UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

LTC PROPERTIES, INC.

(Exact name of Registrant as specified in its charter)

31365 Oak Crest Drive, Suite 200

Westlake Village, California  91361

(Address of principal executive offices)

(805) 981-8655

(Registrant’s telephone number, including area code)

Indicate by check mark whether Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   ý   No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes  ý   No   o

Indicate by check mark whether the registrant is registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o   No   ý

Shares of Registrant’s common stock, $.01 par value, outstanding on October 26, 2005 – 23,195,999

LTC PROPERTIES, INC.

FORM 10-Q

September 30, 2005

INDEX

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LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share amounts)

See accompanying notes.

3

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)

See accompanying notes.

4

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

See accompanying notes

5

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.     General

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

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

We have prepared consolidated financial statements included herein without audit (except for the balance sheet at December 31, 2004 which is audited) and in the opinion of management have included all adjustments necessary for a fair presentation of the results of operations for the three and nine months ended September 30, 2005 and 2004 pursuant to the rules and regulations of the Securities and Exchange Commission.  The accompanying consolidated financial statements include the accounts of our company, its wholly-owned subsidiaries and controlled partnership.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Control over the partnership is based on the provisions of the partnership agreement that provides us with a controlling financial interest in the partnership.  Under the terms of the partnership agreement, our company, as general partner, is responsible for the management of the partnership’s assets, business and affairs.  Certain of our rights and duties in management of the partnership include making all operating decisions, setting the capital budget, executing all contracts, making all employment decisions, and the purchase and disposition of assets.  The general partner is responsible for the ongoing, major, and central operations of the partnership and makes all management decisions.  In addition, the general partner assumes the risk for all operating losses, capital losses, and is entitled to substantially all capital gains (appreciation).

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

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures in the accompanying financial statements are adequate to make the information presented not misleading.

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation and as required by Statement of Financial Accounting Standards (or SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”  The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results for a full year.

No provision has been made for federal or state income taxes.  Our company qualifies as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.  As such, we are not taxed on income that is distributed to our stockholders.

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2.     Real Estate Investments

Owned Properties.  At September 30, 2005, our investment in owned properties consisted of 59 skilled nursing properties with a total of 6,954 beds, 88 assisted living properties with a total of 4,175 units and one school in 23 states.

During the three months ended September 30, 2005, we purchased three skilled nursing properties in New Mexico with a total of 465 beds for a total cost of $27,021,000.  These properties are leased to a third party operator under a 15-year master lease with two 10-year renewal options.  The initial annual master lease payment is $2,844,000 and increases 2.5% annually.

During the nine months ended September 30, 2005, we purchased the three properties discussed above and a 114-bed skilled nursing property in Texas for a total cost of $2,624,000.  The property together with another skilled nursing property we own is leased to a third party operator under a 20-year master lease with two five-year renewal options.  The initial annual master lease payment is $648,000 and increases 2% annually.

Additionally during the nine months ended September 30, 2005, we converted two mortgage loans on two skilled nursing properties with a total of 87 beds into owned properties.  One of the mortgage loans with a principal balance of $694,000 was converted through an auction in accordance with a bankruptcy court order that approved the sale of substantially all of the borrower’s assets to us in exchange for $310,000 in cash plus our bankruptcy claim of approximately $956,000.  This property is leased to a third party under a 10-year lease with two five-year renewal options.  The initial annual lease payment is $180,000 and increases 2.5% annually.  The initial annual lease rate is based on our commitment to fund up to $300,000 for capital improvements as described in Note 7. Commitments and Contingencies.  The other mortgage loan with a principal balance of $996,000 was converted to an owned property through a deed-in-lieu foreclosure transaction.  This property is leased to a third party under a 10-year lease with three five-year renewal options.  The initial annual lease payment beginning in December 2005 is $129,000 and increases 2% annually beginning July 1, 2007.  The lease also provides the lessee with an option to purchase the property for $1,050,000 plus the cost of our capital improvements less a credit of 1% of the purchase price per year for each year of the term of the lease immediately preceding the lessee’s exercise of the purchase option.  The lessee may exercise the purchase option only in the second and fourth year of the lease term.  We also invested $317,000 in capital improvements to existing properties during the nine months ended September 30, 2005.

During the three months ended September 30, 2005, we sold a closed skilled nursing property located in Texas to a third party who wanted to use the property to house victims of hurricane Katrina.  As part of our company’s hurricane relief efforts, we sold the property for $1,000 and in addition, donated $50,000 in cash to the American Red Cross hurricane Katrina relief fund.  As a result of the sale, LTC recognized a loss of $843,000.  During the nine months ended September 30, 2005, we sold the property discussed above and vacant land adjacent to an assisted living property in Ohio.  We received $102,000 in cash and recognized a $30,000 gain on the sale of the Ohio property.

In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” properties held for sale at any reporting period include only those properties available for immediate sale in their present condition and for which management believes that it is probable that a sale of the property will be completed within one year.  Properties held for sale are carried at the lower of cost or fair value less estimated selling costs.  No depreciation expense is recognized on properties held for sale.  In addition, the operating results of real estate assets designated as held for sale and all gains and losses from real estate sold are included in discontinued operations in the consolidated statement of income.

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

Mortgage Loans.  At September 30, 2005, we had investments in 72 mortgage loans secured by first mortgages on 69 skilled nursing properties with a total of 8,199 beds, 13 assisted living properties with 933 units and one school located in 23 states.  At September 30, 2005, the mortgage loans had interest rates ranging from 5.5% to 12.8% and maturities ranging from 2005 to 2019.  In addition, some loans contain certain guarantees, provide for certain facility fees and generally have 25-year amortization schedules.  The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points.

During the quarter ended September 30, 2005, we originated one loan on a 100-bed skilled nursing property in Georgia.  The loan amount was $2,700,000 and the amount funded after receiving $47,000 in cash for commitment fees and holding back $150,000 for capital expenditures was $2,553,000.  Also during the third quarter of 2005 we purchased nine loans from a REMIC pool we originated.  We paid $16,472,000 which represented the outstanding principal balance of the loans plus accrued interest.  These loans have a weighted average interest rate of 10.7%.  Additionally, we refinanced into a mortgage loan secured by one assisted living property in Florida, a mortgage loan that was previously included in the Senior Mortgage Participation Loan Pool, as described in Note 5. Senior Mortgage Participation Payable.  This refinancing involved an increase in the loan balance of $60,000.  The loan matures in one year and has an interest rate of 10.8%.  Also during the third quarter of 2005, we funded, under an existing mortgage loan, $212,000 for capital improvements.

During the third quarter of 2005, a loan was paid off in the last remaining REMIC pool, REMIC 1998-1, which caused the last third party REMIC Certificate holders entitled to any principal payments to be paid off in full.  After this transaction, we became the sole holder of the remaining REMIC Certificates and are therefore entitled to the entire principal outstanding of the loan pool underlying the remaining REMIC Certificates.  Under Emerging Issues Task Force No. 02-9 (“EITF 02-9”) “Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold”, a Special Purpose Entity (“SPE”) may become non-qualified or tainted which generally results in the “repurchase” by the transferor of all the assets sold to and still held by the SPE.  Since we are now the sole REMIC Certificate holder entitled to principal from the underlying loan pool, we bear all the risks and are entitled to all the rewards from the underlying loan pool.  As required by EITF 02-9, the repurchase for the transferred assets was accounted for at fair value.  Prior to the repurchase, the book value of the REMIC Certificates we owned was $21,553,000 which included a $1,374,000 impairment recorded in 2003 and a fair market value adjustment of $1,855,000 included in Accumulated Comprehensive Loss in prior periods.  The fair market value of the loans in the REMIC Pool was $25,296,000.  Accordingly a $3,743,000 fair market value adjustment was recorded in Accumulated Comprehensive Income in the third quarter of 2005.  This amount, offset by the $1,855,000 Accumulated Comprehensive Loss

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previously discussed will be amortized to increase interest income over the remaining life of the loans.  The 13 loans that were effectively repurchased have a weighted average interest rate of 11.2% and an unamortized principal balance of $25,012,000.  The premium of $284,000 will be amortized to reduce interest income over the life of the loans.  The maturity dates of the loan range from 2006 through 2017.

In addition to the transaction described above, during the nine months ended September 30, 2005, we acquired a mortgage loan on a 151 bed skilled nursing property located in California from a REMIC pool we originated.  We paid $2,254,000, which represents the outstanding loan balance.  During the second quarter of 2005, this loan was repaid in full.

Additionally, we acquired $10,469,000 face value mortgage loans secured by five skilled nursing properties from a REMIC pool we originated.  We exchanged the REMIC Certificates we owned and paid $855,000 in cash, which represents the outstanding loan balances and accrued interest of outside REMIC Certificate holders which resulted in the dissolution of the 1996-1 REMIC Pool.  The weighted average effective interest rate on these loans is approximately 11.9%.

Also during the nine months ended September 30, 2005, we originated one mortgage loan in the amount of $500,000 secured by two skilled nursing properties located in Texas with a total of 124 beds.  Subsequently, this note was paid in full.  For further discussion see Note 3. Notes Receivable.  We also originated four new mortgage loans secured by four properties with a total of 125 assisted living units and 393 skilled nursing beds.  The combined principal balance of the new loans is $15,763,000 and the amount funded to the borrowers after fees and tax impounds was $15,586,000.  The mortgage loans have five to ten year terms and bear interest ranging from 9.5% to 11.3%.  We also funded an additional $800,000 under an existing mortgage loan for capital improvements.

During the nine months ended September 30, 2005, we received $5,651,000 plus accrued interest related to the payoff of two mortgage loans secured by skilled nursing properties located in Arizona and New Mexico.

REMIC Certificates.  During the third quarter of 2005, a loan was paid off in the last remaining REMIC pool, REMIC 1998-1, which caused the last third party REMIC Certificate holders entitled to any principal payments to be paid off in full.  See paragraph three under Mortgage Loans on page eight for a description of this event.

During the nine months ended September 30, 2005, the 1996-1 REMIC Pool was fully retired.  We paid $855,000 in cash and exchanged our remaining interest in the 1996-1 REMIC Certificates with a book value of $9,568,000 and we received five mortgage loans with and estimated fair value of $10,398,000 and an unamortized principal balance of $10,469,000.  Accordingly, we recorded a $71,000 discount on these loans which will be amortized as a yield adjustment to increase interest income over the remaining life of the loans.  Additionally, we will amortize the $1,051,000 balance in Other Comprehensive Income that resulted from transferring the loans at fair value as required by SFAS No. 115 “Accounting for Certain Investments in debt and Equity Securities” as a yield adjustment to increase interest income over the life of the related loans.

3.     Notes Receivable

At December 31, 2004, we held a Promissory Note (or Note) issued by Centers for Long Term Care, Inc. (or CLC) and Healthcare Holdings, Inc. (or HHI), a wholly owned subsidiary of CLC.  The face value of the note was $21,269,000 and the book value was $10,709,000.  The Note had a maturity date of October 1, 2007, an interest rate of 8.0% per year compounded monthly, accruing to the balance

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of the Note and was secured by all 1,452,794 shares of Assisted Living Concepts, Inc. (or ALC) common stock owned by HHI.  Cash payments of principal and interest were due upon maturity.  However, any proceeds from the sale of the collateral would result in a prepayment of the Note.  During the first quarter of 2005, we advanced $168,000 under the Note and added $191,000 in compound interest to the principal balance.  Also during the first quarter of 2005, we loaned Center Healthcare, Inc. (or CHC), a private company that purchased CLC in 2003, $500,000 which was secured by two skilled nursing properties in Texas with a total of 124 beds and all of the assets owned by HHI, this note was repaid in full.

On January 31, 2005, Extendicare, Inc. and its wholly-owned U.S. subsidiary, Extendicare Health Services, Inc. (or EHSI) acquired ALC.  Accordingly, in February 2005, we received $22,309,000 in cash from CHC and HHI as payment in full for the Note and the $500,000 mortgage loan, including accrued and unpaid interest through the payoff date.  As a result of the payoff, we recognized $3,667,000 in rental income related to past due rents that were not previously accrued, $2,335,000 of interest income related to past due interest that was not previously accrued, a $477,000 reimbursement for certain expenses paid on behalf of CLC in prior years, a $1,000,000 bonus accrual related to the realization of the value of the Note and non-operating income of $6,217,000 ($3,610,000 of which was classified as Accumulated Comprehensive Income in the equity section of the balance sheet at December 31, 2004).  The $6,217,000 of non-operating income is net of $1,298,000 of legal and investment advisory fees related to the transaction that resulted in the Note payoff.

During the third quarter of 2005, we funded a $1,490,000 loan secured by certain assets including accounts receivable of the borrower.  This loan matures in one year and bears interest at 11.0%.  In addition to this loan, during the nine months ended September 30, 2005, we funded $532,000 under line of credit agreements with certain operators.

4.     Debt Obligations

At September 30, 2005, $4,700,000 was outstanding under our $65,000,000 Unsecured Revolving Credit.  During the three and nine months ended September 30, 2005, pricing under the Unsecured Revolving Credit ranged between LIBOR plus 2.75% and LIBOR plus 3.25%.  At September 30, 2005 our pricing was LIBOR plus 2.75%

During the nine months ended September 30, 2005, the company paid $5,555,000 in principal on mortgage notes payable, bonds and capital lease obligations including the payoff of one mortgage loan payable to a REMIC pool we originated.  Additionally, mortgage loans payable decreased $7,125,000 due to the elimination of two loans payable included in a REMIC pool whose assets were effectively repurchased by us as described in Note 2. Real Estate Investments.  Since we are now entitled to receive all the principal and interest from these two loans, they are eliminated in the consolidated financial statements.

5.     Senior Mortgage Participation Payable

In 2002, we completed a loan participation transaction whereby we issued a $30,000,000 senior participating interest in 22 of our first mortgage loans that had a total unpaid principal balance of $58,627,000 (the “Participation Loan Pool”) to a private bank.  The Participation Loan Pool had a weighted average interest rate of 11.6% and a weighted average scheduled term to maturity of 77 months.  The senior participation balance is secured by the entire Participation Loan Pool.

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The senior participation receives interest at a rate of 9.25% per annum, payable monthly in arrears, on the then outstanding principal balance of the senior participation.  In addition, the senior participation receives all mortgage principal collected on the Participation Loan Pool until the senior participation balance has been reduced to zero.  We retain interest received on the Participation Loan Pool in excess of the 9.25% paid to the senior participation.  The ultimate extinguishments of the senior participation are tied to the underlying maturities of loans in the Participation Loan Pool, which range from 5 to 155 months.  We have accounted for the participation transaction as a secured borrowing under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

During the nine months ended September 30, 2005, the senior participation received principal payments of $3,650,000, which included a $3,007,000 payoff of a loan in the Participation Loan Pool.  During the same period last year the senior participation received principal payments of $632,000.  At September 30, 2005, 18 loans remain in the Participation Loan Pool and $11,757,000 was outstanding under the senior mortgage participation.

6.     Stockholders’ Equity

Preferred Stock.  During the nine months ended September 30, 2005, holders of 199,894 shares of our 8.5% Series E Cumulative Convertible Preferred Stock (Series E preferred stock) notified us of their election to convert such shares into 399,788 shares of our common stock at the Series E preferred stock conversion rate of $12.50 per share.  Total shares reserved for issuance of common stock related to the conversion of Series E preferred stock were 722,750 at September 30, 2005.  Subsequent to September 30, 2005, holders of 4,500 shares of our Series E preferred stock notified us of their election to convert such shares into 9,000 shares of our common stock.  After these conversions, total shares reserved for issuance of common stock related to the conversion of Series E preferred stock were 713,750.

During the nine months ended September 30, 2004, we issued 6,640,000 shares of Series F Cumulative Redeemable Preferred Stock (or Series F preferred stock) in two registered direct placements generating aggregate net cash proceeds of $159,583,000.  The cash proceeds and cash on hand were used to redeem all of our Series A and Series B preferred stock and reduce mortgage debt.  Accordingly, we recognized $4,029,000 of original issue costs related to the Series A and Series B preferred stock redeemed as a preferred stock redemption charge in the nine months ended September 30, 2004.

Common Stock.  During the quarter ended September 30, 2005, we sold 1,500,000 shares of common stock in a registered direct placement for $22.08 per share.  Net proceeds of $32,636,000 were used for general corporate purposes including acquisitions, loan originations and debt retirement.  In 2004 we filed a Form S-3 “shelf” registration.  Subsequent to the registered direct placement of common stock discussed above, we have approximately $105,000,000 available on our shelf registration and 23,195,999 shares of common stock outstanding.

During the nine months ended September 30, 2005, we repurchased and retired 184,700 shares of common stock for an aggregate purchase price of $3,296,000, an average of $17.85 per share.  The shares were purchased on the open market under a Board authorization to purchase up to 5,000,000 shares.  Including these purchases, 2,532,900 shares have been purchased under this authorization.  Therefore, we continue to have an open Board authorization to purchase an additional 2,467,100 shares.  During the nine months ended September 30, 2004 we did not repurchase common stock.

During the nine months ended September 30, 2005, a total of 101,100 stock options were exercised at a total option value of $675,000 and a total market value as of the dates of exercise of $1,971,000.

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During the nine months ended September 30, 2004, two of our limited partners exercised their conversion rights and exchanged their interests in five of our limited partnerships.  In accordance with the partnership agreements, at our option, we issued 168,365 shares of our common stock to one limited partner and paid approximately $109,000 for the redemption of 7,027 shares owned by another limited partner.  During the fourth quarter of 2004, we allowed seven of our limited partners to exchange their interest in five of our limited partnerships.  After these conversions and during the nine months ended September 30, 2005, we only had one limited partnership remaining.  We pay the limited partners in the remaining partnership a preferred return of approximately $86,000 per quarter.

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

(1)   Represents 113 days of accrued dividends.

(2)   Represents $0.30 per share in the first quarter of 2005 and $0.11 per share per month in the second and third quarters of 2005 and $0.25 per share in the first quarter of 2004, $0.275 in the second quarter and $0.30 in the third quarter of 2004.

(3)   The difference between declared and paid is the change in distributions payable on the balance sheet at September 30 and December 31.

In September 2005, we declared a monthly cash dividend of $0.11 per share on our common stock for the months of October, November and December 2005, payable on October 31, November 30 and December 30, 2005, respectively, to stockholders of record on October 21, November 22, and December 22, 2005, respectively.

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

During the nine months ended September 30, 2005, we received $169,000 in principal payments on notes receivable from stockholders.  Also during the nine months ended September 30, 2005, we realized a $3,610,000 gain that was included in Accumulated Comprehensive Income at December 31, 2004 which was related to a note receivable that was paid in full during the period as described more fully in Note 3. Notes Receivable.  Additionally, during the nine months ended September 30, 2005, we recorded $3,743,000 in Comprehensive Income related to marking the loans that were effectively repurchased from the REMIC Trust to fair value as discussed in Note 2. Real Estate Investments.

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During the nine months ended September 30, 2005, we issued 8,000 shares of restricted common stock at $19.62 per share.  These shares vest ratably over a three year period.  Additionally, during the nine months ended September 30, 2005, 11,134 shares of unvested restricted stock were canceled.  During the quarters ended September 30, 2005 and 2004, $140,000 and $121,000, respectively, of compensation expense was recognized related to the vesting of restricted stock.  During the nine months ended September 30, 2005 and 2004, $368,000 and $293,000, respectively, of compensation expense was recognized related to the vesting of restricted stock.

Stock-Based Compensation.  On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”.  SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and amends SFAS No. 95 “Statement of Cash Flows”.  Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123.  However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer an alternative.  The Securities and Exchange Commission has delayed the adoption requirement of SFAS No. 123(R) until January 1, 2006.  We expect to adopt SFAS No. 123(R) on January 1, 2006 as required.

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

1)     A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

2)     A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

We plan to adopt SFAS No. 123(R) using the “modified-prospective” method.  We adopted the fair-value-based method of accounting for share-based payments effective January 1, 2003, using the prospective method described in SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure” and therefore have recognized compensation expense related to all employee stock-based awards granted, modified or settled after January 1, 2003.

Currently, we use the Black-Scholes-Merton formula to estimate the value of stock options granted to employees.  This model requires management to make certain estimates including stock volatility, discount rate and the termination discount factor.  If management incorrectly estimates these variables, the results of operations could be affected.  We expect to continue to use this acceptable option valuation model upon the required adoption of SFAS No. 123(R).  Because SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because we adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under SFAS No. 123 will be recognized under SFAS No. 123(R).

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However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share below.  SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.  Because we qualify as a REIT under the Internal Revenue Code of 1986, as amended, we are not subject to Federal income taxation.  Therefore, this new reporting requirement will not have an impact on our statement of cash flows.

Prior to January 1, 2003, we accounted for stock option grants in accordance with APB 25 and related Interpretations.  Historically, we granted stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant.  Under APB 25, because the exercise price of our employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized.  Effective January 1, 2003, we adopted SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” on a prospective basis for all employee awards granted, modified or settled on or after January 1, 2003.  During the nine months ended September 30, 2005, 15,000 options to purchase common stock were granted at an exercise price of $19.62 and vest ratably over a three year period.  Additionally, during the nine months ended September 30, 2005, 4,000 unvested options to purchase common stock were cancelled.  During the nine months ended September 30, 2004, 30,000 options to purchase common stock were granted at an exercise price of $15.13 and vest ratably over a three year period.  Accordingly, $10,000 and $29,000 of compensation expense was recognized during the three and nine months ended September 30, 2005, respectively, related to the vesting of these options as compared to $6,000 and $10,000 during the three and nine months ended September 30, 2004, respectively.

The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all outstanding and unvested awards in each period (in thousands):

Note: Adjustments to compensation expense related to restricted shares have been excluded from this table since expense for restricted shares is already reflected in net income and is the same under APB No. 25 and SFAS No. 123.

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7.     Commitments and Contingencies

As of September 30, 2005, we had the following commitments outstanding:

We committed to provide Alterra Healthcare Corporation (or Alterra) $2,500,000 over three years ending December 4, 2006, to invest in leasehold improvements to properties they lease from us and an additional $2,500,000 over the next succeeding three years ending December 4, 2009 to expand properties they lease from us.  Both of these investments would be made at a 10% annual return to us.  To date Alterra has not requested any funds under this agreement.

We committed to provide EHSI up to $5,000,000 per year, under certain conditions, for expansion of the 37 properties they lease from us.  Should we invest such funds, EHSI’s monthly minimum rent would increase by an amount equal to (a) 9.5% plus the positive difference, if any, between the average yield on the U.S. Treasury 10-year note for the five days prior to funding, minus 420 basis points (expressed as a percentage), multiplied by (b) the amounts funded.  To date EHSI has not requested any funds under this agreement.

We committed to provide a lessee an accounts receivable financing on a skilled nursing facility.  The loan has a credit limit not to exceed $150,000 and an interest rate of 10%.  The commitment expires if the first advance is not requested by the borrower within a year of the agreement’s commencement date and the term of the loan is not to exceed two years from the date of the first request for advance.  To date $125,000 has been funded under this agreement.  We also committed to invest $300,000 in capital improvements for this facility.  To date no funds have been requested under this agreement.

We committed to provide a lessee an accounts receivable financing on a skilled nursing facility.  The loan has a credit limit not to exceed $75,000 and an interest rate of 10%.  The commitment expires if the first advance is not requested by the borrower within nine months of the agreement’s commencement date and the term of the loan is nine months from the date of the first request for advance.  To date $7,000 has been requested under this agreement.  We have also committed to replace the roof and install a fire sprinkler system for this facility.  The lessee’s monthly minimum rent will increase by an amount equal to 11% of our investment in these capital improvements.  To date no funds have been requested under this agreement.

During part of 2005 we had a commitment to provide a lessee with up to $250,000 to invest in leasehold improvements to a property they lease from us.  The commitment will expire in February of 2006.

We have a commitment to provide an additional $800,000 under the terms of an existing mortgage loan agreement.  Amounts funded under this agreement are added to the loan balance and are to be used for capital improvements.  To date, we have funded $800,000 under this agreement.

Subsequent to September 30, 2005 we sold an option to purchase four of our assisted living properties to a third party who currently leases the four properties from us under a master lease.  The price of the option was $500,000 in cash and a promissory note in the amount of $1,500,000.  The promissory note matures and the purchase option expires on February 17, 2006.  Should the buyer not purchase the properties, the master lease will remain in effect and we will continue receiving the same rental income under the master lease.

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8.     Major Operators

We have two operators, based on properties subject to lease agreements and secured by mortgage loans that each represent between 10% and 20% of our total assets and four operators from each of which we derive over 10% of our rental revenue.  EHSI, one of our major operators, is the wholly owned subsidiary of a publicly traded company, Extendicare Inc.  In addition, EHSI, although not publicly traded, files quarterly financial information with the Securities and Exchange Commission.  Our other operators are privately owned and thus no public financial information is available.  The following table summarizes EHSI’s assets, stockholders’ equity, annual revenue and net income from continuing operations as of or for the six months ended June 30, 2005, per the lessee’s public filings:

EHSI, a wholly owned subsidiary of Extendicare Inc., leased 37 assisted living properties with a total of 1,427 units owned by us representing approximately 11.9%, or $68,657,000, of our total assets at September 30, 2005 and 19.3 % of rental income recognized in 2005 excluding the effects of straight-line rent and the CLC and HHI note payoff as more fully described in Note 3. Notes Receivable.

Alterra Healthcare Corporation (or Alterra) leases 35 assisted living properties with a total of 1,416 units we own representing approximately 11.7%, or $67,682,000, of our total assets at September 30, 2005 and 19.3% of rental revenue recognized in 2005 excluding the effects of straight-line rent and the CLC and HHI note payoff as more fully described in Note 3. Notes Receivable.

CHC leased 26 skilled nursing properties with a total of 3,114 beds owned by us representing approximately 9.9%, or $57,060,000, of our total assets at September 30, 2005 and 12.8% of rental revenue recognized in 2005 excluding the effects of straight-line rent and the CLC and HHI note payoff as more fully described in Note 3. Notes Receivable.

Sunwest Management, Inc. (or Sunwest) operates eight assisted living properties with a total of 958 units that we own or on which we hold mortgages secured by first trust deeds.  This represents approximately 9.7%, or $55,993,000 of our total assets at September 30, 2005, and 13.2% of rental revenue and 4.8% of interest income from mortgage loans recognized in 2005 excluding the effects of straight-line rent and the CLC and HHI note payoff as more fully described in Note 3. Notes Receivable.

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Our financial position and our ability to make distributions may be adversely affected by financial difficulties experienced by Alterra, CHC, EHSI, Sunwest or any of our other lessees and borrowers, including bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with us or our borrowers when it expires.

9.     Earnings per Share

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

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

Executive Overview

Business

LTC Properties, Inc. a self-administered, health care real estate investment trust (or REIT) commenced operations in 1992.  We invest primarily in long-term care and other health care related properties through mortgage loans, property lease transactions and other investments.  The following table summarizes our portfolio as of September 30, 2005:

Our primary objectives are to sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in long-term care properties and other health care related properties managed by experienced operators.  To meet these objectives, we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders and diversify our investment portfolio by geographic location, operator and form of investment.

Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable.  Our investments in mortgage loans and owned properties represent our primary source of liquidity to fund distributions and are dependent upon the performance of the operators on their lease and loan obligations and the rates earned thereon.  To the extent that the operators experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.  To mitigate this risk, we monitor our investments through a variety of methods determined by the type of health care facility and operator.  Our monitoring process includes review of financial statements for each facility, periodic review of operator credit, scheduled property inspections and review of covenant compliance relating to real estate taxes and insurance.

In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk.  We typically invest in or finance up to 90 percent of the stabilized appraised value of a property.  Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit.  In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates.

For the nine months ended September 30, 2005, rental income and interest income represented 72% and 19%, respectively, of total gross revenues (excluding the effect of the note payoff by CLC and HHI as more fully described in Note 3. Notes Receivable).  Our lease structure contains fixed annual rental

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escalations, which are generally recognized on a straight-line basis over the minimum lease period, and annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property.  This revenue is not recognized until the appropriate contingencies have been resolved.  This lease structure initially generates lower revenues and net income but enables us to generate additional growth and minimized non-cash straight-line rent over time.

Depending upon the availability and cost of external capital, we anticipate making additional investments in health care related properties.  New investments are generally funded from temporary borrowings under our unsecured line of credit and internally generated cash flows.  Our investments generate internal cash from rent and interest receipts and principal payments on mortgage loans receivable.  Permanent financing for future investments, which replaces funds drawn under our unsecured line of credit, is expected to be provided through a combination of public and private offerings of debt and equity securities and the incurrence of secured debt.  We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance future investments.

Key Transactions

During 2005 we purchased three skilled nursing properties in New Mexico as discussed in Note 2. Real Estate Investments.  In addition, we sold 1,500,000 shares of common stock in a registered direct placement as discussed in Note 6. Stockholders’ Equity.

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

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