,081 of cash and we committed to fund the remaining $17,027 project cost. During the third quarter of 2018, in a sale-leaseback transaction, the JV purchased an existing operational 89-unit ILF adjacent to the 78-unit ALF/MC we are developing for $14,400. The non-controlling partner contributed $2,857 of equity and we contributed $11,543 in cash. Upon completion of the development project, our combined economic interest in the JV will be approximately 88%. We account for the JV on a consolidated basis.

(2)

⁽²⁾

We entered into a ~~partnership~~JV to own the real estate and develop a 110-unit ILF/ALF/MC community in Wisconsin. ~~The commitment totals approximately $22,471.~~

This development project completed during the second quarter of 2019.

Available Shelf ~~Registrations.~~Registration.We have an automatic shelf registration statement on file with the SEC, and currently have the ability to file additional automatic shelf registration statements, to provide us with capacity to publicly offer an indeterminate amount of common stock, preferred stock, warrants, debt, depositary shares, or units. We may from time to time raise capital under our automatic shelf registration statement in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering.

17

20

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

Distributions. We declared and paid the following cash dividends (in thousands):


	Six Months Ended June 30,
	2019						2018
	Declared			Paid			Declared			Paid
Common Stock	$	45,583	⁽¹⁾	$	45,583	⁽¹⁾	$	45,168	⁽¹⁾	$	45,168	⁽¹⁾

Nine Months Ended September 30,

2018

2017

Declared

Paid

Declared

Paid

Common Stock

$
67,768
(1)
$
67,768
(1)
$
67,664
(1)
$
67,664
(1)

(1)

⁽¹⁾

Represents $0.19 per share per month for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~

2018.

In ~~October 2018,~~July 2019, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of ~~October, November~~July, August and ~~December 2018,~~September 2019, payable on ~~October~~July 31, ~~November~~August 30, and ~~December 31, 2018,~~September 30, 2019, respectively, to stockholders of record on ~~October~~July 23, ~~November 21,~~August 22, and ~~December 21, 2018,~~September 20, 2019, respectively.

Stock-Based Compensation. Under our 2015 Equity Participation Plan (“the 2015 Plan”), 1,400,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2015 Plan are set by our compensation committee at its discretion.

18

~~Table of Contents~~

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

At June 30, 2019, we had 20,000 stock options outstanding and exercisable. During the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, no stock options were granted. The stock options exercised during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 were as follows:


		Weighted
		Average
	Options	Exercise		Option		Market
	Exercised	Price		Value		Value ⁽¹⁾
2019	—	$	n.a	$	—	$	—
2018	5,000	$	24.65	$	123,000	$	205,000

Weighted

Average

Options

Exercise

Option

Market

Exercised

Price

Value

Value (1)

2018

5,000

$
24.65

$
123,000

$
205,000

2017

8,334

$
24.31

$
202,566

$
410,797

(1)

⁽¹⁾

As of exercise date.

~~At September 30, 2018, we had 20,000 stock options outstanding and exercisable. Compensation expense related to the vesting of stock options was $~~0 ~~and $2,000 for the nine months ended September 30, 2018 and 2017, respectively.~~

The following table summarizes our restricted stock and performance-based stock units activity for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017:~~2018:


	Six Months Ended June 30,
	2019			2018
Outstanding, January 1		325,750			244,181
Granted		147,608			156,718
Vested		(126,725)	⁽¹⁾		(74,149)
Outstanding, June 30		346,633			326,750

Nine months ended September 30,

2018

2017

Outstanding, January 1

244,181

210,573

Granted

156,718

143,057

Vested

(75,149)

(84,363)

Cancelled

—

(24,106)

Outstanding, September 30

325,750

245,161

(1)	Includes 48,225 performance-based stock units.

21

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

During the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, we granted restricted stock and performance-based stock units under the 2015 Plan as follows:


	No. of	Price per
Year	Shares/Units	Share		Vesting Period
2019	78,276	$	46.54	ratably over 3 years
	60,836	$	46.54	TSR targets ⁽¹⁾
	8,496	$	44.73	May 29, 2020
	147,608

2018	81,819	$	38.18	ratably over 3 years
	66,171	$	38.18	TSR targets ⁽¹⁾
	8,728	$	41.25	May 30, 2019
	156,718

No. of

Price per

Year

Shares/Units

Share

Vesting Period

2018

81,819

$
38.18

ratably over 3 years

66,171

$
38.18

TSR targets (1)

8,728

$
41.25

ratably over 1 year

156,718

2017

74,760

$
45.76

ratably over 3 years

57,881

$
45.76

TSR targets (1)

7,416

$
48.55

ratably over 1 year

3,000

$
50.55

ratably over 3 years

143,057

(1)

⁽¹⁾

Vesting is based on achieving certain total shareholder return (“TSR”) targets in 4 years with acceleration opportunity in 3 years.

19

~~Table of Contents~~

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

Compensation expense recognized related to the vesting of restricted common stock and performance-based stock units for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 were $3,312,000 and ~~2017 were $4,384,000 and $3,965,000,~~$2,897,000, respectively. At ~~September~~June 30, ~~2018,~~2019, the remaining compensation expense to be recognized related to the future service period of unvested outstanding restricted common stock and performance-based stock units are as ~~follows:~~follows (in thousands):


	Remaining
	Compensation

			Remaining
			Compensation
Vesting Date	Expense		Expense
2018	$	1,486,000
2019		4,250,000	$	3,253
2020		2,210,000		4,619
2021		238,000		2,503
2022				189
Total	$	8,184,000	$	10,564

8.	Commitments and Contingencies

8.~~Commitments and Contingencies~~

At ~~September~~June 30, ~~2018,~~2019, we had commitments as follows (in thousands):


						Total
	Investment			2019		Commitment		Remaining
	Commitment			Funding		Funded		Commitment
Real estate properties(Note 2. Real Estate Investments)	$	81,331	⁽¹⁾	$	14,034	$	59,781	$	21,550
Accrued incentives and earn-out liabilities (Note 5. Lease Incentives)		9,000			—		—		9,000
Mortgage loans (Note 2. Real Estate Investments)		56,200	⁽²⁾		2,236		20,827		35,373
Joint venture investments (Note 3. Investments in Unconsolidated Joint Ventures)		25,650			293		23,976		1,674
Notes receivable (Note 4. Notes Receivable)		2,250			827		852		1,398
Total	$	174,431		$	17,390	$	105,436	$	68,995

Total

Investment

2018

Commitment

Remaining

Commitment

Funding

Funded

Commitment
Real estate properties (Note 2. Real Estate Investments)

$
77,882
(1)
$
17,973

$
35,417

$
42,465
Accrued incentives and earn-out liabilities

23,000
(3)

—

—

23,000
Mortgage loans (Note 2. Real Estate Investments)

65,700
(2)

6,005

23,256

42,444
Joint venture investments (Note 3. Investments in Unconsolidated Joint Ventures)

25,650

580

23,594

2,056
Notes receivable (Note 4. Notes Receivable)

700

50

50

650
Total

$
192,932

$
24,608

$
82,317

$
110,615

(1)

⁽¹⁾

Represents commitments to purchase land and improvements, if applicable, and to develop, re-develop, renovate or expand seniors housing and health care properties.

(2)

⁽²⁾

~~$39,700 represents~~Represents $35,700 of commitments to expand and renovate the seniors housing and health care properties securing the mortgage loans and ~~$26,000~~$20,500 represents contingent funding upon the borrower achieving certain coverage ratios.

Also, some of our lease agreements provide purchase options allowing the lessee to purchase the properties they currently lease from us. See Note 2. Real Estate Investments for a table summarizing information about our purchase options.

22

⁽³⁾

Subsequent to September 30, 2018, we entered into an amended master lease agreement with Senior Lifestyle. Among the provisions of the amendment, the contingent lease incentive payable to Senior Lifestyle was removed. Therefore, subsequent to September 30, 2018, we wrote-off the Senior Lifestyle contingent lease incentive of $6,219 and the related earn-out liability of $9,292 which will result in income of approximately $3,000.

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

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.

20

~~Table of Contents~~

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

9.~~Major Operators~~
9.
Major Operators

We have ~~four~~two operators from each of which we derive ~~approximately~~ 10% or more of our combined rental revenue and interest income from mortgage loans. The following table sets forth information regarding our major operators as of ~~September~~June 30, ~~2018:~~2019:


	Number of		Number of		Percentage of
			SNF	ALF	Total		Total
Operator	SNF	ALF	Beds	Units	Revenue⁽¹⁾		Assets
Prestige Healthcare	24	—	3,010	93	18.1	%	17.4	%
Senior Lifestyle Corporation	—	23	—	1,457	11.7	%	10.4	%
Total	24	23	3,010	1,550	29.8	%	27.8	%

Number of

Number of

Percentage of

SNF

ALF

Total

Total

Operator

SNF

ALF

Beds

Units

Revenue (1)

Assets

Prestige Healthcare

24

—

3,010

93

18.0
%

16.4
%

Senior Lifestyle Corporation

—

23

—

1,457

11.9
%

10.4
%

Brookdale Senior Living

—

37

—

1,702

10.1
%

4.6
%

Senior Care Centers

11

—

1,444

—

9.8
%

7.1
%

Total

35

60

4,454

3,252

49.8
%

38.5
%

(1)

⁽¹⁾

Includes rental income from owned properties and interest income from mortgage loans as of June 30, 2019 and excludes rental income ~~from properties sold~~due to lessee reimbursement of our real estate taxes and ~~mortgage loans paid off during 2018.~~

adjustment for collectability of rental income.

Our financial position and ability to make distributions may be adversely affected if Prestige Healthcare, Senior Lifestyle Corporation, ~~Brookdale Senior Living, Senior Care Centers,~~ or any of our lessees and borrowers face financial difficulties, including any bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with us.

~~10.Earnings per Share~~23

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

10.

Earnings per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2019			2018		2019			2018
Net income	$	20,534		$	68,936	$	40,961		$	89,295
Less income allocated to non-controlling interests		(88)			—		(169)			—
Less income allocated to participating securities:
Non-forfeitable dividends on participating securities		(94)			(91)		(186)			(179)
Income allocated to participating securities		—			(187)		—			(187)
Total net income allocated to participating securities		(94)			(278)		(186)			(366)
Net income available to common stockholders		20,352			68,658		40,606			88,929
Effect of dilutive securities:
Participating securities		—	⁽¹⁾		278		—	⁽¹⁾		366
Net income for diluted net income per share	$	20,352		$	68,936	$	40,606		$	89,295

Shares for basic net income per share		39,577			39,471		39,555			39,461
Effect of dilutive securities:
Stock options		5			2		5			2
Performance-based stock units		187			132		187			132
Participating securities		—	⁽¹⁾		160		—	⁽¹⁾		155
Total effect of dilutive securities		192			294		192			289
Shares for diluted net income per share		39,769			39,765		39,747			39,750

Basic net income per share	$	0.51		$	1.74	$	1.03		$	2.25
Diluted net income per share	$	0.51		$	1.73	$	1.02		$	2.25

Three Months Ended

Nine Months Ended

September 30,

September 30,

2018

2017

2018

2017

Net income

$
34,937

$
20,616

$
124,232

$
67,506

Less net income allocated to non-controlling interests

(17)

—

(17)

—

Less net income allocated to participating securities:

Non-forfeitable dividends on participating securities

(89)

(80)

(268)

(269)

Income allocated to participating securities

(49)

—

(236)

(12)

Total net income allocated to participating securities

(138)

(80)

(504)

(281)

Net income available to common stockholders

34,782

20,536

123,711

67,225

Effect of dilutive securities:

Participating securities

138

80

504

281

Net income for diluted net income per share

$
34,920

$
20,616

$
124,215

$
67,506

Shares for basic net income per share

39,487

39,428

39,470

39,403

Effect of dilutive securities:

Stock options

4

9

3

11

Performance-based stock units

217

170

217

170

Participating securities

157

141

155

154

Total effect of dilutive securities

378

320

375

335

Shares for diluted net income per share

39,865

39,748

39,845

39,738

Basic net income per share

$
0.88

$
0.52

$
3.13

$
1.71

Diluted net income per share

$
0.88

$
0.52

$
3.12

$
1.70

21

(1)	For the three and six months ended June 30, 2019, the participating securities have been excluded from the computation of diluted net income per share as such inclusion would be anti-dilutive.

~~Table of Contents~~

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

~~11.Fair Value Measurements~~
11.
Fair Value Measurements

In accordance with the accounting guidance regarding the fair value option for financial assets and financial liabilities, entities are permitted to choose to measure certain financial assets and liabilities at fair value, with the change in unrealized gains and losses reported in earnings. We did not elect the fair value option for any of our financial assets and financial liabilities.

24

Table of Contents

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

(Unaudited)

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments. We do not invest our cash in auction rate securities. The carrying value and fair value of our financial instruments as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 assuming election of fair value for our financial assets and financial liabilities were as follows (in thousands):


	At June 30, 2019					At December 31, 2018
	Carrying		Fair			Carrying		Fair
	Value		Value			Value		Value
Mortgage loans receivable	$	252,016	$	309,153	⁽¹⁾	$	242,939	$	295,492	⁽¹⁾
Bank borrowings		146,900		146,900	⁽²⁾		112,000		112,000	⁽²⁾
Senior unsecured notes, net of debt issue costs		528,938		538,498	⁽³⁾		533,029		508,613	⁽³⁾

At September 30, 2018

At December 31, 2017

Carrying

Fair

Carrying

Fair

Value

Value

Value

Value

Mortgage loans receivable

$
242,609

$
274,698
(1)
$
223,907

$
278,224
(1)
Bank borrowings

120,000

120,000
(2)

96,500

96,500
(2)
Senior unsecured notes, net of debt issue costs

550,986

529,805
(3)

571,002

577,126
(3)
Accrued incentives and earn-outs

9,292

9,292
(4)

8,916

8,916
(4)

(1)

⁽¹⁾

Our investment in mortgage loans receivable is classified as Level 3. The fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows. The discount rate is determined using our assumption on market conditions adjusted for market and credit risk and current returns on our investments. The discount rate used to value our future cash inflows of the mortgage loans receivable at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 was ~~9.7% and 8.7%, respectively.~~

9.0%.

(2)

⁽²⁾

Our bank borrowings bear interest at a variable interest rate. The estimated fair value of our bank borrowings approximated their carrying values at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 based upon prevailing market interest rates for similar debt arrangements.

(3)

⁽³⁾

Our obligation under our senior unsecured notes is classified as Level 3 and thus the fair value is determined using a widely accepted valuation technique, discounted cash flow analysis on the expected cash flows. The discount rate is measured based upon management’s estimates of rates currently prevailing for comparable loans available to us, and instruments of comparable maturities. At ~~September~~June 30, 2019, the discount rate used to value our future cash outflow of our senior unsecured notes was 3.90% for those maturing before year 2026 and 4.10% for those maturing at or beyond year 2026. At December 31, 2018, the discount rate used to value our future cash outflow of our senior unsecured notes was ~~5.00%~~5.15% for those maturing before year 2026 and ~~5.25%~~5.40% for those maturing at or beyond year 2026. At December 31, 2017, the discount rate used to value our future cash outflow of our senior unsecured notes was 4.10% for those maturing before year 2026 and 4.30% for those maturing at or beyond year 2026.

12.

Subsequent Events

⁽⁴⁾

Our accrued incentives and earn-outs are classified as Level 3. We estimated the fair value of the accrued incentives and earn‑out payments using a discounted cash flow analysis. The discount rate that we use consists of a risk‑free U.S. Treasury rate plus a company specific credit spread which we believe is acceptable by willing market participants. The discount rate used to value our accrued incentives and earn-outs was 6.0% at September 30, 2018 and 6.2% at December 31, 2017.

~~12.Subsequent Events~~

Subsequent to ~~September~~June 30, ~~2018~~2019 the following events occurred:

Real Estate:~~We sold a 60-bed SNF in Florida for $5,000,000 with a net book value of $1,526,000 and will recognize a gain of approximately $3,400,000~~ ~~in the fourth quarter.~~

~~Lease Incentives:~~ We entered into ~~an amended master lease~~a purchase and sale agreement ~~with Senior Lifestyle. Among~~for the ~~provisions~~acquisition of a newly constructed 90-bed skilled nursing center located in Missouri for approximately $19,500,000. Additionally, we entered into a separate purchase and sale agreement for the ~~amendment,~~acquisition of a parcel of land and development of a 90-bed skilled nursing center in Missouri. The commitment totals approximately $18,400,000. These transactions are expected to close in the ~~contingent lease incentive payable to Senior Lifestyle was~~

22

~~Table~~third quarter of ~~Contents~~2019.

~~LTC PROPERTIES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~ ~~CONTINUED~~

~~(Unaudited)~~

removed. Therefore, subsequent to September 30, 2018, we will write-off the Senior Lifestyle contingent lease incentive of $6,219,000 and the related earn-out liability of $9,292,000 which will result in income of approximately $3,000,000.

~~Debt:~~Debt. We ~~paid down $20,000,000~~borrowed $12,000,000 under our unsecured revolving line of credit. Accordingly, we have ~~$100,000,000~~$158,900,000 outstanding under our ~~unsecured~~ revolving line of credit with ~~$500,000,000~~$441,100,000 available for borrowing. Also, we paid $8,500,000 in scheduled principal payments. Accordingly, we have $520,438,000 outstanding and $105,500,000 available under our senior unsecured notes.

Equity: We declared a monthly cash dividend of $0.19 per share on our common stock for the months of ~~October, November~~July, August and ~~December 2018,~~September 2019, payable on ~~October~~July 31, ~~November~~August 30, and ~~December 31, 2018,~~September 30, 2019, respectively to stockholders of record on ~~October~~July 23, ~~November 21,~~August 22, and ~~December 21, 2018,~~September 20, 2019, respectively.

2325

Table of Contents

Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statement Regarding Forward Looking Disclosure

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some of the forward-looking statements by their use of forward-looking words, such as “believes,” “expects,” “may,” “will,” “could,” “would,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or the negative of those words or similar words. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, the status of the economy; the status of capital markets (including prevailing interest rates) and our access to capital; the income and returns available from investments in health care related real estate (including our ability to re-lease properties upon expiration of a lease term); the ability of our borrowers and lessees to meet their obligations to us; our reliance on a few major operators; our dependence on operators for revenue and cash flow; the bankruptcy, insolvency or financial deterioration of our lessees; potential limitations on our remedies when mortgage loans default; competition faced by our borrowers and lessees within the health care industry; regulation of the health care industry by federal, state and local governments; changes in Medicare and Medicaid reimbursement amounts (including due to federal and state budget constraints); compliance with and changes to regulations and payment policies within the health care industry; debt that we may incur and changes in financing terms; our ability to continue to qualify as a real estate investment trust; the relative illiquidity of our real estate investments; ~~potential limitations on our remedies when mortgage loans default;~~ and risks and liabilities in connection with properties owned through limited liability companies and partnerships. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017~~2018 and in our publicly available filings with the Securities and Exchange Commission. We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

Business and Investment Strategy

We are a self-administered health care real estate investment trust (“REIT”) that invests in seniors housing and health care properties ~~primarily~~ through sale-leaseback transactions, mortgage financing and structured finance solutions including mezzanine lending. We conduct and manage our business as one operating segment, rather than multiple operating segments, for internal reporting and internal ~~decision making~~decision-making purposes. Our primary objectives are to create, sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in seniors housing and health care properties managed by experienced operators.

2426

Table of Contents

The ~~below~~following graph summarizes our gross investments as of ~~September~~June 30, ~~2018:~~2019:

Our primary seniors housing and health care property classifications include skilled nursing centers (“SNF”), assisted living communities (“ALF”), independent living communities (“ILF”), memory care communities (“MC”) and combinations thereof. ALF, ILF, MC, and combinations thereof are included in the ALF ~~property~~ classification. As of ~~September~~June 30, ~~2018,~~2019, seniors housing and long-term health care properties comprised approximately ~~99.4%~~99.3% of our real estate investment portfolio. We have been operating since August 1992.

Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals, ~~and~~ interest earned on outstanding loans ~~receivable.~~receivable an income from investments in unconsolidated joint ventures. Our investments in owned properties and mortgage loans represent our ~~main~~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~~property type ~~of health care facility~~ and operator. Our monitoring process includes periodic review of financial statements for each facility, periodic review of operator credit, scheduled property inspections and review of covenant compliance.

In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk. Some operating leases and loans are credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans ~~secured by multiple properties.~~

25

are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates.

27

Table of Contents

Real Estate Portfolio Overview

The following tables summarize our real estate investment portfolio by owned properties and mortgage loans and by type, as of ~~September~~June 30, ~~2018~~2019 (dollar amounts in thousands):


					Six Months Ended
			Percentage		June 30, 2019				Percentage		Number	Number of
	Gross		of		Rental		Interest		of		of	SNF	ALF
Owned Properties	Investments		Investments		Income ⁽¹⁾		Income		Revenues		Properties ⁽²⁾	Beds ⁽³⁾	Units ⁽³⁾
Assisted Living	$	843,682	49.4	%	$	33,861	$	—	40.2	%	105	—	6,070
Skilled Nursing		589,581	34.5	%		35,249		—	41.8	%	72	8,893	261
Under Development ⁽⁴⁾		8,167	0.5	%		—		—	—	%	—	—	—
Other ⁽⁵⁾		11,239	0.7	%		472		—	0.6	%	1	118	—
Total Owned Properties		1,452,669	85.1	%		69,582		—	82.6	%	178	9,011	6,331

Mortgage Loans
Skilled Nursing		254,555	14.9	%		—		14,662	17.4	%	22	2,892	—
Total Mortgage Loans		254,555	14.9	%		—		14,662	17.4	%	22	2,892	—

Total Portfolio	$	1,707,224	100.0	%	$	69,582	$	14,662	100.0	%	200	11,903	6,331


					Six Months Ended
			Percentage		June 30, 2019				Percentage		Number	Number of
	Gross		of		Rental		Interest		of		of	SNF	ALF
Summary of Properties by Type	Investments		Investments		Income ⁽¹⁾		Income		Revenues		Properties ⁽²⁾	Beds ⁽³⁾	Units ⁽³⁾
Skilled Nursing	$	844,136	49.4	%	$	35,249	$	14,662	59.2	%	94	11,785	261
Assisted Living		843,682	49.4	%		33,861		—	40.2	%	105	—	6,070
Under Development ⁽⁴⁾		8,167	0.5	%		—		—	—	%	—	—	—
Other ⁽⁵⁾		11,239	0.7	%		472		—	0.6	%	1	118	—
Total Portfolio	$	1,707,224	100.0	%	$	69,582	$	14,662	100.0	%	200	11,903	6,331

Nine Months Ended

Percentage

September 30, 2018

Percentage

Number

Number of

Gross

of

Rental

Interest

of

of

SNF

ALF
Owned Properties

Investments

Investments

Income (5)

Income (6)

Revenues

Properties (1)

Beds (2)

Units (2)
Assisted Living

$
802,484

48.4
%
$
49,053

$
—

40.6
%

103

—

5,885
Skilled Nursing

569,141

34.3
%

50,111

—

41.5
%

73

8,919

261
Under Development (3)

31,602

1.9
%

—

—

—
%

—

—

—
Other (4)

11,040

0.6
%

689

—

0.6
%

1

118

—
Total Owned Properties

1,414,267

85.2
%

99,853

—

82.7
%

177

9,037

6,146

Mortgage Loans

Skilled Nursing

245,053

14.8
%

—

20,853

17.3
%

22

2,892

—
Total Mortgage Loans

245,053

14.8
%

—

20,853

17.3
%

22

2,892

—

Total Portfolio

$
1,659,320

100.0
%
$
99,853

$
20,853

100.0
%

199

11,929

6,146

Nine Months Ended

Percentage

September 30, 2018

Percentage

Number

Number of

Gross

of

Rental

Interest

of

of

SNF

ALF
Summary of Properties by Type

Investments

Investments

Income (5)

Income (6)

Revenues

Properties (1)

Beds (2)

Units (2)
Skilled Nursing

$
814,194

49.1
%
$
50,111

$
20,853

58.8
%

95

11,811

261
Assisted Living

802,484

48.4
%

49,053

—

40.6
%

103

—

5,885
Under Development (3)

31,602

1.9
%

—

—

—
%

—

—

—
Other (4)

11,040

0.6
%

689

—

0.6
%

1

118

—
Total Portfolio

$
1,659,320

100.0
%
$
99,853

$
20,853

100.0
%

199

11,929

6,146

(1)	⁽¹⁾Excludes variable rental income of $8,245 related to our real estate taxes which were reimbursed by our operators and adjustment for collectability of rental income.

(2)

We have investments in 28 states leased or mortgaged to 2930 different operators.

(3)

⁽²⁾

See Item 1. Financial Statements – Note 2. Real Estate Investments for discussion of bed/unit count.

(4)

⁽³⁾

Represents ~~three~~a development ~~projects~~project consisting of ~~a 143-bed SNF located in Kentucky,~~ a 78-unit ALF/MC located in ~~Oregon and a 110-unit ILF/ALF/MC located in Wisconsin.~~

Oregon.

(5)

⁽⁴⁾

Includes three parcels of land held-for-use and one behavioral health care hospital.

⁽⁵⁾

~~Excludes rental income from properties sold.~~

⁽⁶⁾

~~Represents interest income from mortgage loans and excludes interest income from paid-off mortgage loans.~~

As of ~~September~~June 30, ~~2018,~~2019, we had ~~$1.3~~$1.4 billion in net carrying value of ~~net~~ real estate investments, consisting of $1.1 billion or ~~82.0%~~81.6% invested in owned and leased properties and ~~$0.2~~$0.3 billion or ~~18.0%~~18.4% invested in mortgage loans secured by first mortgages. Our investment in mortgage loans mature in 2043 and beyond and contain interest rates between 9.2% and ~~9.5%. Approximately 76.1% of those mortgage loans mature in 2043 and have an interest rate of 9.5%~~9.7%.

For the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, rental income and interest income from mortgage loans represented ~~82.1%~~82.8% and ~~16.7%~~16.0%, respectively, of total gross revenues. In most instances, our lease structure contains fixed annual rental escalations and/or annual rental escalations that are contingent upon changes in the Consumer Price Index, 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. ~~For those certain leases, the~~This revenue is not recognized until the appropriate contingencies have been resolved.

During the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, there were no lease renewals. ~~During 2018, we transitioned two operating skilled nursing centers to another operator in our portfolio. This transition had no economic impact on us.~~ For the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, we recorded ~~$8.6~~$2.5 million in straight-line rental income and ~~recovered a net~~amortization of ~~$0.1 million in straight-line rent receivable reserve.~~lease incentive cost of $0.2 million. During the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, we received ~~$95.7~~$75.5 million of cash rental ~~revenue and~~

26

~~Table~~income, which includes $8.2 million of ~~Contents~~

~~recorded amortization of lease incentives cost of $1.7 million.~~operator reimbursements for our real estate taxes. At ~~September~~June 30, ~~2018,~~2019, the straight-line rent receivable balance, net of reserves, on the balance sheet was ~~$73.1~~$43.7 million.

28

Table of Contents

Update on ~~Anthem Memory Care and Preferred Care~~Certain Operators

During 2017, we issued a notice of default to Anthem Memory Care (“Anthem”) resulting from Anthem’s partial payment of minimum rent. Anthem operates 11 ~~operational~~ memory care communities under a master lease. We ~~are~~ currently ~~not pursuing enforcement~~estimate that Anthem will pay $7.5 million of ~~our rights and remedies pertaining to known events~~annual cash rent during 2019. This amount represents approximately 50% of ~~default~~the contractual amount due under the ~~master~~ lease in 2019. In accordance with Accounting Standard codification (“ASC”) Topic 842, Leases (“ASC 842”) lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and our guarantees, with the stipulation that Anthem Memory Care achieve certain level of performance and pay a minimum of $5.2 million of cash rent for these 11 properties through December 31, 2018. We receive regular financial performance updates fromlease incentive balances related to Anthem and ~~continue~~determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to ~~monitor Anthem’s performance obligations under~~equity as of January 1, 2019 as required by the ~~master lease agreement closely.~~ASC 842 transition guidance.

~~Also, during~~During 2017, Preferred Care, Inc. (“Preferred Care”) and ~~several~~ affiliated entities filed for Chapter 11 bankruptcy as a result of a ~~multi-million dollar judgement~~multi-million-dollar judgment in a lawsuit in Kentucky against Preferred Care and certain affiliated entities. The affiliated entities named in the lawsuit operate properties in Kentucky and New Mexico. ~~According to Preferred Care, it is subject to the judgement because it was included in the lawsuit.~~ Preferred Care leases 24 properties under two master leases from us and none of the 24 properties are located in Kentucky or New Mexico. Those 24 properties are in Arizona, Colorado, Iowa, Kansas ~~Texas~~ and ~~Virginia. Additionally, the~~Texas. The Preferred Care operating entities that sublease those properties did not file for bankruptcy. ~~Our annual rental revenue from~~The court ordered deadline for affirmation or rejection of the lease has passed without action by Preferred Care. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Preferred Care ~~represented 6.5%~~and determined that it was not probable that we would collect substantially all of ~~total rental and interest income~~the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as of ~~September 30, 2018.~~January 1, 2019 as required by the ASC 842 transition guidance. Furthermore, we placed Preferred Care ~~is current~~ on ~~its~~a cash basis on January 1, 2019. We are working with Preferred Care on options for the portfolio which may include re-leasing or selling some or all of the properties.

On December 4, 2018, Senior Care Centers, LLC. and affiliates and subsidiaries (“Senior Care”) filed for Chapter 11 bankruptcy as a result of lease terminations from certain landlords and on-going operational challenges. Senior Care did not pay us December 2018 rent, but has paid us January to July 2019 rent, real estate property tax and maintenance deposits. In December 2018, we placed Senior Care on a cash basis. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Senior Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as of January 1, 2019 as required by the ASC 842 transition guidance.

Pursuant to the U.S. Bankruptcy Code, Senior Care had an initial period of 120 days from the petition date to assume or reject the lease. However, the Bankruptcy Code also provides that the court may extend this initial 120-day period for an additional 90 days. Accordingly, Senior Care requested, and the court approved an additional 90 days, which ended on July 2, 2019, to assume or reject the lease. In July 2019, Senior Care filed a motion attempting to affirm the lease. We have subsequently filed an objection in opposition to Senior Care’s motion.

During the three months ended March 31, 2019, we placed Thrive Senior Living, LLC. (“Thrive”) on a cash basis due to usshort-payment of contractual rent in November 2018 and ~~provides us updates on~~non-payment of rent in December 2018 totaling $0.7 million. This rent was subsequently received in 2019. Thrive did not pay January to July 2019 rent. In April 2019, we issued a notice of default to Thrive. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the ~~bankruptcy proceedings.~~

27

collectibility of straight-line rent receivable and lease incentive balances related to Thrive and determined that it was not probable

29

Table of Contents

that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as of January 1, 2019 as required by the ASC 842 transition guidance.

We completed the following for all of the properties in the Thrive portfolio:

●

Transitioned two memory care communities located in Ohio and Kentucky with a total of 120-units to a new operator during the second quarter of 2019. The memory care communities are under a 10-year lease term with initial cash rent of $1.3 million in year one, $1.5 million in year two, $2.0 million in year three and $2.2 million in year four. Rent may increase subject to a contingent escalation formula commencing in year five and annually thereafter. The lease provides the lessee with a purchase option available between 2028-2029;

●

Transitioned a 56-unit memory care community located in Texas to an existing operator and added the memory care community to an existing master lease during the second quarter of 2019. As a result of this transition, annual cash rent under the existing master lease was increased by $0.4 million effective June 1, 2019 and will increase by an additional $0.3 million on June 1, 2020 and 2.5% annually thereafter. Additionally, LTC will be entitled to incremental rent calculated as a percentage of increase in gross revenues generated by the property above an established threshold;

●

Transitioned two memory care communities in Georgia and South Carolina with a total of 159-units to an existing operator subsequent to June 30, 2019. The new 2-year lease agreement has an initial annual cash rent of $1.8 million. The lease provides the lessee one month free rent and the option to defer up to 50% of contractual rent for the next 5 months. Rent increases 3.5% in year two; and

●

Transitioned the remaining 60-unit memory care community located in Florida to an existing operator effective August 1, 2019. The new 10-year lease provides the lessee twelve months free rent increasing to $0.5 million in year two and $0.6 million in year three and thereafter. In year two the lessee has the option to defer rent in an amount not to exceed $0.2 million. Rent may increase subject to a contingent escalation formula commencing in year three and annually thereafter. Additionally, the lease provides the lessee with a purchase option available in 2029.

30

Table of Contents

~~2018~~2019 Activities Overview

The following tables summarize our transactions during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 (dollar amounts in thousands):

Investment in Owned Properties


	Number		Type	Number	Initial					Total		Total
	of		of	of	Cash			Purchase		Transaction		Acquisition
State	Properties		Properties	Beds/Units	Yield			Price ⁽¹⁾		Costs		Costs
Virginia	1	⁽²⁾	ALF/MC	74	7.4	%	$	16,719	$	176	$	16,895
California	—	⁽³⁾	Land	—	n.a			110		26		136
Total	1			74			$	16,829	$	202	$	17,031

Number

Type

Number

Initial

Total

Total

of

of

of

Cash

Purchase

Transaction

Acquisition

State

Properties

Properties

Beds/Units

Yield

Price

Costs

Costs

Oregon

1
(1)
ILF

89

6.75
%

$
14,400

$
—

$
14,400

Oregon

—
(1)
UDP

—

—
%

600

36

636

Texas

2

MC

88

7.25
%

25,200

66

25,266

Wisconsin

—

UDP

—

—
%

95

11

106

Total

3

177

$
40,295

$
113

$
40,408

(1)

⁽¹⁾

~~During the second quarter of 2018,~~Subsequent to June 30, 2019, we entered into a ~~partnership~~purchase and sale agreement for the acquisition of a newly constructed 90-bed skilled nursing center located in Missouri for approximately $19,500. Additionally, we entered into a separate purchase and sale agreement for the acquisition of a parcel of land and development of a 90-bed skilled nursing center in Missouri. The commitment totals approximately $18,400. These transactions are expected to ~~develop~~close in the third quarter of 2019.

(2)

We entered into a joint venture (“JV”) to purchase an existing operational 74-unit ALF/MC community. The non-controlling partner contributed $919 of equity and ~~own~~we contributed $15,971 in cash. Our economic interest in the real ~~estate. Under the partnership agreement, we~~estate JV is approximately 95%.

(3)

We acquired a parcel of land adjacent to ~~develop a 78-unit assisted living and memory care community in Medford, OR for a total commitment of $18,108, and~~ an existing ~~operational 89-unit independent living community~~SNF in ~~Oregon for $14,400, during the second and third quarter of 2018, respectively.~~

California.

Investment in Development and Improvement projects


	Developments		Improvements

					Developments		Improvements
Assisted Living Communities	$	19,251	$	1,131	$	8,520	$	893
Skilled Nursing Centers		6,466		500		4,492		—
Other		—		432		—		175
Total	$	25,717	$	2,063	$	13,012	$	1,068

Completed Developments

Number

Type

Number

of

Total

Number

Type

Number

of

Total

Type of Project

Properties

Property

Beds/Units

State

Investment

Properties

Property

Beds/Units

State

Investment

Development

1

MC

66

Illinois

$

13,974

1

SNF

143

Kentucky

$

24,493

Development

1

ILF/ALF/MC

110

Wisconsin

21,872

2

253

$

46,365

~~Properties Sold~~

Type

Number

Number

of

of

of

Sales

Carrying

Net

State

Properties

Properties

Beds/Units

Price

Value

Gain

Alabama

SNF

2

285

$
17,525

$
3,272

$
14,253

Kansas

ALF
(1)
—

—

350

346

—

Ohio and Pennsylvania

ALF

6

320

67,500

16,352

48,445

Total

8

605

$
85,375

$
19,970

$
62,698

⁽¹⁾

~~We sold land adjacent to an existing ALF community in Kansas.~~

Investment in Mortgage Loans


Originations and funding under mortgage loans receivable	$	9,736	⁽¹⁾
Scheduled principal payments received		(565)
Mortgage loan (premiums)		(2)
Provision for loan loss reserve		(92)
Net increase in mortgage loans receivable	$	9,077

Originations and funding under mortgage loans receivable

$
20,530
(1)
Pay-offs received

(1,086)

Scheduled principal payments received

(550)

Net increase in mortgage loans receivable

$
18,894

(1)

⁽¹⁾

During ~~2018,~~2019, we funded an additional ~~$7,400~~$7,500 under an existing mortgage ~~loan for the purchase of a 112-bed skilled nursing center in Michigan.~~loan. The incremental funding bears interest at 8.7%, fixed for five years, and escalating by 2.25% thereafter. Also, we funded additional loan proceeds of $7,125 under an existing mortgage loan for the purchase of a 126-bed skilled nursing center in Michigan. This incremental funding bears interest at 9.41%, fixed for ~~five~~two years, and escalating by 2.25% thereafter.

28

31

Table of Contents

Investment in Unconsolidated Joint Ventures


	Type	Type	Total		Currently			Number													Received
	of	of	Preferred		Paid in			of		Investment			Carrying			Capital		Recognized			Cash
State	Properties	Investment	Return		Cash			Beds/ Units		Commitment			Value			Contribution		Income			Interest
Arizona	ALF/MC/ILF	Preferred Equity	15	%	8	%	⁽¹⁾	585	$	25,650		$	24,324		$	293	$	553		$	727
Florida	ALF/ILF/MC	Mezzanine	15	%	15	%		99		2,900	⁽²⁾		3,197	⁽²⁾		—		256			243
Florida ⁽³⁾	UDP/ALF/MC	Mezzanine	n.a		n.a	%		n.a		—			—			—		404	⁽³⁾		432	⁽³⁾
								684	$	28,550		$	27,521		$	293	$	1,213		$	1,402

Type

Type

Total

Currently

Number

Cash

of

of

Preferred

Paid in

of

Investment

Carrying

Capital

Income

Interest

State

Properties

Investment

Return


Cash


Beds/ Units


Commitment


Value


Contribution


Recognized

Received

Arizona

ALF/MC/ILF

Preferred Equity

15
%

7
%

585

$
25,650

$
23,942

$
580

$
1,490

$
1,436

Florida

ALF/IL/MC

Mezzanine

15
%

12
%

99

2,900
(1)

3,169
(1)

—

383

291

Florida

UDP-ALF/MC

Mezzanine

15
%

10
%

127

3,400

3,400

—

230

—
(2)

811

$
31,950

$
30,511

$
580

$
2,103

$
1,727

(1)	⁽¹⁾Effective second quarter of 2019, this JV was placed on cash basis due to delinquency of our preferred return.

(2)

Since interest payments were deferred and no interest was recorded for the first twelve months of the loan, we used the effective interest method in accordance with ~~GAAP~~U.S. generally accepted accounting principles (“GAAP”) to recognize interest income and recorded the difference between the effective interest income and cash interest income to the loan principal balance.

(3)	⁽²⁾We had a $3,400 mezzanine loan commitment for the development of a 127-unit seniors housing community in Florida with a total preferred return of 15%. During the first quarter of 2019, the mezzanine loan was paid off.

Notes Receivable


Advances under notes receivable	$	7,766	⁽¹⁾
Principal payments received under notes receivable		(49)
Reclassified to lease incentives ⁽²⁾		(200)
Notes receivable reserve		(75)
Total	$	7,442

(1)

We ~~withheld $653 at~~originated a $6,800 mezzanine loan commitment for the ~~time~~development of a 204-unit ILF/ALF/MC in Georgia. The mezzanine loan ~~origination~~has a five-year term and a 12.0% return, a portion of which is ~~being applied~~paid in cash, and the remaining portion of which is deferred during the first 46 months. Additionally, we originated a $1,400 note agreement, funding $582 with a commitment to ~~interest. As~~fund $818. The note bears interest at 7.0%. Further, we originated a $550 note agreement, funding $200 with a commitment to fund $350. The note bears interest at 7.5%.

(2)	Represents an interim working capital loan related to a development project which matured upon completion of ~~September 30, 2018, we still hold $257 which will be applied to future interest.~~ the development project and commencement of the lease.

~~Notes Receivable~~

Advances under notes receivable
$
50
Principal payments received under notes receivable

(3,848)
Total
$
(3,798)

~~Debt Obligations~~

During 2018, we amended and restated our unsecured credit agreement to replace the previous unsecured credit agreement, prior to its expiration on October 14, 2018. The amended credit agreement maintains the $600.0 million aggregate commitment of the lenders under the prior agreement and provides for the opportunity to increase the commitment size of the credit agreement up to a total of $1.0 billion. The amended credit agreement extends the maturity of the credit agreement to June 27, 2022 and provides for a one-year extension option at our discretion, subject to customary conditions. Additionally, the amended credit agreement decreases the interest rate margins and converts from the payment of unused commitment fees to a facility fee.

29

~~Table of Contents~~

Health Care Regulatory Climate

The Centers for Medicare & Medicaid Services (“CMS”) annually updates Medicare skilled nursing facility prospective payment system rates and other policies. On July 31, ~~2017,~~2018, CMS released a final rule updating ~~Medicare~~ skilled nursing facility rates and policies for fiscal year ~~2018, which began on October 1, 2017. CMS expected the~~2019. The final rule toadopts a 2.4% payment increase, ~~overall payments to SNFs by $370 million in fiscal year 2018, or 1.0%, compared to fiscal year 2017 levels. The 1% update for fiscal year 2018 was set by Congress in 2015 legislation.~~

On April 27, 2018, CMS released its proposed update to Medicare skilled nursing facility rates for fiscal year 2019, which CMS projected would increase overall payments to skilled nursing facilities by $850 million in fiscal year 2019 relative to fiscal year 2018 levels. The proposed rate update for fiscal year 2019 was 2.4%, as mandated by the Bipartisan Budget Act of 2018. CMS projects this update will increase overall payments to skilled nursing facilities by $820 million in fiscal year 2019 as compared to fiscal year 2018 levels. Furthermore, CMS ~~proposed replacing~~finalized a plan to replace the existing Resource Utilization Groups, Version IV (“RUG–IV”) case mix classification system with a new model beginning in fiscal year 2020. The new case mix classification system, called the “Patient-Driven Payment Model,” ~~would~~will base Medicare payment on resident needs rather than the amount of therapy a resident receives.

On July 31, 2018, CMS released a final rule updating skilled nursing facility rates and policies for fiscal year 2019. The final rule adopts the proposed 2.4% payment increase, which CMS projects will increase overall payments to skilled nursing facilities by $820 million in fiscal year 2019 as compared to fiscal year 2018 levels ($30 million less than projected in the proposed rule). CMS also ~~finalized the Patient-Driven Payment Model, effective for fiscal year 2020. Finally, CMS confirm~~confirmed that ~~as required by statute, beginning October 1, 2018,~~ the SNF Value-Based Purchasing (“VBP”) Program ~~will~~would go into ~~effect.~~effect beginning October 1, 2018, as required by statute. Under the VBP Program, CMS ~~will reduce~~reduces Medicare payments to skilled nursing facilities by 2%~~. CMS will then return~~ and returns approximately 60% of the withheld amount to skilled nursing facilities based on their relative performance on a readmission measure. The remaining portion of the withheld amount will be retained in the Medicare Trust Fund.

On ~~September 28, 2016,~~April 19, 2019, CMS released a proposed rule to update skilled nursing facility rates and policies for fiscal year 2020, which starts October 1, 2019. CMS estimates that payments to skilled nursing facilities would rise by $887 million, or 2.5%, compared with fiscal year 2019 levels. CMS proposes to implement the Patient-Driven Payment Model in fiscal year 2020, as previously adopted, but CMS proposes to modify the definition of group therapy. CMS also proposes certain policy changes to the VBP and quality reporting program requirements that would affect Medicare payments to skilled nursing facilities. On July 30, 2019, CMS

32

Table of Contents

issued its final fiscal year 2020 Medicare skilled nursing facility update. Under the final rule, ~~revising~~CMS projects aggregate payments to skilled nursing facilities will increase by $851 million, or 2.4%, for fiscal year 2020 compared with fiscal year 2019. The final rule also addresses implementation of the ~~requirements that long-term care facilities must meet~~Patient-Driven Payment Model on October 1, 2019, changes to ~~participate~~the group therapy definition in the ~~Medicare and Medicaid programs. This major rule addresses requirements for improving quality of care and patient safety,~~skilled nursing facility ~~staffing, care planning, infection control,~~setting, and ~~residents’ rights~~various skilled nursing facility VBP and ~~compliance and ethics programs, among other key provisions. While the rule also banned pre-dispute arbitration agreements, that provision was stayed due to litigation challenging the requirement.~~ quality reporting program policies.

On ~~June 8, 2017,~~July 18, 2019, CMS published a ~~proposed~~final rule that ~~would eliminate~~eliminates the prohibition on pre-dispute binding arbitration agreements between long-term care facilities and ~~otherwise modify these requirements; this~~their residents. The rule ~~has not been finalized.~~also strengthens the transparency of arbitration agreements and makes other changes to arbitration requirements for long-term care facilities. There can be no assurance that these rules or future regulations modifying Medicare skilled nursing facility payment rates or other requirements for Medicare and/or Medicaid participation will not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.

Congress periodically considers legislation revising Medicare and Medicaid policies, including legislation that could have the impact of reducing Medicare reimbursement for skilled nursing facilities and other Medicare providers, limiting state Medicaid funding allotments, encouraging home and community-based long-term care services as an alternative to institutional settings, or otherwise reforming payment policy for post-acute care services. On February 9, 2018, President Trump signed into law the Bipartisan Budget Act of 2018, which, as noted, establishes a 2.4% increase to fiscal year 2019 Medicare skilled nursing facility rates; the update otherwise would have been based on the change in the skilled nursing facility market basket index, reduced by a productivity adjustment. There can be no assurances that enacted or future legislation will not have an adverse impact on the financial condition of our borrowers and lessees, which subsequently could materially adversely impact our company.

30

~~Table of Contents~~

Additional reforms affecting the payment for and availability of health care services have been proposed at the federal and state level and adopted by certain states. Increasingly, state Medicaid programs are providing coverage through managed care programs under contracts with private health plans, which is intended to decrease state Medicaid costs. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodologies may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third-party payors.

33

Table of Contents

Key Performance Indicators, Trends and Uncertainties

We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results in making operating decisions and for budget planning purposes.

Concentration Risk. We evaluate by gross investment our concentration risk in terms of asset mix, real estate investment mix, operator mix and geographic mix. Concentration risk is valuable to understand what portion of our real estate investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our investments that are real property or mortgage loans. ~~In order to qualify~~The National Association of Real Estate Investment Trusts (“NAREIT”), an organization representing U.S. REITs and publicly traded real estate companies, classifies a company with 50% or more of assets directly or indirectly in the equity ownership of real estate as an equity ~~REIT, at least 75 percent of our total assets must be represented by real estate assets, cash, cash items and government securities.~~REIT. Investment mix measures the portion of our investments that relate to our various property classifications. Operator mix measures the portion of our investments that relate to our top five operators. Geographic mix measures the portion of our real estate investment that relate to our top five states.

The following table reflects our recent historical trends of concentration risk (gross investment, in thousands):

								��
	6/30/19		3/31/19		12/31/18		9/30/18		6/30/18
Asset mix:
Real property	$	1,452,669	$	1,445,596	$	1,421,456	$	1,414,267	$	1,401,303
Loans receivable		254,555		246,775		245,386		245,053		236,178
Real estate investment mix:
Skilled nursing centers ⁽¹⁾	$	844,136	$	834,185	$	830,485	$	832,599	$	829,941
Assisted living communities ⁽²⁾		843,682		840,926		820,686		812,800		794,426
Under development ^{(1) (2)}		8,167		6,193		4,606		2,881		2,291
Other ⁽³⁾		11,239		11,067		11,065		11,040		10,823
Operator mix:
Prestige Healthcare ⁽³⁾	$	267,688	$	259,907	$	258,519	$	258,186	$	249,311
Senior Lifestyle Corporation		190,758		190,368		190,368		189,945		189,945
Senior Care Centers		138,109		138,109		138,109		138,109		138,109
Anthem Memory Care		136,397		136,397		136,397		135,946		135,342
Carespring Health Care Management ⁽⁴⁾		102,038		99,997		97,461		95,951		93,279
Remaining operators ⁽⁴⁾		872,234		867,593		845,988		841,183		831,495
Geographic mix:
Texas	$	292,159	$	292,091	$	292,317	$	292,317	$	292,317
Michigan		255,498		247,718		246,329		245,996		237,121
Wisconsin		149,064		146,750		143,657		137,056		133,794
Colorado		114,923		114,923		114,923		114,923		114,923
California		102,412		102,254		102,254		102,254		102,254
Remaining states		793,168		788,635		767,362		766,774		757,072

9/30/18

6/30/18

3/31/18

12/31/17

9/30/17

Asset mix:











Real property

$
1,414,267

$
1,401,303

$
1,401,506

$
1,392,122

$
1,359,586

Loans receivable

245,053

236,178

235,734

226,162

224,095

Investment mix:

Skilled nursing centers

$
814,194

$
814,208

$
813,542

$
803,691

$
803,853

Assisted living communities

802,484

787,373

795,036

789,520

759,896

Under development

31,602

25,077

17,922

14,465

9,716

Other (1)

11,040

10,823

10,740

10,608

10,216

Operator mix:

Prestige Healthcare (1)

$
258,186

$
249,311

$
247,769

$
238,184

$
236,105

Senior Lifestyle Corporation

189,945

189,945

189,226

189,226

189,025

Senior Care Centers

138,109

138,109

138,109

138,109

138,109

Anthem Memory Care

135,946

135,342

131,527

126,120

121,138

Brookdale Senior Living

126,991

126,991

126,991

126,991

126,991

Remaining operators

810,143

797,783

803,618

799,654

772,313

Geographic mix:

Texas

$
292,317

$
292,317

$
267,051

$
267,051

$
269,279

Michigan

245,996

237,121

235,579

225,994

223,916

Wisconsin

137,056

133,794

130,941

129,398

126,313

Colorado

114,923

114,923

114,923

114,923

114,923

California

102,254

102,254

102,254

102,254

102,254

Remaining states

766,774

757,072

786,492

778,664

746,996

(1)	⁽¹⁾During the three months ended March 31, 2019, we completed the construction of a 143-bed SNF in Kentucky. Accordingly, the property was reclassified from “Under development” to “Skilled nursing centers” for all periods presented.

(2)	During the three months ended June 30, 2019, we completed the construction of a 110-unit ILF/ALF/MC in Wisconsin. Accordingly, the property was reclassified from “Under Development” to “Assisted living communities” for all periods presented.

(3)	We have three parcels of land ~~as of September 30, 2018. These parcels are~~ located adjacent to properties securing the Prestige Healthcare mortgage loan and are managed by Prestige.

(4)

During the three months ended June 30, 2019, we transitioned two assisted living communities from Brookdale Senior Living to a new operator. As a result of this transition, Brookdale Senior Living is no longer a top five operator under our geographic mix and is replaced by Carespring Health Care Management. Accordingly, our "Carespring Health Care Management" properties were reclassified from "Remaining operators" and our "Brookdale Senior Living" properties were reclassified to “Remaining operators” for all periods presented.

3134

Table of Contents

Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to gross asset value and debt to market capitalization. The leverage ratios indicate how much of our consolidated balance sheet capitalization is related to long-term obligations. Our coverage ratios include interest coverage ratio and fixed charge coverage ratio. The coverage ratios indicate our ability to service interest and fixed charges (interest). The coverage ratios are based on earnings before interest, taxes, depreciation and amortization for real estate (“EBITDAre”) as defined by ~~National Association of Real Estate Investment Trusts (“NAREIT”).~~ NAREIT. EBITDAre is calculated as net income available to common stockholders (computed in accordance with GAAP) excluding (i) interest expense, (ii) income tax expense, (iii) real estate depreciation and amortization, (iv) impairment write-downs of depreciable real estate, (v) gains or losses on the sale of depreciable real estate, and (vi) adjustments for unconsolidated partnerships and joint ventures. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. The following table reflects the recent historical trends for our credit strength measures:

35

Table of Contents

Balance Sheet Metrics


	Year to Date		Quarter Ended
	6/30/19		6/30/19			3/31/19			12/31/18			9/30/18		6/30/18
Debt to gross asset value	36.8	%	36.8	%	⁽¹⁾	37.1	%	⁽²⁾	35.2	%	⁽⁵⁾	36.4	%	36.1	%
Debt to market capitalization ratio	27.1	%	27.1	%		27.1	%	⁽³⁾	28.1	%	⁽⁶⁾	27.7	%	27.8	%
Interest coverage ratio ⁽⁸⁾	4.8	x	4.8	x		4.9	x	⁽⁴⁾	5.2	x	⁽⁷⁾	4.8	x	4.7	x
Fixed charge coverage ratio ⁽⁸⁾	4.8	x	4.8	x		4.9	x	⁽⁴⁾	5.2	x	⁽⁷⁾	4.8	x	4.7	x

Year to Date

Quarter Ended

9/30/18

9/30/18

6/30/18

3/31/18

12/31/17

9/30/17

Debt to gross asset value

36.4
%
36.4
%

36.1
%
(1)
38.3
%
(3)
37.6
%
(3)
36.8
%
Debt to market capitalization ratio

27.7
%
27.7
%

27.8
%
(2)
31.4
%
(4)
27.9
%
(4)
25.5
%
Interest coverage ratio (5)

4.7
x
4.8
x

4.7
x

4.7
x

4.8
x

4.8
x
Fixed charge coverage ratio (5)

4.7
x
4.8
x

4.7
x

4.7
x

4.8
x

4.8
x

(1)

⁽¹⁾

Decreased due to ~~decrease in outstanding debt and~~ increase in gross asset value from ~~acquisitions partially offset by sold properties and~~additional mortgage loan, ~~payoffs.~~

⁽²⁾

~~Decreased due to decrease in outstanding debt and increase in market capitalization.~~

⁽³⁾

~~Increased primarily due to increase in outstanding debt partially offset by the increase in gross asset value from acquisitions, additional~~ development and capital improvement funding.

(2)

⁽⁴⁾

Increased ~~primarily~~ due to increase in outstanding debt and decrease in gross asset value. The decrease in gross asset value was primarily due to adoption of ASC 842 during the three months ended March 31, 2019. ASC 842 requires a lease-by-lease collectibility analysis of receivables and related balances. Based on our assessment, we determined that it was not probable that we would collect substantially all of the contractual lease obligations for certain leases through maturity. Accordingly, we wrote-off the balance of straight-line rent receivable and lease incentives related to these leases as a cumulative adjustment to equity, as required by the transition guidance.

(3)	Decreased due to increase in market capitalization.

(4)	^{Decreased due to decrease in other income compared to the fourth quarter of 2018. See (7) below for explanation.}

(5)	Decreased due to decrease in outstanding debt partially offset by decrease in gross asset value.

(6)	Increased due to decrease in market capitalization, partially offset by decrease in outstanding debt.

(7)	Increased due to decrease in interest expense and increase in other income from the net write-off of Senior Lifestyle contingent lease incentive and the related earn-out liability.

(8)

In calculating our interest coverage and fixed charge coverage ratios above, we use EBITDAre, which is a financial measure not derived in accordance with ~~U.S. generally accepted accounting principles (“GAAP”)~~GAAP (non-GAAP financial measure). EBITDAre is not an alternative to net income, operating income or cash flows from operating activities as calculated and presented in accordance with GAAP. You should not rely on EBITDAre as a substitute for any such GAAP financial measures or consider it in isolation, for the purpose of analyzing our financial performance, financial position or cash flows. Net income is the most directly comparable GAAP measure to EBITDAre.


	Year to Date			Quarter Ended
	6/30/19			6/30/19			3/31/19			12/31/18			9/30/18			6/30/18
Net income	$	40,961		$	20,534		$	20,427		$	30,844		$	34,937		$	68,936
Less: Gain loss on sale		(500)			(500)			—			(7,984)			(14,353)			(48,345)
Add: Interest expense		15,177			7,710			7,467			7,215			7,497			7,655
Add: Depreciation and amortization		19,467			9,860			9,607			9,396			9,447			9,268
Total EBITDAre	$	75,105		$	37,604		$	37,501		$	39,471		$	37,528		$	37,514

Interest expense	$	15,177		$	7,710		$	7,467		$	7,215		$	7,497		$	7,655
Add: Capitalized interest		333			73			260			398			298			293
Interest incurred	$	15,510		$	7,783		$	7,727		$	7,613		$	7,795		$	7,948

Interest coverage ratio		4.8	x		4.8	x		4.9	x		5.2	x		4.8	x		4.7	x

Interest incurred	$	15,510		$	7,783		$	7,727		$	7,613		$	7,795		$	7,948
Total fixed charges	$	15,510		$	7,783		$	7,727		$	7,613		$	7,795		$	7,948

Fixed charge coverage ratio		4.8	x		4.8	x		4.9	x		5.2	x		4.8	x		4.7	x

Year to Date

Quarter Ended

9/30/18

9/30/18

6/30/18

3/31/18

12/31/17

9/30/17

Net income

$
124,232

$
34,937

$
68,936

$
20,359

$
19,834

$
20,616

(Less): gain on sale |Add: loss on sale

(62,698)

(14,353)

(48,345)

—

1,240

—

Add: Impairment charges

—

—

—

—

—

—

Add: Interest expense

22,981

7,497

7,655

7,829

7,683

7,644

Add: Depreciation and amortization

28,159

9,447

9,268

9,444

9,424

9,519

Total EBITDAre

$
112,674

$
37,528

$
37,514

$
37,632

$
38,181

$
37,779

Interest expense

$
22,981

$
7,497

$
7,655

$
7,829

$
7,683

$
7,644

Add: Capitalized interest

850

298

293

259

281

256

Interest incurred

$
23,831

$
7,795

$
7,948

$
8,088

$
7,964

$
7,900

Interest coverage ratio

4.7
x

4.8
x

4.7
x

4.7
x

4.8
x

4.8
x

Interest incurred

$
23,831

$
7,795

$
7,948

$
8,088

$
7,964

$
7,900

Total fixed charges

$
23,831

$
7,795

$
7,948

$
8,088

$
7,964

$
7,900

Fixed charge coverage ratio

4.7
x

4.8
x

4.7
x

4.7
x

4.8
x

4.8
x

32

36

Table of Contents

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 seniors 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.

33

37

Table of Contents

Operating Results (unaudited, in thousands)


	Three Months Ended
	June 30,
	2019			2018			Difference
Revenues:
Rental income	$	38,277		$	33,930		$	4,347	^{(1) (2)}
Interest income from mortgage loans		7,351			7,007			344	⁽³⁾
Interest and other income		638			535			103
Total revenues		46,266			41,472			4,794

Expenses:
Interest expense		7,710			7,655			(55)
Depreciation and amortization		9,860			9,268			(592)	⁽⁴⁾
Provision (recovery) for doubtful accounts		84			(38)			(122)
Transaction costs		200			6			(194)
Property tax expense		3,910			—			(3,910)	⁽²⁾
General and administrative expenses		4,596			4,716			120
Total expenses		26,360			21,607			(4,753)

Other operating income:
Gain on sale of real estate, net		500	⁽⁵⁾		48,345	⁽⁵⁾		(47,845)
Operating income		20,406			68,210			(47,804)
Income from unconsolidated joint ventures		128			726			(598)	⁽⁶⁾
Net income		20,534			68,936			(48,402)
Income allocated to non-controlling interests		(88)			—			(88)
Net income attributable to LTC Properties, Inc.		20,446			68,936			(48,490)
Income allocated to participating securities		(94)			(278)			184
Net income available to common stockholders	$	20,352		$	68,658		$	(48,306)

Three Months Ended

September 30,

2018

2017

Difference

Revenues:

Rental income

$
34,211

$
33,233

$
978
(1)
Interest income from mortgage loans

7,087

6,677

410
(2)
Interest and other income

478

1,336

(858)
(3)
Total revenues

41,776

41,246

530

Expenses:

Interest expense

7,497

7,644

147
(4)
Depreciation and amortization

9,447

9,519

72

Provision (recovery) for doubtful accounts

106

(96)

(202)
(5)
Transaction costs

9

34

25

General and administrative expenses

4,879

4,144

(735)
(6)
Total expenses

21,938

21,245

(693)

Operating income

19,838

20,001

(163)

Income from unconsolidated joint ventures

746

615

131
(7)
Gain on sale of real estate, net

14,353

—

14,353
(8)
Net income

34,937

20,616

14,321

Income allocated to non-controlling interests

(17)

—

(17)

Net income attributable to LTC Properties, Inc.

34,920

20,616

14,304

Income allocated to participating securities

(138)

(80)

(58)

Net income available to common stockholders

$
34,782

$
20,536

$
14,246

(1)

⁽¹⁾

Increased due to (2) below and increased rent from acquisitions ~~capital improvement investments~~ and ~~higher cash rental income from Anthem~~developments partially offset by ~~a reduction related to~~decreased rent from properties sold ~~during 2017~~in 2018.

(2)

Increased due to recording $3,910 real estate taxes that are reimbursed by our operators as rental income with a corresponding property tax expense. We adopted ASC 842 using a modified retrospective approach as of the adoption date of January 1, 2019. Accordingly, we are not required to report the expense and ~~2018.~~

revenue stream for periods prior to January 1, 2019.

(3)

⁽²⁾

Increased primarily due to mortgage originations and capital improvement ~~funding~~funding.

(4)	Increased due to acquisitions and completed developments partially offset by ~~payoffs.~~ properties sold in 2018.

(5)

⁽³⁾

~~Decreased due to~~During the ~~net write-off of an earn-out liability and the related lease incentive asset during the third~~second quarter of ~~2017 resulting from the lessee’s business model change, which negatively impacted the lessee’s operating results~~2018, we sold a portfolio of six ALFs in Ohio and ~~caused the payment of the earn-out within the exercisable window improbable.~~

⁽⁴⁾

~~Decreased due to scheduled principal payments under our senior unsecured notes~~Pennsylvania and ~~an increase in capitalized interest related to development projects partially offset by~~recognized a ~~higher average outstanding balance on our line of credit and an increase in LIBOR rates.~~

⁽⁵⁾

~~Increased primarily due to (2) above and the reversal of straight-line rent reserve in 2017.~~

⁽⁶⁾

~~Increased primarily due to lower incentive compensation in the prior year related to a previously disclosed defaulted master lease.~~

⁽⁷⁾

Increased primarily due to income generated from additional funding under a preferred capital contribution commitment and income from a mezzanine loan accounted for as an unconsolidated joint venture in accordance with GAAP which was previously deferred.

⁽⁸⁾

~~Represents the~~ net gain on sale of ~~two senior living centers~~$48,345. During the second quarter of 2019, due to receipt of funds held in ~~Alabama~~escrow related to this portfolio, we recognized an additional $500 net gain on sale.

(6)	Decreased primarily due to a preferred equity investment which was placed on cash basis during the ~~third~~second quarter of ~~2018.~~ 2019 due to delinquency of our preferred return.

34

38

Table of Contents


	Six Months Ended
	June 30,
	2019			2018			Difference
Revenues:
Rental income	$	75,901		$	68,435		$	7,466	^{(1) (2)}
Interest income from mortgage loans		14,662			13,823			839	⁽³⁾
Interest and other income		1,159			1,024			135
Total revenues		91,722			83,282			8,440

Expenses:
Interest expense		15,177			15,484			307	⁽⁴⁾
Depreciation and amortization		19,467			18,712			(755)	⁽⁵⁾
Provision (recovery) for doubtful accounts		167			(30)			(197)
Transaction costs		200			10			(190)
Property tax expense		8,296			—			(8,296)	⁽²⁾
General and administrative expenses		9,167			9,513			346	⁽⁶⁾
Total expenses		52,474			43,689			(8,785)

Other operating income:
Gain on sale of real estate, net		500	⁽⁷⁾		48,345	⁽⁷⁾		(47,845)
Operating income		39,748			87,938			(48,190)
Income from unconsolidated joint ventures		1,213			1,357			(144)	⁽⁸⁾
Net income		40,961			89,295			(48,334)
Income allocated to non-controlling interests		(169)			—			(169)
Net income attributable to LTC Properties, Inc.		40,792			89,295			(48,503)
Income allocated to participating securities		(186)			(366)			180
Net income available to common stockholders	$	40,606		$	88,929		$	(48,323)

Nine Months Ended

September 30,

2018

2017

Difference

Revenues:

Rental income

$
102,646

$
103,533

$
(887)
(1)
Interest income from mortgage loans

20,910

20,050

860
(2)
Interest and other income

1,502

2,753

(1,251)
(3)
Total revenues

125,058

126,336

(1,278)

Expenses:

Interest expense

22,981

22,266

(715)
(4)
Depreciation and amortization

28,159

28,186

27

Impairment charges

—

1,880

1,880
(5)
Provision (recovery) for doubtful accounts

76

(139)

(215)
(6)
Transaction costs

19

56

37

General and administrative expenses

14,392

13,270

(1,122)
(7)
Total expenses

65,627

65,519

(108)

Operating income

59,431

60,817

(1,386)

Income from unconsolidated joint ventures

2,103

1,635

468
(8)
Gain on sale of real estate, net

62,698

5,054

57,644
(9)
Net income

124,232

67,506

56,726

Income allocated to non-controlling interests

(17)

—

(17)

Net income attributable to LTC Properties, Inc.

124,215

67,506

56,709

Income allocated to participating securities

(504)

(281)

(223)

Net income available to common stockholders

$
123,711

$
67,225

$
56,486

(1)

⁽¹⁾

~~Decreased~~Increased due to ~~Anthem’s default, as previously discussed,~~(2) below and ~~the reduction of~~increased rent ~~related to properties sold during 2017~~from acquisitions and ~~2018,~~developments partially offset by ~~acquisitions~~decreased rent from properties sold in 2018.

(2)

Increased due to recording $8,245 real estate taxes that are reimbursed by our operators as rental income with a corresponding property tax expense. We adopted ASC 842 using a modified retrospective approach as of the adoption date of January 1, 2019. Accordingly, we are not required to report the expense and ~~capital improvement investments.~~

revenue stream for periods prior to January 1, 2019.

(3)

⁽²⁾

Increased primarily due to mortgage originations and capital improvement ~~funding partially offset by payoffs.~~

funding.

(4)

⁽³⁾

Decreased due to ~~non-accrual of interest on~~ a loan to Anthem and the net write-off of an earn-out liability and the related lease incentive asset during the third quarter of 2017 resulting from the lessee’s business model change, which negatively impacted the lessee’s operating results and caused the payment of the earn-out within the exercisable window improbable, partially offset by interest income from mezzanine loans.

⁽⁴⁾

~~Increased primarily due to a higher average~~lower outstanding ~~balance on our line of credit and an increase in LIBOR rates , partially offset by scheduled principal payments~~debt under our senior unsecured notes partially offset by a higher outstanding balance on our unsecured line of credit and ~~an increase~~decrease in capitalized ~~interest related to development projects.~~

interest.

(5)

⁽⁵⁾

~~Represents the write-off of straight-line rent and other receivables in 2017 related to two properties~~Increased due to ~~negotiations to transition these~~acquisitions and completed developments partially offset by properties ~~to another operator~~sold in ~~our portfolio.~~

2018.

(6)

⁽⁶⁾

~~Increased primarily due to (2) above and the reversal of straight-line rent reserve in 2017.~~

⁽⁷⁾

~~Increased~~Decreased primarily due to lower accrual of incentive compensation in ~~the prior year related to a previously disclosed defaulted master lease.~~

2019.

(7)

⁽⁸⁾

~~Increased primarily due to income generated from additional funding under~~During the second quarter of 2018, we sold a ~~preferred capital contribution commitment and income from a mezzanine loan accounted for as an unconsolidated joint venture in accordance with GAAP which was previously deferred.~~

⁽⁹⁾

~~Represents the net gain on sale~~portfolio of six ~~assisted living communities~~ALFs in Ohio and Pennsylvania and ~~net gain on sale of two skilled nursing centers in Alabama during 2018 partially offset by~~recognized a net gain on sale of ~~four assisted living communities~~$48,345. During the second quarter of 2019, due to receipt of funds held in ~~Indiana and Iowa~~escrow related to this portfolio, we recognized an additional $500 net gain on sale.

(8)	Decreased primarily due to a preferred equity investment which was placed on cash basis during ~~2017.~~ the second quarter of 2019 due to delinquency of our preferred return.

Funds From Operations Available to Common Stockholders

Funds from Operations (“FFO”) available to common stockholders, basic FFO available to common stockholders per share and diluted FFO available to common stockholders per share are supplemental measures of a REIT’s financial performance that are not defined by GAAP. Real estate values historically rise and fall with market conditions, but cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. We

35

~~Table of Contents~~

believe that by excluding the effect of historical cost depreciation, which may be of limited relevance in evaluating current performance, FFO facilitates comparisons of operating performance between periods.

We use FFO as a supplemental performance measurement of our cash flow generated by operations. FFO does not represent cash generated from operating activities in accordance with GAAP,

39

Table of Contents

and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income available to common stockholders.

We calculate and report FFO in accordance with the definition and interpretive guidelines issued by NAREIT. FFO, as defined by NAREIT, means net income available to common stockholders (computed in accordance with GAAP) excluding gains or losses on the sale of real estate and impairment write-downs of depreciable real estate plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that have a different interpretation of the current NAREIT definition from us; therefore, caution should be exercised when comparing our FFO to that of other REITs.

The following table reconciles GAAP net income available to common stockholders to NAREIT FFO available to common stockholders (unaudited, amounts in thousands, except per share amounts):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
GAAP net income available to common stockholders	$	20,352		$	68,658		$	40,606		$	88,929
Add: Depreciation and amortization		9,860			9,268			19,467			18,712
Less: (Gain) loss on sale of real estate, net		(500)			(48,345)			(500)			(48,345)
NAREIT FFO attributable to common stockholders	$	29,712		$	29,581		$	59,573		$	59,296
NAREIT FFO attributable to common stockholders per share:
Basic	$	0.75		$	0.75		$	1.51		$	1.50
Diluted	$	0.75	⁽¹⁾	$	0.75		$	1.50	⁽¹⁾	$	1.50	⁽¹⁾
Weighted average shares used to calculate NAREIT FFO per share:
Basic		39,577			39,471			39,555			39,461
Diluted		39,934	⁽²⁾		39,605	⁽³⁾		39,908	⁽²⁾		39,750	⁽²⁾

Three Months Ended

Nine Months Ended

September 30,

September 30,

2018

2017

2018

2017

GAAP net income available to common stockholders

$
34,782

$
20,536

$
123,711

$
67,225

Add: Depreciation and amortization

9,447

9,519

28,159

28,186

Add: Impairment charges

—

—

—

1,880

Less: Gain on sale of real estate, net

(14,353)

—

(62,698)

(5,054)

NAREIT FFO attributable to common stockholders

$
29,876

$
30,055

$
89,172

$
92,237

NAREIT FFO attributable to common stockholders per share:

Basic

$
0.76

$
0.76

$
2.26

$
2.34

Diluted

$
0.75
(1)
$
0.76
(1)
$
2.25
(1)
$
2.33
(1)
Weighted average shares used to calculate NAREIT FFO per share:

Basic

39,487

39,428

39,470

39,403

Diluted

39,865
(2)

39,748
(2)

39,845
(2)

39,738
(2)

(1)

⁽¹⁾

Includes the effect of the participating securities.

(2)

⁽²⁾

Includes the effect of stock option equivalents, participating securities and performance-based stock units.

(3)	Includes the effect of stock option equivalents andperformance-based stock units.

Liquidity and Capital Resources

Sources and Uses of Cash

As of ~~September~~June 30, ~~2018,~~2019, we had a total of ~~$20.4~~$3.2 million of cash and cash equivalents, ~~$480.0~~$453.1 million available under our unsecured revolving line of credit, ~~$79.8~~$98.0 million available under our senior unsecured note shelf agreement and the potential ability to access the capital markets through the issuance of ~~$184.1~~$200.0 million of common stock under our equity distribution agreement. Subsequent to September 30, 2018, we paid down $20.0 million under our unsecured revolving line of credit. Accordingly, we have $500.0 million available under our unsecured line of credit.Equity Distribution Agreement. Furthermore, we have the ability to access the capital markets through the issuance of debt and/ or equity securities under an automatic shelf registration statement.

We believe that our current cash balance, cash flow from operations available for distribution or reinvestment, our borrowing capacity and our potential ability to access the capital markets are sufficient to provide for payment of our current operating costs, meet debt obligations and pay common dividends

36

~~Table of Contents~~

at least sufficient to maintain our REIT status and repay borrowings at, or prior to, their maturity. The timing, source and amount of cash flows used in financing and investing activities are sensitive to the capital markets environment, especially to changes in interest rates. We continuously evaluate the availability of cost-effective capital and believe we have sufficient liquidity for additional capital investments in ~~2018 and~~ 2019.

40

Table of Contents

We expect our future income and ability to make distributions from cash flows from operations to depend on the collectibility of our rents and mortgage loans receivable. The collection of these loans and rents will be dependent, in large part, upon the successful operation by the operators of the seniors housing and health care properties we own or that are pledged to us. The operating results of the facilities will be impacted by various factors over which the operators/owners may have no control. Those factors include, without limitation, the status of the economy, changes in supply of or demand for competing seniors housing and health care facilities, ability to control rising operating costs, and the potential for significant reforms in the health care industry. In addition, our future growth in net income and cash flow may be adversely impacted by various proposals for changes in the governmental regulations and financing of the health care industry. We cannot presently predict what impact these proposals may have, if any. We believe that an adequate provision has been made for the possibility of loans proving uncollectible but we will continually evaluate the financial status of the operations of the seniors housing and health care properties. In addition, we will monitor our borrowers and the underlying collateral for mortgage loans and will make future revisions to the provision, if considered necessary.

Our investments, principally our investments in mortgage loans and owned properties, are subject to the possibility of loss of their carrying values as a result of changes in market prices, interest rates and inflationary expectations. The effects on interest rates may affect our costs of financing our operations and the fair market value of our financial assets. Generally, our loans have predetermined increases in interest rates and our leases have agreed upon annual increases. Inasmuch as we may initially fund some of our investments with variable interest rate debt, we would be at risk of net interest margin deterioration if medium and long-term rates were to increase.

Our primary sources of cash include rent and interest receipts, borrowings under our primary unsecured credit facility, public and private issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures and construction advances), loan advances and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows as summarized below (in thousands):


	Nine months ended September 30,					Change

							Six Months Ended June 30,					Change
Cash provided by (used in):	2018		2017			$	2019		2018			$
Operating activities	$	83,438	$	76,134	$	7,304	$	61,672	$	55,471	$	6,201
Investing activities		(2,374)		(53,815)		51,441		(44,075)		9,383		(53,458)
Financing activities		(63,706)		(26,468)		(37,238)		(17,046)		(63,361)		46,315
Increase in cash and cash equivalents		17,358		(4,149)		21,507
Cash and cash equivalents, beginning of period		5,213		7,991		(2,778)
Cash and cash equivalents, end of period	$	22,571	$	3,842	$	18,729
Increase in cash, cash equivalents and restricted cash								551		1,493		(942)
Cash, cash equivalents and restricted cash, beginning of period								4,764		5,213		(449)
Cash, cash equivalents and restricted cash, end of period							$	5,315	$	6,706	$	(1,391)

Debt Obligations

Bank Borrowings. ~~During 2018, weamended and restated our unsecured~~We have an Unsecured Credit Agreement that provides for a revolving line of credit ~~agreement~~up to ~~replace the previous unsecured credit agreement, prior to its expiration on October 14, 2018. The amended credit agreement maintains the~~ $600.0 million in aggregate commitment of the lenders ~~under the prior agreement~~ and ~~provides for~~ the opportunity to increase the commitment size of the credit agreement

37

~~Table of Contents~~

up to a total of $1.0 billion.The ~~amended credit agreement extends the maturity of the credit agreement to~~Unsecured Credit Agreement matures on June 27, 2022 and provides for a one-year extension option at our discretion, subject to customary conditions. ~~Additionally, the amended credit agreement decreases the interest rate margins and converts from the payment of unused commitment fees to a facility fee.~~ Based on our leverage at ~~September~~June 30, ~~2018,~~2019, the facility provides for interest annually at LIBOR plus 115 basis points and a facility fee of 20 basis points. At ~~September~~June 30, ~~2018,~~2019, we were in compliance with all covenants.

41

Table of Contents

Senior Unsecured Notes. We have a $337.5 million shelf agreement with affiliates and managed accounts of Prudential Investment Management, Inc. (“Prudential”) with ~~$79.8~~$98.0 million available for borrowing.

The debt obligations by component as of ~~September~~June 30, ~~2018~~2019 are as follows (dollar amounts in thousands):


	Applicable			Available
	Interest	Outstanding		for
Debt Obligations	Rate ⁽¹⁾	Balance		Borrowing
Bank borrowings ⁽²⁾	3.74%	$	146,900	$	453,100
Senior unsecured notes, net of debt issue costs ⁽³⁾	4.49%		528,938		98,000
Total	4.33%	$	675,838	$	551,100

Applicable

Available

Interest

Outstanding

for
Debt Obligations

Rate (1)

Balance

Borrowing
Bank borrowings (2)

3.38%

$
120,000

$
480,000
Senior unsecured notes, net of debt issue costs

4.49%

550,986

79,833
Total

4.29%

$
670,986

$
559,833

(1)

⁽¹⁾

Represents weighted average of interest rate as of ~~September~~June 30, ~~2018.~~

2019.

(2)

⁽²⁾

Subsequent to ~~September~~June 30, ~~2018,~~2019, we ~~paid down $20,000~~borrowed $12,000 under our unsecured revolving line of credit. Accordingly, we have ~~$100,000~~$158,900 outstanding under our ~~unsecured~~ revolving line of credit with ~~$500,000~~$441,100 available for borrowing.

(3)	Subsequent to June 30, 2019, we paid $8,500 in scheduled principal payments. Accordingly, we have $520,438 outstanding and $105,500 available under our senior unsecured notes.

Our debt borrowings and repayments during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 are as follows (in thousands):



Debt Obligations		Borrowings		Repayments		Borrowings		Repayments
Bank borrowings	$	96,500	$	(73,000)	$	36,900	$	(2,000)
Senior unsecured notes		—		(20,167)		—		(4,167)
Total	$	96,500	$	(93,167)	$	36,900	$	(6,167)

Equity

At ~~September~~June 30, ~~2018,~~2019, we had ~~39,656,737~~39,747,191 shares of common stock outstanding, equity on our balance sheet totaled ~~$823.3~~$787.6 million and our equity securities had a market value of ~~$1.7~~$1.8 billion. During the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, we declared and paid ~~$67.8~~$45.6 million of cash dividends.

Subsequent to ~~September~~June 30, ~~2018,~~2019, we declared a monthly cash dividend of $0.19 per share on our common stock for the months of ~~October, November~~July, August and ~~December 2018,~~September 2019, payable on ~~October~~July 31, ~~November~~August 30, and ~~December 31, 2018,~~September 30, 2019, respectively, to stockholders of record on ~~October~~July 23, ~~November 21,~~August 22, and ~~December 21, 2018,~~September 20, 2019, respectively.

At-The-Market Program. ~~We have an~~On March 1, 2019, we entered into new separate equity distribution ~~agreement~~agreements (collectively, “Equity Distribution Agreement”) with four sales agents, ~~to issue~~replacing prior equity distribution agreements dated August 1, 2016. Under the terms of the new Equity Distribution Agreement, we may offer and sell, from time to time, up to $200.0 ~~million~~ in aggregate offering price of shares of our common ~~shares. The equity distribution agreement provides that sales~~stock. As of ~~common~~June 30, 2019, no shares ~~are to be made by means of ordinary brokers’ transactions, which may include block trades, or transactions that are deemed to be “at~~had been issued under the ~~market” offerings. During the nine months ended September~~Equity Distribution Agreement. Accordingly, at June 30, 2018, we sold 22,244 shares of common stock for $1.0 million in net proceeds under our equity distribution agreement. In conjunction with the sale of common stock, we paid $18,000 as compensation to our sales agents and we reclassified $76,000 of accumulated costs associated with this agreement to additional paid in capital. At September 30, 2018,2019, we had ~~$184.1 million~~$200.0 available under ~~our equity distribution agreement.~~the Equity Distribution Agreement.

38

~~Table of Contents~~

Available Shelf Registrations.We have an automatic shelf registration statement on file with the SEC and currently have the ability to file additional automatic shelf registration statements to provide us with capacity to publicly offer an indeterminate amount of common stock, preferred stock, warrants, debt, depositary shares, or units. We may from time to time raise capital under our automatic registration statement in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering.

42

Table of Contents

Stock-Based Compensation. During the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, we granted restricted stock and performance-based stock units under the 2015 Plan as follows:


No. of	Price per
Shares	Share		Vesting Period
78,276	$	46.54	ratably over 3 years
60,836	$	46.54	TSR targets ⁽¹⁾
8,496	$	44.73	May 29, 2020
147,608

No. of

Price per

Shares

Share

Vesting Period

81,819

$
38.18

ratably over 3 years

66,171

$
38.18

TSR targets (1)

8,728

$
41.25

ratably over 1 year

156,718

(1)

⁽¹⁾

Vesting is based on achieving certain total shareholder return (“TSR”) targets in 4 years with acceleration opportunity in 3 years.

Critical Accounting Policies

~~There~~Our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q are prepared in conformity with U.S. generally accepted accounting principles for interim financial information set forth in the Accounting Standards Codification as published by the Financial Accounting Standards Board, which require us to make estimates and assumptions regarding future events that affect the amounts reported in our financial statements and accompanying footnotes. We base these estimates on our experience and assumptions regarding future events we believe to be reasonable under the circumstances. Actual results could differ from those estimates and such differences may be material to the consolidated financial statements. We have ~~been no material changes from the~~described our most critical accounting policies ~~as previously disclosed~~ in our 2018 Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2017.~~2018.

There have been no changes to our critical accounting policies or estimates since December 31, 2018, with exception of the adoption of ASC Topic 842, Leases. Please refer to Note 1. General of these unaudited consolidated financial statements under Part 1, Item 1 of this Quarterly Report on Form 10-Q for information regarding recently adopted standards.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in our market risk during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. For additional information, refer to Item 7A as presented in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Item 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended). As of the end of the period covered by this report based on such evaluation our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective.

There has been no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

3943

Table of Contents

PART II

OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We are and may become from time to time a party to various claims and lawsuits arising in the ordinary course of business, which in our opinion are not singularly or in the aggregate anticipated to be material to our results of operations or financial condition. Claims and lawsuits may include matters involving general or professional liability asserted against the lessees or borrowers related to our properties, which we believe under applicable legal principles are not our responsibility as a non-possessory landlord or mortgage holder. We believe that these matters are the responsibility of our lessees and borrowers pursuant to general legal principles and pursuant to insurance and indemnification provisions in the applicable leases or mortgages. We intend to continue to vigorously defend such claims and lawsuits.

Item 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017.~~2018.

~~Item~~

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~During the three months ended September 30, 2018, we did not make any unregistered sales of equity securities.~~None

During the three months ended September 30, 2018, we acquired shares of common stock held by employees who tendered shares to satisfy tax withholding obligations. Specifically, the number of shares of common stock acquired from employees and the average prices paid per share for each month in the quarter ended September 30, 2018 are as follows:

Total Number

of Shares

Maximum

Purchased as

Number of

Average

Part of

Shares that May

Total Number

Price

Publicly

Yet Be

of Shares

Paid per

Announced

Purchased

Period

Purchased

Share

Plan

Under the Plan

July 1- July 31, 2018

—

$
—

—

—

August 1 - August 31, 2018

487

$
42.91

—

—

September 1 - September 30, 2018

—

$
—

—

—

Total

487

—

—

4044

Table of Contents

Item 6. Exhibits

3.1	LTC Properties, Inc. Articles of Restatement (incorporated by reference to Exhibit 3.1.2 to LTC Properties Inc.’s Current Report on Form ~~8‑K~~8K (File No. ~~1‑11314)~~111314) filed June 6, 2016)

3.2	Bylaws of LTC Properties, Inc., as restated June 2, 2015 (incorporated by reference to Exhibit 3.2 to LTC Properties Inc.’s Current Report on Form 8-K (File No. 1-11314) filed June 5, 2015)

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

~~101~~101.INS	~~The following materials from LTC Properties, Inc.’s Form 10-Q for~~XBRL Instance Document - the ~~quarter ended September 30, 2018, formatted~~instance document does not appear in the Interactive Data File because its XBRL ~~(eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2018 and December 31, 2017; (ii) Consolidated Statements of Income for~~tags are embedded within the three and nine months ended September 30, 2018 and 2017; (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017; and (iv) Notes to Consolidated Financial StatementsInline XBRL document.

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

4145

Table of Contents

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LTC PROPERTIES, INC.
	Registrant



Dated: ~~November 5, 2018~~August 8, 2019	By:	/s/ Pamela Kessler
		Pamela Kessler
		Executive Vice President, Chief Financial Officer and Corporate Secretary
		(Principal Financial and Accounting Officer)

4246


Maryland				71-0720518
(State or other jurisdiction of				(I.R.S. Employer
incorporation or organization)				Identification No.)



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $.01 par value	LTC	New York Stock Exchange


Large accelerated filer ☑þ	Accelerated filer ☐◻	Non-accelerated filer ☐◻	Smaller reporting company ☐	Emerging growth company ☐


PART I -- Financial Information		Page

Item 1.	Financial Statements
	Consolidated Balance Sheets	3
	Consolidated Statements of Income and Comprehensive Income	4
	Consolidated Statements of Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24 26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39 43
Item 4.	Controls and Procedures	39 43
PART II -- Other Information

Item 1.	Legal Proceedings	40 44
Item 1A.	Risk Factors	40 44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40 44
Item 6.	Exhibits	41 45


	September 30, 2018		December 31, 2017
	(unaudited)		(audited)
ASSETS
Investments:
Land	$	125,533	$	124,041
Buildings and improvements		1,280,491		1,262,335
Accumulated depreciation and amortization		(304,337)		(304,117)
Operating real estate property, net		1,101,687		1,082,259
Properties held-for-sale, net of accumulated depreciation: 2018—$2,887; 2017—$1,916		5,356		3,830
Real property investments, net		1,107,043		1,086,089

Mortgage loans receivable, net of loan loss reserve: 2018—$2,444; 2017—$2,255		242,609		223,907
Real estate investments, net		1,349,652		1,309,996
Notes receivable, net of loan loss reserve: 2018—$128; 2017—$166		12,642		16,402
Investments in unconsolidated joint ventures		30,511		29,898
Investments, net		1,392,805		1,356,296

Other assets:
Cash and cash equivalents		20,408		5,213
Restricted cash		2,163		—
Debt issue costs related to bank borrowings		3,202		810
Interest receivable		19,290		15,050
Straight-line rent receivable, net of allowance for doubtful accounts: 2018—$739; 2017—$814		73,114		64,490
Lease incentives		21,102		21,481
Prepaid expenses and other assets		3,767		2,230
Total assets	$	1,535,851	$	1,465,570
LIABILITIES
Bank borrowings	$	120,000	$	96,500
Senior unsecured notes, net of debt issue costs: 2018—$981; 2017—$1,131		550,986		571,002
Accrued interest		3,468		5,276
Accrued incentives and earn-outs		9,292		8,916
Accrued expenses and other liabilities		28,812		25,228
Total liabilities		712,558		706,922
EQUITY
Stockholders’ equity:
Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding: 2018—39,657; 2017—39,570		397		396
Capital in excess of par value		861,226		856,992
Cumulative net income		1,224,998		1,100,783
Cumulative distributions		(1,270,779)		(1,203,011)
Total LTC Properties, Inc. stockholders’ equity		815,842		755,160
Non-controlling interests		7,451		3,488
Total equity		823,293		758,648
Total liabilities and equity	$	1,535,851	$	1,465,570



	June 30, 2019		December 31, 2018
	(unaudited)		(audited)
ASSETS
Investments:
Land	$	126,028	$	125,358
Buildings and improvements		1,320,895		1,290,352
Accumulated depreciation and amortization		(332,364)		(312,959)
Operating real estate property, net		1,114,559		1,102,751
Properties held-for-sale, net of accumulated depreciation: 2019—$1,916; 2018—$1,916		3,830		3,830
Real property investments, net		1,118,389		1,106,581

Mortgage loans receivable, net of loan loss reserve: 2019—$2,539; 2018—$2,447		252,016		242,939
Real estate investments, net		1,370,405		1,349,520
Notes receivable, net of loan loss reserve: 2019—$204; 2018—$128		20,157		12,715
Investments in unconsolidated joint ventures		27,521		30,615
Investments, net		1,418,083		1,392,850

Other assets:
Cash and cash equivalents		3,207		2,656
Restricted cash		2,108		2,108
Debt issue costs related to bank borrowings		2,597		2,989
Interest receivable		23,640		20,732
Straight-line rent receivable, net of allowance for doubtful accounts: 2019—$0; 2018—$746		43,730		73,857
Lease incentives		2,652		14,443
Prepaid expenses and other assets		3,463		3,985
Total assets	$	1,499,480	$	1,513,620
LIABILITIES
Bank borrowings	$	146,900	$	112,000
Senior unsecured notes, net of debt issue costs: 2019—$862; 2018—$938		528,938		533,029
Accrued interest		5,290		4,180
Accrued expenses and other liabilities		30,742		31,440
Total liabilities		711,870		680,649
EQUITY
Stockholders’ equity:
Common stock: $0.01 par value; 60,000 shares authorized; shares issued and outstanding: 2019—39,747; 2018—39,657		397		397
Capital in excess of par value		863,993		862,712
Cumulative net income		1,253,748		1,255,764
Cumulative distributions		(1,338,967)		(1,293,383)
Total LTC Properties, Inc. stockholders’ equity		779,171		825,490
Non-controlling interests		8,439		7,481
Total equity		787,610		832,971
Total liabilities and equity	$	1,499,480	$	1,513,620


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Revenues:
Rental income	$	34,211	$	33,233	$	102,646	$	103,533
Interest income from mortgage loans		7,087		6,677		20,910		20,050
Interest and other income		478		1,336		1,502		2,753
Total revenues		41,776		41,246		125,058		126,336
Expenses:
Interest expense		7,497		7,644		22,981		22,266
Depreciation and amortization		9,447		9,519		28,159		28,186
Impairment charges		—		—		—		1,880
Provision (recovery) for doubtful accounts		106		(96)		76		(139)
Transaction costs		9		34		19		56
General and administrative expenses		4,879		4,144		14,392		13,270
Total expenses		21,938		21,245		65,627		65,519
Operating income		19,838		20,001		59,431		60,817
Income from unconsolidated joint ventures		746		615		2,103		1,635
Gain on sale of real estate, net		14,353		—		62,698		5,054
Net income		34,937		20,616		124,232		67,506
Income allocated to non-controlling interests		(17)		—		(17)		—
Net income attributable to LTC Properties, Inc.		34,920		20,616		124,215		67,506
Income allocated to participating securities		(138)		(80)		(504)		(281)
Net income available to common stockholders	$	34,782	$	20,536	$	123,711	$	67,225

Earnings per common share:
Basic	$	0.88	$	0.52	$	3.13	$	1.71
Diluted	$	0.88	$	0.52	$	3.12	$	1.70

Weighted average shares used to calculate earnings per common share:
Basic		39,487		39,428		39,470		39,403
Diluted		39,865		39,748		39,845		39,738

Dividends declared and paid per common share	$	0.57	$	0.57	$	1.71	$	1.71

Comprehensive Income:
Net income	$	34,937	$	20,616	$	124,232	$	67,506
Comprehensive income	$	34,937	$	20,616	$	124,232	$	67,506


					Capital in		Cumulative				Total		Non-
	Common Stock				Excess of		Net		Cumulative		Stockholder's		Controlling		Total
	Shares		Amount		Par Value		Income		Distributions		Equity		Interests		Equity
Balance—December 31, 2016	39,221	$	392	$	839,005	$	1,013,443	$	(1,112,792)	$	740,048	$	—	$	740,048
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,552)		(22,552)		—		(22,552)
Proceeds from common stock issued, net of issuance costs	313		3		14,526		—		—		14,529		—		14,529
Issuance of restricted stock	75		1		(7)		—		—		(6)		—		(6)
Stock-based compensation expense	—		—		1,259		—		—		1,259		—		1,259
Net income	—		—		—		21,513		—		21,513		—		21,513
Other	(36)		—		(1,651)		—		—		(1,651)		—		(1,651)
Balance—March 31, 2017	39,573	$	396	$	853,132	$	1,034,956	$	(1,135,344)	$	753,140	$	—	$	753,140
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,558)		(22,558)		—		(22,558)
Issuance of restricted stock	8		—		—		—		—		—		—		—
Cancelation of restricted stock	(14)		—		—		—		—		—		—		—
Stock option exercises	3		—		79		—		—		79		—		79
Stock-based compensation expense	—		—		1,425		—		—		1,425		—		1,425
Net income	—		—		—		25,377		—		25,377		—		25,377
Other	(6)		—		(296)		—		—		(296)		—		(296)
Balance—June 30, 2017	39,564	$	396	$	854,340	$	1,060,333	$	(1,157,902)	$	757,167	$	—	$	757,167
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,554)		(22,554)		—		(22,554)
Issuance of restricted stock	3		—		—		—		—		—		—		—
Cancelation of restricted stock	(1)		—		—		—		—		—		—		—
Stock option exercises	5		—		123		—		—		123		—		123
Stock-based compensation expense	—		—		1,283		—		—		1,283		—		1,283
Net income	—		—		—		20,616		—		20,616		—		20,616
Balance—September 30, 2017	39,571	$	396	$	855,746	$	1,080,949	$	(1,180,456)	$	756,635	$	—	$	756,635
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,555)		(22,555)		—		(22,555)
Issuance of restricted stock	—		—		(14)		—		—		(14)		—		(14)
Stock-based compensation expense	—		—		1,282		—		—		1,282		—		1,282
Net income	—		—		—		19,834		—		19,834		—		19,834
Non-controlling interest contributions	—		—		—		—		—		—		3,488		3,488
Other	(1)		—		(22)		—		—		(22)		—		(22)
Balance—December 31, 2017	39,570	$	396	$	856,992	$	1,100,783	$	(1,203,011)	$	755,160	$	3,488	$	758,648
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,578)		(22,578)		—		(22,578)
Issuance of restricted stock	82		—		—		—		—		—		—		—
Stock option exercises	5		—		123		—		—		123		—		123
Stock-based compensation expense	—		—		1,376		—		—		1,376		—		1,376
Net income	—		—		—		20,359		—		20,359		—		20,359
Other	(28)		—		(1,065)		—		—		(1,065)		—		(1,065)
Balance—March 31, 2018	39,629	$	396	$	857,426	$	1,121,142	$	(1,225,589)	$	753,375	$	3,488	$	756,863
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,590)		(22,590)		—		(22,590)
Issuance of restricted stock	9		—		(8)		—		—		(8)		—		(8)
Stock-based compensation expense	—		—		1,521		—		—		1,521		—		1,521
Net income	—		—		—		68,936		—		68,936		—		68,936
Non-controlling interest contributions	—		—		—		—		—		—		1,081		1,081
Other	(3)		—		(107)		—		—		(107)		—		(107)
Balance—June 30, 2018	39,635	$	396	$	858,832	$	1,190,078	$	(1,248,179)	$	801,127	$	4,569	$	805,696
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,600)		(22,600)		—		(22,600)
Proceeds from common stock issued, net of issuance costs	22		1		928		—		—		929		—		929
Stock-based compensation expense	—		—		1,487		—		—		1,487		—		1,487
Net income	—		—		—		34,920		—		34,920		17		34,937
Non-controlling interest contributions	—		—		—		—		—		—		2,882		2,882
Non-controlling interest distributions	—		—		—		—		—		—		(17)		(17)
Other	—		—		(21)		—		—		(21)		—		(21)
Balance—September 30, 2018	39,657	$	397	$	861,226	$	1,224,998	$	(1,270,779)	$	815,842	$	7,451	$	823,293


					Capital in		Cumulative				Total		Non-
	Common Stock				Excess of		Net		Cumulative		Stockholder's		Controlling		Total
	Shares		Amount		Par Value		Income		Distributions		Equity		Interests		Equity
Balance—December 31, 2017	39,570	$	396	$	856,992	$	1,100,783	$	(1,203,011)	$	755,160	$	3,488	$	758,648
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,578)		(22,578)		—		(22,578)
Issuance of restricted stock	82		—		—		—		—		—		—		—
Stock option exercises	5		—		123		—		—		123		—		123
Stock-based compensation expense	—		—		1,376		—		—		1,376		—		1,376
Net income	—		—		—		20,359		—		20,359		—		20,359
Other	(28)		—		(1,065)		—		—		(1,065)		—		(1,065)
Balance—March 31, 2018	39,629	$	396	$	857,426	$	1,121,142	$	(1,225,589)	$	753,375	$	3,488	$	756,863
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,590)		(22,590)		—		(22,590)
Issuance of restricted stock	9		—		(8)		—		—		(8)		—		(8)
Stock-based compensation expense	—		—		1,521		—		—		1,521		—		1,521
Net income	—		—		—		68,936		—		68,936		—		68,936
Non-controlling interest contributions	—		—		—		—		—		—		1,081		1,081
Other	(3)		—		(107)		—		—		(107)		—		(107)
Balance—June 30, 2018	39,635	$	396	$	858,832	$	1,190,078	$	(1,248,179)	$	801,127	$	4,569	$	805,696
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,600)		(22,600)		—		(22,600)
Proceeds from common stock issued, net of issuance costs	22		1		928		—		—		929		—		929
Stock-based compensation expense	—		—		1,487		—		—		1,487		—		1,487
Net income	—		—		—		34,920		—		34,920		17		34,937
Non-controlling interest contributions	—		—		—		—		—		—		2,882		2,882
Non-controlling interest distributions	—		—		—		—		—		—		(17)		(17)
Other	—		—		(21)		—		—		(21)		—		(21)
Balance—September 30, 2018	39,657	$	397	$	861,226	$	1,224,998	$	(1,270,779)	$	815,842	$	7,451	$	823,293
Common Stock cash distributions ($0.57 per share)	—		—		—		—		(22,604)		(22,604)		—		(22,604)
Stock-based compensation expense	—		—		1,486		—		—		1,486		—		1,486
Net income	—		—		—		30,766		—		30,766		78		30,844
Non-controlling interest distributions	—		—		—		—		—		—		(48)		(48)
Balance—December 31, 2018	39,657	$	397	$	862,712	$	1,255,764	$	(1,293,383)	$	825,490	$	7,481	$	832,971
Cumulative effect of the adoption of the ASC 842	—		—		—		(42,808)		—		(42,808)		—		(42,808)
As Adjusted Balance at January 1, 2019	39,657	$	397	$	862,712	$	1,212,956	$	(1,293,383)	$	782,682	$	7,481	$	790,163
Common Stock cash distributions ($0.57 per share)	48		—		—		—		(22,931)		(22,931)		—		(22,931)
Issuance of restricted stock	78				(1)						(1)				(1)
Stock-based compensation expense	—		—		1,689		—		—		1,689		—		1,689
Net income	—		—		—		20,346		—		20,346		81		20,427
Non-controlling interest contributions	—		—		—		—		—		—		919		919
Non-controlling interest distributions	—		—		—		—		—		—		(89)		(89)
Other	(44)		—		(2,024)		—		—		(2,024)		—		(2,024)
Balance—March 31, 2019	39,739	$	397	$	862,376	$	1,233,302	$	(1,316,314)	$	779,761	$	8,392	$	788,153
Common Stock cash distributions ($0.57 per share)	—	$	—	$	—	$	—	$	(22,653)	$	(22,653)	$	—	$	(22,653)
Issuance of restricted stock	8		—		(6)		—		—		(6)		—		(6)
Stock-based compensation expense	—		—		1,623		—		—		1,623		—		1,623
Net income	—		—		—		20,446		—		20,446		88		20,534
Non-controlling interest contributions	—		—		—		—		—		—		46		46
Non-controlling interest distributions	—		—		—		—		—		—		(87)		(87)
Balance—June 30, 2019	39,747	$	397	$	863,993	$	1,253,748	$	(1,338,967)	$	779,171	$	8,439	$	787,610


								Average
			Percentage		Number	Number of		Investment
	Gross		of		of	SNF	ALF	per
Type of Property	Investment		Investment		Properties (1)	Beds	Units	Bed/Unit
Assisted Living	$	802,484	56.8	%	103	—	5,885	$	136.36
Skilled Nursing		569,141	40.2	%	73	8,919	261	$	62.00
Under Development (2)		31,602	2.2	%	—	—	—		—
Other (3)		11,040	0.8	%	1	118	—		—
Total	$	1,414,267	100.0	%	177	9,037	6,146


		At September 30, 2018		At December 31, 2017
Mezzanine loans	$	9,869	$	13,700
Other loans		2,901		2,868
Notes receivable reserve		(128)		(166)
Total	$	12,642	$	16,402


		At September 30, 2018				At December 31, 2017
	Applicable			Available				Available
	Interest	Outstanding		for		Outstanding		for
Debt Obligations	Rate (1)	Balance		Borrowing		Balance		Borrowing
Bank borrowings (2)	3.38%	$	120,000	$	480,000	$	96,500	$	503,500
Senior unsecured notes, net of debt issue costs	4.49%		550,986		79,833		571,002		63,667
Total	4.29%	$	670,986	$	559,833	$	667,502	$	567,167


		Weighted
		Average
	Options	Exercise		Option		Market
	Exercised	Price		Value		Value (1)
2018	5,000	$	24.65	$	123,000	$	205,000
2017	8,334	$	24.31	$	202,566	$	410,797


	No. of	Price per
Year	Shares/Units	Share		Vesting Period
2018	81,819	$	38.18	ratably over 3 years
	66,171	$	38.18	TSR targets (1)
	8,728	$	41.25	ratably over 1 year
	156,718

2017	74,760	$	45.76	ratably over 3 years
	57,881	$	45.76	TSR targets (1)
	7,416	$	48.55	ratably over 1 year
	3,000	$	50.55	ratably over 3 years
	143,057


	Number of		Number of		Percentage of
			SNF	ALF	Total		Total
Operator	SNF	ALF	Beds	Units	Revenue (1)		Assets
Prestige Healthcare	24	—	3,010	93	18.0	%	16.4	%
Senior Lifestyle Corporation	—	23	—	1,457	11.9	%	10.4	%
Brookdale Senior Living	—	37	—	1,702	10.1	%	4.6	%
Senior Care Centers	11	—	1,444	—	9.8	%	7.1	%
Total	35	60	4,454	3,252	49.8	%	38.5	%


	At September 30, 2018					At December 31, 2017
	Carrying		Fair			Carrying		Fair
	Value		Value			Value		Value
Mortgage loans receivable	$	242,609	$	274,698	(1)	$	223,907	$	278,224	(1)
Bank borrowings		120,000		120,000	(2)		96,500		96,500	(2)
Senior unsecured notes, net of debt issue costs		550,986		529,805	(3)		571,002		577,126	(3)
Accrued incentives and earn-outs		9,292		9,292	(4)		8,916		8,916	(4)


Originations and funding under mortgage loans receivable	$	20,530	(1)
Pay-offs received		(1,086)
Scheduled principal payments received		(550)
Net increase in mortgage loans receivable	$	18,894


Advances under notes receivable	$	50
Principal payments received under notes receivable		(3,848)
Total	$	(3,798)


	9/30/18		6/30/18		3/31/18		12/31/17		9/30/17
Asset mix:
Real property	$	1,414,267	$	1,401,303	$	1,401,506	$	1,392,122	$	1,359,586
Loans receivable		245,053		236,178		235,734		226,162		224,095
Investment mix:
Skilled nursing centers	$	814,194	$	814,208	$	813,542	$	803,691	$	803,853
Assisted living communities		802,484		787,373		795,036		789,520		759,896
Under development		31,602		25,077		17,922		14,465		9,716
Other (1)		11,040		10,823		10,740		10,608		10,216
Operator mix:
Prestige Healthcare (1)	$	258,186	$	249,311	$	247,769	$	238,184	$	236,105
Senior Lifestyle Corporation		189,945		189,945		189,226		189,226		189,025
Senior Care Centers		138,109		138,109		138,109		138,109		138,109
Anthem Memory Care		135,946		135,342		131,527		126,120		121,138
Brookdale Senior Living		126,991		126,991		126,991		126,991		126,991
Remaining operators		810,143		797,783		803,618		799,654		772,313
Geographic mix:
Texas	$	292,317	$	292,317	$	267,051	$	267,051	$	269,279
Michigan		245,996		237,121		235,579		225,994		223,916
Wisconsin		137,056		133,794		130,941		129,398		126,313
Colorado		114,923		114,923		114,923		114,923		114,923
California		102,254		102,254		102,254		102,254		102,254
Remaining states		766,774		757,072		786,492		778,664		746,996


	Year to Date		Quarter Ended
	9/30/18		9/30/18		6/30/18			3/31/18			12/31/17			9/30/17
Debt to gross asset value	36.4	%	36.4	%	36.1	%	(1)	38.3	%	(3)	37.6	%	(3)	36.8	%
Debt to market capitalization ratio	27.7	%	27.7	%	27.8	%	(2)	31.4	%	(4)	27.9	%	(4)	25.5	%
Interest coverage ratio (5)	4.7	x	4.8	x	4.7	x		4.7	x		4.8	x		4.8	x
Fixed charge coverage ratio (5)	4.7	x	4.8	x	4.7	x		4.7	x		4.8	x		4.8	x


				Total Number
				of Shares	Maximum
				Purchased as	Number of
		Average		Part of	Shares that May
	Total Number	Price		Publicly	Yet Be
	of Shares	Paid per		Announced	Purchased
Period	Purchased	Share		Plan	Under the Plan
July 1- July 31, 2018	—	$	—	—	—
August 1 - August 31, 2018	487	$	42.91	—	—
September 1 - September 30, 2018	—	$	—	—	—
Total	487			—	—