UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008ORo

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


Commission file number: 1-11314



LTC PROPERTIES, INC.(Exact name of Registrant as specified in its charter)

MARYLAND(State or other jurisdiction of incorporation or organization)

71-0720518(I.R.S. Employer Identification No.)


31365 Oak Crest Drive Suite 200
Westlake Village, California 91361(Address of principal executive offices)

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



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

Title of Each Class

Name of Each Exchange on Which RegisteredCommon stock, $.01 Par Value

New York Stock Exchange8.50% Series E Cumulative Convertible Preferred Stock, $.01 Par Value

New York Stock Exchange8.00% Series F Cumulative Preferred Stock, $.01 Par Value

New York Stock Exchange


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



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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o

Smaller reporting company o(Do not check if a smaller reporting company)


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



The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant was approximately $481,089.000
as of June 30, 2008 (the last business day of the Registrant's most recently completed second fiscal quarter). For purposes of this calculation, shares of common stock held by officers and
directors of the registrant and shares of common stock held by persons who hold more than 5% of the outstanding common stock of the Registrant have been excluded from this calculation because such
persons may be deemed to be affiliates.

The
number of shares of common stock outstanding as of February 18, 2009 was 23,137,745.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement relating to its 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of
this Annual Report on Form 10-K where indicated.



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CAUTIONARY STATEMENTS

This annual 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," "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, compliance with and changes to regulations and payment policies within the health care industry, changes in financing terms, competition within the health
care and senior housing industries, and changes in federal, state and local legislation. 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 this annual report and in other information contained in this annual report and 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.

PART I

Item 1.    BUSINESS

General

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

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

Owned Properties.As of December 31, 2008, our investment in 23 states are in owned properties consisting of 62 skilled nursing
properties
with a total of 7,209 beds, 85 assisted living properties with a total of 3,884 units and one school, representing in aggregate a gross investment of approximately $502.6 million. Here and
throughout this Form 10-K wherever we provide details of our properties' bed/unit count the number of beds/units applies to skilled nursing properties and assisted living residences
only. This number is based upon unit/bed counts shown on operating licenses provided to us by lessees/borrowers or units/beds as stipulated by lease/mortgage documents. We have found during the years
that these numbers often differ, usually not materially, from units/beds in operation at any point in time. The differences are caused by such things as operators converting a patient/resident room
for alternative uses, such as offices or storage, or converting a multi-patient room/unit into a

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single
patient room/unit. We monitor our properties on a routine basis through site visits and reviews of current licenses. In an instance where such change would cause a de-licensing of
beds or in our opinion impact the value of the property, we would take action against the lessee/borrower to preserve the value of the property/collateral. SeeItem 8.
FINANCIAL STATEMENTSNote 6. Real Estate Investmentsfor further description.

The
following operators accounted for more than 10% of our 2008 cash rental revenue:

Lessee

Percent of Rental RevenueExtendicare REIT and ALC


19.6
%Alterra Healthcare Corporation(1)


18.1
%Preferred Care, Inc.


15.9
%






Mortgage Loans.As part of our strategy of making long-term investments in properties used in the provision of long-term
health care services, we provide mortgage financing on such properties based on our established investment underwriting criteria. See "Investment and Other
Policies" in this section for further discussion. We have also provided construction loans that by their terms converted into purchase/lease transactions or permanent financing
mortgage loans upon completion of construction. SeeItem 8. FINANCIAL STATEMENTSNote 6. Real Estate Investmentsfor further
description. At December 31, 2008 we had 43 mortgage loans secured by first mortgages on 39 skilled nursing properties with a total of 4,498 beds, 16 assisted living residences with 714 units
and one school. These properties are located in 16 states.

Investment and Other Policies

Objectives and Policies.Our investment policy is to invest primarily in income-producing long-term care properties. Also see
"Government Regulation"below. Over the past three years (2006 through 2008), we invested approximately $15.7 million in mortgage loans and we
acquired skilled nursing and assisted living properties for approximately $18.0 million. At December 31, 2008, we had $21.1 million of cash on hand and $80.0 million
available on our unsecured line of credit with no scheduled maturities other than the maturity date of July 17, 2011. In calendar year 2009, we have debt maturities of $8.1 million due
in October 2009 at an interest rate of 8.43% and $15.8 million due in December 2009 at an interest rate of 8.81%. The October maturity may be paid 90 days early and the December maturity
may be paid six months early. In calendar year 2009, we have mortgage loans receivable of $7.6 million maturing in November. We believe that our current cash balance, cash flow from operations
available for distribution or reinvestment, and our current unsecured line of credit borrowing capacity are sufficient to provide for payment of our current operating costs and debt obligations and to
provide funds for distribution to the holders of our preferred stock and pay common dividends at least sufficient to maintain our REIT status. The timing, source and amount of cash flows provided by
financing activities and used in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. The current turmoil in the debt and equity markets
preclude us from, at this time, being able to determine if there is cost-effective long-term capital available for significant additional capital investments for calendar 2009.

We
believe that recent competitive markets had created an environment of very highly priced properties and low yielding mortgages. However, we expect that the recent deterioration in the
credit markets should exert downward pressure on prices of long term care properties. During 2007 we hired a vice president of marketing whose focus is to increase our presence at the state and local
levels

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through
participation in various healthcare associations and trade shows. We believe that this expanded marketing effort will result in increased deal flow and potentially a greater level of new
investments in 2009 and 2010. Since the competition from buyers in large transactions consisting of multiple property portfolios generally results in pricing that does not meet our investment
criteria, our primary marketing efforts focus on single property transactions or small multiple property portfolios that complement our historic investments and are priced with yields in our
historical range.

Historically
our investments have consisted of:



In
evaluating potential investments, we consider factors such as:



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

We
believe that assisted living facilities are an important sector in the long-term care market and our investments include direct ownership and mortgages secured by assisted
living properties. For assisted living investments we have attempted to diversify our portfolio both geographically and across product levels. Thus, we believe that although the majority of our
investments are in affordably priced units, our portfolio also includes upscale units in appropriate markets with certain operators.

Borrowing Policies.We may incur additional indebtedness when, in the opinion of our Board of Directors, it is advisable. We may incur
such
indebtedness to make investments in additional long-term care properties or to meet the distribution requirements imposed upon REITs under the Internal Revenue Code of 1986, as amended.
For other short-term purposes, we may, from time to time,

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negotiate
lines of credit, or arrange for other short-term borrowings from banks or otherwise. We may also arrange for long-term borrowings through public offerings or from
institutional investors.

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

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



Competition

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

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

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Government Regulation

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

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

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

A
significant portion of the revenue of our skilled nursing facility borrowers and lessees is derived from governmentally-funded reimbursement programs, such as Medicare and Medicaid.
Because of significant health care costs paid by such government programs, both federal and state governments have adopted and continue to consider various health care reform proposals to control
health care costs. There have been fundamental changes in the Medicare program that resulted in reduced levels of payment for a substantial portion of health care services. In many instances, revenues
from Medicaid programs are already insufficient to cover the actual costs incurred in providing care to those patients. According to a report issued by the Kaiser Commission on Medicaid and the
Uninsured in January 2009, while 47 states adopted budgets for fiscal year 2009 that included provider rate increases, after years of aggressive state Medicaid cost containment efforts, widespread
provider rate decreases and program cutbacks are expected in fiscal year 2010. In addition, many states are making changes to their long-term care delivery systems that emphasize home and
community-based long-term care services, in some cases coupled with cost controls for institutional providers. Spending on home and community-based services has risen from 13% of total
Medicaid long-term care spending in 1990 to 41% of Medicaid long-term care spending in 2006. As states continue to respond to budget pressures, future reduction in state
Medicaid payments for skilled nursing facility services could have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level
of their payments to us. On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009, which, among many other things, increases federal Medicaid
payments by approximately $87 billion to help support state Medicaid programs as they face budget shortfalls. Nevertheless, the federal government periodically adopts legislative and/or
regulatory policies designed to reduce federal Medicaid spending and to promote community-based alternatives to

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institutional
services. Moreover, health care facilities continue to experience pressures from private payors attempting to control health care costs, and reimbursement from private payors has in many
cases effectively been reduced to levels approaching those of government payors.

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

The
Centers for Medicare & Medicaid Services (or CMS) annually updates Medicare skilled nursing facility prospective payment system rates and other policies. On August 8,
2008, CMS published the final Medicare skilled nursing facility rates for fiscal year 2009, which began October 1, 2008. The final
rule provides a 3.4% market basket update, which CMS estimates will increase overall Medicare payments to skilled nursing facilities by $780 million compared to fiscal year 2008 levels.
Notably, CMS did not adopt an earlier provision from its May 7, 2008 proposed rule that would have recalibrated case mix weights to make up for increased Medicare expenditures resulting from
certain refinements made in January 2006. The proposed recalibration would have reduced overall Medicare skilled nursing facility payments by 3.3% ($770 million) in fiscal year 2009. The final
rule also addresses a number of other related policy issues, including a continuation of a special adjustment for skilled nursing facility residents with acquired immune deficiency syndrome (or AIDS),
consolidated billing, and other policy initiatives that eventually could impact reimbursement for skilled nursing facility services. While the federal government will not decrease Medicare payments to
skilled nursing facilities in fiscal year 2009, the loss of revenues associated with potential changes in skilled nursing facility payment rates could, in the future, 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.

Various
federal and state laws govern financial and other arrangements between health care providers that participate in, receive payments from, or make or receive referrals for work in
connection with government funded health care programs, including Medicare and Medicaid. These laws, known as the fraud and abuse laws, include the federal anti-kickback statute, which
prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration directly or indirectly in return for, or to induce, the referral of an individual to a
person for the furnishing of an item or service for which payment may be made under federal health care programs. In addition, the federal physician self-referral law, commonly known as
Stark II (or the Stark Law), prohibits physicians and certain other types of practitioners from making referrals for certain designated health services paid in whole or in part by Medicare and
Medicaid to entities with which the practitioner or a member of the practitioner's immediate family has a financial relationship, unless the financial relationship fits within an applicable exception
to the Stark Law. The Stark Law also prohibits the entity receiving the referral from seeking payment under the Medicare and Medicaid programs for services rendered pursuant to a prohibited referral.
If an entity is paid for services rendered pursuant to a prohibited referral, it may incur civil penalties of up to $15,000 per prohibited claim and may be excluded from participating in the Medicare
and Medicaid programs. Many states have enacted similar fraud and abuse laws which are not necessarily limited to items and services for which payment is made by federal health care programs.
Violations of these laws may result in fines, imprisonment, denial of payment for services, and exclusion from federal and/or other state-funded programs. Other federal and state laws authorize the
imposition of penalties, including criminal and civil fines and exclusion from participation in federal healthcare programs for submitting false claims, improper billing and other

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offenses.
Federal and state government agencies have continued rigorous enforcement of criminal and civil fraud and abuse laws in the health care arena. Our borrowers and lessees are subject to many
of these laws, and some of them could in the future become the subject of a governmental enforcement action.

Legislative Developments

Congress and the state legislatures regularly consider, and in some cases adopt, legislation that would impact health care providers,
including long-term care providers. For instance, the Balanced Budget Act of 1997 enacted significant changes to the Medicare and Medicaid programs designed to modernize payment and health
care delivery systems while achieving substantial budgetary savings. Among other things, the law established the prospective payment system for skilled nursing facility services to replace the
cost-based reimbursement system, which resulted in significant reductions in Medicare payments to skilled nursing facilities. In recent years, Congress has adopted legislation to somewhat
mitigate the impact of the new payment system, including a temporary payment add-on for high-acuity patients, which has subsequently expired, and a temporary payment
add-on for residents with AIDS that still is in effect through fiscal year 2009. Other legislation enacted by Congress in recent years has reduced certain Medicare skilled nursing facility
bad debt payments, strengthened Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage, reduced Medicaid provider taxes that are used by
many states to finance state health programs, and given states greater flexibility to expand access to home and community based services.

In
addition, each year legislation is proposed in Congress and in some state legislatures that would affect broader changes in the health care system, either nationally or at the state
level. Among the proposals under consideration are additional cost controls on the Medicare and Medicaid programs, health care provider cost-containment initiatives, health care coverage
expansion for the uninsured, measures to prevent medical errors, incentives to promote community-based care as an alternative to institutional long-term care services, and limits on
damages that could be claimed in malpractice lawsuits. We cannot predict whether any reform proposals will be adopted or, if adopted, what effect, if any, such proposals would have on our business.

Environmental Matters

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

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

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Insurance

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

Employees

We currently employ 13 people. The employees are not members of any labor union, and we consider our relations with our employees to be
excellent.

Taxation of our Company

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code (or the Code). We believe that
we have been organized and have operated in such a manner as to qualify for taxation as a REIT under the Code commencing with our taxable year ending December 31, 1992. We intend to continue to
operate in such a manner, but there is no assurance that we have operated or will continue to operate in a manner so as to qualify or remain qualified.

If
we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income taxes on our net income that is currently distributed to our stockholders.
This treatment substantially eliminates the "double taxation" (once at the corporate level when earned and once at stockholder level when distributed) that generally results from investment in a
non-REIT corporation.

However,
we will be subject to federal income tax as follows:



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Finally,
if we own a residual interest in a real estate mortgage investment conduit (or REMIC), we will be taxed at the highest corporate rate on the portion of any excess inclusion
income that we derive from the REMIC residual interests equal to the percentage of our shares that is held in record name by "disqualified organization." A "disqualified organization" includes the
United States, any state or political subdivision thereof, any foreign government or international organization, any agency or instrumentality of any of the foregoing, any rural electrical or
telephone cooperative and any tax-exempt organization (other than a farmer's cooperative described in Section 521 of the Code) that is exempt from income taxation and from the
unrelated business taxable income provisions of the

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Code.
However, to the extent that we own a REMIC residual interest through a taxable REIT subsidiary, we will not be subject to this tax.

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



The
Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Conditions (5) and (6) do not apply until after the first taxable year
for which an election is made to be taxed as a REIT. For purposes of condition (6), pension funds and certain other entities are treated as individuals, subject to a "look-through"
exception.

Pursuant
to the Code and applicable Treasury Regulations, in order to be able to elect to be taxed as a REIT, we must maintain certain records and request certain information from our
stockholders designed to disclose the actual ownership of our stock. Based on publicly available information, we believe we have satisfied the share ownership requirements set forth in
conditions (5) and (6). In addition, Sections 9.2 and 9.3 of our Charter provide for restrictions regarding the transfer and ownership of shares. These restrictions are intended to
assist us in continuing to satisfy the share ownership requirements described in conditions (5) and (6). These restrictions, however, may not ensure
that we will, in all cases, be able to satisfy the share ownership requirements described in conditions (5) and (6).

We
have complied with, and will continue to comply with, regulatory rules to send annual letters to certain of our stockholders requesting information regarding the actual ownership of
our stock. If despite sending the annual letters, we do not know, or after exercising reasonable diligence would not have known, whether we failed to satisfy the ownership requirement set forth in
condition (6) above, we will be treated as having satisfied such condition. If we fail to comply with these regulatory rules, we will be subject to a monetary penalty. If our failure to comply
was due to intentional disregard of the requirement, the penalty would be increased. However, if our failure to comply was due to reasonable cause and not willful neglect, no penalty would be imposed.

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



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

Rents
received by us will qualify as "rents from real property" for purposes of satisfying the gross income tests for a REIT only if several conditions are
met:



For
taxable years beginning after August 5, 1997, a REIT has been permitted to render a de minimus amount of impermissible services to tenants and still treat amounts received
with respect to that property as rents from real property. The amount received or accrued by the REIT during the taxable year for the impermissible services with respect to a property may not exceed
1% of all amounts received or accrued by the REIT directly or indirectly from the property. If the amount received or accrued by the REIT during the taxable year for impermissible services with
respect to a property exceeds 1% of the total amounts received or accrued with respect to such property, then none of the rents received or accrued from such property shall be treated as rents from
real property. The amount received for any service or management operation for this purpose shall be deemed to be not less than 150% of the direct cost of the REIT in furnishing or rendering the
service or providing the management or operation. Furthermore, impermissible services may be furnished to tenants by a taxable REIT subsidiary subject to certain conditions, and we may still treat
rents received with respect to the property as rent from real property.

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The
term "interest" generally does not include any amount if the determination of the amount depends in whole or in part on the income or profits of any person, although an amount
generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage of receipts or sales.

If
we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year if we are eligible for relief. These
relief provisions will be generally available if our failure to meet the tests was due to reasonable cause and not due to wilful neglect and following the identification of the failure to satisfy one
or both income tests, a description of each item of gross income is filed in accordance with IRS regulations.

It
is not now possible to determine the circumstances under which we may be entitled to the benefit of these relief provisions. If these relief provisions apply, a 100% tax is imposed on
an amount equal to (a) the gross income attributable to the greater of the amount by which we failed the 75% or 95% test, multiplied by (b) a fraction intended to reflect our
profitability.

Asset Tests.At the close of each quarter of our taxable year, we must also satisfy several tests relating to the nature and
diversification of our
assets. At least 75% of the value of our total assets must be represented by real estate assets, cash, cash items (including receivables arising in the ordinary course of our operations), and
government securities and qualified temporary investments. Although the remaining 25% of our assets generally may be invested without restriction, we are prohibited from owning securities representing
more than 10% of either the vote or value of the outstanding securities of any issuer other than a qualified REIT subsidiary, another REIT or a taxable REIT subsidiary (the "10% vote and value test").
Further, no more than 20% of our total assets may be represented by securities of one or more taxable REIT subsidiaries (for tax years beginning after July 30, 2008, 25% of the total value of
our assets) and no more than 5% of the value of our total assets may be represented by securities of any non-governmental issuer other than a qualified REIT subsidiary, another REIT or a
taxable REIT subsidiary (or TRS). Each of the 10% vote and value test and the 20% and 5% asset tests must be satisfied at the end of any quarter. There are special rules which provide relief if the
value related tests are not satisfied due to changes in the value of the assets of a REIT.

Investments in Taxable REIT Subsidiaries.For taxable years beginning after December 1, 2000, REITs may own more than 10% of the
voting and
value of securities in a TRS. A TRS is a corporation other than
a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with the REIT to be treated as a TRS. A TRS also includes any corporation other than a REIT with respect
to which a TRS owns securities possessing more that 35% of the total voting power or value of the outstanding securities of such corporation. Other than some activities relating to lodging and health
care facilities, a TRS may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to income tax as
a regular C corporation. In addition, a TRS may be prevented from deducting interest on debt funded directly or indirectly by its parent REIT if certain tests regarding the TRS's debt to equity ratio
and interest expense are not satisfied. A REIT's ownership of a TRS will not be subject to the 10% or 5% asset tests described above, and its operations will be subject to the provisions described
above. At this time, we do not have any taxable REIT subsidiaries.

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

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Ownership of Interests in Partnerships, Limited Liability Companies and qualified REIT Subsidiaries.We own interests in various
partnerships and
limited liabilities companies. In the case of a REIT which is a partner in a partnership, or a member in a limited liability company treated as a partnership for federal income tax purposes, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership or limited liability company, based on its interest in partnership capital, subject to
special rules relating to the 10% REIT asset test described above. Also, the REIT will be deemed to be entitled to its proportionate share of income of that entity. The assets and items of gross
income of the partnership or limited liability company retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income tests
and the asset tests. Thus, our proportionate share of the assets and items of income of partnerships and limited liability companies taxed as partnerships, in which we are, directly or indirectly
through other partnerships or limited liability companies taxed as partnerships, a partner or member, are treated as our assets and items of income for purposes of applying the REIT qualification
requirements described in this Annual Report on Form 10-K (including the income and asset tests previously described).

We
also own interests in a number of subsidiaries which are intended to be treated as qualified REIT subsidiaries. The Code provides that such subsidiaries will be ignored for federal
income tax purposes and that all assets, liabilities and items of income, deduction and credit of such subsidiaries will be treated as assets, liabilities and such items of our company. If any
partnership or qualified real estate investment trust subsidiary in which we own an interest were treated as a regular corporation (and not as a partnership or qualified real estate investment trust
subsidiary) for federal income tax purposes, we would likely fail to satisfy the REIT asset test prohibiting a REIT from owning greater than 10% of the voting power of the stock or value of securities
of any issuer, as described above, and would therefore fail to qualify as a REIT. We believe that each of the partnerships and subsidiaries in which we own an interest will be treated for tax purposes
as a partnership or qualified REIT subsidiary, respectively, although no assurance can be given that the IRS will not successfully challenge the status of any such entity.

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



In
addition, if we dispose of any asset we acquired from a corporation which is or has been a C corporation in a transaction in which our basis in the asset is determined by reference to
the basis of the asset in the hands of that C corporation, within the ten-year period following our acquisition of such asset, we would be required to distribute at least 90% of the
after-tax gain, if any, we recognized on the disposition of the asset, to the extent that gain does not exceed the excess of (a) the fair market value of the asset on the date we
acquired the asset over (b) our adjusted basis in the asset on the date we acquired the asset.

We
must pay these annual distributions (1) in the taxable year to which they relate or (2) in the following year if (i) we pay these distributions during January to
stockholders of record in either

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October,
November, or December of the prior year or (ii) we elect to declare the dividend before the due date of the tax return (including extensions) and pay on or before the first regular
dividend payment date after such declaration.

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

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



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

We
intend to make timely distributions sufficient to satisfy these annual distribution requirements and to avoid the imposition of the 4% excise tax.

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

2008 Act.The Housing and Economic Recovery Act of 2008 made a number of substantial changes to the qualification and tax treatment of
REITs. The
following is a brief summary of certain significant REIT provisions on the 2008 Act.



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

Investor Information

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

Posted
on our website and available in print upon request of any stockholder to our Investor Relations Department are the charters for our Audit Committee, Compensation Committee and
Nominating and Corporate Governance Committee, our Corporate Governance Guidelines and a Code of Business Conduct, Ethics and Corporate Governance governing our directors, officers and employees.
Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Business Conduct, Ethics and Corporate Governance and any waiver
applicable to our Chief Executive Officer, Principal Financial Officer, Principal Accounting Officer or Directors. In addition, our website includes information concerning purchases and sales of our
equity securities by our executive officers and directors. On our website, under the heading "SEC Filings," there is a link to view each Form 4 filing. Our Investor Relations Department can be
contacted at:

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

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

Our
Company is listed on the New York Stock Exchange (or NYSE), ticker symbol LTC. Section 303A.12(a) of the NYSE Listed Company Manual requires that listed companies disclose in
their annual report to stockholders that the NYSE Annual CEO Certification has been filed with the NYSE and disclose any qualifications. We filed with the NYSE in 2008 the Annual CEO Certification
without any qualifications.

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Item 1A.    RISK FACTORS

The following discussion of risk factors contains "forward-looking statements" as discussed above. These risk factors may be important
to understanding any statement in this Annual Report on Form 10-K or elsewhere. The following information should be read in conjunction with Management's Discussion and Analysis,
and the consolidated financial statements and related notes in this Annual Report on Form 10-K.

A Failure to Maintain or Increase our Dividend Could Reduce the Market Price of Our Stock.In January 2009, we declared a $0.13 per
share monthly
dividend for the first quarter of calendar 2009. During calendar 2008, we paid a $0.13 monthly dividend on our common stock. During calendar 2007, we paid a $0.125 monthly dividend on
our common stock. The ability to maintain or raise our common dividend is dependent, to a large part, on growth of funds from operations. This growth in turn depends upon increased revenues from
additional investments and loans, rental increases and mortgage rate increases.

At Times, We May Have Limited Access to Capital Which Will Slow Our Growth.A REIT is required to make dividend distributions and
retains little cash
flow for growth. As a result, growth for a REIT is generally through the steady investment of new capital in real estate assets. Currently, we believe that our low debt levels, $80.0 million
available under our unsecured line of credit and $21.1 million cash balance at December 31, 2008, will enable us to meet our obligations and continue to make investments. Recently,
liquidity in the credit markets has deteriorated and, at this time, we are unable to determine if there is cost effective long-term capital available for significant additional capital
investments for calendar 2009. There may be times when we will have limited access to capital from the equity and/or debt markets. During such periods, virtually all of our available capital would be
required to meet existing commitments and to reduce existing debt. We may not be able, during such periods, to obtain additional equity or debt capital or dispose of assets on favorable terms, if at
all, at the time we
require additional capital to acquire health care properties on a competitive basis or meet our obligations.

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

We Depend on Lease Income and Mortgage Payments from Real Property.Approximately 97% of our revenue for the year ended December 31,
 2008, was
derived from mortgage payments and lease income from real property. Our revenue would be adversely affected if a significant number of our borrowers or lessees were unable to meet their obligations to
us or if we were unable to lease our properties or make mortgage loans on economically favorable terms. There can be no assurance that any lessee will exercise its option to renew its lease upon the
expiration of the initial term or that if such failure to renew were to occur, we could lease the property to others on favorable terms.

We Rely on a Few Major Operators.Extendicare REIT and Assisted Living Concepts, Inc (or ALC), collectively lease 37 assisted living
properties with
a total of 1,427 units owned by us

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representing
approximately 12.2%, or $61.8 million, of our total assets at December 31, 2008. Alterra Healthcare Corporation (or Alterra), a wholly owned subsidiary of Brookdale Senior
Living, Inc., leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 12.1%, or $61.3 million, of our total assets at December 31,
2008. Subsequent to December 31, 2008 the name Alterra Healthcare Corporation was changed to Brookdale Senior Living Communities, Inc. Preferred Care, Inc. (or Preferred Care),
through various wholly owned subsidiaries, operates 33 skilled nursing properties with a total of 4,021 beds that we own or on which we hold mortgages secured by first trust deeds. This represents
approximately 12.6% or $63.5 million of our total assets at December 31, 2008. Our financial position and ability to make distributions may be adversely affected by financial
difficulties experienced by any of our other lessees and borrowers, including bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in
the
event any such operator does not renew and/or extend its relationship with us or our borrowers when it expires.

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

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

Congress and the States Have Enacted Health Care Reform and Budget Measures.The health care industry continues to face various
challenges, including
increased government and private payor pressure on health care providers to control costs. Certain of these initiatives have had the result of limiting Medicare and Medicaid reimbursement for nursing
facility services. In particular, the establishment of a Medicare prospective payment system for skilled nursing facility services to replace the cost-based reimbursement system
significantly reduced Medicare reimbursement to skilled nursing facility providers. While Congress subsequently took steps to mitigate the impact of the prospective payment system on skilled nursing
facilities, other federal legislative policies have been adopted and continue to be proposed that would reduce Medicare and/or Medicaid payments to nursing facilities. Moreover, states are facing
increasing budget pressures in light of the current economic downturn, prompting consideration and in some cases adoption of cuts in state Medicaid payments to providers. No assurances can be given
that any additional Medicare or Medicaid legislation enacted by Congress or the states would not reduce Medicare or Medicaid reimbursement to nursing facilities or result in additional costs for
operators of nursing facilities.

In
addition, comprehensive reforms affecting the payment for and availability of health care services have been proposed at the federal and state levels and major reform proposals have
been

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adopted
by certain states. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new
interpretations of existing laws, or changes in payment methodology may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing
business and the amount of reimbursement by the government and other third party payors. Congress also has given states greater flexibility to expand access to home and community based services as an
alternative to nursing facility services. These provisions could further increase state funding for home and community based services, while prompting states to cut funding for nursing facilities and
homes for persons with disabilities. In light of continuing state Medicaid program reforms, budget cuts, and regulatory initiatives, no assurance can be given that the implementation of such
regulations and reforms will not have a material adverse effect on the financial condition or results of operations of our lessees and/or borrowers which, in turn, could effect their ability to meet
their contractual obligations to us.

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

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

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

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

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

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

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

Provisions in Our Article of Incorporation May Limit Ownership of Shares of Our Capital Stock.In order for us to qualify as a REIT, no
more than 50%
in value of the outstanding shares of our stock may be beneficially owned, directly or indirectly, by five or fewer individuals at any time during the last half of each taxable year. To ensure
qualification under this test, our articles of incorporation provide that, subject to exceptions, no person may beneficially own more than 9.8% of outstanding shares of any class or series of our
stock, including our common stock. Our Board of Directors may exempt a person from the 9.8% ownership limit upon such conditions as the Board of Directors may direct. However, our Board of Directors
may not grant an exemption from the 9.8% ownership limit if it would result in the termination of our status as a REIT. Shares of capital stock in excess of 9.8% ownership limitation that lack an
applicable exemption may lose rights to dividends and voting, and may be subject to redemption. As a result of the limitations on ownership set forth in our Articles of Incorporation, acquisition of
any shares of capital stock that would result in our disqualification as a REIT may be limited or void. The 9.8% ownership limitation also may have the effect of delaying, deferring, or preventing a
change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our
capital stock.

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

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

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



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

Item 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

Item 2.    PROPERTIES

Investment Portfolio

At December 31, 2008, our real estate investment portfolio (before accumulated depreciation and amortization) consisted of
$502.6 million invested primarily in owned long-term care properties and mortgage loans of approximately $78.3 million (prior to deducting a $0.8 million reserve). Our
"direct real estate investment portfolio" (properties that we own or on which we hold promissory notes secured by first mortgages) consisted of investments in 101 skilled nursing properties with
11,707 beds, 101 assisted living properties with 4,598 units and two schools. These properties are located in 30 states.

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

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

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

Owned Properties.At December 31, 2008, we owned properties in 23 states consisting of 62 skilled nursing properties with a total
of 7,209
beds, 85 assisted living properties with a total of 3,884 units and one school representing a gross investment of approximately $502.6 million. Owned properties are leased pursuant to
non-cancelable operating leases generally with an initial term of 10 to 30 years. Many of the leases contain renewal options and two contain limited period options that permit the
operators to purchase the properties. The leases provide for fixed minimum base rent

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during
the initial and renewal periods. The majority of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four ways
depending on specific provisions of each lease: (i) a specified percentage increase over the prior year, generally between 2.0% and 2.5%; (ii) the higher of (i) or a calculation
based on the Consumer Price Index; (iii) as a percentage of facility net patient revenues in excess of base amounts or (iv) specific dollar increases. Each lease is a triple net lease
which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and non-capital expenditures and other costs necessary in the operations of the facilities. See Item 8. FINANCIAL
STATEMENTSNOTE 6. Real Estate Investmentsfor further descriptions.

The
following table sets forth certain information regarding our owned properties as of December 31, 2008 (dollar amounts in
thousands):

Location

No. of
SNFs

No. of
ALFs

No. of
Schools

No. of
Beds/Units(1)

Encumbrances

Lease
Term(2)

Current
InvestmentAlabama


3


1





458

$



93

$
16,540Arizona


5


2





1,029





129


41,212California


1


2





343


16,054


94


29,305Colorado


4


6





562


6,019


156


27,706Florida


3


6





776


2,038


137


33,567Georgia


2


1





292





34


6,600Idaho





4





148





72


9,756Indiana





2





78





72


5,070Iowa


7


1





645





146


17,422Kansas


3


4





398





149


17,568Nebraska





4





156





72


9,332New Jersey





1


1


39





87


12,195New Mexico


7








860





138


48,876N. Carolina





5





210





144


13,096Ohio


5


11





737





97


56,804Oklahoma





6





221


4,066


144


12,315Oregon


1


3





218





77


11,927Pennsylvania





1





69





112


8,327S. Carolina





3





128





144


7,610Tennessee


2








142





118


3,075Texas


15


14





2,710


3,886


131


74,399Virginia


3








443





151


13,711Washington


1


8





431


4,690


74


26,204TOTAL


62


85


1


11,093

$
36,753
(3)

119

$
502,617
(4)


---

23

---



Mortgage Loans.At December 31, 2008, we had 43 mortgage loans secured by first mortgages on 39 skilled nursing properties with a
total of
4,498 beds, 16 assisted living properties with 714 units and one school. These properties are located in 16 states. SeeItem 8. FINANCIAL
STATEMENTSNote 6. Real Estate Investmentsfor further description.

The
following table sets forth certain information regarding our mortgage loans as of December 31, 2008 (dollar amounts in
thousands):

Location

No. of
SNFs

No. of
ALFs

No. of
Schools

No. of
Beds/
Units(3)

Interest Rate
%

Average
Months to
Maturity

Original
Face Amount
of Mortgage
Loans

Current
Carrying
Amount of
Mortgage Loans

Current
Annual Debt
Service(1)California


3


1





489


10.93-12.30


53

$
8,100

$
5,335

$
1,140Florida


4


1





387


10.50-13.73


13


11,360


10,317


1,437Georgia


1








152


10.90


27


2,000


1,778


218Iowa





1





44


13.15


58


2,400


2,252


319Louisiana


1








127


12.27


95


1,600


1,094


215Minnesota








1





7.28


126


3,751


3,751


273Missouri


2








190


10.13-10.60


81


3,000


2,409


344Montana





1





34


13.41


58


2,346


2,194


316Nebraska





4





163


11.00-13.15


58


10,911


9,759


1,367Oklahoma


2








273


12.40


56


2,600


1,243


292S. Dakota





1





34


13.15


58


2,346


2,203


311Tennessee


1








120


10.05


84


3,400


2,071


403Texas


22


7





2,896


9.50-13.15


47


44,705


29,798


5,483Utah


1








84


10.00


131


1,400


1,400


162Washington


1








104


13.00


94


1,700


1,151


234Wisconsin


1








115


11.00


98


2,200


1,546


273TOTAL


39


16


1


5,212


11.48


53

$
103,819

$
78,301
(2)
$
12,787


---

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

24

---



security
provisions in the form of letters of credit, pledged collateral accounts, security deposits, cross-default and cross-collateralization features and certain guarantees.

Item 3.    LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote of our security holders during the fourth quarter of 2008.

25

---





PART II

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

Market Information

Our common stock is listed on the NYSE under the symbol "LTC". Set forth below are the high and low reported sale prices for our common
stock as reported on the NYSE for each of the periods indicated.

2008

2007High

Low

High

LowFirst Quarter

$
27.35

$
22.51

$
29.25

$
23.83Second Quarter

$
28.30

$
25.13

$
27.16

$
22.00Third Quarter

$
31.16

$
24.57

$
25.69

$
19.03Fourth Quarter

$
28.87

$
14.70

$
28.00

$
20.89


Holders of Record

As of December 31, 2008 we had approximately 403 stockholders of record of our common stock.

Dividend Information

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

Declared

Paid2008

2007

2008

2007First Quarter

$
0.390

$
0.375

$
0.390

$
0.375Second Quarter

$
0.390

$
0.375

$
0.390

$
0.375Third Quarter

$
0.390

$
0.375

$
0.390

$
0.375Fourth Quarter

$
0.390

$
0.375

$
0.390

$
0.375$
1.560

$
1.500

$
1.560

$
1.500


We
intend to distribute to our stockholders an amount at least sufficient to satisfy the distribution requirements of a REIT. Cash flows from operating activities available for
distribution to stockholders will be derived primarily from interest and rental payments from our real estate investments. All distributions will be made subject to approval of our Board of Directors
and will depend on our earnings, our financial condition and such other factors as our Board of Directors deem relevant. In order to qualify for the beneficial tax treatment accorded to REITs by
Sections 856 through 860 of the Internal Revenue Code, we are required to make distributions to holders of our shares equal to at least 90% of our REIT taxable income. (See "Annual Distribution
Requirements" beginning on page 13.)

Issuer Purchases of Equity Securities

During the fourth fiscal quarter ended December 31, 2008, we did not repurchase any of our outstanding common stock or preferred
securities.

Since
inception of our existing share repurchase program through December 31, 2008, we had repurchased (i) 893,079 shares of our common stock at an average cost of $21.01
per share, including commissions, for an aggregate purchase price including commissions paid of $18,768,000 and (ii) 636,300 shares of our Series F preferred stock at an average cost of
$22.44 per share, including commissions, for an aggregate purchase price including commissions paid of $14,276,000.

26

---



Our
Board of Directors established the existing share repurchase program in June 2007 enabling us to repurchase up to 5,000,000 shares of our common stock on the open market. This
authorization does not expire until 5,000,000 shares of our common stock have been repurchased or the Board of Directors terminates its authorization. In January 2008, our Board of Directors amended
the share repurchase program to include authorization to repurchase our outstanding preferred securities.

We
continue to have authorization to purchase an additional 3,470,621 shares of common stock and/or preferred securities.

Stock Performance Graph

The National Association of Real Estate Investment Trusts (or NAREIT), the representative voice for U.S. REITs and publicly traded real
estate companies, classifies a company with less than 25% of its real estate investments in mortgages as an equity REIT. In 2008, our mortgage investments were less than 25% of our total real estate
assets.

This
graph compares the cumulative total stockholder return on our common stock from December 31, 2003 to December 31, 2008 with the cumulative stockholder total return of
(1) the Standard & Poor's 500 Stock Index and (2) the NAREIT Equity REIT Index. The comparison assumes $100 was invested on December 31, 2003 in our common stock and in
each of the foregoing indices and assumes the reinvestment of dividends.

Total Return Stock Performance

GRAPHIC

The
stock performance depicted in the above graph is not necessarily indicative of future performance.

The stock performance graph shall not be deemed incorporated by reference into any filing by us under the Securities Act of 1933 or the Securities Exchange Act of
1934 except to the extent that we specifically incorporate such information by reference, and shall not otherwise be deemed filed under such Acts.

27

---



Item 6.    SELECTED FINANCIAL DATA

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

2008

2007

2006

2005

2004(In thousands, except per share amounts)Operating Information:Total revenues

$
69,357

$
74,790

$
73,163

$
72,408

$
62,177Income from continuing operations


42,885


47,696


45,536


50,688


32,303Preferred stock dividends


(15,390
)

(16,923
)

(17,157
)

(17,343
)

(17,356
)Preferred stock buyback


989











Preferred stock redemption charge














(4,029
)Net income available to common stockholders


28,576


30,832


61,631
(3)

35,366


15,003Per share Information:Net Income (Loss) per Common Share from Continuing Operations Net of Preferred Stock Dividends, Preferred Stock Buyback and Preferred Stock
Redemption Charge:Basic

$
1.24

$
1.33

$
1.22

$
1.49

$
0.56Diluted

$
1.24

$
1.32

$
1.21

$
1.48

$
0.56Net Income Per Common Share Available to Common Stockholders:Basic

$
1.24

$
1.33

$
2.64

$
1.58

$
0.77Diluted

$
1.24

$
1.32

$
2.51

$
1.56

$
0.77Common Stock Distributions declared

$
1.56

$
1.50

$
1.08
(1)
$
1.65
(1)
$
1.125Common Stock Distributions paid

$
1.56

$
1.50

$
1.44

$
1.29

$
1.125Balance Sheet Information:Total assets

$
506,053

$
544,105

$
567,767

$
585,271

$
547,880Total debt(2)


36,753
(4)

52,295


53,811


92,361


96,764


---

28

---





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

Executive Overview

Business

We are a self-administered health care real estate investment trust (or REIT) that invests primarily in
long-term care and other health care related properties through mortgage loans, property lease transactions and other investments. In 2008, long-term care properties, which
include skilled nursing and assisted living properties, comprised approximately 98% of our investment portfolio.

The
following table summarizes our "direct real estate investment portfolio" (properties that we own or on which we hold promissory notes secured by first mortgages) as of
December 31, 2008(dollar amounts in thousands):

Type of Property

Gross
Investments

Percentage
of
Investments

For the year
ended
12/31/08
Rental Income

For the year
ended
12/31/08
Interest
Income(3)

Percentage
of
Revenues
(4)

Number
of
Properties

Number
of Beds/
Units
(2)

Investment
per
Bed/Unit

Number of
Operators(1)

Number
of
States(1)Assisted Living Properties

$
282,084


48.6
%
$
28,046

$
3,063


46.2
%

101


4,598

$
61.35


13


22Skilled Nursing Properties


285,814


49.2
%

28,349


6,338


51.6
%

101


11,707

$
24.41


36


20Schools


13,020


2.2
%

1,167


307


2.2
%

2


N/A


N/A


2


2Totals

$
580,918


100.0
%
$
57,562

$
9,708


100.0
%

204


16,305


---

As of December 31, 2008 we had $449.7 million in carrying value of net real estate investment, consisting of $372.1 million
or 83% invested in owned and leased properties and $77.6 million or 17% invested in mortgage loans secured by first mortgages.

For
the year ended December 31, 2008, rental income and interest income from mortgage loans represented 83.0% and 14.0%, respectively, of total gross revenues. In most instances,
our lease structure contains fixed annual rental escalations, which are generally recognized on a straight-line basis over the minimum lease period in accordance with SFAS No. 13. "Accounting for Leases."Certain leases have annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in
the gross operating revenues of the property. This
revenue is not recognized until the appropriate contingencies have been resolved. This lease structure initially generates lower revenues and net income but enables us to generate additional growth
and minimize non-cash straight-line rent over time. For the years ended December 31, 2008, 2007, and 2006 we recorded $3.5 million, $4.8 million, and
$3.1 million, respectively in straight-line rental income. Also during 2008 we recorded $0.1 million of straight-line rent receivable reserve.
Straight-line rental income on a same store basis will increase from $3.5 million for annual 2008 to $4.1 million for projected annual 2009 assuming no new leased investments
with fixed annual rental escalations are added to our portfolio. During the year ended December 31, 2008 we received $54.7 million of cash rental revenue and recorded $0.6 million
of lease inducement costs. At December 31, 2008 and 2007, the straight-line rent receivable balance, net of reserves, on the balance sheet was $13.9 million and
$10.5 million, respectively.

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

29

---



stockholders
and diversify our investment portfolio by geographic location, operator and form of investment. We opportunistically consider investments in health care facilities in related businesses
where the business model is similar to our existing model and the opportunity provides an attractive expected return. Consistent with this strategy, we pursue, from time to time, opportunities for
potential acquisitions and investments, with due diligence and negotiations often at different stages of development at any particular time.



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 periodic 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. Historically we have financed up to 90 percent of the stabilized
market value of a property. Due to current market uncertainties we most likely will finance lower than our historical percentage. 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 are generally cross-defaulted and cross-collateralized with other loans, operating leases or
agreements between us and the operator and its affiliates.

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
cash on hand and temporary borrowings under our unsecured line of credit and internally generated cash flows. Our investments generate internal cash from rent and interest receipts and principal
payments on mortgage loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured line of credit, is expected to be provided through a combination of
public and private offerings of debt and equity securities and secured debt financing. The timing, source and amount of cash flows provided by financing activities and used in investing activities are
sensitive to the capital markets environment, especially to changes in interest rates. Changes in capital markets environment may impact the availability of cost-effective capital. We
believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and

30

---



interest),
make dividend distributions and finance future investments during the current period of tightened credit conditions.

Economic Climate

Through 2008, the U.S experienced challenging financial markets, tighter credit conditions, and slower growth. Continued concerns about
the systemic impact of inflation, energy costs, declining business and consumer confidence, and a weakened real estate market have contributed to increased market volatility and diminished
expectations for the U.S. economy. As a result, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Continued
turbulence in the U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our operators.

We
expect that the deterioration in the credit markets should exert downward pressure on prices of long term care properties, although the lack of recent transaction volume makes it
difficult to determine if this is occurring. However, we believe our business model has enabled and will continue to allow us to maintain the integrity of our property investments, including in
response to financial difficulties that may be experienced by operators. Traditionally, we have taken a conservative approach to managing our business, choosing to maintain liquidity and exercise
patience until favorable investment opportunities arise.

At
December 31, 2008, we had $21.1 million of cash on hand and $80.0 million available on our unsecured line of credit with no scheduled maturities other than the
maturity date of July 17, 2011. In calendar year 2009, we have debt maturities of $8.1 million due in October 2009 at an interest rate of 8.43% and $15.8 million due in December
2009 at an interest rate of 8.81%. The October maturity may be paid 90 days early and the December maturity may be paid six months early. In calendar year 2009, we have mortgage receivables of
$7.6 million maturing in November.

As
a result, 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 some future investments should we determine such future investments are financially feasible.

Key Transactions

Mortgage Loans.During 2008 we invested we invested $9.1 million, net of closing fees, in three mortgage
loans. One loan secured by an assisted living property in Florida with 41 units in the amount of $1.0 million has an initial interest rate of 10.5%, increasing 0.125% annually, with a
25-year amortization and matures in November 2009. The second loan secured by six assisted living properties located in Texas with 108 units in the amount of $6.8 million has an
initial interest rate of 9.5%, increasing 0.15% annually, with a 20-year amortization and matures in June 2018. The final loan secured by a skilled nursing property located in Utah with 84
beds in the amount of $1.4 million has an initial interest rate of 10.0% increasing 0.15% annually, with a 20-year amortization and matures in 11 years. We also invested
$0.6 million under three mortgage loans for capital improvements at an average rate of 11.1%.

Owned Properties.During 2008, we acquired a 30-bed skilled nursing property located in Ohio for an aggregate price of
$1.0 million that was added to an existing master lease at a 10.0% yield and we agreed to provide funding up to $2.0 million to purchase land, construct and equip a new replacement
building which will be a combined skilled nursing and assisted living property. This investment will be at the higher of one-year LIBOR plus 5.3% or 10.0% and construction must be
completed by January 18, 2011. Additionally, we invested $3.0 million under agreements to expand and renovate 13 properties operated by seven different operators. These investments are
at an average yield of approximately 10.0%.

31

---



Debt Obligations.We amended and extended our Unsecured Revolving Credit Agreement at an initial commitment amount of
$80.0 million. The
Credit Agreement provides for the opportunity to increase the credit amount up to a total of $120.0 million. The prior agreement did not have an expansion provision. The Credit Agreement
provides a revolving line of credit with no scheduled maturities other than the maturity date of July 17, 2011. The interest rates under the Credit Agreement remain the same as under our prior
credit agreement, Prime Rate plus 0.50% or LIBOR plus 1.5%. We presently have no outstanding borrowings under the Credit Agreement.

Sunwest Management Inc.On August 19, 2008 we disclosed in a voluntary Current Report on Form 8-K filed with the
Securities and Exchange Commission that we had received letters from companies affiliated with Sunwest Management, Inc. (or Sunwest) explaining that Sunwest was experiencing certain negative
cash shortfalls which they attributed to properties that had not yet matured in terms of occupancy. Our relationship with Sunwest is limited to only four properties: two mortgage loans secured by
properties in Texas and a master lease covering two properties in California. We have acted to preserve our investments with respect to Sunwest as described below.

During
the year ended December 31, 2008 we did not receive August or September payments on a $1.5 million loan at an interest rate of 11.15% and secured by a first mortgage
on a 165-unit assisted living property in Mesquite, Texas operated by Sunwest. However, in October we received from non-Sunwest equity investors in this property the payment of
all past due interest, property tax impounds, attorney's fees and a $0.1 million replacement reserve. Interest on the loan, which matures November 19, 2011, represented 1.7% of our
interest income from mortgage loans for the year ended December 31, 2008. On October 31, 2008, we completed an assignment and assumption of the loan to an entity formed by the
non-Sunwest equity investors. One of the non-Sunwest equity investors is operating the property.

During
the year ended December 31, 2008 we did not receive August or September payments on a $4.7 million loan at an interest rate of 11.15% and secured by a first mortgage
on a 140-unit independent living property in Fort Worth, Texas operated by Sunwest. Accordingly we did not record interest income of $0.1 million in the third quarter of 2008
related to this mortgage loan. Interest on the loan represented 5.0% of our interest income from mortgage loans for the three months ended June 30, 2008. On October 7, 2008 we acquired
the property through foreclosure for $4.7 million, the amount of the debt outstanding and capitalized fees associated with the foreclosure. The property is being operated by a third party under
a 10-year lease with two five-year renewal options. The lease provides for a 10-month rent abatement. The annual minimum rent is $0.1 million for 2009,
$0.5 million for 2010, $0.6 million for 2011 and increases 3% annually commencing January 1, 2012 and thereafter. Beginning January 1, 2011, total rent payable annually
will be equal to 25% of gross revenues but never less than the minimum rent as defined by the lease agreement. We agreed to provide funding up to $0.9 million for specific capital improvements
to the leased property with the yield included in the initial lease rate. The capital improvements deadline is October 7, 2010. SeeItem 8. FINANCIAL
STATEMENTSNote 11. Commitments and Contingenciesfor further discussion about our commitment agreements.

During
the year ended December 31, 2008 we did not receive August, September, October or November payments on a master lease covering a 109-unit assisted living
property in Vacaville, California and a 113-unit assisted living property in Bakersfield, California operated by Sunwest. The total monthly lease payment under the master lease agreement
was approximately $0.2 million per month or approximately 4.5% of our monthly rental income as of August 2008. Accordingly we did not record rental income of $0.8 million and
wrote-off $0.1 million of straight-line rent receivable in 2008 related to this lease. Our total gross investment in the properties under the master lease is
approximately $26.2 million or 4.5% of our gross investments in real estate as of December 31, 2008. As of December 31, 2008, single purpose subsidiaries owned by us owed debt
obligations totaling $16.1 million secured by the master lease properties. Specifically, the outstanding principal balance on

32

---



the
Bakersfield property was $8.2 million at a rate of 8.43% and is due October 1, 2009, and the outstanding principal balance on the Vacaville property was $7.9 million at a rate
of 8.69% and is due August 1, 2010. On December 1, 2008, we leased these properties to a third party under a 10-year lease with two five-year renewal options. The
annual minimum rent will be $1.8 million for the first lease year, $2.1 million for the second lease year, $2.5 million for the
third lease year and increases 3% annually commencing on December 1, 2011 and thereafter. We agreed to provide capital improvement funding up to $1.5 million allocated in two tranches of
$0.8 million each. The yield on the first tranche is included in the initial lease rate and the second tranche is at an 8.5% yield. The capital improvement deadline is December 1, 2010.
SeeItem 8. FINANCIAL STATEMENTSNote 11. Commitments and Contingenciesfor further discussion about our commitment
agreements.

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 or
mortgage loans. In order to qualify as an equity REIT, at least 75 percent of our total assets must be represented by real estate assets, cash, cash items and government securities. Investment
mix measures the portion of our investments that relate to our various property types. Operator mix measures the portion of our investments that relate to our top three operators. Geographic mix
measures the portion of our investment that relate to our top five states.

The
following table reflects our recent historical trends of concentration risk:

Period Ended12/31/08

9/30/08

6/30/08

3/31/08

12/31/07(gross investment, in thousands)Asset mix:Real property

$
502,617

$
497,656

$
496,114

$
495,202

$
492,880Loans receivable


78,301


87,581


91,040


91,955


92,168Investment asset mix:Assisted living properties

$
282,084

$
282,304

$
282,406

$
275,313

$
274,333Skilled nursing properties


285,814


289,913


291,728


298,824


297,695Schools


13,020


13,020


13,020


13,020


13,020Operator asset mix:Alterra(1)

$
84,210

$
84,210

$
84,210

$
84,210

$
84,210Preferred Care, Inc.(2)


87,150


87,281


87,490


93,197


92,042ALC


88,034


88,034


88,034


88,034


88,034Remaining operators


321,524


325,712


327,420


321,716


320,762


33

---



Period Ended12/31/08

9/30/08

6/30/08

3/31/08

12/31/07(gross investment, in thousands)Geographic asset mix:Colorado

$
27,706

$
27,581

$
27,581

$
27,581

$
27,518Florida


43,884


43,930


43,975


47,368


46,385Ohio


56,804


56,804


55,862


55,121


54,010Texas


104,197


104,637


106,568


102,245


101,721Washington


27,355


27,376


27,412


27,504


27,593Remaining states


320,972


324,909


325,756


327,338


327,821


---

Credit Strength.We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt
to book
capitalization and debt to market capitalization. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt. Our coverage ratios include
interest coverage ratio and fixed charge coverage ratio. The coverage ratios indicate our ability to service interest and fixed charges (interest plus preferred dividends). The coverage ratios are
based on earnings before interest, taxes, depreciation and amortization. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison,
rating and investment recommendations of companies. The following table reflects the recent historical trends for our credit strength measures:

Three Months Ended12/31/08

9/30/08

6/30/08

3/31/08

12/31/07Debt to book capitalization ratio(5)


7.4
%

7.4
%

7.4
%(4)

10.0
%

9.8
%Debt & Preferred Stock to book capitalization ratio(5)


45.8
%

45.6
%

45.5
%(4)

47.0
%

49.1
%Debt to market capitalization ratio(5)


5.5
%(1)

4.2
%

4.6
%(4)

6.2
%

6.4
%Debt & Preferred Stock to market capitalization ratio(5)


30.2
%(1)

23.1
%

26.9
%(4)

28.7
%

30.1
%Interest coverage ratio


15.4
x(2)

17.1
x(3)

15.0
x(3)

13.6
x

13.0
xFixed charge coverage ratio


3.1
x

3.2
x

3.3
x

3.2
x

2.9
x


---

34

---



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



Management
regularly monitors the economic and other factors listed above. We develop strategic and tactical plans designed to improve performance and maximize our competitive position.
Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends.

Operating Results

Year ended December 31, 2008 compared to year ended December 31, 2007

Revenues for the year ended December 31, 2008 decreased to $69.4 million from $74.8 million for the same period in
2007 primarily due to decreases resulting from Sunwest
non-payment of rental and interest income, decreases in interest income from mortgage loans and decreases in interest and other income, as discussed below. SeeKey
Transactionsabove for further discussion on Sunwest non-payment of rental income and interest income. Rental income decreased $0.3 million primarily as a
result of decreases resulting from non-payment of rental income primarily from Sunwest ($1.0 million) and lower straight-line rent and amortization of lease costs
($1.3 million) partially offset by rental increases provided for in existing lease agreements ($2.0 million). Same store rental income, properties owned for both years ended
December 31, 2008 and 2007, and excluding straight-line rental income increased $2.0 million due to rental increases provided for in existing lease agreements.

Interest
income from mortgage loans and notes receivable decreased $2.8 million primarily as a result of mortgage loan payoffs and Sunwest non-payment of interest
income, as described inKey Transactionsabove.

Interest
and other income decreased $2.4 million in 2008 from the prior year primarily due to the early redemption of $3.5 million face value of the Skilled Healthcare
Group, Inc. (or SHG) Senior Subordinated Notes in 2007 and lower interest income from our investments of cash resulting from lower interest rates and lower cash balances. See Item 8. FINANCIAL
STATEMENTSNote 8. Marketable Securitiesfor further discussion of the SHG Senior Subordinated Notes early
redemption.

Interest
expense decreased $0.8 million in 2008 from the prior year primarily due to a decrease in average debt outstanding during the period resulting from the repayment of a
$14.2 million mortgage loan and normal amortization of existing mortgage loans. SeeItem 8. FINANCIAL STATEMENTSNote 9. Debt
Obligationsfor further discussion of the debt payoff.

Depreciation
and amortization expense in 2008 increased $0.7 million from the prior year due to acquisitions and capital improvements made on existing properties. See Item 8. FINANCIAL STATEMENTSNote 6. Real Estate
Investments.

35

---





Operating and other expenses decreased $0.4 million primarily due to a decrease in restricted stock vesting, as described inItem 8. FINANCIAL
STATEMENTSNote 10. Stockholders' Equity, partially offset by an increase in straight-line rent
receivable reserve and increase of one-time charges in the fourth quarter of 2008 related primarily to lease/loan defaults and terminated transactions.

Net
income available to common stockholders for the year ended December 31, 2008 decreased $2.3 million from the same period in 2007 due to the changes previously described
above and offset by a $0.1 million gain on sale of a vacant parcel of land adjacent to a skilled nursing property located New Mexico, a $1.0 million EITF D-42, "The effect on the Calculation of Earnings per
Share for the Redemption or Induced Conversion of Preferred Stock,"allocation of net income available to
common shareholders related to the repurchase of 636,300 shares of our 8.0% Series F Cumulative Preferred Stock (or Series F preferred stock) and a $1.5 million decrease in
preferred stock dividends primarily due to the repurchase of our Series F preferred stock. SeeItem 8. FINANCIAL STATEMENTSNote 10.
Stockholders' Equityfor further discussion on the Series F preferred stock buyback. During the year ended December 31, 2007, we recognized a $0.1 million
gain related to the sale of a closed, previously impaired, skilled nursing property located in Texas and a 59-bed skilled nursing property located in Tennessee.

Year ended December 31, 2007 compared to year ended December 31, 2006

Revenues for the year ended December 31, 2007, were $74.8 million compared to $73.2 million for the same period in
2006. Rental income increased $5.5 million primarily as a result of properties acquired in 2006 ($1.1 million), rental increases provided for in existing lease agreements
($1.5 million), a new master lease entered into during the fourth quarter of 2006 ($1.7 million) and increase in straight-line rental income net of amortization of lease
costs ($1.2 million). Same store rental income, properties owned for both years ended December 31, 2007 and 2006, and excluding straight-line rental income increased
$3.2 million due to
rental increases provided for in existing lease agreements ($1.5 million) and a new master lease entered into during the fourth quarter of 2006 ($1.7 million).

Interest
income from mortgage loans and notes receivable decreased $2.9 million primarily as a result of mortgage loan payoffs.

Interest
and other income decreased $0.9 million in 2007 from the prior year primarily as a result of note receivable payoffs ($0.4 million) and a decrease in other income
received in conjunction with early payoff of mortgage loans ($0.5 million).

Interest
expense decreased $2.1 million in 2007 from the prior year primarily due to a decrease in outstanding borrowings as a result of the payoff of mortgage loans, and bond
obligations in 2006.

Depreciation
and amortization expense in 2007 increased $0.5 million from the prior year due to acquisitions in 2006 and capital improvements made on existing properties. See Item 8. FINANCIAL STATEMENTSNote 6. Real
Estate Investments.

Operating
and other expenses increased $0.5 million primarily due to the vesting of restricted stock and stock options ($1.2 million), post retirement healthcare benefits
vesting during the year ($0.3 million) partially offset by a $1.0 million expense related to an IRS settlement in 2006, as described inItem 8. FINANCIAL
STATEMENTSNote 2. Summary of Significant Accounting Policies.

Non-operating
income decreased by $0.5 million as a result of a gain recognized in 2006 from the sale of the National Health Investors, Inc. (or NHI) common
stock, as described inItem 8. FINANCIAL STATEMENTSNote 8. Marketable Securities.

For
the year ended December 31, 2007, net income from discontinued operations was $0.1 million. During 2007 we recognized a $0.1 million gain resulting from the sale
of a closed, previously impaired skilled nursing property located in Texas and a 59-bed skilled nursing property located in Tennessee. For the year ended December 31, 2006, net
income from discontinued operations was $33.3 million.

36

---



During
2006 we sold four assisted living properties in various states with a total of 431 units and one 174-bed skilled nursing property in Arizona. We recognized a gain of
$32.6 million on the two transactions. During 2006 we realized $0.7 million in income from discontinued operations related to the properties that were sold in 2006 and 2007. This
reclassification was made in accordance
with SFAS No. 144 which requires that the financial results of properties meeting certain criteria be reported on a separate line item called "Discontinued Operations."

Net
income available to common stockholders for the year ended December 31, 2007, was $30.8 million compared to $61.6 million for the year ended December 31,
2006. This decrease is due primarily to a gain on the sale of assets in 2006 and the decrease in mortgage interest income partially offset by increase in rental income and decrease in interest expense
as previously discussed.

Critical Accounting Policies

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

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

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

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

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

Rental
income from operating leases is recognized in accordance with U.S. generally accepted accounting principles, including Statement of Financial Accounting Standards
No. 13"Accounting for Leases"(or SFAS No. 13) and SEC Staff Accounting Bulletin No. 101"Revenue
Recognition"(or SAB

37

---



No.101)
as amended by SEC Staff Bulletin No. 104 "Revenue Recognition in Financial Statements"(or SAB No. 104). Substantially all of our
leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four methods depending on specific provisions of each lease as follows:
(i) a specified annual increase over the prior year's rent, generally between 2.0% and 2.5%; (ii) an increase based on the change in the Consumer Price Index from year to year;
(iii) an increase derived as a percentage of facility net patient revenues in excess of base revenue amounts or (iv) specific dollar increases over prior years. SAB No. 104 does
not provide for the recognition of contingent revenue until all possible contingencies have been eliminated. We consider the operating history of the lessee and the general condition of the industry
when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. We follow a policy
related to rental income whereby we consider a lease to be non-performing after 60 days of non-payment of past due amounts and do not recognize unpaid rental income from
that lease until the amounts have been received.

Rental
revenues relating to non-contingent leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis.
Recognizing income on a straight-line basis requires us to calculate the total non-contingent rent containing specified rental increases over the life of the lease and to
recognize the revenue evenly over that life. This method results in rental income in the early years of a lease being higher than actual cash received, creating a straight-line rent
receivable asset included in our balance sheet. At some point during the lease, depending on its terms, the cash rent payments eventually exceed the straight-line rent which results in the
straight-line rent receivable asset decreasing to zero over the remainder of the lease term. We assess the collectibility of straight-line rent in accordance with the
applicable accounting standards and our reserve
policy and defer recognition of straight-line rent if its collectibility is not reasonably assured.

We
will defer recognition of the straight-line rental income if the lessee becomes delinquent in rent owed under the terms of the lease. If it is determined that the
delinquency is temporary, we will resume booking rent on a straight-line basis once payment is received for past due rents. If it appears that we will not collect future rent under the
delinquent lease, we may provide a reserve against the previously recognized straight-line rent receivable asset for a portion, up to its full value, that we estimate may not be
recoverable. At December 31, 2008 and 2007 the straight-line rent receivable balance, net of reserves, was $13.9 million and $10.5 million on our balance sheet. We
evaluate the collectibility of straight-line rent receivable balances on an ongoing basis and provide reserves against receivables we believe may not be fully recoverable. The ultimate
amount of straight-line rent we realize could be less than amounts recorded.

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

Liquidity and Capital Resources

Financing Activities:

During 2008, we used $82.9 million in cash in financing activities. We paid $15.5 million in principal on mortgage loans
and bonds payable including $14.2 million related to the payoff of a mortgage loan payable secured by four assisted living properties located in Ohio. We also paid cash dividends on our
Series C, Series E, and Series F preferred stocks totaling $3.3 million, $0.2 million and $12.3 million respectively. Additionally, we declared and paid cash
dividends on our common stock totaling $36.0 million. Subsequent to December 31, 2008 we declared a monthly cash dividend of $0.13 per share on our common stock for the months of
January, February and March 2009, payable on January 30, February 27 and March 31, 2009, respectively, to stockholders of record on January 22, February 19 and
March 23, 2009, respectively.

38

---



In
June 2007 our Board of Directors terminated the prior existing share repurchase program and authorized a new share repurchase program enabling us to repurchase up to 5,000,000 shares
of our common stock. In January 2008, the Board of Directors amended the share repurchase program to include authorization to repurchase our outstanding preferred securities. During the year ended
December 31, 2008, we invested $14.3 million to repurchase a total of 636,300 shares of our 8.0% Series F Cumulative Preferred Stock (or Series F preferred stock) at an
average cost of $22.44 per share, including commissions. The Series F preferred stock has a liquidation value of $25.00 per share. As required by EITF D-42, "The Effect on the Calculation of Earnings per Share for the
Redemption or Induced Conversion of Preferred Stock,"the discounted purchase price on
these shares, which is the liquidation value over the fair value, is reflected on the income statement netted with the original issue discount and is added to net income in calculating the allocation
of net income available to common shareholders. After this purchase, 6,003,700 shares of our Series F preferred stock remained issued and outstanding. We continue to have an open Board
authorization to purchase an additional 3,470,621 shares of our outstanding equity securities.

Additionally,
we received $0.4 million in conjunction with the exercise of 17,500 stock options. The total market value as of the dates of exercise was approximately
$0.5 million.

During
2008, holders of 123,419 shares of our 8.5% Series E Cumulative Convertible Preferred Stock (or Series E Preferred Stock) notified us of their election to convert
such shares into 246,838 shares of our common stock at the Series E Preferred Stock conversion rate of $12.50 per share. Subsequent to December 31, 2008, holders of 900 shares of our
Series E Preferred Stock notified us of their election to convert such shares into 1,800 shares of common stock. After this most recent conversion, there are 37,816 shares of our
Series E Preferred Stock outstanding.

During
the year ended December 31, 2008, one of our limited partners redeemed a portion of its interest in the limited partnership. In accordance with the limited partnership
agreement, we paid $0.5 million for the redemption of 22,000 shares owned by the limited partner. Since the market value of the common stock converted was greater than the book value of the
partnership interests received, we recognized a $0.1 million increase in the basis of the properties underlying the limited partnership interest acquired. This conversion had an immaterial
effect on minority interest expense. Subsequent to this conversion we have 179,882 shares of our common stock reserved for this partnership agreement. At December 31, 2008 the carrying value
(excluding accrued preferred returns) and the market value of the partnership conversion rights are $3.1 million and $3.6 million, respectively.

During
the year ended December 31, 2008, we amended and extended our Unsecured Revolving Credit Agreement at an initial commitment amount of $80.0 million. The Credit
Agreement provides for the opportunity to increase the credit amount up to a total of $120.0 million. The prior agreement did not
have an expansion provision. The Credit Agreement provides a revolving line of credit with no scheduled maturities other than the maturity date of July 17, 2011. The pricing under the Credit
Agreement based on our borrowing election is Prime Rate plus 0.50% or LIBOR plus 1.50% which remained the same as under our prior credit agreement. At the time of borrowing, we may elect the 1, 2, 3
or 6 month LIBOR rate. Under financial covenants contained in the Unsecured Credit Agreement which are measured quarterly we are required to maintain, among other things:



At
December 31, 2008, we had no outstanding borrowings under our Unsecured Revolving Credit Agreement and the full amount was available for borrowing. Also, at December 31,
2008 we were in compliance with all covenants.

39

---



As
of December 31, 2008, we are obligated to make scheduled principal payments on our mortgage loans and bonds payable. The total scheduled principal payments and debt maturities
in 2009 through 2013 and thereafter is approximately $24.8 million, $8.2 million, $0.5 million, $0.6 million, $0.6 million and $2.0 million, respectively.

Available Shelf Registrations:

During 2007, we filed a Form S-3 "shelf" registration statement which became effective August 7, 2007, and
provides us with the capacity to offer up to $300.0 million in our debt and/or equity securities. We currently have $300.0 million of availability under
our effective shelf registration. We may from time to time raise capital under our currently effective shelf registration or a new shelf registration by issuing, in public or private transactions, our
equity and debt securities, but the availability and terms of such issuance will depend upon then prevailing market and other conditions.

Operating and Investing Activities:

At December 31, 2008, our real estate investment portfolio (before accumulated depreciation and amortization) consisted of
$502.6 million invested primarily in owned long-term care properties and mortgage loans of approximately $78.3 million (prior to deducting a $0.8 million reserve). Our
portfolio consists of direct investments (properties that we either own or on which we hold promissory notes secured by first mortgages) in 101 skilled nursing properties, 101 assisted living
properties and two schools. These properties are located in 30 states. During the year ended December 31, 2008, net cash provided by operating activities was $56.4 million.

For
the year ended December 31, 2008 we recorded $3.5 million in straight-line rent in accordance with SFAS No. 13."Accounting
for Leases."Straight-line rental income on a same store basis will increase from $3.5 million for annual 2008 to $4.1 million for projected annual
2009 assuming no new leased investments with fixed annual rental escalations are added to our portfolio. Also during the year ended December 31, 2008 we recorded a $0.1 million
straight-line rent receivable reserve. During the year ended December 31, 2008 we received $54.7 million of cash rental revenue and recorded $0.6 million of lease
inducement costs. At December 31, 2008 and 2007, the straight-line rent receivable balance, net of reserves, on the balance sheet was $13.9 million and $10.5 million,
respectively.

In
2008 we had net cash provided by investing activities of $5.0 million. We invested $3.0 million at an average yield of approximately 10.0% under agreements to renovate
13 properties operated by seven different operators. Additionally, we invested $1.4 million in capital improvements to existing properties under various lease agreements whose rental rates
already reflected this investment.

During
2008 we sold for $0.6 million a vacant parcel of land adjacent to a skilled nursing property in New Mexico to a third party. We received net cash proceeds of
$0.6 million and recognized a $0.1 million gain on sale. We also acquired a 30-bed skilled nursing property located in Ohio for an aggregate price of $1.0 million that
was added to an existing master lease at a 10.0% yield and we agreed to provide funding up to $2.0 million to purchase land, construct and equip a new replacement building which will be a
combined skilled nursing and assisted living property. This investment will be at the higher of one-year LIBOR plus 5.3% or 10.0% and construction must be completed by January 18,
2011.

During
2008 we also acquired, via foreclosure sale, a 140-unit independent living property in Fort Worth, Texas for $4.7 million. The purchase price represented the
amount of the debt outstanding on a first mortgage to an affiliate of Sunwest and capitalized fees associated with the foreclosure. SeeKey Transactionsabove for further discussion on Sunwest non-payment. The property is being operated by a third party under a 10-year lease with two five-year renewal options. The
lease provides for a10-month rent abatement. The annual minimum rent is $0.1 million for the first lease year, $0.5 million for the second lease year, $0.6 million for
the third lease year and increases 3% annually commencing January 1, 2012 and thereafter. Beginning January 1, 2011, total rent payable annually will be equal to

40

---



25%
of gross revenues but never less than the minimum rent as defined by the lease agreement. We agreed to provide funding up to $0.9 million for specific capital improvements on the leased
property with the yield included in the initial lease rate. The capital improvements deadline is October 7, 2010. SeeItem 8. FINANCIAL
STATEMENTSNote 11. Commitments and Contingenciesfor further discussion about our commitment agreements.

Additionally,
during 2008, we invested $9.1 million, net of closing fees, in three mortgage loans. One loan secured by an assisted living property in Florida with 41 units in the
amount of $1.0 million has an initial interest rate of 10.5%, increasing 0.125% annually, with a 25-year amortization and matures in November 2009. The second loan secured by six
assisted living properties located in Texas with 108 units in the amount of $6.8 million has an initial interest rate of 9.5%, increasing 0.15% annually, with a 20-year amortization
and matures in June 2018. The final loan secured by a skilled nursing property located in Utah with 84 beds in the amount of $1.4 million has an initial interest rate of 10.0% increasing 0.15%
annually, with a 20-year amortization and matures in 11 years. We also invested $0.6 million under three mortgage loans for capital improvements at an average rate of 11.1%.
During 2008, we received $14.2 million plus accrued interest related to the payoff of nine mortgage loans secured by nine skilled nursing properties and received $4.7 million in
regularly scheduled principal payments.

During
2008 we funded $0.4 million under various loans and line of credit agreements with certain operators. Additionally, we received $0.8 million in principal payments on
notes receivable.

Commitments.

The following table summarizes our capital improvement commitments as of December 31, 2008(dollar
amounts in thousands):

Original Commitment(9)

Expiration
Date

Investment at
12/31/08

Open
Commitment

Estimated
Yield

Property
Type

Properties

Major
Operator$
650


3/31/2009

$
124

$
526


13.00
%(1)
SNF


1

N/A2,500


12/4/2009





2,500


10.00
%(2)
ALF


35

Alterra500


3/31/2010


273


227


11.00
%(2)
SNF


1

Preferred Care2,000


3/31/2010





2,000


11.00
%(1)
SNF


1

Preferred Care4,000


3/31/2010





4,000


11.00
%(1)
SNF


1

Preferred Care875


10/7/2010


7
(8)

868



(6)
ALF


1

N/A2,500


6/16/2010


2


2,498


10.00
%(1)
SNF


1

N/A1,500


12/1/2010





1,500



(5)
ALF


2

N/A2,000


1/18/2011





2,000



(4)(1)
SNF


1

N/A5,000
(7)

12/31/2014





5,000
(7)


(3)
ALF


37

ALC$
21,525




$
406

$
21,119


---

41

---



The following table summarizes our loan commitments as of December 31, 2008(dollar amounts in
thousands):

Original Commitment(1)

Expiration
Date

Investment at
12/31/08

Open
Commitment
at 12/31/08

Yield

Property
Type

Properties

Major
Operator$
400


1/1/2009
(3)
$
107

$
293



(2)
SNF


1

N/A200


3/31/2009


20


180


10.00
%
SNF


1

N/A450


6/30/2009


250


200


8.75
%
SNF


3

N/A$
1,050




$
377

$
673


---

Contractual Obligations:

We monitor our contractual obligations and commitments detailed above to ensure funds are available to meet obligations when due. The
following table represents our long-term contractual obligations (scheduled principal payments and amounts due at maturity) as of December 31, 2008, and excludes the effects of
interest (amounts in thousands):

Total

2009

2010  2011

2012  2013

ThereafterMortgage loans payable

$
32,063

$
24,378

$
7,685

$


$
Bonds payable


4,690


465


1,025


1,165


2,035$
36,753

$
24,843

$
8,710

$
1,165

$
2,035


Off-Balance Sheet Arrangements:

We had no off-balance sheet arrangements as of December 31, 2008.

Liquidity:

We have an Unsecured Credit Agreement in the amount of $80.0 million and it provides for the opportunity to increase the credit
amount up to a total of $120.0 million. The Credit Agreement provides a revolving line of credit with no scheduled maturities other than the maturity date of July 17, 2011. The pricing
under the Credit Agreement based on our borrowing election is Prime Rate plus 0.50% or LIBOR plus 1.50%. At the time of borrowing, we may elect the 1, 2, 3 or 6 month LIBOR rate.

42

---



At
December 31, 2008, we had $21.1 million of cash on hand and $80.0 million available on our unsecured line of credit. In calendar year 2009, we have debt
maturities of $8.1 million due in October 2009 at an interest rate of 8.43% and $15.8 million due in December 2009 at an interest rate of 8.81%. The October maturity may be paid
90 days early and the December maturity may be paid six months early. In calendar year 2009, we have mortgage receivables of $7.6 million maturing in November. We believe that our
current cash balance, cash flow from operations available for distribution or reinvestment, and our current unsecured line of credit borrowing capacity are sufficient to provide for payment of our
current operating costs and debt obligations and to provide funds for distribution to the holders of our preferred stock and pay common dividends at least sufficient to maintain our REIT status. The
timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. The
current turmoil in the debt and equity markets preclude us from, at this time, being able to determine if there is availability of cost-effective long-term capital for
significant additional capital investments for calendar 2009.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

You are cautioned that statements contained in this section are forward looking and should be read in
conjunction with the disclosure under the heading "Cautionary Statements" and the "Risk Factors" set forth above.

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

We
do not utilize interest rate swaps, forward or option contracts or foreign currencies or commodities, or other types of derivative financial instruments nor do we engage in
"off-balance sheet" transactions. The purpose of the following disclosure is to provide a framework to understand our sensitivity to hypothetical changes in interest rates as of
December 31, 2008.

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

At
December 31, 2008, based on the prevailing interest rates for comparable loans and estimates made by management, the fair value of our mortgage loans receivable using a 7.5%
discount rate was approximately $88.9 million. A 1% increase in such rates would decrease the estimated fair value of our mortgage loans by approximately $3.2 million while a 1% decrease
in such rates would increase their estimated fair value by approximately $3.4 million. A 1% increase or decrease in applicable interest rates would not have a material impact on the fair value
of our fixed rate debt.

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

43

---





Item 8.    FINANCIAL STATEMENTS

Index to Consolidated Financial Statements  and Financial Statement Schedules

PageReport of Independent Registered Public Accounting Firm

45Consolidated Balance Sheets as of December 31, 2008 and 2007

46Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2008, 2007
and 2006

47Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006

48Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006

49Notes to Consolidated Financial Statements

50Management Report on Internal Control over Financial Reporting

85Report of Independent Registered Public Accounting Firm

86Consolidated Financial Statement SchedulesSchedule IIValuation and Qualifying Accounts

77Schedule IIIReal Estate and Accumulated Depreciation

78Schedule IVMortgage Loans on Real Estate

82


44

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the accompanying consolidated balance sheets of LTC Properties, Inc. (the "Company") as of December 31, 2008 and 2007, and the related consolidated
statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial
statement schedules listed in the Index at Item 15. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LTC Properties, Inc. at
December 31, 2008 and 2007, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information
set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), LTC Properties, Inc.'s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 24, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


Los
Angeles, California
February 24, 2009

45

---





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

December 31,2008

2007ASSETSReal Estate Investments:Buildings and improvements, net of accumulated depreciation and amortization: 2008$130,475; 2007$115,766

$
337,171

$
342,222Land


34,971


34,429Properties held for sale, net of accumulated depreciation and amortization: 2008$0; 2007$0





463Mortgage loans receivable, net of allowance for doubtful accounts: 2008$760; 2007$890


77,541


91,278Real estate investments, net


449,683


468,392Other Assets:Cash and cash equivalents


21,118


42,631Debt issue costs, net


831


326Interest receivable


2,010


2,553Straight-line rent receivable, net of allowance for doubtful accounts: 2008$140; 2007$0 (1)


13,900


10,548Prepaid expenses and other assets


9,148


9,899Notes receivable


2,895


3,292Marketable debt securities (2)


6,468


6,464Total assets

$
506,053

$
544,105LIABILITIES AND STOCKHOLDERS' EQUITYBank borrowings

$


$
Mortgage loans payable


32,063


47,165Bonds payable and capital lease obligations


4,690


5,130Accrued interest


251


349Accrued expenses and other liabilities


5,015


5,381Distributions payable


3,022


3,406Total liabilities


45,041


61,431Minority interests


3,134


3,518Stockholders' Equity:Preferred stock $0.01 par value: 15,000 shares authorized; shares issued and outstanding: 20088,042; 20078,802


189,560


208,553Common stock: $0.01 par value; 45,000 shares authorized; shares issued and outstanding: 200823,136; 200722,872


231


229Capital in excess of par value


321,979


316,609Cumulative net income


533,565


490,588Other


735


956Cumulative distributions


(588,192
)

(537,779
)Total stockholders' equity


457,878


479,156Total liabilities and stockholders' equity

$
506,053

$
544,105


---

See
accompanying notes.

46

---





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

Years ended December 31,2008

2007

2006Revenues:Rental income (1)

$
57,562

$
57,841

$
52,342Interest income from mortgage loans


9,708


12,502


15,444Interest and other income (2)


2,087


4,447


5,377Total revenues


69,357


74,790


73,163Expenses:Interest expense


4,114


4,957


7,028Depreciation and amortization


14,960


14,305


13,841Legal expenses


251


260


236Operating and other expenses


6,840


7,229


6,696Total expenses


26,165


26,751


27,801Income before non-operating income and minority interest


43,192


48,039


45,362Non-operating income








517Minority interest


(307
)

(343
)

(343
)Income from continuing operations


42,885


47,696


45,536Discontinued operations:(Loss) income from discontinued operations





(47
)

695Gain on sale of assets, net


92


106


32,557Net income from discontinued operations


92


59


33,252Net income


42,977


47,755


78,788Preferred stock buyback


989





Preferred stock dividends


(15,390
)

(16,923
)

(17,157
)Net income available to common stockholders

$
28,576

$
30,832

$
61,631Net Income per Common Share from Continuing Operations Net of Preferred Stock Dividends:Basic

$
1.24

$
1.33

$
1.22Diluted

$
1.24

$
1.32

$
1.21Net Income Per Common Share from Discontinued Operations:Basic

$
0.00

$
0.00

$
1.42Diluted

$
0.00

$
0.00

$
1.41Net Income Per Common Share Available to Common Stockholders:Basic

$
1.24

$
1.33

$
2.64Diluted

$
1.24

$
1.32

$
2.51Basic weighted average shares outstanding


22,974


23,215


23,366Comprehensive Income:Net income

$
42,977

$
47,755

$
78,788Reclassification adjustment


(221
)

(737
)

(715
)Comprehensive income

$
42,756

$
47,018

$
78,073


---

See
accompanying notes.

47

---





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

SharesPreferred
Stock

Common
Stock

Preferred
Stock

Common
Stock

Capital in
Excess of
Par Value

Cumulative
Net Income

Other

Cumulative
DistributionsBalanceDecember 31, 2005


8,993


23,276

$
213,317

$
233

$
331,415

$
364,045

$
(941
)
$
(443,376
)Conversion of 8.5% Series E Preferred Stock


(159
)

318


(3,976
)

3


3,973








Payments on stockholder notes




















226


Reclassification adjustment














(3,123
)




2,408


Repurchase of stock





(71
)




(1
)

(1,476
)







Net income

















78,788





Vested stock options














43








Stock option exercises





46





1


368








Vested restricted stock














949








Preferred stock dividends























(17,157
)Common stock cash distributions ($1.44 per share)























(25,285
)BalanceDecember 31, 2006


8,834


23,569


209,341


236


332,149


442,833


1,693


(485,818
)Conversion of 8.5% Series E Preferred Stock


(32
)

63


(788
)

1


787








Reclassification adjustment




















(737
)

Stock option exercises





34








191








Repurchase of stock





(893
)




(9
)

(18,759
)







Issue restricted stock





99





1


(1
)







Net income

















47,755





Vested stock options














109








Vested restricted stock














2,133








Preferred stock dividends























(16,923
)Common stock cash distributions ($1.50 per share)























(35,038
)BalanceDecember 31, 2007


8,802


22,872


208,553


229


316,609


490,588


956


(537,779
)Conversion of 8.5% Series E Preferred Stock


(124
)

247


(3,085
)

2


3,083








Reclassification adjustment




















(221
)

Stock option exercises





17








416








Repurchase of stock


(636
)




(15,908
)




642








989Net income

















42,977





Vested stock options














1,088








Vested restricted stock














141








Preferred stock dividends























(15,390
)Common stock cash distributions ($1.56 per share)























(36,012
)BalanceDecember 31, 2008


8,042


23,136

$
189,560

$
231

$
321,979

$
533,565

$
735

$
(588,192
)


See accompanying notes.

48

---





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

Year ended December 31,2008

2007

2006OPERATING ACTIVITIES:Net income

$
42,977

$
47,755

$
78,788Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortizationcontinuing operations


14,960


14,305


13,841Depreciation and amortizationdiscontinued operations





47


103Minority interest


307


343


343Stock-based compensation expense


1,229


2,242


992Gain on sale of real estate and other investments, net


(92
)

(106
)

(33,074
)Straight-line rental income(1)


(3,492
)

(4,765
)

(3,085
)Other non-cash items, net


955


(1,213
)

(772
)Decrease in interest receivable


152


410


487(Increase) decrease in prepaid, other assets and allowance


(113
)

139


161Decrease in accrued interest payable


(98
)

(9
)

(172
)Decrease in accrued expenses and other liabilities


(401
)

(523
)

(45
)Net cash provided by operating activities


56,384


58,625


57,567INVESTING ACTIVITIES:Investment in real estate properties and capital improvements, net


(5,369
)

(5,696
)

(19,685
)Conversion of mortgage loans to owned properties


(13
)




Proceeds from sale of real estate investments, net


555


322


54,035Payment of deferred lease cost








(9,500
)Principal payments on mortgage loans receivable


18,990


33,004


31,509Investment in real estate mortgages


(9,635
)

(6,039
)

Investment in marketable debt and equity securities








(1,440
)Proceeds from the redemption/sale of marketable securities(2)





3,885


1,957Advances under notes receivable


(420
)

(52
)

(1,486
)Principal payments received on notes receivable


848


1,139


4,180Net cash provided by investing activities


4,956


26,563


59,570FINANCING ACTIVITIES:Bank borrowings








2,000Repayment of bank borrowings








(18,000
)Repayment of senior mortgage participation








(11,535
)Principal payments on mortgage loans, bonds payable and capital leases


(15,542
)

(1,516
)

(11,021
)Repurchase of common stock





(18,768
)

(1,476
)Preferred stock buyback


(14,276
)




Distributions paid to stockholders


(51,786
)

(51,978
)

(50,909
)Repayment of stockholder loans








226Redemption of minority interests


(510
)




Distributions paid to minority interests


(317
)

(343
)

(349
)Other


(422
)

161


245Net cash used in financing activities


(82,853
)

(72,444
)

(90,819
)(Decrease) increase in cash and cash equivalents


(21,513
)

12,744


26,318Cash and cash equivalents, beginning of year


42,631


29,887


3,569Cash and cash equivalents, end of year

$
21,118

$
42,631

$
29,887Supplemental disclosure of cash flow information:Interest paid

$
3,879

$
4,714

$
7,045Non-cash investing and financing transactions:SeeNote 4: Supplemental Cash Flow Informationfor further discussion.


---

See
accompanying notes.

49

---





LTC PROPERTIES, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

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

2. Summary of Significant Accounting Policies

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

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

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

Financial
Accounting Standards Board (or FASB) Interpretation No. 46(R) "Consolidation of Variable Interest Entities"(or
FIN 46) addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. FIN 46 requires that we consolidate a "variable
interest entity" if we are subject to a majority of the risk of loss from the "variable interest entity's" activities, or are entitled to receive a majority of the entity's residual returns, or both.
FIN 46 also requires disclosure about "variable interest entities" that we are not required to consolidate but in

50

---



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

which
we have a significant variable interest. We believe that as of December 31, 2008, we do not have investments in any entities that meet the definition of a "variable interest entity."

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

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

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

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

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

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

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

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

51

---



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

expected
to be received, or if foreclosure is probable, the fair value of the collateral securing the mortgage.

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

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

In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,"Fair Value Measurement"(or SFAS
No. 157). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. The standard expands required disclosures about the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value. SFAS No. 157 does not expand the use of fair value in any new circumstances. SFAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset
or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant
assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting
entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs utilize quoted prices (unadjusted) in
active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the
asset or liability (other than quoted prices). SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years.

On
February 14, 2008, the FASB issued FASB Staff Position No. 157-1, "Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13"(or SFAS
No. 157-1). SFAS No. 157-1 amends SFAS No. 157, to exclude the FASB issued Statement of Financial Accounting Standards No. 13,
"Accounting for Leases"(or SFAS No. 13), and other accounting

52

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

pronouncements
that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13. However, this scope exception does not apply to assets acquired and
liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141(R), "Business
Combinations"(or SFAS No. 141(R)), regardless of whether those assets and liabilities are related to leases. The adoption of SFAS No. 157 on January 1,
2008 did not have a material impact on our results of operations or financial position.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,"The Fair Value of Option for Financial Assets and Financial
Liabilities"(or SFAS No. 159). SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities at fair value, with the change in
unrealized gains and losses on items for which the fair value option has been elected reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
We did not adopt the elective fair market value option in our 2008 financial statements.

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 fair value of investments in marketable debt securities at December 31, 2008 is based upon the market rate for those securities. The fair values of mortgage loans receivable and
long-term debt obligations are based upon the estimates of management and on rates currently prevailing for comparable loans, and instruments of comparable maturities.

The
carrying 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 December 31, 2008 and 2007 assuming election of SFAS No. 159 were as follows(in
thousands):

At December 31, 2008

At December 31, 2007Carrying
Value

Fair
Value

Carrying
Value

Fair
ValueMortgage loans receivable

$
77,541

$
88,891
(1)
$
91,278

$
105,421
(1)Marketable debt securities


6,468


6,110
(2)

6,464


6,955
(4)Mortgage loans payable


32,063


32,914
(3)

47,165


48,832
(3)Bonds payable


4,690


4,690
(4)

5,130


5,130
(4)






53

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For
discussion of our investments in mortgage loans receivable seeNote 6. Real Estate Investments.For discussion of our
investment in marketable debt securities seeNote 8. Marketable Securities. For discussion of our mortgage loans payable, bonds payable and
senior mortgage participation payable, seeNote 9. Debt Obligations.

Investments.Investments and marketable debt and equity securities are accounted for in accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities"which requires that we categorize our investments as trading,
available-for-sale or held-to-maturity. Available-for-sale securities are stated at fair value, with the unrealized gains and
losses, reported in other comprehensive income until realized. Realized gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in net income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest and other income. Our investment in marketable debt securities is classified as
held-to-maturity because we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to maturity.

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

Rental
income from operating leases is recognized in accordance with U.S. generally accepted accounting principles, including Statement of Financial Accounting Standards
No. 13"Accounting for Leases"(or SFAS No. 13) and SEC Staff Accounting Bulletin No. 101"Revenue
Recognition"(or SAB No.101) as amended by SEC Staff Bulletin No. 104 "Revenue Recognition in Financial Statements"(or
SAB No. 104). Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four methods depending on
specific provisions of each lease as follows: (i) a specified annual increase over the prior year's rent, generally between 2.0% and 2.5%; (ii) an increase based on the change in the
Consumer Price Index from year to year; (iii) an increase derived as a percentage of facility net patient revenues in excess of base revenue amounts or (iv) specific dollar increases
over prior years. SAB No. 104 does not provide for the recognition of contingent revenue until all possible contingencies have been eliminated. We consider the operating history of the lessee
and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as
income until received. We follow a policy related to rental income whereby we consider a lease to be non-performing after 60 days of non-payment of past due amounts and
do not recognize unpaid rental income from that lease until the amounts have been received.

Rental
revenues relating to non-contingent leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis.
Recognizing income on a straight-line basis requires us to calculate the total non-contingent rent containing specified rental increases over the life of the lease and to
recognize the revenue evenly over that life. This method results in rental income in the early years of a lease being higher than actual cash received, creating a straight-line rent
receivable

54

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

asset
included in our balance sheet. At some point during the lease, depending on its terms, the cash rent payments eventually exceed the straight-line rent which results in the
straight-line rent receivable asset decreasing to zero over the remainder of the lease term. We assess the collectibility of straight-line rent in accordance with the
applicable accounting standards and our reserve policy and defer recognition of straight-line rent if its collectibility is not reasonably assured.

We
will defer recognition of the straight-line rental income if the lessee becomes delinquent in rent owed under the terms of the lease. If it is determined that the
delinquency is temporary, we will resume booking rent on a straight-line basis once payment is received for past due rents. If it appears that we will not collect future rent under the
delinquent lease, we may provide a reserve against the previously recognized straight-line rent receivable asset for a portion, up to its full value, that we estimate may not be
recoverable.

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

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

For
Federal tax purposes, depreciation is generally calculated using the straight-line method over a period of 27.5 years. Earnings and profits, which determine the
taxability of distributions to stockholders, differs from net income for financial statement purposes principally due to the treatment of certain interest income, other expense items, impairment
charges, and depreciable lives and basis of assets. At December 31, 2008, the book basis of our net assets exceeded the tax basis (unaudited) by approximately $55,515,000, primarily due to
additional depreciation taken for tax purposes.

At
December 31, 2006, we expensed $950,000 related to a closing agreement with the Internal Revenue Service (or IRS). During 2006 we voluntarily approached the IRS to correct a
technical violation in our filing for the year 2000, which is a closed year, and paid the $950,000 to them in the first quarter of 2007.

In
July 2006, the FASB issued Interpretation No. 48,"Accounting for Uncertainty in Income Taxes"(or FIN 48), which
clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48
utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs when a company concludes that a tax position, based solely on its technical merits, is more likely
than not to be sustained upon examination. Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more likely than not to be sustained). Under step two,
the tax benefit is measured as the largest amount of benefit (determined on a cumulative probability basis) that is more likely than not to be realized upon ultimate settlement. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 on January 1, 2007 did not have a material effect on our consolidated financial statements.

We
may from time to time be assessed interest or penalties by certain tax jurisdictions. In the event we have received an assessment for interest and/or penalties, it has been classified
in the financial statements as general and administrative expense.

55

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

In
June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" (or FSP No. EITF 03-6-1). Under FSP No. EITF 03-6-1, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to
the two-class method. FSP No. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim
periods within those years and requires retrospective application. We are currently evaluating the impact of adopting FSP No. EITF 03-6-1 on our earnings per share.

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

56

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the
results of operations could be affected. 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 previous 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 did not have an impact on our statement of cash flows.

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

Impact of New Accounting Pronouncement

In December 2007, the FASB issued SFAS No. 141(R) which requires the acquiring entity in a business combination to measure the
assets acquired, liabilities assumed (including contingencies) and any noncontrolling interests at their fair values on the acquisition date. The
statement also requires that acquisition-related transaction costs be expensed as incurred and acquired research and development value be capitalized. In addition, acquisition-related restructuring
costs are to be capitalized only if they meet certain criteria. SFAS No. 141(R) is effective for fiscal years beginning December 15, 2008. We are currently evaluating the impact of the
application of SFAS No.141(R) on our results of operations and financial position.

In
December 2007, the FASB also issued Statement of Financial Accounting Standards No. 160,"Noncontrolling Interests in Consolidated Financial Statements,
an amendment of Accounting Research Bulletin No. 51"(or SFAS No. 160). SFAS No. 160 requires the classification of noncontrolling interests (formerly,
minority interests) as a component of consolidated equity. In addition, net income will include the total income of all consolidated subsidiaries with the attribution of earnings and other
comprehensive income between controlling and noncontrolling interests reported as a separate disclosure on the face of the consolidated income statement. The calculation of earnings per share will
continue to be based on income amounts attributable to the controlling interest. SFAS No. 160 also addresses accounting and reporting for a change in control of a subsidiary. SFAS
No. 160 is effective for fiscal years beginning December 15, 2008, and is required to be adopted prospectively, except for the presentation and disclosure requirements, which are
required to be adopted retrospectively. We are currently evaluating the impact of the application of SFAS No.160 on our results of operations and financial position.

3. Major Operators

We have three 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 three operators from each of which we derive over 10% of our rental revenue and interest income from mortgage loans.

In
2006, Extendicare Services, Inc. (or EHSI), one of our major operators, effected a reorganization whereby it completed a spin-off of Assisted Living Concepts, Inc
(or ALC). ALC is now a NYSE traded public company operating assisted living centers. The remaining EHSI assets and operations were converted into a Canadian REIT (or Extendicare REIT) listed on the
Toronto Stock Exchange (or TSX). Both Extendicare REIT and ALC continue to be parties to the leases with us.

Alterra
Healthcare Corporation (or Alterra) is a wholly owned subsidiary of a publicly traded company, Brookdale Senior Living, Inc. (or Brookdale). Subsequent to
December 31, 2008, the name Alterra Healthcare Corporation was changed to Brookdale Senior Living Communities, Inc.

57

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes Extendicare REIT's, ALC's and Brookdale's financial information as of and for the nine months ended September 30, 2008 per
the operators' public filings (in thousands). Our other operator is privately owned and thus no public financial information is available:

(UNAUDITED)Extendicare REIT(1)

ALC

BrookdaleCurrent assets

$
433,215

$
23,969

$
264,689Non-current assets


1,188,119


444,669


4,422,237Current liabilities


308,225


46,940


864,223Non-current liabilities


1,334,145


138,139


2,587,501Stockholders' (deficit) equity


(21,036
)

283,559


1,235,202Gross revenue


1,482,228


176,468


1,441,126Operating expenses


1,451,679


152,889


1,457,342Income (loss) from continuing operations


16,631


11,293


(94,455
)Net income (loss)


17,858


11,293


(94,455
)Cash provided by operations


58,803


40,296


107,354Cash used in investing activities


(44,129
)

(24,053
)

(101,700
)Cash provided by (used in) financing activities


66,721


(23,962
)

(50,673
)


---

Extendicare
REIT and ALC, collectively lease 37 assisted living properties with a total of 1,427 units owned by us representing approximately 12.2%, or $61,819,000, of our total assets
at December 31, 2008 and 16.7% of rental revenue and interest income from mortgage loans recognized as of December 31, 2008 excluding the effects of straight-line rent and
effective interest income from mortgage loans.

Alterra
leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 12.1%, or $61,334,000, of our total assets at December 31, 2008 and
15.5% of rental revenue and interest income from mortgage loans recognized as of December 31, 2008 excluding the effects of straight-line rent and effective interest income from
mortgage loans.

Preferred
Care, Inc. (or Preferred Care), through various wholly owned subsidiaries, operates 33 skilled nursing properties with a total of 4,021 beds that we own or on which we
hold mortgages secured by
first trust deeds. This represents approximately 12.6%, or $63,543,000, of our total assets at December 31, 2008 and 14.8% of rental revenue and interest income from mortgage loans recognized
as of December 31, 2008 excluding the effects of straight-line rent and effective interest income from mortgage loans.

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

58

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Supplemental Cash Flow Information

For the year ended
December 31,2008

2007

2006(in thousands)Non-cash investing and financing transactions:Property exchange

$


$


$
3,410Conversion of mortgage loans to owned properties


4,704





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





530


(1,500
)Conversion of preferred stock to common stock


3,085


788


3,976Redemption of minority interest


136





Restricted stock issued, net of cancellations





1


Capital improvement holdback from investments in notes / mortgage loans receivable





130


432Application of a prior year capital expenditure funding








489


5. Impairment Charge

No impairment charges were recorded during 2008, 2007 or 2006. We have evaluated all assets and believe there were no other than
temporary impairments. However in past years, the long-term care industry experienced significant adverse changes which resulted
in operating losses by certain of our lessees and borrowers and in some instances the filing by certain lessees and borrowers for bankruptcy protection. Thus, we cannot predict what, if any,
impairment charge may be needed in the future.

6. Real Estate Investments

Mortgage Loans.At December 31, 2008, we had 43 mortgage loans secured by first mortgages on 39 skilled nursing properties with a
total of
4,498 beds, 16 assisted living residences with 714 units and one school. These properties are located in 16 states. At December 31, 2008, the mortgage loans had interest rates ranging from 7.3%
to 13.7% and maturities ranging from 2009 to 2019. In addition, the loans contain certain guarantees, provide for certain facility fees and generally have 25-year amortization schedules.
The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points. At December 31, 2008 and 2007, the carrying values
of the mortgage loans were $77,541,000 and $91,278,000, respectively. Scheduled principal payments on mortgage loans are $11,777,000; $4,964,000; $10,854,000; $5,393,000; $18,633,000 and $25,920,000
in 2009, 2010, 2011, 2012, 2013 and thereafter, respectively.

During
the year ended December 31, 2008, we invested $9,085,000, net of closing fees, in three mortgage loans. One loan secured by an assisted living property located in Florida
with 41 units in the amount of $1,000,000 has an initial interest rate of 10.5%, increasing 0.125% annually, with a 25-year amortization and matures in November 2009. The second loan
secured by six assisted living properties located in Texas with 108 units in the amount of $6,800,000 has an initial interest rate of 9.5%, increasing 0.15% annually, with a 20-year
amortization and matures in June 2018. The final loan secured by a skilled nursing property located in Utah with 84 beds in the amount of $1,400,000 has an initial interest rate of 10.0% increasing
0.15% annually, with a 20-year amortization and matures in 11 years. We also invested $550,000 under three mortgage loans for capital improvements at an average rate of 11.07%.

59

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Additionally,
during the year ended December 31, 2008, we received $14,248,000 plus accrued interest related to the payoff of nine mortgage loans secured by nine skilled nursing
properties and received $4,742,000 in regularly scheduled principal payments.

During
the year ended December 31, 2007, we invested $6,039,000, net of closing fees and capital improvement holdbacks in two mortgage loans with the same borrower on two skilled
nursing properties located in Texas. One loan in the amount of $4,000,000 is secured by a first trust deed on a property with 230 licensed beds of which 172 beds are Medicaid licensed. The other loan
in the amount of $2,200,000 is secured by a first trust deed on a property with 117 licensed beds of which 114 are Medicaid licensed. Both loans have an initial interest rate of 9.75%, increasing
0.15% annually, with a 20-year amortization and mature in 10 years. The borrower has entered into separate operating leases with one of our existing operators. We also received a
$530,000 mortgage loan secured by a skilled nursing property located in Tennessee in connection with the sale of 59-bed skilled nursing property. SeeOwned
Properties and Lease Commitmentsbelow for further detail on the sale. This loan has a fixed interest rate of 11% and was paid off in July 2008. During the year ended
December 31, 2007 we also received $28,509,000 related to the payoff of 11 mortgage loans secured by 14 skilled nursing properties located in various states. We also received $4,495,000 in
regularly scheduled principal payments.

Owned Properties.At December 31, 2008, we owned properties in 23 states consisting of 62 skilled nursing properties with a total
of 7,209
beds, 85 assisted living properties with 3,884 units and one school. Owned properties are leased pursuant to non-cancelable operating leases generally with an initial term of 10 to
30 years. Many of the leases contain renewal options and two contain limited period options that permit the operators to purchase the properties. The leases provide for fixed minimum base rent
during the initial and renewal periods. The majority of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four ways
depending on specific provisions of each lease: (i) a specified percentage increase over the prior year, generally between 2.0% and 2.5%; (ii) the higher of (i) or a calculation
based on the Consumer Price Index; (iii) as a percentage of facility net patient revenues in excess of base amounts or (iv) specific dollar increases. Each lease is a triple net lease
which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and non-capital expenditures and other costs necessary in the operations of the facilities.
Contingent rent income for the years ended December 31, 2008, 2007 and 2006 was not significant in relation to contractual base rent income.

During
the year ended December 31, 2008, we sold for $600,000 a vacant parcel of land adjacent to a skilled nursing property in New Mexico to a third party. We received net cash
proceeds of $555,000 and recognized a $92,000 gain on sale. We also acquired a 30-bed skilled nursing property located in Ohio for an aggregate price of $1,014,000 that was added to an
existing master lease at a 10% yield and we agreed to provide funding up to $2,000,000 to purchase land, construct and equip a new replacement building which will be a combined skilled nursing and
assisted living property. This investment will be at the higher of one-year LIBOR plus 5.3% or 10% and construction must be completed by January 18, 2011. Additionally, during the
twelve months ended December 31, 2008, we invested $2,996,000, at an average yield of approximately 10%, under existing commitment agreements to expand and renovate 13 existing properties
operated by seven different operators. As of December 31, 2008, the total commitment remaining for projects currently under renovation was $3,682,000. We also invested $1,359,000 in capital
improvements to existing properties under various lease agreements whose rental rates already reflected this investment. SeeNote 11. Commitments and
Contingenciesfor further discussion about our commitment agreements.

During
the year ended December 31, 2007 we sold a closed, previously impaired skilled nursing property located in Texas to a third party for $166,000. We also sold a
59-bed skilled nursing property

60

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

located
in Tennessee to a third party for $700,000. We received $322,000 in cash proceeds net of closing costs resulting from these sold properties and received a mortgage loan of $530,000 secured by
the first mortgage on the skilled nursing property located in Tennessee. As a result of these two sales, we recognized a gain net of selling expenses of $106,000 in 2007. Additionally, we invested
$4,014,000 at an average yield of approximately 10% under agreements to renovate 20 properties operated by nine different operators. We also invested $1,682,000 in capital improvements to existing
properties under various lease agreements whose rental rates already reflected this investment.

During
2006 we sold four assisted living properties located in various states with a total of 431 units and one 174-bed skilled nursing property located in Arizona. We
recognized a gain of $32,557,000 on the two transactions and received total net proceeds of $3,410,000 in property associated with the exchange described below and $54,035,000 in cash, after paying
both closing costs and a $3,824,000 8.75% State of Oregon bond obligation related to one of the properties sold. SeeNote 9. Debt Obligationsfor
further discussion of the debt payoff. In 2005 we sold an option to purchase the four assisted living properties to Sunwest Management Inc. (or Sunwest) for $2,000,000. In exchange for the
right to purchase the properties for $58,500,000 we received $500,000 in cash and a note receivable for $1,500,000. The proceeds from the sale of the purchase option were applied to the proceeds of
the sale of the four assisted living properties in 2006.

During
the year ended December 31, 2006 we acquired five skilled nursing properties with a total of 373 beds for $13,536,000 in cash and $3,410,000 in property located in various
states. These properties are leased to two third parties under 10-year master leases, each with two five-year renewal options. The combined initial annual rent is approximately
$1,932,000, an 11.4% initial yield.

Depreciation
expense on buildings and improvements, including properties owned under capital leases and properties classified as discontinued operations as required by SFAS
No. 144, was $14,709,000, $14,032,000 and $13,581,000 for the years ended December 31, 2008, 2007 and 2006.

Future
minimum base rents receivable under the remaining non-cancelable terms of operating leases excluding the effects of straight-line rent are: $56,299,000;
$58,230,000; $59,742,000; $60,534,000; $61,412,000 and $343,936,000 for the years ending December 31, 2009, 2010, 2011, 2012, 2013, and thereafter.

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

For the year ended
December 31,2008

2007

2006Rental income

$


$


$
725Interest and other income








97Total revenues








822Interest expense








17Depreciation and amortization





47


103Operating and other expenses








7Total expenses





47


127(Loss) Income from discontinued operations

$


$
(47
)
$
695


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

61

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Sunwest Management Inc.On August 19, 2008 we disclosed in a voluntary Current Report on Form 8-K filed with the
Securities and Exchange Commission that we had received letters from companies affiliated with Sunwest Management, Inc. (or Sunwest) explaining that Sunwest was experiencing certain negative
cash shortfalls which they attributed to properties that had not yet matured in terms of occupancy. Our relationship with Sunwest is limited to only four properties: two mortgage loans secured by
properties in Texas and a master lease covering two properties in California. We have acted to preserve our investments with respect to Sunwest as described below.

During
the year ended December 31, 2008 we did not receive August or September payments on a $1,523,000 loan at an interest rate of 11.15% and secured by a first mortgage on a
165-unit assisted living property in Mesquite, Texas operated by Sunwest. However, in October we received from non-Sunwest equity investors in this property the payment of all
past due interest, property tax impounds, attorney's fees and a $50,000 replacement reserve. Interest on the loan, which matures November 19, 2011, represented 1.7% of our interest income from
mortgage loans for the year ended December 31, 2008. On October 31, 2008, we completed an assignment and assumption of the loan to an entity formed by the non-Sunwest equity
investors. One of the non-Sunwest equity investors is operating the property.

During
the year ended December 31, 2008 we did not receive August or September payments on a $4,704,000 loan at an interest rate of 11.15% and secured by a first mortgage on a
140-unit independent living property in Fort Worth, Texas operated by Sunwest. Accordingly we did not record interest income of $131,000 in the third quarter of 2008 related to this
mortgage loan. Interest on the loan represented 5.0% of our interest income from mortgage loans for the three months ended June 30, 2008. On October 7, 2008 we acquired the property
through foreclosure for $4,717,000, the amount of the debt outstanding and capitalized fees associated with the foreclosure. The property is being operated by a third party under a 10-year
lease with two five-year renewal options. The lease provides for a 10-month rent abatement. The annual minimum rent is $90,000 for 2009, $525,000 for 2010, $600,000 for 2011
and increases 3% annually commencing January 1, 2012 and thereafter. Beginning January 1, 2011, total rent payable annually will be equal to 25% of gross revenues but never less than the
minimum rent as defined by the lease agreement. We agreed to provide funding up to $875,000 for specific capital improvements to the leased property with the yield included in the initial lease rate.
The capital improvements deadline is October 7, 2010. SeeNote 11. Commitments and Contingenciesfor further discussion about our
commitment agreements.

During
the year ended December 31, 2008 we did not receive August, September, October or November payments on a master lease covering a 109-unit assisted living
property in Vacaville, California and a 113-unit assisted living property in Bakersfield, California operated by Sunwest. The total monthly lease payment under the master lease agreement
was approximately $208,000 per month or approximately 4.5% of our monthly rental income as of August 2008. Accordingly we did not record rental income of $832,000 and wrote-off $124,000 of
straight-line rent receivable in 2008 related to this lease. Our total gross investment in the properties under the master lease is approximately $26,156,000 or 4.5% of our gross
investments in real estate as of December 31, 2008. As of December 31, 2008, single purpose subsidiaries owned by us owed debt obligations totaling $16,054,000 secured by the master
lease properties. Specifically, the outstanding principal balance on the Bakersfield property was $8,202,000 at a rate of 8.43% and is due
October 1, 2009, and the outstanding principal balance on the Vacaville property was $7,852,000 at a rate of 8.69% and is due August 1, 2010. On December 1, 2008, we leased these
properties to a third party under a 10-year lease with two five-year renewal options. The annual minimum rent will be $1,800,000 for the first lease year, $2,100,000 for the
second lease year, $2,500,000 for the third lease year and increases 3% annually commencing on December 1, 2011 and thereafter. We agreed to provide capital improvement funding up to $1,500,000
allocated in two tranches of $750,000 each. The yield on the first tranche is included in the initial lease rate and the second tranche is at an 8.5% yield. The capital improvement deadline is
December 1, 2010. SeeNote 11. Commitments and Contingenciesfor further discussion about our commitment agreements.

62

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Notes Receivable

During 2008, we funded $420,000 and received $848,000 in principal payments under various loans and line of credit agreements with
certain operators. At December 31, 2008, we had 6 loans outstanding with a carrying value of $2,895,000 at a weighted average interest rate of 11.84%.

8. Marketable Securities

At December 31, 2008 and 2007, we had a $6,500,000 investment in Skilled Healthcare Group, Inc.'s (or SHG) Senior
Subordinated Notes with a face rate of 11.0% and an effective yield of 11.1%. Interest on the notes is payable semi-annually in arrears and the notes mature on January 15, 2014. One
of our board members is the chief executive officer of SHG.

During
2007, SHG redeemed $3,500,000 face value of our original investment of $10,000,000 face value Senior Subordinated Notes at a redemption price equal to 111% of the principal amount
of the notes, plus accrued and unpaid interest. As a result of this early redemption we recognized additional interest income of $385,000 in 2007.

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

9. Debt Obligations

Bank Borrowings.During 2008, we amended and extended our Unsecured Revolving Credit Agreement at an initial commitment amount of
$80,000,000. The
Credit Agreement provides for the opportunity to increase the credit amount up to a total of $120,000,000. The prior agreement did not have an expansion provision. The Credit Agreement provides a
revolving line of credit with no scheduled maturities other than the maturity date of July 17, 2011. The pricing under the amended Unsecured Revolving Credit Agreement remains the same as under
our prior credit agreement, either Prime Rate plus 0.50% or LIBOR plus 1.50% depending on our borrowing election. At the time of borrowing, we may elect the 1, 2, 3 or 6 month LIBOR rate. Under
financial covenants contained in the Unsecured Credit Agreement which are measured quarterly we are required to maintain, among other things:



At
December 31, 2008, we had no outstanding borrowings under our Unsecured Revolving Credit Agreement and the full amount was available for borrowing. Also, at December 31,
2008 we were in compliance with all covenants.

Mortgage Loans Payable.During 2008, we paid off a mortgage loan in the amount of $14,188,000 secured by four assisted living
properties located in
Ohio. The retired debt bore an interest rate of 7.27%. We also paid $914,000 in regularly scheduled principal payments. At December 31, 2008 we had

63

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

four
mortgage loans outstanding with a carrying value of $32,063,000 at a weighted average interest rate of 8.68%.

As
of December 31, 2008, single purpose subsidiaries owned by us owed debt obligations totaling $16,054,000, which is included in our outstanding mortgage loan payable, on the
master lease properties and secured by the master lease properties. Specifically, the outstanding principal balance on the Bakersfield property was $8,202,000 at a rate of 8.43% and is due
October 1, 2009, and the outstanding principal balance on the Vacaville property was $7,852,000 at a rate of 8.69% and is due August 1, 2010. SeeNote 6.
Real Estate Investmentsfor further discussion on Sunwest.

The
following table represents the year-end balances of our mortgage loans payable and weighted average interest rates allocated by maturity date(dollar amounts
in thousands):

Maturity

Total Loan Balance at
December 31, 2008

Rate

Total Loan Balance at
December 31, 2007

Rate2009

$
24,211


8.68
%
$
24,781


8.68
%2010


7,852


8.69
%

8,005


8.69
%$
32,063




$
32,786


As
of December 31, 2008 and 2007 the aggregate carrying value of real estate properties securing our mortgage loans payable was $38,702,000 and $57,088,000, respectively.

Bonds Payable.At December 31, 2008 and 2007 we had outstanding principal of $4,690,000 and $5,130,000, respectively, on
multifamily
tax-exempt revenue bonds that are secured by five assisted living properties in Washington. These bonds bear interest at a variable rate that is reset weekly and mature during 2015. For
the year ended December 31, 2008, the weighted average interest rate, including letter of credit fees, on the outstanding bonds was 4.78%. During 2008 and 2007 we paid $440,000 and $415,000 in
regularly scheduled principal payments. As of December 31, 2008 and 2007, the aggregate carrying value of real estate properties securing our bonds payable was $7,707,000 and $7,971,000,
respectively.

During
2006 we prepaid on our $3,824,000 multi-unit housing tax-exempt revenue bond that bore interest at 8.75% and was secured by one assisted living property in
Oregon using the proceeds received from the sale of the four assisted living properties as described inNote 6. Real Estate Investments.

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

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

64

---



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

accounted
for the participation transaction as a secured borrowing under SFAS No. 140"Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities."

During
2006 the Senior Participation was repaid in full receiving a principal payment of $10,767,000 from the payoff of three mortgage loans and the refinance of six mortgage loans in
the Participation Loan Pool. Also during 2006 the Senior Participation received scheduled principal payments of $767,000. We had no Senior Participation balance at December 31, 2007 and 2008.

Scheduled Principal Payments.Total scheduled principal payments for our mortgage loans payable, and bonds payable as of
December 31, 2008
were $24,843,000; $8,180,000; $530,000; $565,000; $600,000 and $2,035,000 in 2009, 2010, 2011, 2012, 2013 and thereafter.

10. Stockholders' Equity

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

Shares outstanding at
December 31,





Carrying Value at
December 31,Liquidation Value Per share

Dividend RateIssuance

2008

2007

2008

2007Series C Cumulative Convertible Preferred Stock


2,000,000


2,000,000

$
19.25


8.5
%
$
18.80

$
18.80Series E Cumulative Convertible Preferred Stock


38,716


162,135

$
25.00


8.5
%
$
23.84

$
23.84Series F Cumulative Preferred Stock


6,003,700


6,640,000

$
25.00


8.0
%
$
23.99

$
23.99


Our
Series C Cumulative Convertible Preferred Stock (or Series C Preferred Stock) is convertible into 2,000,000 shares of our common stock at $19.25 per share. Dividends
are payable quarterly. Total shares reserved for issuance of common stock related to the conversion of Series C Preferred Stock were 2,000,000 shares at December 31, 2008 and 2007.

Our
Series E Cumulative Convertible Preferred Stock (or Series E Preferred Stock) is convertible at any time into shares of our common stock at a conversion price of $12.50
per share of common stock, subject to adjustment under certain circumstances. Dividends are payable quarterly. During 2008, holders of 123,419 shares of Series E Preferred Stock notified us of
their election to convert such shares into 246,838 shares of common stock. During 2007, holders of 31,509 shares of Series E Preferred Stock notified us of their election to convert such shares
into 63,018 shares of common stock. During 2006, holders of 159,031 shares of Series E Preferred Stock notified us of their election to convert such shares into 318,062 shares of common stock.
Total shares reserved for issuance of common stock related to the conversion of Series E Preferred Stock were 77,432 at December 31, 2008. Subsequent to December 31, 2008, holders
of 900 shares of Series E Preferred Stock notified us of their election to
convert such shares into 1,800 shares of common stock. Subsequent to this most recent conversion, there are 37,816 shares of our Series E Preferred Stock outstanding.

Our
Series F Cumulative Stock (or Series F Preferred Stock) is not redeemable prior to February 23, 2009, except as necessary to preserve our status as a real estate
investment trust. On or after February 23, 2009, we may, at our option, redeem the Series F Preferred Stock, in whole or from time to time in part, for $25.00 per Series F
Preferred Stock in cash plus any accrued and unpaid dividends to the date of redemption. The dividend rate is 8.0% and the liquidation value is $25.00 per share. Dividends are cumulative from the date
of original issue and are payable quarterly to stockholders of record on the first day of each quarter. During 2008, we invested $14,276,000 to repurchase a total of 636,300 shares of our
Series F Preferred Stock at an average cost of $22.44 per

65

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

share,
including commissions. The Series F preferred stock has a liquidation value of $25.00 per share. As required by EITF D-42,"The Effect on the
Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,"the discounted purchase price on these shares, which is the liquidation value
over the fair value, is reflected on the income statement netted with the original issue discount and is added to net income in calculating the allocation of net income available to common
shareholders. At December 31, 2008 there were 6,003,700 shares of our Series F Preferred Stock outstanding.

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

Common Stock.During 2006 we repurchased and retired 71,493 shares of common stock for an aggregate purchase price of $1,476,000 or
$20.65 per share.
The shares were purchased on the open market under a Board authorization to purchase up to 5,000,000 shares. Including these purchases, 2,604,393 shares were purchased under this authorization. In
June 2007 our Board of Directors terminated the prior existing share repurchase program and authorized a new share repurchase program enabling us to repurchase up to 5,000,000 shares of our common
stock. In January 2008, the Board of Directors amended the share repurchase program to include authorization to repurchase our outstanding preferred securities. During 2007 we repurchased and retired
893,079 shares of common stock for an aggregate purchase price of $18,768,000 or $21.01 per share, including commissions. The shares were purchased on the open market under the new Board authorization
discussed above. After this common stock repurchase and the Preferred stock repurchase, as mentioned above, we continue to have an open Board authorization to purchase an additional 3,470,621 shares.

At
December 31, 2008 we have one limited partnership and reserved 179,882 shares of our common stock under this partnership agreement. We consolidate the limited partnership since
we exercise control and we carry the minority interest at cost. The limited partners can exercise their conversion rights and be paid, at our election, in shares of our common stock or for an amount
of cash
approximating the then current market value of shares of our common stock. Historically, we have elected to pay cash upon limited partners' election to exercise their conversion rights. If we elected
to issue shares of our common stock upon limited partners' election to exercise their conversion rights, the carrying amount of the partnership is reclassified to stockholder's equity.

During
2008 one of our limited partners exercised its conversion rights and exchanged a portion of its interest in the limited partnership. In accordance with the limited partnership
agreement, we paid $510,000 for the redemption of 22,000 shares owned by the limited partner. Since the market value of the common stock converted was greater than the book value of the partnership
interests received, we recognized a $136,000 increase in the basis of the properties underlying the limited partnership interest acquired. At December 31, 2008 the carrying value (excluding
accrued preferred returns) and the market value of the partnership conversion rights are $3,058,000 and $3,648,000, respectively.

Available Shelf Registrations.During 2007 we filed a Form S-3 "shelf" registration statement which became effective
August 7, 2007 and provides us with the capacity to offer up to $300,000,000 in our debt and/or equity securities. At December 31, 2008 we had $300,000,000 available under the "shelf"
registration.

66

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Year ended
December 31, 2008

Year ended
December 31, 2007

Year ended
December 31, 2006Declared

Paid

Declared

Paid

Declared

PaidPreferred StockSeries C

$
3,272

$
3,272

$
3,272

$
3,272

$
3,272

$
3,272Series E


110


176


371


388


605


689Series F


12,008


12,326


13,280


13,280


13,280


13,280Total Preferred


15,390


15,774


16,923


16,940


17,157


17,241Common Stock


36,012
(1)

36,012
(1)

35,038
(2)

35,038
(2)

25,285
(3)

33,668
(4)Total

$
51,402
(5)
$
51,786
(5)
$
51,961
(5)
$
51,978
(5)
$
42,442
(5)
$
50,909
(5)


---

Subsequent
to December 31, 2008, we declared a monthly cash dividend of $0.13 per share on our common stock for the months of January, February and March 2009, payable on
January 30, February 27
and March 31, 2009, respectively, to stockholders of record on January 22, February 19 and March 23, 2009, respectively.

Other Equity.At December 31, 2008 and 2007, Other Equity consisted of $735,000 and $956,000, respectively, of accumulated other
comprehensive
income.

Accumulated Other Comprehensive Income.During the years we had investments in REMIC Certificates, we retained the non-investment grade
certificates issued in the securitizations. During 2005, a loan was paid off in the last remaining REMIC pool which caused the last third party REMIC Certificate holders entitled to any principal
payments to be paid off in full. After this transaction, we became the sole holder of the remaining REMIC Certificates and are therefore entitled to the entire principal outstanding of the loan pool
underlying the remaining REMIC Certificates. Under EITF No. 02-9 (or EITF 02-9)"Accounting for Changes That Result in a Transferor
Regaining Control of Financial Assets Sold", a Special Purpose Entity (or SPE) may become non-qualified or tainted which generally results in the "repurchase" by
the transferor of all the assets sold to and still held by the SPE. Since we were the sole REMIC Certificate holder entitled to principal from the underlying loan pool, we had all the risks and were
entitled to all the rewards from the underlying loan pool. As required by EITF 02-9, the repurchase for the transferred assets was accounted for at fair value. The accumulated other
comprehensive income balance represents the fair market value adjustment offset by any previously adjusted impairment charge which is amortized to increase interest income over the remaining life of
the loans that we repurchased from the REMIC pool.

67

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Notes Receivable from Stockholders.In 1997, the Board of Directors adopted a loan program designed to encourage executives, key
employees,
consultants and directors to acquire common stock through the exercise of options. Under the program, we made full recourse, secured loans to participants equal to the exercise price of vested options
plus up to 50% of the taxable income resulting from the exercise of options. Such loans bear interest at the then current Applicable Federal Rate (or AFR). In January 2000, the Board of Directors
approved a new loan agreement (or New Agreement) for current executives and directors in the amounts of the then remaining principal balance of the original loans.

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

During
2006, the last remaining note receivable from stockholders with a balance of $226,000 was paid in full. We currently have no loan programs for officers and/or directors and do not
provide any guarantee to any officer and/or director or third party relating to purchases and sales of our equity securities. At December 31, 2008 and 2007, no loans were outstanding.

Stock Based Compensation Plans.During 2008 we adopted and our shareholders approved The 2008 Equity Participation Plan which replaces
The 2004
Restricted Stock Plan, The 2004 Stock Option Plan and The 1998 Equity Participation Plan. Under The 2008 Equity Participation Plan, 600,000 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 2008 Equity
Participation Plan are set by our compensation committee at its discretion. During 2008 neither stock options nor restricted stock were granted under this plan.

During
2004 we adopted and our stockholders approved The 2004 Stock Option Plan under which 500,000 shares of common stock have been reserved for incentive and nonqualified stock option
grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under The 2004 Stock Option Plan are set by our compensation committee at its
discretion. During 2008 no stock options were granted under this plan. Also, during 2008 this plan was terminated and replaced by The 2008 Equity Participation Plan, as mentioned above. During 2007 we
granted 174,500 stock options at $23.79 per share and 30,000 stock options at $23.47 per share under this plan. These shares vest ratably over a three-year period. During 2006 no stock
options were granted under this plan. Total shares available for future grant under The 2004 Stock Option Plan as of December 31, 2007 and 2006 were 265,500 and 470,000, respectively. All stock
options outstanding that were granted under The 2004 Stock Option Plan vest over three years from the original date of grant. Unexercised stock options expire seven years after the date of vesting.

Our
stockholders approved the 1998 Equity Participation Plan under which 500,000 shares of common stock were reserved. The plan provides for the issuance of incentive and nonqualified
stock options, restricted stock and other stock based awards to officers, employees, non-employee directors and consultants. The terms of the awards granted under the Plan are set by our
compensation committee at its discretion; however, in the case of incentive stock options, the term may not exceed 10 years from the date of grant. During 2008 neither stock options nor
restricted stocks were granted under the plan. Also, during 2008 this plan was terminated and replaced by The 2008 Equity

68

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Participation
Plan, as mentioned above. During 2007 we issued 40,000 shares of restricted stock at $25.98 per share, 46,500 shares of restricted stock at $23.79 per share and 3,766 shares of
restricted stock at $23.47 per share under this plan. These shares vest ratably over a three-year period. During 2006 neither stock options nor restricted stock were granted under the
plan. Total shares available for future grant under the 1998 Equity Participation Plan as of December 31, 2007 and 2006 were 9,350 and 99,616, respectively. All stock options and restricted
stock outstanding that were granted under the 1998 Equity Participation Plan vest over three to five years from the original date of grant. Unexercised stock options expire seven years after the date
of vesting.

Our
stockholders previously approved the 1992 Stock Option Plan. All shares reserved under the 1992 Stock Plan have vested, been exercised, and been issued. The 1992 Stock Option Plan no
longer is effective.

Nonqualified
stock option activity for the years ended December 31, 2008, 2007 and 2006, was as follows:

Shares

Weighted Average Price2008

2007

2006

2008

2007

2006Outstanding, January 1


234,500


64,000


110,200

$
22.71

$
10.33

$
9.26Granted





204,500




$


$
23.74

$
Exercised


(17,500
)

(34,000
)

(46,200
)
$
23.79

$
5.64

$
7.77Canceled










$


$


$
Outstanding, December 31


217,000


234,500


64,000

$
22.62

$
22.71

$
10.33Exercisable, December 31(1)


80,663


25,000


40,000

$
25.88

$
14.85

$
7.07


---

During
2008 a total of 17,500 options were exercised at a total option value of $416,000 and a total market value as of the exercise dates of $519,000.

Restricted
stock activity for the years ended December 31, 2008, 2007 and 2006 was as follows:

2008

2007

2006Outstanding, January 1


137,354


130,522


177,495Granted





98,500


Vested


(48,904
)

(91,668
)

(46,973
)Canceled








Outstanding, December 31


88,450


137,354


130,522Compensation Expense for the year (1)

$
1,088,000

$
2,132,000

$
953,000






69

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



During
2004, we adopted and our stockholders approved The 2004 Restricted Stock Plan under which 100,000 shares of common stock have been reserved for restricted stock grants to
officers, employees, non-employee directors and consultants. The terms of the awards granted under The 2004 Restricted Stock Plan are set by our compensation committee at its discretion.
During 2008 we
did not issue any shares of restricted stock. Also, during 2008 this plan was terminated and replaced by The 2008 Equity Participation Plan, as mentioned above. During 2007 we issued 8,234 shares of
restricted stock at $23.47 per share. These shares vest ratably over a three-year period. During 2006 we did not issue any shares of restricted stock. Total shares available for future
grant under The 2004 Restricted Stock Plan as of December 31, 2007 and 2006 were 0 and 8,234, respectively.

During
2007 we extended the vesting of 27,120 shares of unvested restricted stock to align the vesting dates with the 40,000 share of restricted stock grant previously discussed. The
impact on future compensation expense we will recognize related to this vesting modification is immaterial. Additionally, during 2007 we modified the vesting of 54,960 shares of unvested restricted
stock by accelerating the vesting so that the 54,960 shares vest ratably from March through December 2007. Prior to this modification the shares were vesting in two traunches ratably over two and
three years, respectively. The accelerated compensation expense we recognized related to this vesting acceleration was $551,000 in 2007.

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

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

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.

As
of December 31, 2008, 2007 and 2006, there were 217,000, 234,500, and 64,000 options outstanding, respectively. The fair value of these options was estimated utilizing the
Black-Scholes-

70

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LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Merton
valuation model and assumptions as of each respective grant date. The estimates for the fair value of options granted during 2008, 2007, and 2006 were as follows:

Options Granted

Weighted Average Expected Life(in years)

Weighted Average Volatility

Weighted Average Risk Free Interest Rate

Expected Dividend Yield

Weighted Average Fair Value2008
















$
2007


174,500


3


0.187


4.66
%

6.31
%
$
2.0430,000


3


0.195


5.03
%

6.39
%
$
2.182006
















$



The
weighted average exercise price of the options was $22.62, $22.71 and $10.33 and the weighted average remaining contractual life was 1.3, 2.5 and 0.5 years as of
December 31, 2008, 2007 and 2006, respectively. At December 31, 2008, the total compensation cost related to unvested stock options granted is $199,000, which will be recognized over the
remaining vesting period.

11. Commitments and Contingencies

The following table summarizes our capital improvement commitments as of December 31, 2008(dollar
amounts in thousands):

Original Commitment(9)

Expiration Date

Investment at 12/31/08

Open Commitment

Estimated Yield

Property Type

Properties

Major Operator$
650


3/31/2009

$
124

$
526

13.00%
(1)
SNF


1

N/A2,500


12/4/2009





2,500

10.00%
(2)
ALF


35

Alterra500


3/31/2010


273


227

11.00%
(2)
SNF


1

Preferred Care2,000


3/31/2010





2,000

11.00%
(1)
SNF


1

Preferred Care4,000


3/31/2010





4,000

11.00%
(1)
SNF


1

Preferred Care875


10/7/2010


7
(8)

868


(6)
ALF


1

N/A2,500


6/16/2010


2


2,498

10.00%
(1)
SNF


1

N/A1,500


12/1/2010





1,500


(5)
ALF


2

N/A2,000


1/18/2011





2,000


(4)(1)
SNF


1

N/A5,000
(7)

12/31/2014





5,000
(7)

(3)
ALF


37

ALC$
21,525




$
406

$
21,119


---

71

---



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes our loan commitments as of December 31, 2008(dollar amounts in
thousands):

Original Commitment(1)

Expiration Date

Investment at 12/31/08

Open Commitment at 12/31/08

Yield

Property Type

Properties

Major Operator$
400


1/1/2009
(3)
$
107

$
293



(2)
SNF


1

N/A200


3/31/2009


20


180


10.00
%
SNF


1

N/A450


6/30/2009


250


200


8.75
%
SNF


3

N/A$
1,050




$
377

$
673


---

12. Transactions with Related Party

We have entered into transactions with Skilled Healthcare Group, Inc. (or SHG). One of our directors, Boyd W. Hendrickson,
serves as Chief Executive Officer of SHG.

In
December 2005, we purchased, on the open market, $10,000,000 face value of SHG Senior Subordinate Notes with a face rate of 11.0% and an effective yield of 11.1%. Our Board of
Directors, with Mr. Hendrickson abstaining, ratified the purchase of SHG Senior Subordinated Notes. In May 2007, SHG redeemed $3,500,000 face value of the $10,000,000 face value Senior
Subordinated Notes at a redemption price equal to 111% of the principal amount of the notes, plus accrued and unpaid interest. As a result of this early redemption we received $3,885,000 in proceeds
including additional interest income of $385,000 in 2007. At December 31, 2008 and 2007, we have a remaining investment in $6,500,000 face value of SHG Senior Subordinated Notes. During 2008
and 2007, we recognized $728,000 and $1,327,000, respectively, of interest income related to the SHG Senior Subordinated Notes. Interest on the notes is payable semi-annually in arrears
and the notes mature on January 15, 2014.

In
addition, during September 2007 SHG purchased the assets of Laurel Healthcare (or Laurel). In February 2006 we entered into a 15-year master lease agreement with Laurel.
One of the assets

72

---



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SHG
purchased was Laurel's leasehold interests in the skilled nursing properties Laurel leased from us under the master lease agreement. Our Board of Directors, with Mr. Hendrickson abstaining,
ratified our consent to the assignment of Laurel's master lease to SHG. The economic terms of the master lease agreement did not change as a result of our assignment of the master lease to SHG. During
2008 and 2007, SHG paid us $3,917,000 and $1,267,000 in rent, respectively. During 2008 and 2007, we recorded $535,000 and $206,000, respectively, of straight-line rental income from SHG.
At December 31, 2008 and 2007, the straight-line rent receivable from SHG was $2,037,000 and $1,502,000, respectively.

Also
during 2007 we committed to provide SHG with $800,000 to invest in capital improvements on five skilled nursing properties they lease from us. The commitment includes interest
compounded at 10% on each advance made from the disbursement date until the final distribution of the commitment. Upon final distribution of the capital allowance, minimum rent shall increase by the
total commitment multiplied by 10%. During 2007 and 2008 we funded $674,000 and $46,000, respectively, under this commitment. The capital improvements on this commitment have been completed and the
commitment has expired.

13. Distributions

We must distribute at least 90% of our taxable income in order to continue to qualify as a REIT. This distribution requirement can be
satisfied by current year distributions or, to a certain extent, by distributions in the following year.

For
federal tax purposes, distributions to stockholders are treated as ordinary income, capital gains, return of capital or a combination thereof. Distributions for 2008, 2007, and 2006
were cash distributions.

The
federal income tax classification of the per share common stock distributions are (unaudited):

Year Ended December 31,2008

2007

2006Ordinary income

$
1.557

$
1.489

$
0.405Non-taxable distribution








Section 1250 capital gain








0.243Long term capital gain


0.003


0.011


0.792Total

$
1.560

$
1.500

$
1.440


73

---



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Net Income Per Common Share

Basic and diluted net income per share were as follows(in thousands except per share
amounts):

For the year ended December 31,2008

2007

2006Net income

$
42,977

$
47,755

$
78,788Preferred Stock Buyback


989





Preferred dividends


(15,390
)

(16,923
)

(17,157
)Net income for basic net income per common share


28,576


30,832


61,631Other dilutive securities


110
(1)

371
(1)

4,219
(2)Net income for diluted net income per common share

$
28,686

$
31,203

$
65,850Shares for basic net income per common share


22,974


23,215


23,366Stock options and unvested restricted stock


53


63


50Other dilutive securities


104
(1)

349
(1)

2,770
(2)Shares for diluted net income per common share


23,131


23,627


26,186Basic net income per common share

$
1.24

$
1.33

$
2.64Diluted net income per common share

$
1.24

$
1.32

$
2.51


---

74

---



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. Quarterly Financial Information (Unaudited)

For the quarter endedMarch 31,

June 30,

September 30,

December 31,(in thousands except per share amounts)2008Revenues(2)

$
17,847

$
17,851

$
16,999

$
16,660Net income from discontinued operations


92








Net income available to common stockholders


8,289


7,530


6,784


5,973Net income per common share from continuing operations net of preferred dividends:Basic

$
0.36

$
0.33

$
0.29

$
0.26Diluted

$
0.36

$
0.33

$
0.29

$
0.26Net income per common share from discontinued operations:Basic

$
0.00

$
0.00

$
0.00

$
0.00Diluted

$
0.00

$
0.00

$
0.00

$
0.00Net income per common share available to common stockholders:Basic

$
0.36

$
0.33

$
0.29

$
0.26Diluted

$
0.36

$
0.33

$
0.29

$
0.26Dividends per share declared

$
0.39

$
0.39

$
0.39

$
0.39Dividend per share paid

$
0.39

$
0.39

$
0.39

$
0.392007Revenues(2)

$
18,729

$
19,793
(1)
$
18,246

$
18,022Net income (loss) from discontinued operations


136


(13
)

(13
)

(51
)Net income available to common stockholders


8,146


8,609


7,195


6,882Net income per common share from continuing operations net of preferred dividends:Basic

$
0.34

$
0.37

$
0.31

$
0.30Diluted

$
0.34

$
0.36

$
0.31

$
0.30Net income per common share from discontinued operations:Basic

$
0.01

$
0.00

$
0.00

$
0.00Diluted

$
0.01

$
0.00

$
0.00

$
0.00Net income per common share available to common stockholders:Basic

$
0.35

$
0.37

$
0.31

$
0.30Diluted

$
0.35

$
0.36

$
0.31

$
0.30Dividends per share declared

$
0.375

$
0.375

$
0.375

$
0.375Dividend per share paid

$
0.375

$
0.375

$
0.375

$
0.375


---

75

---



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

76

---





LTC PROPERTIES, INC.        SCHEDULE II        VALUATION AND QUALIFYING ACCOUNTS(in thousands)

Allowance for Doubtful Accounts:

Loan Loss Reserve

Straight-line Rent
Receivable ReserveBalanceDecember 31, 2005

$
1,280

$
(Credit) / Charge to Operations





BalanceDecember 31, 2006


1,280


(Credit) / Charge to Operations


(390
)

BalanceDecember 31, 2007


890


(Credit) / Charge to Operations


(130
)

140BalanceDecember 31, 2008

$
760

$
140


77

---





LTC PROPERTIES, INC.        SCHEDULE III        REAL ESTATE AND ACCUMULATED DEPRECIATION(in thousands)

Gross Amount at which Carried at
December 31, 2008Initial Cost to Company

Costs
Capitalized
Subsequent
to
AcquisitionEncumbrances

Land

Building and
Improvements

Land

Building and
Improvements

Total(1)

Accum.
Deprec.

Construction/
Renovation Date

Acquisition
DateSkilled Nursing Properties:Alamogordo, NM

$


$
210

$
2,590

$
3

$
210

$
2,593

$
2,803

$
497

1985


Dec-01Albuquerque, NM





1,696


3,891


530


1,696


4,421


6,117


490

1967/2008


Sep-05Albuquerque, NM





1,950


8,910


207


1,950


9,117


11,067


1,098

1982


Sep-05Albuquerque, NM





2,463


7,647


9


2,463


7,656


10,119


938

1970


Sep-05Altoona, IA





105


2,309


444


105


2,753


2,858


1,128

1973


Jan-96Aransas Pass, TX





154


1,276


589


154


1,865


2,019


193

1973/2008


Dec-04Atlanta, GA





175


1,282


3


175


1,285


1,460


495

1968


Sep-99Atmore, AL





131


2,877


196


131


3,073


3,204


1,177

1967/1974


Jan-96Beaumont, TX





370


1,141


93


370


1,234


1,604


166

1950


Dec-05Beeville, TX





186


1,197


70


186


1,267


1,453


144

1974


Dec-04Benbrook, TX





503


2,121


102


503


2,223


2,726


349

1976


Jan-05Bradenton, FL





330


2,720


160


330


2,880


3,210


1,298

1989/2002


Sep-93Brownsville, TX





302


1,856


156


302


2,012


2,314


322

1968


Apr-04Canyon, TX(6)





196


506


211


196


717


913


342

1985/86


Jun-00Carroll, IA





47


1,033


213


47


1,246


1,293


505

1969


Jan-96Chesapeake, VA





388


3,469


871


388


4,340


4,728


1,695

1977/2002/2007


Oct-95Clovis, NM





561


5,539


307


561


5,846


6,407


1,172

1970/2006


Dec-01Clovis, NM





598


5,902


59


598


5,961


6,559


1,228

1969/95


Dec-01Commerce City, CO





236


3,217


167


236


3,384


3,620


571

1964


Jun-04Commerce City, CO





161


2,160


95


161


2,255


2,416


372

1967


Jun-04Del Norte, CO





103


930


226


103


1,156


1,259


135

1955/2006


Jun-05Des Moines, IA(6)





115


2,096


1,433


115


3,529


3,644


1,218

1972


Sep-99Dresden, TN





31


1,529


123


31


1,652


1,683


470

1966/2002


Nov-00Gardendale, AL





84


6,316


2


84


6,318


6,402


2,429

1976/1984


May-96Gardner, KS





896


4,478


875


896


5,353


6,249


1,590

1961/1974


Dec-99Granger, IA





62


1,356


221


62


1,577


1,639


608

1979


Jan-96Grapevine, TX





431


1,449


188


431


1,637


2,068


521

1974


Jan-02Griffin, GA





500


2,900





500


2,900


3,400


956

1969


Sep-99Holyoke, CO





211


1,513


283


211


1,796


2,007


738

1963


Nov-00Houston, TX





202


4,458


1,426


202


5,884


6,086


2,248

1961/2007


Jun-96Houston, TX





365


3,769


1,598


365


5,367


5,732


2,075

1964/1968


Jun-96Houston, TX





202


4,458


1,359


202


5,817


6,019


2,186

1967/2008


Jun-96Jacksonville, FL





486


1,981


30


486


2,011


2,497


538

1986-1987


Mar-02Jefferson, IA





86


1,883


296


86


2,179


2,265


837

1968/1972


Jan-96Lecanto, FL





351


2,665


2,737


351


5,402


5,753


2,193

1988/2006


Sep-93Marion, OH





119


1,156


1,142


119


2,298


2,417


263

1950/06/07


May-05Marion, OH





48


2,466





48


2,466


2,514


234

1997


May-06Marion, OH





210


804





210


804


1,014


246

1959


Jan-08Mesa, AZ





305


6,909


1,876


305


8,785


9,090


3,185

1975/1996


Jun-96Mesa, AZ





1,095


2,330





1,095


2,330


3,425


212

1979


Aug-06Midland, TX





33


2,285


26


33


2,311


2,344


948

1973


Feb-96Montgomery, AL





242


5,327


115


242


5,442


5,684


2,148

1967/1974


Jan-96Nacogdoches, TX





100


1,738


168


100


1,906


2,006


694

1973


Oct-97Norwalk, IA





47


1,033


239


47


1,272


1,319


483

1975


Jan-96Olathe, KS





520


1,872


313


520


2,185


2,705


681

1968


Sep-99Orrville, OH





107


1,946


108


107


2,054


2,161


209

1956


Jun-06Phoenix, AZ





334


3,383


456


334


3,839


4,173


719

1982


Apr-04Phoenix, AZ





300


9,703


92


300


9,795


10,095


2,921

1985


Aug-00Polk City, IA





63


1,376


153


63


1,529


1,592


606

1976


Jan-96Portland, OR





100


1,925


2,652


100


4,577


4,677


1,057

1956/1974/06/07


Jun-97Richland Hills, TX





144


1,656


427


144


2,083


2,227


561

1976


Dec-01Richmond, VA





356


3,180


3,350


356


6,530


6,886


2,048

1970/75/80/02/06/07


Oct-95Ripley, TN





20


985


387


20


1,372


1,392


371

1951/2002/07


Nov-00Roswell, NM





568


5,232


3


568


5,235


5,803


1,003

1975


Dec-01Rusk, TX





34


2,399


448


34


2,847


2,881


1,328

1969


Mar-94Sacramento, CA





220


2,929





220


2,929


3,149


1,157

1968


Feb-97


78

---



LTC PROPERTIES, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

(in thousands)

Gross Amount at which Carried at
December 31, 2008Initial Cost to Company

Costs
Capitalized
Subsequent
to
AcquisitionEncumbrances

Land

Building and
Improvements

Land

Building and
Improvements

Total(1)

Accum.
Deprec.

Construction/
Renovation Date

Acquisition
DateSalina, KS(6)





100


1,153


628


100


1,781


1,881


691

1985


May-97Tacoma, WA





723


6,401





723


6,401


7,124


569

1993


Aug-06Tappahannock,
VA(6)





375


1,327


397


375


1,724


2,099


1,051

1977/1978


Oct-95Tucson, AZ





276


8,924


112


276


9,036


9,312


2,690

1985/92


Aug-00Tyler, TX





300


3,071


22


300


3,093


3,393


469

1974


Mar-04Wooster, OH





118


1,711


2,222


118


3,933


4,051


225

1952/62/71/07/08


Jun-06Skilled Nursing Properties




$
21,744

$
186,645


2,753

$
21,744

$
217,263

$
239,007

$
59,691Assisted Living Properties:Ada, OK





100


1,650





100


1,650


1,750


523

1996


Dec-96Arlington, OH





629


6,973





629


6,973


7,602


1,326

1993


Dec-01Arvada, CO


6,019
(4)

100


2,810


276


100


3,086


3,186


901

1997


Aug-97Athens, TX





96


1,510


1


96


1,511


1,607


515

1995


Jan-96Bakersfield, CA


8,202


834


11,986


20


834


12,006


12,840


2,630

1998/2002


Dec-01Battleground, WA





100


2,500





100


2,500


2,600


784

1996


Nov-96Beatrice, NE





100


2,173





100


2,173


2,273


640

1997


Oct-97Bexley, OH





306


4,196





306


4,196


4,502


799

1992


Dec-01Bullhead City, AZ





100


2,500





100


2,500


2,600


738

1997


Aug-97Burley, ID





100


2,200





100


2,200


2,300


653

1997


Sep-97Caldwell, ID





100


2,200





100


2,200


2,300


653

1997


Sep-97Camas, WA



(3)

100


2,175





100


2,175


2,275


712

1996


May-96Central, SC





100


2,321





100


2,321


2,421


543

1998


Mar-99Cordele, GA





153


1,455


132


153


1,587


1,740


489

1987/88/2002


Jul-00Denison, IA





100


2,713





100


2,713


2,813


742

1998


Jun-98Dodge City, KS





84


1,666


4


84


1,670


1,754


594

1995


Dec-95Durant, OK





100


1,769





100


1,769


1,869


545

1997


Apr-97Edmond, OK



(5)

100


1,365


526


100


1,891


1,991


560

1996


Aug-97Elkhart, IN





100


2,435





100


2,435


2,535


699

1997


Dec-97Erie, PA





850


7,477





850


7,477


8,327


2,143

1998


Oct-99Eugene, OR





100


2,600





100


2,600


2,700


766

1997


Sep-97Fremont ,OH





100


2,435





100


2,435


2,535


724

1997


Aug-97Ft. Collins, CO





100


2,961





100


2,961


3,061


753

1998


Mar-99Ft. Collins, CO





100


3,400





100


3,400


3,500


832

1999


Jul-99Ft. Meyers, FL





100


2,728


9


100


2,737


2,837


765

1998


Mar-98Ft. Worth. TX





333


4,385


7


333


4,392


4,725


50

1985


Oct-08Gardendale, AL





16


1,234





16


1,234


1,250


475

1988


May-96Goldsboro, NC





100


2,385


1


100


2,386


2,486


517

1998


Mar-99Grandview, WA



(3)

100


1,940





100


1,940


2,040


650

1996


Mar-96Great Bend, KS





80


1,570


21


80


1,591


1,671


602

1995


Dec-95Greeley, CO





100


2,310


270


100


2,580


2,680


760

1997


Aug-97Greenville, NC





100


2,478


2


100


2,480


2,580


608

1998


Mar-99Greenville, TX





42


1,565





42


1,565


1,607


532

1995


Jan-96Greenwood, SC





100


2,638





100


2,638


2,738


659

1998


Mar-99Hayden, ID





100


2,450


243


100


2,693


2,793


837

1996


Dec-96Hoquiam, WA





100


2,500





100


2,500


2,600


743

1997


Aug-97Jacksonville, TX





100


1,900





100


1,900


2,000


640

1996


Mar-96Kelso, WA





100


2,500





100


2,500


2,600


840

1996


Nov-96Kennewick. WA



(3)

100


1,940





100


1,940


2,040


654

1996


Feb-96Klamath Falls, OR





100


2,300





100


2,300


2,400


718

1996


Dec-96Lake Havasu, AZ





100


2,420





100


2,420


2,520


720

1997


Aug-97Lakeland, FL





519


2,313


1,125


519


3,438


3,957


860

1968/74/96/02/06/07


Jul-00Longmont, CO



(4)

100


2,640





100


2,640


2,740


729

1998


Jun-98Longview, TX





38


1,568


1


38


1,569


1,607


539

1995


Oct-95Loveland, CO



(4)

100


2,865


270


100


3,135


3,235


907

1997


Sep-97Lufkin, TX





100


1,950





100


1,950


2,050


649

1996


Apr-96Madison, IN





100


2,435





100


2,435


2,535


714

1997


Oct-97


79

---



LTC PROPERTIES, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

(in thousands)

Gross Amount at which Carried at
December 31, 2008Initial Cost to Company

Costs
Capitalized
Subsequent
to
AcquisitionEncumbrances

Land

Building and
Improvements

Land

Building and
Improvements

Total(1)

Accum.
Deprec.

Construction/
Renovation Date

Acquisition
DateMarshall, TX





38


1,568


451


38


2,019


2,057


689

1995


Oct-95McPherson, KS





79


1,571


4


79


1,575


1,654


596

1994


Dec-95Millville, NJ





100


2,825





100


2,825


2,925


835

1997


Aug-97Nampa, ID





100


2,240


23


100


2,263


2,363


707

1997


Jan-97New Bern, NC





100


2,427


1


100


2,428


2,528


536

1998


Mar-99Newark, OH





100


2,435





100


2,435


2,535


714

1997


Oct-97Newport Richey, FL





100


5,845


664


100


6,509


6,609


2,007

1986/1995


Jan-98Newport, OR





100


2,050





100


2,050


2,150


763

1996


Dec-96Niceville, FL





100


2,680





100


2,680


2,780


739

1998


Jun-98Norfolk, NE





100


2,123





100


2,123


2,223


639

1997


Jun-97Rocky Mount, NC





100


2,494


1


100


2,495


2,595


570

1998


Mar-99Rocky River, OH





760


6,963





760


6,963


7,723


1,933

1998


Oct-99Salina, KS





79


1,571


4


79


1,575


1,654


596

1994


Dec-95San Antonio, TX



(5)

100


1,900





100


1,900


2,000


583

1997


May-97San Antonio, TX



(5)

100


2,055





100


2,055


2,155


624

1997


Jun-97Shelby, NC





100


2,805


2


100


2,807


2,907


773

1998


Jun-98Spring Hill, FL





100


2,650





100


2,650


2,750


731

1998


Jun-98Springfield, OH





100


2,035


270


100


2,305


2,405


678

1997


Aug-97Sumter, SC





100


2,351





100


2,351


2,451


566

1998


Mar-99Tallahassee, FL



(5)

100


3,075





100


3,075


3,175


850

1998


Apr-98Tiffin, OH





100


2,435





100


2,435


2,535


724

1997


Aug-97Troy, OH





100


2,435


306


100


2,741


2,841


820

1997


May-97Tulsa, OK



(5)

200


1,650





200


1,650


1,850


517

1997


Feb-97Tulsa, OK



(5)

100


2,395





100


2,395


2,495


723

1997


Jun-97Tyler, TX


9,990
(5)

100


1,800





100


1,800


1,900


569

1996


Dec-96Vacaville, CA


7,852


1,662


11,634


19


1,662


11,653


13,315


2,588

1998/2002


Dec-01Vancouver, WA



(3)

100


2,785





100


2,785


2,885


910

1996


Jun-96Waco, TX





100


2,235





100


2,235


2,335


676

1997


Jun-97Wahoo, NE





100


2,318





100


2,318


2,418


691

1997


Jul-97Walla Walla, WA


4,690
(3)

100


1,940





100


1,940


2,040


646

1996


Apr-96Watauga, TX





100


1,668





100


1,668


1,768


502

1996


Aug-97Wetherford, OK





100


1,669


592


100


2,261


2,361


665

1996


Aug-97Wheelersburg, OH





29


2,435





29


2,435


2,464


714

1997


Sep-97Wichita Falls, TX





100


1,850





100


1,850


1,950


584

1996


Dec-96Wichita Falls, TX





100


2,750





100


2,750


2,850


808

1997


Sep-97Worthington, OH








6,102








6,102


6,102


2,175

1993


Dec-01Worthington, OH








3,402








3,402


3,402


1,265

1995


Dec-01York, NE





100


2,318





100


2,318


2,418


691

1997


Aug-97Assisted Living Properties


36,753


13,127


235,968


5,245


13,127


241,213


254,340


67,829SchoolTrenton, NJ





100


6,000


3,170


100


9,170


9,270


2,955

1930/1998


Dec-98School





100


6,000


3,170


100


9,170


9,270


2,955$
36,753

$
34,971

$
428,613

$
39,033

$
34,971

$
467,646

$
502,617

$
130,475


---

80

---



LTC PROPERTIES, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

(in thousands)

Activity for the years ended December 31, 2006, 2007 and 2008 is as follows:

Real
Estate
& Equipment

Accumulated
DepreciationBalance at December 31, 2005

$
500,723

$
95,771Additions


24,016


13,581Impairment charges





Cost of real estate sold


(36,452
)

(7,261
)Balance at December 31, 2006


488,287


102,091Additions


5,696


14,032Impairment charges


Cost of real estate sold


(1,103
)

(357
)Balance at December 31, 2007


492,880


115,766Additions


5,347


14,655Conversions of Mortgage Loans into owned properties


4,717


50Step up in basis resulting from partnership conversions


136


4Impairment charges





Cost of real estate sold


(463
)

Balance at December 31, 2008

$
502,617

$
130,475


81

---





LTC PROPERTIES, INC.        SCHEDULE IV        MORTGAGE LOANS ON REAL ESTATE        (dollars in thousands)

Principal
Amount of
Loans
Subject to
Delinquent
Principal or
Interest(Unaudited)
Number ofCurrent
Monthly
Debt
Service



Carrying
Amount of
Mortgages
December 31, 2007Final
Maturity Date

Balloon
Amount(2)

Face
Amount of
MortgagesState

Facilities

Units/Beds(3)

Interest Rate(1)TX


6


108

9.50%

2018

$
5,141

$
63

$
6,800

$
6,755

$
FL


3


256

11.40%

2009


6,620


70


6,850


6,620


TX


1


230

9.90%

2017


2,999


38


4,000


3,926


MN


1




7.28%

2019


3,783


23


3,751


3,751


NE


1


47

13.15%

2013


2,743


36


3,243


2,964


TX


5


583

12.90%

2011


914


91


8,000


2,993


NE


1


44

13.15%

2013


2,562


34


3,036


2,769


FL


1


90

13.73%

2012


2,249


40


3,510


2,703


Various


37


3,854

9.90% - 13.41%

2009 - 2019


24,207


671


64,629


45,060


56


5,212
(4)




$
51,218

$
1,066

$
103,819

$
77,541

$



---

# of Loans

Original loan amounts24

$   500 - $  2,0009

$2,001 - $  3,0006

$3,001 - $  4,0001

$4,001 - $  5,000

$5,001 - $  6,0002

$6,001 - $  7,0001

$7,001 - $10,000


82

---



LTC PROPERTIES, INC.

SCHEDULE IV

MORTGAGE LOANS ON REAL ESTATE (Continued)

(dollars in thousands)

Activity for the years ended December 31, 2006, 2007 and 2008 is as follows:

Balance at December 31, 2005

$
148,052Mortgage premium


449Loan prepayments/payoffs


(26,496
)Collections of principal


(5,013
)Balance at December 31, 2006


116,992Investment in real estate mortgages


6,854(Provision for) recovery of loan losses


390Mortgage premium


46Loan prepayments/payoffs


(28,508
)Collections of principal


(4,496
)Balance at December 31, 2007


91,278Investment in real estate mortgages


9,783(Provision for) recovery of loan losses


130Mortgage premium


44Loan prepayments/payoffs


(14,248
)Collections of principal


(4,742
)Conversion of loans into leases


(4,704
)Balance at December 31, 2008

$
77,541


83

---





Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

Item 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, 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 fourth fiscal quarter ended December 31, 2008. Based on this evaluation our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the fiscal quarter our
disclosure controls and procedures were effective.

Internal Control Over Financial Reporting.

Management Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon
are set forth on pages 80 and 81, respectively.

There
were no changes in our internal control over financial reporting during the fourth fiscal quarter ended December 31, 2008 that materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.

Item 9B.    OTHER INFORMATION

At a meeting of the Compensation Committee (or the Committee) of our Board of Directors held on February 19, 2009, the Committee
approved the following discretionary bonuses for the following Named Executive Officers payable in cash and shares of our restricted common stock:

Discretionary Bonus ValueName

Position

Cash

Restricted Shares Value

Total
Discretionary
Bonus ValueWendy Simpson

CEO and President

$


$
416,000

$
416,000Pamela Shelley-Kessler

Senior Vice President, Chief Financial Officer and Corporate Secretary


75,000


96,000


171,000Clint Malin

Vice President and Chief Investment Officer


75,000


63,000


138,000T. Andrew Stokes

Vice President, Marketing and Strategic Planning


70,000


56,000


126,000


The
number of shares of restricted common stock awarded to each Named Executive Officer will be determined on the grant date, February 27, 2009, and based upon the closing price
of our common stock on the New York Stock Exchange on that date. These shares vest ratably over a three-year period.

84

---





MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under
the supervision of, the issuer's principal executive and principal financial officers and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those
policies and procedures that:



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements on a timely basis. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Our
management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting as of
December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (or COSO) in Internal
Control-Integrated Framework. Based on this assessment, our management concluded that, as of the end of the fiscal year ended December 31, 2008, our internal control over financial reporting
was effective.

The
effectiveness of our internal control over financial reporting as of December 31, 2008, has been audited by Ernst &Young LLP, independent registered public
accounting firm. Ernst & Young LLP's report on our internal control over financial reporting appears on page 81.

85

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited LTC Properties, Inc.'s (the "Company") internal control over financial reporting as of December 31, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). LTC Properties Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal
control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, LTC Properties, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO
criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LTC Properties Inc. as
of December 31, 2008 and 2007, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended
December 31, 2008 of LTC Properties Inc. and our report dated through February 24, 2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLPLos Angeles, California
February 24, 2009


86

---





PART III

Item 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference to our definitive proxy statement for the 2009 Annual Meeting of
Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our December 31, 2008 fiscal year end) under the headings "Proposal 1
Election of Directors,""Corporate Governance Principles and Board Matters," and "Executive
Officers."

Item 11.    EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to our definitive proxy statement for the 2009 Annual Meeting of
Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our December 31, 2008 fiscal year end) under the
headings "Executive Compensation Discussion and Analysis," "Summary Compensation Table,"
"Director Compensation," and "Compensation Committee Report."

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to our definitive proxy statement for the 2009 Annual Meeting of
Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our December 31, 2008 fiscal year end) under the heading "Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to our definitive proxy statement for the 2009 Annual Meeting of
Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our December 31, 2008 fiscal year end) under the heading "Certain
Relationships and Related Transactions, and Director Independence."

Item 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to our definitive proxy statement for the 2009 Annual Meeting of
Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our December 31, 2008 fiscal year end) under the heading "Independent
Registered Public Accounting Firm Fees and Services."

87

---





PART IV

Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as a part of this report:

Financial Statements

PageReport of Independent Registered Public Accounting Firm


45Consolidated Balance Sheets as of December 31, 2008 and 2007


46Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006


47Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006


48Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006


49Notes to Consolidated Financial Statements


50


Financial Statement Schedules

II.

Valuation and Qualifying Accounts

77III.

Real Estate and Accumulated Depreciation

78IV.

Mortgage Loans on Real Estate

82


All
other schedules are omitted because they are not applicable or not present in amounts sufficient to require submission of the schedule or the required information is shown in the
Consolidated Financial Statements and the Notes thereto.

Exhibits

The exhibits required by Item 601 of Regulation S-K are set forth in the index to exhibits on page 84
of this annual report.

88

---





LTC PROPERTIES, INC.    INDEX TO EXHIBITS

Exhibit Number

Description3.1

Amended and Restated Articles of Incorporation of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.'s Current Report on Form 8-K filed December 16,
1997)3.2

Amended and Restated By-Laws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)3.3

Articles of Amendment of LTC Properties, Inc. (incorporated by reference to Exhibit 3.3 to LTC Properties, Inc.'s Current Report on Form 8-K filed December 16, 1997)3.4

Certificate of Amendment to Amended and Restated Bylaws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998)3.5

Articles Supplementary Classifying 2,000,000 Shares of 8.5% Series C Cumulative Convertible Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties,
 Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)3.6

Articles Supplementary Reclassifying 5,000,000 shares of Common Stock into Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.'s Registration
Statement on Form S-3 filed June 27, 2003)3.7

Certificate of Amendment to Amended and Restated Bylaws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.10 to LTC Properties, Inc.'s Registration Statement on Form S-3, Amendment
No. 2 filed August 29, 2003)3.8

Articles Supplementary Classifying 2,200,000 shares of 8.5% Series E Cumulative Convertible Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties,
 Inc.'s Current Report on Form 8-K filed September 17, 2003)3.9

Articles Supplementary Classifying 4,000,000 shares of 8.0% Series F Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.'s Current
Report on Form 8-K filed February 19, 2004)3.10

Articles Supplementary Reclassifying 40,000 Shares of Series D Junior Participating Preferred Stock to authorized but unissued shares of Preferred Stock of LTC Properties, Inc. (incorporated by reference to
Exhibit 3.2 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004)3.11

Articles Supplementary Reclassifying 3,080,000 Shares of 9.5% Series A Cumulative Preferred Stock and 2,000,000 Shares of 9% Series B Cumulative Preferred Stock to authorized but unissued shares of Preferred
Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004)3.12

Articles of Amendment replacing Section 7.1 regarding authorized shares of stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.12 to LTC Properties, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended July 31, 2004)


89

---



Exhibit Number

Description3.13

Articles Supplementary Classifying an Additional 2,640,000 shares of 8.0% Series F Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.13 to LTC Properties,
 Inc.'s Quarterly Report on Form 10-Q for the quarter ended July 31, 2004)3.14

Certificate of Correction to Articles of Amendment of LTC Properties, Inc. (incorporated by reference to Exhibit 3.14 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)4.1

Rights Agreement dated as of May 2, 2000 (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.'s Registration Statement on Form 8-A filed on May 9, 2000)4.2

Amendment No. 1 to Rights Agreement dated as of March 19, 2004 (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.'s Current Report on Form 8-K filed on March 19,
2004)4.3

Amended and Restated Agreement of Limited Partnership of LTC Partners IX, L.P. and Exchange Rights Agreement dated February 11, 1998 (incorporated by reference to Exhibit 4.8 to LTC Properties,
 Inc.'s Registration Statement on Form S-3 filed on May 28, 2004)Certain instruments defining the rights of holders of long-term debt securities are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon
request, copies of any such instruments.10.1

Second Amended and Restated Credit Agreement dated July 17, 2008 among LTC Properties, Inc. and Bank of Montreal, Chicago Branch is the Administrative Agent, BMO Capital Markets, is Co Lead Arranger and Book
Manager, Key Bank National Association is Co-Lead Arranger and Syndication Agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Current Report on Form 8-K filed July 18, 2008)10.2+

Second Amendment to 2007 Amended and Restated Employment Agreement of Andre Dimitriadis, dated July 1, 2007 (incorporated by reference to Exhibit 10.3 to LTC Properties, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007)10.3+

Third Amendment to the 2007 Amended and Restated Employment Agreement of Wendy Simpson dated December 4, 2007 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Current Report on
Form 8-K dated December 5, 2007)10.4+

Third Amended and Restated Employment Agreement of Pamela Kessler, effective as of December 4, 2007 (incorporated by reference to Exhibit 10.13 to LTC Properties, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2007)10.5+

Second Amended and Restated Employment Agreement of Peter Lyew, effective as of December 4, 2007 (incorporated by reference to Exhibit 10.14 to LTC Properties, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 2007)10.6+

Second Amended and Restated Employment Agreement of Clint Malin, effective as of December 4, 2007 (incorporated by reference to Exhibit 10.15 to LTC Properties, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2007)10.7+

Amended and Restated Employment Agreement of T. Andrew Stokes, effective as of December 4, 2007 (incorporated by reference to Exhibit 10.16 to LTC Properties, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 2007)12

Ratio of Earnings to Fixed Charges


90

---



Exhibit Number

Description21

List of Subsidiaries23.1

Consent of Independent Registered Accounting Firm24.1

Power of Attorney (included on signature page)31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232

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


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LTC PROPERTIES, INC.  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
RegistrantDated: February 25, 2009By:

/s/PAMELA SHELLEY-KESSLER Pamela Shelley-KesslerSenior Vice President, Chief Financial Officer
and Corporate Secretary
(Principal Financial Officer)


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Wendy L. Simpson and Pamela
Shelley-Kessler, and each of them severally, his true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his name, place and stead, in any and
all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and
requirements of the U.S. Securities and Exchange Commission in connection with the Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and
purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

/s/WENDY L. SIMPSON Wendy L. Simpson

Chief Executive Officer, President and Director (Principal Executive Officer)


February 25, 2009/s/PAMELA SHELLEY-KESSLER Pamela Shelley-Kessler

Senior Vice President, Chief Financial Officer
and Corporate Secretary (Principal Financial Officer and Principal Accounting Officer)


February 25, 2009/s/ANDRE C. DIMITRIADIS Andre C. Dimitriadis

Chairman of the Board and Director


February 25, 2009/s/BOYD HENDRICKSON Boyd Hendrickson

Director


February 25, 2009/s/EDMUND C. KING Edmund C. King

Director


February 25, 2009/s/TIMOTHY J. TRICHE Timothy J. Triche

Director


February 25, 2009


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