**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGEACT OF 1934

**Forthe fiscal year ended December 31, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Commissionfile number:  1-11314**

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**LTC PROPERTIES, INC.**

(Exact name of Registrantas specified in its charter)

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

 

**31365 Oak Crest DriveSuite 200**

**Westlake Village,California  91361**

**(Address of principal executiveoffices)**

Registrant’s telephonenumber, including area code: **(805) 981-8655**

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Securities registeredpursuant to Section 12(b) of the Act:

| Title of Each Class                                     | ** ** | ** ** | ** **               | **Name of Each Exchange on Which Registered** | ** ** |
|------------------------------------------------------------------------|------------|------------|--------------------------|-----------------------------------------------------------------------------|------------|
| Common stock, $.01 Par Value                                           |       |       | New  York Stock Exchange |                                                                        |       |
| 8.50% Series E Cumulative Convertible Preferred Stock,  $.01 Par Value |       |       | New  York Stock Exchange |                                                                        |       |
| 8.00% Series F  Cumulative Preferred Stock, $.01 Par Value             |       |       | New York Stock Exchange  |                                                                        |       |

 

**Securities registered pursuant toSection 12(g) of the Act:**  NONE

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

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

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x   No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.

Large accelerated filer o   Accelerated filer x   Non-accelerated filer o

Indicated by check markwhether the Registrant is a shell company Yes o   No x

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The aggregate market valueof voting and non-voting stock held by non-affiliates of the Registrant wasapproximately $492,423,470 as of June 30, 2006 (the last business day ofthe Registrant’s most recently completed second fiscal quarter).

The number of shares ofcommon stock outstanding as of February 15, 2007 was 23,589,162.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portions of the definitiveProxy Statement for the Registrant’s 2007 Annual Meeting of Stockholders havebeen incorporated into Part III of this Report.

 

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*STATEMENT REGARDINGFORWARD LOOKING DISCLOSURE*

*Certain informationcontained in this annual report includes statements that are not purelyhistorical and are “forward looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, includingstatements regarding our expectations, beliefs, intentions or strategiesregarding the future. All statements other than historical facts contained inthis annual report are forward looking statements. These forward lookingstatements involve a number of risks and uncertainties. All forward lookingstatements included in this annual report are based on information available tous on the date hereof, and we assume no obligation to update such forwardlooking statements. Although we believe that the assumptions and expectationsreflected in such forward looking statements are reasonable, no assurance canbe given that such expectations will prove to have been correct. The actualresults achieved by us may differ materially from any forward lookingstatements due to the risks and uncertainties of such statements.*

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

**Item 1.**                        BUSINESS

**General**

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

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

We were organized to qualify, and intend to continueto qualify, as a REIT. So long as we qualify, with limited exceptions, we maydeduct distributions, both preferred dividends and common dividends, to ourstockholders from our taxable income. We have made distributions, and intend tocontinue to make distributions to our stockholders, in order to eliminate anyfederal tax liability.

*OwnedProperties.**  *As ofDecember 31, 2006, our investment in owned properties consisted of 63 skillednursing properties with a total of 7,304 beds, 84 assisted living propertieswith a total of 3,744 units and one school in 23 states, representing a grossinvestment of approximately $488.3 million. Here and throughout thisForm 10-K wherever we provide details of our properties’ bed/unitcount the number of beds/units applies to skilled nursing properties andassisted living residences only. This number is based upon unit/bed countsshown on operating licenses provided to us by lessees/borrowers or units/bedsas stipulated by lease/mortgage documents. We have found during the years thatthese numbers often differ, usually not materially, from units/beds inoperation at any point in time. The differences are caused by such things asoperators converting a patient/resident room for alternative uses, such asoffices or storage, or converting a multi-patient room/unit into a singlepatient room/unit. We monitor our properties on a routine basis through sitevisits and reviews of current licenses. In an instance where such change wouldcause a de-licensing of beds or in our opinion impact the value of theproperty, we would take action 

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against thelessee/borrower to preserve the value of the property/collateral. See*Item 8. FINANCIAL STATEMENTS*—*Note 6. RealEstate Investments* for further description.

Thefollowing operators accounted for more than 10% of our 2006 rental revenue:

| **Lessee**                      | ** ** | ** ** | ** ** | **Percent of  Rental Revenue** | ** ** |
|---------------------------------|------------|------------|------------|------------------------------------------|------------|
| Extendicare REIT  and ALC       |       |       | 19.6       | %                                        |       |
| Alterra  Healthcare Corporation |       |       | 19.0       | %                                        |       |
| Preferred  Care, Inc.      |       |       | 13.4       | %                                        |       |

 

*MortgageLoans.*   As part of our strategy of makinglong-term investments in properties used in the provision of long-term healthcare services, we provide mortgage financing on such properties based on ourestablished investment underwriting criteria. See “*Investment and Other Policies*” in this section for furtherdiscussion. We have also provided construction loans that by their termsconverted into purchase/lease transactions or permanent financing mortgageloans upon completion of construction. See*Item 8. FINANCIAL STATEMENTS—Note 6. Real EstateInvestments* for further description.

See*Item 8. FINANCIALSTATEMENTS—Note 10. Debt Obligations* for a description of our SeniorMortgage Participation Payable, which was secured by certain of our mortgageloans receivable.

*REMICCertificates.*   Inthe past, we have completed securitizations by transferring mortgage loans tonewly created Real Estate Mortgage Investment Conduits (or REMIC) that, inturn, issued mortgage pass-through certificates aggregating approximately thesame amount. A portion of the REMIC Certificates were then sold to thirdparties and a portion of the REMIC Certificates were retained by us. The REMICCertificates we retained were subordinated in right of payment to the REMICCertificates sold to third parties and a portion of the REMIC Certificates weretained were interest-only certificates which had no principal amount andentitled us to receive cash flows designated as interest. Between 1993 and 1998we completed four REMIC pools. The 1993, 1994, 1996 and 1998 REMIC pools haveall been fully retired. During 2005, a loan was paid off in the 1998 REMIC poolwhich caused the last third party REMIC Certificate holders entitled to anyprincipal payments to be paid off in full. Under Emerging Issues Task Force No. 02-9 (“EITF 02-9”)*“Accounting for Changes That Result in a TransferorRegaining Control of Financial Assets Sold”*, a Special PurposeEntity (“SPE”) may become non-qualified or tainted which generally results inthe “repurchase” by the transferor of all the assets sold to and still held bythe SPE. Since we are now the sole REMIC Certificate holder entitled toprincipal from the underlying loan pool, we bear all the risks and are entitledto 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. AtDecember 31, 2006, we did not have any investment in REMIC Certificates onour balance sheet. See*Item 8. FINANCIALSTATEMENTS*—*Note 6. Real EstateInvestments and Note 7. Asset Securitizations* for furtherdescription of our historical investments in REMIC Certificates.

We maintain a long-terminvestment interest in mortgages we originate either through the directretention of the mortgages or historically through the retention of REMICCertificates originated in our securitizations. We are a REIT and, as such,make our investments with the intent to hold them for long-term purposes.However, in the past we have securitized a portion of our mortgage loanportfolio when a securitization provided us with the best available form ofcapital to fund additional long-term investments. In addition, we believe thatthe REMIC Certificates we retained in the past from our securitizationsprovided our stockholders with a more diverse real estate investment whilemaintaining the returns that provided value to our stockholders.

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**Investment andOther Policies**

*Objectivesand Policies.*   Our investment policy is to investprimarily in income-producing long-term care properties. Also see “*Government Regulation”* below. Primarily,as a result of obligations we had under our Secured Revolving Credit, we madefew investments in years 2000 through 2003. Over the past three years (2004through 2006), we invested approximately $57.6 million in mortgage loansand we acquired skilled nursing and assisted living properties forapproximately $49.7 million. At this time, we anticipate completing some levelof new investments in 2007; however, given the highly competitive environmentfor health care real estate acquisitions and mortgages, we can give noassurances that we will complete a significant level of new investments in2007.

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

Historically ourinvestments have consisted of:

·       mortgageloans secured by long-term care properties;

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

·       participationin such investments indirectly through investments in real estate partnershipsor other entities that themselves make direct investments in such loans orproperties.

In evaluatingpotential investments, we consider factors such as:

·       typeof property;

·       thelocation;

·       constructionquality, condition and design of the property;

·       theproperty’s current and anticipated cash flow and its adequacy to meetoperational needs and lease obligations or debt service obligations;

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

·       thepayor mix of private, Medicare and Medicaid patients;

·       thegrowth, tax and regulatory environments of the communities in which theproperties are located;

·       theoccupancy and demand for similar properties in the area surrounding theproperty; and

·       theMedicaid reimbursement policies and plans of the state in which the property islocated.

For investments in long-term care properties we favorlow cost per bed opportunities, whether in fee simple properties or inmortgages. In addition, with respect to skilled nursing properties, we attemptto invest in properties that do not have to rely on a high percentage ofprivate-pay patients. We seek to invest in properties that are located insuburban and rural areas of states. Prior to every investment, we conduct aproperty site review to assess the general physical condition of the propertyand the potential of additional sub-acute services. In addition, we review theenvironmental reports, state survey and financial statements of the propertybefore the investment is made. We prefer to invest in a property that has asignificant 

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market presence in itscommunity and where state certificate of need and/or licensing procedures limitthe entry of competing properties.

We believe that assisted living facilities are animportant sector in the long-term care market and our investments includedirect ownership of assisted living properties. For assisted living investmentswe have attempted to diversify our portfolio both geographically and acrossproduct levels. Thus, we believe that although the majority of our investmentsare in affordably priced units, our portfolio also includes upscale units inappropriate markets with certain operators.

*BorrowingPolicies.*   We may incur additional indebtednesswhen, in the opinion of our Board of Directors, it is advisable. We may incursuch indebtedness to make investments in additional long-term care propertiesor to meet the distribution requirements imposed upon REITs under the InternalRevenue Code of 1986, as amended. For other short-term purposes, we may, fromtime to time, negotiate lines of credit, or arrange for other short-termborrowings from banks or otherwise. We may also arrange for long-termborrowings through public offerings or from institutional investors.

In addition, we may incur mortgage indebtedness onreal estate which we have acquired through purchase, foreclosure or otherwise.We may also obtain mortgage financing for unleveraged or underleveragedproperties in which we have invested or may refinance properties acquired on aleveraged basis. There is no limitation on the number or amount of mortgagesthat may be placed on any one property, and we have no policy with respect tolimitations on borrowing, whether secured or unsecured.

*Prohibited Investments andActivities.*   Our policies, which are subject tochange by our Board of Directors without stockholder approval, impose certainprohibitions and restrictions on our investment practices or activitiesincluding prohibitions against:

·       investing in any juniormortgage loan unless by appraisal or other method, the Directors determine that

(a)           the capital invested inany such loan is adequately secured on the basis of the equity of the borrowerin the property underlying such investment and the ability of the borrower torepay the mortgage loan; or

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

·       investingin commodities or commodity futures contracts (other than interest ratefutures, when used solely for hedging purposes);

·       investingmore than 1% of our total assets in contracts for sale of real estate unlesssuch contracts are recordable in the chain of title;

·       holding equity investmentsin unimproved, non-income producing real property, except such properties asare currently undergoing development or are presently intended to be developedwithin one year, together with mortgage loans on such property (other thanfirst mortgage development loans), aggregating to more than 10% of our assets.

**Competition**

In the health care industry, we compete for realproperty investments with health care providers, other health care relatedREITs, real estate partnerships, banks, private equity funds, venture capitalfunds and other investors. Many of our competitors are significantly larger andhave greater financial resources and lower cost of capital than we haveavailable to us. Our ability to compete successfully for real propertyinvestments will be determined by numerous factors, including our ability toidentify suitable acquisition 

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

The lessees and borrowersof our properties compete on a local, regional and, in some instances, nationalbasis with other health care providers. The ability of the lessee or borrowerto compete successfully for patients or residents at our properties dependsupon several factors, including the levels of care and services provided by thelessees or borrowers, the reputation of the providers, physician referralpatterns, physical appearances of the properties, family preferences, financialcondition of the operator and other competitive systems of health care deliverywithin the community, population and demographics.

**GovernmentRegulation**

The health care industry is heavily regulated by thegovernment. Our borrowers and lessees who operate health care facilities aresubject to extensive regulation by federal, state and local governments. Theselaws and regulations are subject to frequent and substantial changes resultingfrom legislation, adoption of rules and regulations, and administrativeand judicial interpretations of existing law. These changes may have a dramaticeffect on the definition of permissible or impermissible activities, therelative costs associated with doing business and the amount of reimbursementby both government and other third-party payors. These changes may be appliedretroactively. The ultimate timing or effect of these changes cannot bepredicted. The failure of any borrower of funds from us or lessee of any of ourproperties to comply with such laws, requirements and regulations could resultin sanctions or remedies such as denials of payment for new Medicare andMedicaid admissions, civil monetary penalties, state oversight and loss ofMedicare and Medicaid participation or licensure. Such action could affect ourborrower’s or lessee’s ability to operate its facility or facilities and couldadversely affect such borrower’s or lessee’s ability to make debt or leasepayments to us.

The properties owned by us and the manner in whichthey are operated are affected by changes in the reimbursement, licensing andcertification policies of federal, state and local governments. Properties mayalso be affected by changes in accreditation standards or procedures ofaccrediting agencies that are recognized by governments in the certificationprocess. In addition, expansion (including the addition of new beds or servicesor acquisition of medical equipment) and occasionally the discontinuation ofservices of health care facilities are, in some states, subjected to state andregulatory approval through “certificate of need” laws and regulations.

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

A significant portion of the revenue of our skillednursing facility borrowers and lessees is derived from governmentally-fundedreimbursement programs, such as Medicare and Medicaid. Because of significanthealth care costs paid by such government programs, both federal and stategovernments have adopted and continue to consider various health care reformproposals to control health care costs. There have been fundamental changes inthe Medicare program that resulted in reduced levels of payment for asubstantial portion of health care services. In many instances, revenues fromMedicaid programs are already insufficient to cover the actual costs incurredin providing care to those patients. According to a report issued by the KaiserCommission on Medicaid and the Uninsured in October 2006, while manystates continued to freeze provider rates in fiscal year 2006, more statesimplemented provider rate increases in fiscal year 2006 or plan to do so infiscal year 2007. In fiscal year 2006, 46 states froze or cut rates for atleast one provider type, but the same number of states also increased rates forat least one 

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group of providers.Similarly in fiscal year 2007, 47 states intend to increase rates for at leastone group of providers and 43 states plan rate freezes or cuts, but no statecurrently plans to cut Medicaid payments for skilled nursing facilities forfiscal year 2007. Skilled nursing facilities also were the major provider groupmost likely to see payment increases for fiscal year 2006 and fiscal year 2007,although some skilled nursing facility rate increases are tied to increasedprovider taxes. Nevertheless, future reduction in state Medicaid payments forskilled nursing facility services could have an adverse effect on the financialcondition of our borrowers and lessees which could, in turn, adversely impactthe timing or level of their payments to us. Moreover, health care facilitiescontinue to experience pressures from private payors attempting to controlhealth care costs, and reimbursement from private payors has in many caseseffectively been reduced to levels approaching those of government payors.

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

On August 4, 2005, the Centers for Medicare &Medicaid Services, commonly known as CMS, published a final rule updatingskilled nursing facility prospective payment rates for fiscal year 2006, whichbegan October 1, 2005. This update implemented refinements to the patientclassification system and triggered the expiration of a temporary paymentadd-on for certain high-acuity patients, effective January 1, 2006. Thefinal rule also adopted a 3.1 percent market basket increase for fiscalyear 2006. On July 31, 2006, CMS published a notice updating Medicareskilled nursing facility prospective payment system rates for fiscal year 2007,which began October 1, 2006. Under the notice, skilled nursing facilitiesreceive the full 3.1 percent market basket increase to rates, increasingMedicare payments to skilled nursing facilities by approximately$560.0 million for fiscal year 2007.

On February 5, 2007, the Bush Administrationreleased its fiscal year 2008 budget proposal, which includes legislative andadministrative proposals that would reduce Medicare spending by approximately$5.3 billion in fiscal 2008 and $75.8 billion over 5 years. Among other things,the budget would provide no update for skilled nursing facilities in 2008 and a-0.65% adjustment to the update annually thereafter. The budget alsowould move toward site-neutral post-hospital payments to limit inappropriateincentives for five conditions commonly treated in both skilled nursingproperties and inpatient rehabilitation facilities. The budget proposal alsowould eliminate all bad debt reimbursements for unpaid beneficiary cost-sharingover four years. In addition, the budget proposal includes a series ofproposals impacting Medicaid, including legislative and administrative changesthat would reduce Medicaid payments by almost $26.0 billion over five years.Many of the proposed policy changes would require Congressional approval toimplement. Thus, while the fiscal year 2007 skilled nursing facility rates willnot decrease payments to skilled nursing facilities, the loss of revenuesassociated with potential future changes in skilled nursing facility paymentrates could, in the future, have an adverse effect on the financial conditionof our borrowers and lessees which could, in turn, adversely impact the timingor level of their payments to us.

The federal physicianself-referral law, commonly known as Stark II (or Stark Law), prohibitsphysicians and certain other types of practitioners from making referrals forcertain designated health services paid in whole or in part by Medicare andMedicaid to entities with which the practitioner or a member of thepractitioner’s immediate family has a financial relationship, unless thefinancial relationship fits within an applicable exception to the Stark Law.The Stark Law also prohibits the entity receiving the referral from seekingpayment under the Medicare and Medicaid programs for services rendered pursuant

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

**LegislativeDevelopments**

Each year, legislativeproposals are proposed in Congress and in some state legislatures that wouldaffect major changes in the health care system, either nationally or at thestate level. Among the proposals under consideration are additional costcontrols on the Medicare and Medicaid programs, health care providercost-containment initiatives, health care coverage expansion for the uninsured,measures to prevent medical errors, limits on damages that could be claimed inphysician malpractice lawsuits, and a “Patient Bill of Rights” to increase theliability of insurance companies as well as the ability of patients to sue inthe event of a wrongful denial of claim. We cannot predict whether anyproposals will be adopted or, if adopted, what effect, if any, such proposalswould have on our business.

**EnvironmentalMatters**

Under various federal, state and local environmentallaws, 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 hazardousor 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 adjacentproperty). Such laws often impose such liability without regard to whether theowner or secured lender knew of, or was responsible for, the presence ordisposal of such substances and may be imposed on the owner or secured lenderin connection with the activities of an operator of the property. The cost ofany required remediation, removal, fines or personal or property damages andthe owner’s or secured lender’s liability therefore could exceed the value ofthe 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 orremediate such substances, may adversely affect the owner’s ability to sell orrent such property or to borrow using such property as collateral which, inturn, would reduce our revenues.

Although the mortgageloans that we provide and leases covering our properties require the borrowerand the lessee to indemnify us for certain environmental liabilities, the scopeof such obligations may be limited and we cannot assure that any such borroweror lessee would be able to fulfill its indemnification obligations.

**Insurance**

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

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contingencies.If an uninsured loss or a loss in excess of insured limits occurs with respectto one or more of our properties, we could be subject to an adverse claimincluding claims for general or professional liability, could lose the capitalthat we have invested in the properties, as well as the anticipated futurerevenue for the properties and, in the case of debt which is with recourse tous, we would remain obligated for any mortgage debt or other financialobligations related to the properties. Certain losses such as losses due tofloods or seismic activity if insurance is available may be insured subject tocertain limitations including large deductibles or co-payments and policylimits.

**Employees**

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

**Taxation of OurCompany**

*General.*   Webelieve that we have been organized and have operated in such a manner as toqualify for taxation as a REIT under Sections 856 to 860 of the InternalRevenue Code of 1986, as amended, commencing with our taxable year endedDecember 31, 1992. We intend to continue to operate in such a manner, butno assurance can be given that we have operated or will be able to continue tooperate in a manner so as to qualify or to remain qualified. This summary isqualified in its entirety by the applicable Internal Revenue Code provisions,rules and regulations, and administrative and judicial interpretations.

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

*First,* we will be taxed atregular corporate rates on any undistributed taxable income, including undistributednet capital gains.

*Second,*undercertain circumstances, we may be subject to the alternative minimum tax, if ourdividend distributions are less than our alternative minimum taxable income.

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

*Fourth,* if we have net incomefrom prohibited transactions (which are, in general, certain sales or otherdispositions of property (other than foreclosure property) held primarily forsale to customers in the ordinary course of business), such income will besubject to a 100% tax.

*Fifth,* if we fail to satisfythe 75% gross income test or the 95% gross income test, but nonethelessmaintain our qualification as a REIT because certain other requirements have beenmet, we will be subject to a 100% tax on an amount equal to (a) the grossincome attributable to the greater of the amount by which we fail the 75% or95% test multiplied by (b) a fraction intended to reflect ourprofitability.

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

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

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

*Eighth,*ifwe have taxable REIT subsidiaries, we will also be subject to a tax of 100% onthe amount of any rents from real property, deductions or excess interest paidto us by any of our taxable REIT subsidiaries that would be reduced throughreapportionment under certain federal income tax principles in order to moreclearly reflect income for the taxable REIT subsidiary.

*Requirements forQualification.*   The Internal Revenue Code definesa REIT as a corporation, trust or association:

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

(2)         the beneficial ownershipof which is evidenced by transferable shares, or by transferable certificatesof beneficial interest;

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

(4)         which is neither afinancial institution; nor, an insurance company subject to certain provisionsof the Internal Revenue Code;

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

(6)         during the last half ofeach taxable year not more than 50% in value of the outstanding stock of whichis owned, actually or constructively, by five or fewer individuals (includingspecified entities); and

(7)         which meets certain othertests, described below, regarding the amount of its distributions and thenature of its income and assets.

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

*Income Tests.*   Therepresently are two gross income requirements that we must satisfy to qualify asa REIT:

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

·       Second,at least 95% of our gross income (excluding gross income from prohibitedtransactions) for each taxable year must be derived from income that qualifiesunder the 75% test or from dividends, interest and gain from the sale or otherdisposition of stock or securities.

Cancellation of indebtedness income generated by us isnot taken into account in applying the 75% and 95% income tests discussedabove. A “prohibited transaction” is a sale or other disposition of property(other than foreclosure property) held for sale to customers in the ordinarycourse of business. Any gain realized from a prohibited transaction is subjectto a 100% penalty tax.

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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 REITfor the year if we are eligible for relief. These relief provisions will begenerally available if: our failure to meet the tests was due to reasonablecause and not due to willful neglect, we attach a schedule of the sources ofour income to our return; and any incorrect information on the schedule was notdue to fraud with intent to evade tax.

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

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

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

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

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

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

With the passage of the American Jobs Creation Act of2004 (2004 Act), for years beginning after the effective date ofOctober 22, 2004, if we meet certain requirements, a violation of theprohibition of owning securities of any one issuer that exceeds 5% of the valueof our assets or owning securities of any one issuer that exceeds 10% of thatissuer’s voting securities or 10% of the value of that issuer’s outstandingsecurities may not result in disqualification as a REIT.

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

In addition, a failure exceeding the de minimis amountis considered to have satisfied the requirements if such failure is due toreasonable cause and not due to willful neglect, a description of each assetthat causes the failure is filed with the Internal Revenue Service, a certaintax is paid, and the assets that cause the failure are disposed of within sixmonths of the last day of the quarter in which we identify the failure. The taxis the greater of $50,000 or the net income generated by such assets during theperiod beginning on the date of failure until disposal taxed at the highestcorporate rate.

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

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partnership as apartnership (as opposed to an association taxable as a corporation) for federalincome tax purposes.

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

If any partnership or qualified real estate investmenttrust subsidiary in which we own an interest were treated as a regularcorporation (and not as a partnership or qualified real estate investment trustsubsidiary) for federal income tax purposes, we would likely fail to satisfythe REIT asset test prohibiting a REIT from owning greater than 10% of thevoting power of the stock or value of securities of any issuer, as describedabove, and would therefore fail to qualify as a REIT. As described above, the2004 Act provides relief for certain failures of the REIT asset test for yearsbeginning after October 22, 2004. We believe that each of the partnershipsand subsidiaries in which we own an interest will be treated for tax purposesas a partnership or qualified real estate investment trust subsidiary,respectively, although no assurance can be given that the Internal RevenueService will not successfully challenge the status of any such organization.

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

*Annual DistributionRequirements.*   In order to qualify as a REIT, weare required to distribute dividends (other than capital gain dividends) to ourstockholders annually in an amount at least equal to:

(1)         thesum of:

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

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

(2)         the excess of certainitems of non-cash income over 5% of our real estate investment trust taxableincome.

These annual distributions are paid in the taxableyear to which they relate. Alternatively, they must be declared and payable tostockholders of record in either October, November, or December and paidduring January of the following year. In addition, if we elect, thedividends may be declared before the due date of the tax return (includingextensions) and paid on or before the first regular dividend payment date aftersuch declaration, and we must specify the dollar amount in our tax returns.

Amounts distributed must not be preferential; that is,every stockholder of the class of stock with respect to which a distribution ismade must be treated the same as every other stockholder of that class, and noclass of stock may be treated otherwise than in accordance with its dividendrights as a class.

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

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

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

(3)         any undistributed taxableincome from prior periods;

we would be subject to a4% excise tax on the excess of such required distributions over the amountsactually distributed. Any real estate investment trust taxable income and netcapital gain on which this excise tax is imposed for any year is treated as anamount distributed during that year for purposes of calculating such tax.

*Failureto Qualify.*   If we fail to qualify for taxationas a REIT in any taxable year, and certain relief provisions do not apply, wewill be subject to tax (including any applicable alternative minimum tax) onour taxable income at regular corporate rates. Distributions to stockholders inany 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 reliefunder specific statutory provisions, we will also be disqualified from taxationas a REIT for the four taxable years following the year during whichqualification was lost. It is not possible to state whether in all circumstanceswe would be entitled to the statutory relief. Failure to qualify for even oneyear could substantially reduce distributions to stockholders and could resultin our incurring substantial indebtedness (to the extent borrowings arefeasible) or liquidating substantial investments in order to pay the resultingtaxes.

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

1)              *Investmentlimitations and taxable REIT subsidiaries*.   The 99 Act modified the REIT asset test by adding arequirement effective for years beginning after December 31, 2000 that,with the exception of the stock of a taxable REIT subsidiary, a REIT cannot ownmore than 10% of the total value of the “securities” of any issuer (10% Rule).Excluded from the definition of “securities” are straight debt securities, aREIT’s interest as a partner in a partnership, any loan to an individual or anestate, certain rental agreements, any obligation to pay rents from realproperty, certain securities issued by States, the District of Columbia, aforeign government, or the Commonwealth of Puerto Rico, any security issued bya REIT, and any other arrangement that is determined by the Internal RevenueService. Straight debt securities are non-convertible, non-contingent debtprovided that the REIT or any controlled taxable REIT subsidiaries does not ownany other “securities” of the issuer that have an aggregate value greater than1% of the issuer’s outstanding securities.

2)              Fora corporation to qualify as a taxable REIT subsidiary the followingrequirements must be satisfied.

(1)          The REIT must own stockin the subsidiary corporation.

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

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(3)          The subsidiarycorporation cannot directly or indirectly operate or manage either a lodging orhealth care facility.

(4)          The subsidiarycorporation generally cannot provide to any person rights to any brand nameunder which lodging or health care facilities are operated.

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

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

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

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

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

4)              *REIT distributionrequirements*.   The 99 Act reduces the requirementthat a REIT must distribute at least 95% of its income as deductible dividendsto 90% of its income.

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

*State and local taxation.**  *We may be subject to state or local taxation invarious state or local jurisdictions, including those in which we transactbusiness or reside. Our state and local tax treatment may not conform to thefederal income tax consequences discussed above.

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**InvestorInformation**

We make available to the public free of charge throughour internet website our Annual Report on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended, as soon asreasonably practicable after we electronically file such reports with, orfurnish such reports to, the Securities and Exchange Commission. Our internetwebsite address is www.ltcproperties.com. We are not including the informationcontained on our website as part of, or incorporating it by reference into,this Annual Report on Form 10-K.

Posted on our website andavailable upon request of any stockholders to our Investor Relations Departmentare the charters for our Audit Committee, Compensation Committee and Nominatingand Corporate Governance Committee, our Corporate Governance Guidelines and aCode of Business Conduct and Ethics governing our directors, officers andemployees. Within the time period required by the SEC and the New York StockExchange, we will post on our website any amendment to the Code BusinessConduct and Ethics and any waiver applicable to our senior financial officersand our executive officers or directors. In addition, our website includesinformation concerning purchases and sales of our equity securities by ourexecutive officers and directors. Our Investor Relations Department can becontacted at:

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

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

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

**Item 1A.**                RISKFACTORS

*Certain informationcontained in this annual report includes statements that are not purelyhistorical and are “forward looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, including statements regarding ourexpectations, beliefs, intentions or strategies regarding the future. Allstatements other than historical facts contained in this annual report areforward looking statements. These forward looking statements involve a number ofrisks and uncertainties. All forward looking statements included in this annualreport are based on information available to us on the date hereof, and weassume no obligation to update such forward looking statements. Although webelieve that the assumptions and expectations reflected in such forward lookingstatements are reasonable, no assurance can be given that such expectationswill prove to have been correct. The actual results achieved by us may differmaterially from any forward looking statements due to the risks anduncertainties of such statements.*

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*We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise. Stockholders andinvestors are cautioned not to unduly rely on such forward-looking statementswhen evaluating the information presented in our filings and reports.*

Such risks anduncertainties include, among other things, the following risks including thosedescribed in more detail below:

·       thestatus of the economy;

·       thestatus of capital markets, including prevailing interest rates;

·       compliancewith and changes to regulations and payment policies within the health careindustry;

·       changesin financing terms;

·       competitionwithin the health care and senior housing industries; and

·       changesin federal, state and local legislation.

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

*AtTimes, We May Have Limited Access to Capital Which Will Slow Our Growth.**  *A REIT is required to make dividend distributions andretains little capital for growth. As a result, growth for a REIT is generallythrough the steady investment of new capital in real estate assets. Presently,we believe capital is readily available to us. However, there will be timeswhen we will have limited access to capital from the equity and/or debt markets.During such periods, virtually all of our available capital will be required tomeet existing commitments and to reduce existing debt. We may not be able toobtain additional equity or debt capital or dispose of assets on favorableterms, if at all, at the time we require additional capital to acquire healthcare properties on a competitive basis or meet our obligations.

*Incomeand Returns from Health Care Facilities Can be Volatile.*   Thepossibility that the health care properties in which we invest will notgenerate income sufficient to meet operating expenses, will generate income andcapital appreciation, if any, at rates lower than those anticipated or willyield returns lower than those available through investments in comparable realestate or other investments are additional risks of investing in health carerelated real estate. Income from properties and yields from investments in suchproperties may be affected by many factors, including changes in governmentalregulation (such as zoning laws and government payment), general or localeconomic conditions (such as fluctuations in interest rates and employmentconditions), the available local supply of and demand for improved real estate,a reduction in rental income as the result of an inability to maintainoccupancy levels, natural disasters (such as hurricanes, earthquakes andfloods) or similar factors.

*WeDepend on Lease Income and Mortgage Payments from Real Property.*   Sincea substantial portion of our income is derived from mortgage payments and leaseincome from real property, our income would be adversely affected if asignificant number of our borrowers or lessees were unable to meet theirobligations to us or if we were unable to lease our properties or make mortgageloans on economically favorable terms. There can be no assurance that anylessee will exercise its option to renew its lease upon the expiration of theinitial term or that if such failure to renew were to occur, we could lease theproperty to others on favorable terms.

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*WeRely on a Few Major Operators.**  *ExtendicareREIT and Assisted Living Concepts, Inc (or ALC) lease 37 assisted livingproperties with a total of 1,427 units owned by us representing approximately11.6%, or $66.0 million, of our total assets at December 31, 2006.

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

Preferred Care, Inc. (or Preferred Care) operates32 skilled health care properties with a total of 3,871 beds that we own or onwhich we hold mortgages secured by first trust deeds. This representsapproximately 10.9% or $62.1 million of our total assets at December 31,2006.

Our financial position and ability to makedistributions may be adversely affected by financial difficulties experiencedby any of our other lessees and borrowers, including bankruptcies, inability toemerge from bankruptcy, insolvency or general downturn in business of any suchoperator, or in the event any such operator does not renew and/or extend itsrelationship with us or our borrowers when it expires.

*OurBorrowers and Lessees Face Competition in the Health Care Industry.*   Thelong-term care industry is highly competitive and we expect that it may becomemore competitive in the future. Our borrowers and lessees are competing withnumerous other companies providing similar long-term care services oralternatives such as home health agencies, hospices, life care at home,community-based service programs, retirement communities and convalescentcenters. There can be no assurance that our borrowers and lessees will notencounter increased competition in the future which could limit their abilityto attract residents or expand their businesses and therefore affect theirability to make their debt or lease payments to us.

*TheHealth Care Industry is Heavily Regulated by the Government.*   Ourborrowers and lessees who operate health care facilities are subject toextensive regulation by federal, state and local governments. These laws andregulations are subject to frequent and substantial changes resulting fromlegislation, adoption of rules and regulations, and administrative andjudicial interpretations of existing law. These changes may have a dramaticeffect on the definition of permissible or impermissible activities, therelative costs associated with doing business and the amount of reimbursementby both government and other third-party payors. These changes may be appliedretroactively. The ultimate timing or effect of these changes cannot bepredicted. The failure of any borrower of funds from us or lessee of any of ourproperties to comply with such laws, requirements and regulations could affectits ability to operate its facility or facilities and could adversely affectsuch borrower’s or lessee’s ability to make debt or lease payments to us. Alsosee *“Government Regulation”*beginning on page 5.

*Congressand the States Have Enacted Health Care Reform Measures.*   Thehealth care industry continues to face various challenges, including increasedgovernment and private payor pressure on health care providers to controlcosts. For instance, the Balanced Budget Act of 1997 enacted significantchanges to the Medicare and Medicaid programs designed to modernize payment andhealth care delivery systems while achieving substantial budgetary savings. Inseeking to limit Medicare reimbursement for long-term care services, Congressestablished the prospective payment system for skilled nursing facilityservices to replace the cost-based reimbursement system. Skilled nursingfacilities needed to restructure their operations to accommodate the newMedicare prospective payment system reimbursement. Since the skilled nursingfacility prospective payment system was enacted, several then publicly heldoperators of long-term care facilities and at least two then publicly heldoperators of assisted living facilities filed for reorganization under Chapter11 of the federal bankruptcy laws. During their reorganizations and in someinstances subsequent thereto, long-term care operators and assisted livingoperators reduced their operations by rejecting leases and/or defaulting onloans resulting in properties being returned to lessors or lenders. There canbe no assurances given that there will not be additional bankruptcies ofskilled nursing and assisted living operators in the future.

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In recent years, Congress has adopted legislation tosomewhat mitigate the impact of the Balanced Budget Act on providers, includingskilled nursing facilities. For instance, on December 8, 2003, PresidentBush signed into law the Medicare Prescription Drug, Improvement andModernization Act of 2003 (P.L. 108-173). In addition to providingexpanded Medicare prescription drug coverage, the new act modifies Medicarepayments to a variety of health care providers. With respect to skilled nursingfacilities, the act provides a temporary 128% increase in the Medicare paymentfor skilled nursing facility residents with acquired immune deficiencysyndrome, applicable to services furnished on or after October 1, 2004. Thistemporary increase is still in effect as of December 31, 2006.

On the other hand, in February 2006 Congress gavefinal approval to the Deficit Reduction Act (or DRA), which will reducenet Medicare and Medicaid spending by approximately $11.0 billion over fiveyears. Among other things, the legislation reduces Medicare skilled nursingfacility bad debt payments by 30 percent for those individuals who are notdually eligible for Medicare and Medicaid, and strengthens Medicaid assettransfer restrictions for persons seeking to qualify for Medicaid long-termcare coverage.

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

In addition, comprehensive reforms affecting thepayment for and availability of health care services have been proposed at thefederal and state levels and major reform proposals have been adopted bycertain states. Congress and state legislatures can be expected to continue toreview and assess alternative health care delivery systems and paymentmethodologies. Changes in the law, new interpretations of existing laws, orchanges in payment methodology may have a dramatic effect on the definition ofpermissible or impermissible activities, the relative costs associated withdoing business and the amount of reimbursement by the government and otherthird party payors. The DRA also gives states greater flexibility to expandaccess to home and community based services by allowing states to provide theseservices as an optional benefit without undergoing the waiver approval process.Moreover, the DRA includes a new demonstration to encourage states to providelong-term care services in a community setting to individuals who currentlyreceive Medicaid services in nursing homes. Together the provisions couldincrease state funding for home and community based services, while promptingstates to cut funding for nursing facilities and homes for persons withdisabilities. In light of continuing state Medicaid program reforms, budgetcuts, and regulatory initiatives, no assurance can be given that theimplementation of such regulations and reforms will not have a material adverseeffect on the financial condition or results of operations of our lesseesand/or borrowers which, in turn, could effect their ability to meet their contractualobligations to us. Also see *“Government Regulation”*beginningon page 5.

*OurBorrowers and Lessees Rely on Government and Third Party Reimbursement.*   Theability of our borrowers and lessees to generate revenue and profit determinesthe underlying value of that property to us. Revenues of our borrowers andlessees are generally derived from payments for patient care. Sources of suchpayments include the federal Medicare program, state Medicaid programs, privateinsurance carriers, health care service plans, health maintenanceorganizations, preferred provider arrangements, self-insured employers, as wellas the patients themselves. Also see *“Government Regulation”*beginningon page 5.

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*WeCould Incur More Debt.**  *We operatewith a policy of incurring debt when, in the opinion of our Directors, it isadvisable. We may incur additional debt by issuing debt securities in a publicoffering or in a private transaction. Accordingly, we could become more highlyleveraged. The degree of leverage could have important consequences tostockholders, including affecting our ability to obtain additional financing inthe future for working capital, capital expenditures, acquisitions, developmentor other general corporate purposes and making us more vulnerable to a downturnin business or the economy generally.

*WeCould Fail to Collect Amounts Due Under Our Straight-line Rent Receivable Asset.**  *Straight-line accounting requires us to calculate thetotal rent we will receive as a fixed amount over the life of the lease andrecognize that revenue evenly over that life. In a situation where a leasecalls for fixed rental increases during the life of the lease rental incomerecorded in the early years of a lease is higher than the actual cash rentreceived, which creates an asset on the balance sheet called deferred rentreceivable. At some point during the lease, depending on the rent levels andterms, this reverses and the cash rent payments received during the later yearsof the lease are higher than the rental income recognized, which reduces thedeferred rent receivable balance to zero by the end of the lease. Weperiodically assess the collectibility of the deferred rent receivable. Ifduring our assessment we determined that we were unlikely to collect a portionor all of the deferred rent receivable balance, we may record an impairmentcharge in current period earnings for the portion, up to its full value, thatwe estimate will not be recovered.

*OurAssets May be Subject to Impairment Charges.**  *We periodically but not less than quarterly evaluateour real estate investments and other assets for impairment indicators. Thejudgment regarding the existence of impairment indicators is based on factorssuch as market conditions, operator performance and legal structure. If wedetermine that a significant impairment has occurred, we would be required tomake an adjustment to the net carrying value of the asset, which could have amaterial adverse affect on our results of operations and a non-cash impact onfunds from operations in the period in which the write-off occurs.

*AFailure to Reinvest Cash Available to Us Could Adversely Affect Our FutureRevenues and Our Ability to Increase Dividends to Stockholders; There isConsiderable Competition in Our Market for Attractive Investments.*   From time to time, we will have cashavailable from (1) proceeds of sales of shares of securities, (2) proceedsfrom new debt issuances, (3) principal payments on our mortgages and otherinvestments, (4) sale of properties, and (5) funds from operations. We may reinvest this cash in health careinvestments in accordance with our investment policies, repay outstanding debtor invest in qualified short-term or long-term investments. We compete for realestate investments with a broad variety of potential investors. The competitionfor attractive investments negatively affects our ability to make timelyinvestments on acceptable terms. Delays in acquiring properties or making loanswill negatively impact revenues and perhaps our ability to increasedistributions to our stockholders.

*OurFailure to Qualify as a REIT Would Have Serious Adverse Consequences to OurStockholders.*   We intend to operate so as toqualify as a REIT under the Internal Revenue Code (the Code). We believe thatwe have been organized and have operated in a manner which would allow us toqualify 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 amanner which would not allow us to qualify as a REIT, or that our futureoperations could cause us to fail to qualify. Qualification as a REIT requiresus to satisfy numerous requirements (some on an annual and quarterly basis)established under highly technical and complex Code provisions for which thereare only limited judicial and administrative interpretations, and involves thedetermination of various factual matters and circumstances not entirely withinour control. For example, in order to qualify as a REIT, at least 95% of ourgross income in any year must be derived from qualifying sources, and we mustpay dividends to stockholders aggregating annually at least 90% (95% fortaxable years ending prior to January 1, 2001) of our REIT taxable income(determined without regard to the dividends paid deduction and by excludingcapital gains). Legislation, new regulations, administrative interpretations orcourt decisions could significantly change the tax laws with respect toqualification as a 

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REIT or the federal incometax consequences of such qualification. However, we are not aware of anypending tax legislation that would adversely affect our ability to operate as aREIT.

If we fail to qualify as a REIT in any taxable year,we will be subject to federal income tax (including any applicable alternativeminimum tax) on our taxable income at regular corporate rates. Unless we areentitled to relief under statutory provisions, we would be disqualified fromtreatment as a REIT for the four taxable years following the year during whichwe lost qualification. If we lose our REIT status, our net earnings availablefor investment or distribution to stockholders would be significantly reducedfor each of the years involved. In addition, we would no longer be required tomake distributions to stockholders.

*Ourreal estate investments are relatively illiquid.*   Realestate investments are relatively illiquid and, therefore, tend to limit ourability to vary our portfolio promptly in response to changes in economic orother conditions. All of our properties are “special purpose” properties thatcannot be readily converted to general residential, retail or office use.Health care facilities that participate in Medicare or Medicaid must meetextensive program requirements, including physical plant and operationalrequirements, which are revised from time to time. Such requirements mayinclude a duty to admit Medicare and Medicaid patients, limiting the ability ofthe facility to increase its private pay census beyond certain limits. Medicareand Medicaid facilities are regularly inspected to determine compliance, andmay be excluded from the programs—in some cases without a prior hearing—forfailure to meet program requirements. Transfers of operations of nursing homesand other healthcare-related facilities are subject to regulatory approvals notrequired for transfers of other types of commercial operations and other typesof real estate. Thus, if the operation of any of our properties becomesunprofitable due to competition, age of improvements or other factors such thatour lessee or mortgagor becomes unable to meet its obligations on the lease ormortgage loan, the liquidation value of the property may be substantially less,particularly relative to the amount owing on any related mortgage loan, thanwould be the case if the property were readily adaptable to other uses. Thereceipt of liquidation proceeds or the replacement of an operator that hasdefaulted on its lease or loan could be delayed by the approval process of anyfederal, state or local agency necessary for the transfer of the property orthe replacement of the operator with a new operator licensed to manage thefacility. In addition, certain significant expenditures associated with realestate investment, such as real estate taxes and maintenance costs, aregenerally not reduced when circumstances cause a reduction in income from theinvestment. Should such events occur, our income and cash flows from operationswould be adversely affected.

*OurRemedies May Be Limited When Mortgage Loans Default.**  *To the extent we invest in mortgage loans, suchmortgage loans may or may not be recourse obligations of the borrower andgenerally will not be insured or guaranteed by governmental agencies orotherwise. In the event of a default under such obligations, we may have toforeclose on the property underlying the mortgage or protect our interest byacquiring title to a property and thereafter make substantial improvements orrepairs in order to maximize the property’s investment potential. Borrowers maycontest enforcement of foreclosure or other remedies, seek bankruptcyprotection against such enforcement and/or bring claims for lender liability inresponse to actions to enforce mortgage obligations. If a borrower seeksbankruptcy protection, the Bankruptcy Court may impose an automatic stay thatwould preclude us from enforcing foreclosure or other remedies against theborrower. Relatively high “loan to value” ratios and declines in the value ofthe property may prevent us from realizing an amount equal to our mortgage loanupon foreclosure.

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*We are Subject to Risksand Liabilities in Connection with Properties Owned Through Limited LiabilityCompanies and Partnerships.*   We have ownershipinterests in limited liability companies and/or partnerships. We may makeadditional investments through these ventures in the future. Partnership orlimited liability company investments may involve risks such as the following:

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

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

·       ourpartners or co-members may be in a position to take action contrary to ourinstructions, requests, policies or objectives, including our policy withrespect to maintaining our qualification as a REIT; and

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

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

**Item 1B.**               UNRESOLVEDSTAFF COMMENTS

None.

**Item 2.**                        PROPERTIES

**Investment Portfolio**

At December 31, 2006, our “direct real estateinvestment portfolio” (properties that we own or on which we hold promissorynotes secured by first mortgages) consisted of investments in 121 skillednursing properties with 13,953 beds, 94 assisted living properties with4,449 units and two schools in 32 states. We had approximately$488.3 million (before accumulated depreciation of $102.1 million)invested in properties we own and lease to lessees and approximately$118.3 million invested in mortgage loans (before allowance for doubtfulaccounts of $1.3 million). Subsequent to December 31, 2006, we sold aclosed, previously impaired skilled nursing property to a third party for$0.2 million. As aresult of the sale, we will recognize a gain of $0.1 million in 2007.

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

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

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

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

Thefollowing table sets forth certain information regarding our owned propertiesas of December 31, 2006 (*dollar amountsin thousands*):

| **Location** | ** ** | ** ** | ** ** | **No. of  SNFs** | ** ** | **No. of  ALFs** | ** ** | **No. of  Schools** | ** ** | **No. of  Beds/Units(1)** | ** ** | **Encumbrances** | ** ** | **Lease  Term(2)** | ** ** | **Current  Investment** | ** ** |
|--------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|--------------------------|------------|--------------------------------|------------|------------------|------------|--------------------|------------|-------------------------|------------|
| Alabama      |       |       | 3          |                  |       |                  | 1          |                     |       |                           | —     |             |       |               | 458        |                    |       |   | $ | — |   |   |   | 81 |   |   |   | $ | 16,539 |   |   |
| Arizona      |       |       | 5          |                  |       |                  | 2          |                     |       |                           | —     |             |       |               | 1,029      |                    |       |   | — |   |   |   | 156 |   |   |   | 41,053 |   |   |
| California   |       |       | 1          |                  |       |                  | 2          |                     |       |                           | —     |             |       |               | 343        |                    |       |   | 16,712 |   |   |   | 62 |   |   |   | 29,305 |   |   |
| Colorado     |       |       | 4          |                  |       |                  | 6          |                     |       |                           | —     |             |       |               | 562        |                    |       |   | 6,294 |   |   |   | 181 |   |   |   | 27,401 |   |   |
| Florida      |       |       | 3          |                  |       |                  | 6          |                     |       |                           | —     |             |       |               | 776        |                    |       |   | 2,130 |   |   |   | 161 |   |   |   | 32,831 |   |   |
| Georgia      |       |       | 2          |                  |       |                  | 1          |                     |       |                           | —     |             |       |               | 292        |                    |       |   | — |   |   |   | 58 |   |   |   | 6,550 |   |   |
| Idaho        |       |       | —     |                  |       |                  | 4          |                     |       |                           | —     |             |       |               | 148        |                    |       |   | — |   |   |   | 96 |   |   |   | 9,756 |   |   |
| Indiana      |       |       | —     |                  |       |                  | 2          |                     |       |                           | —     |             |       |               | 78         |                    |       |   | — |   |   |   | 96 |   |   |   | 5,070 |   |   |
| Iowa         |       |       | 7          |                  |       |                  | 1          |                     |       |                           | —     |             |       |               | 645        |                    |       |   | — |   |   |   | 168 |   |   |   | 17,087 |   |   |
| Kansas       |       |       | 3          |                  |       |                  | 4          |                     |       |                           | —     |             |       |               | 398        |                    |       |   | — |   |   |   | 172 |   |   |   | 17,313 |   |   |
| Nebraska     |       |       | —     |                  |       |                  | 4          |                     |       |                           | —     |             |       |               | 156        |                    |       |   | — |   |   |   | 96 |   |   |   | 9,332 |   |   |
| New Jersey   |       |       | —     |                  |       |                  | 1          |                     |       |                           | 1          |             |       |               | 39         |                    |       |   | — |   |   |   | 111 |   |   |   | 12,195 |   |   |
| New Mexico   |       |       | 7          |                  |       |                  | —     |                     |       |                           | —     |             |       |               | 860        |                    |       |   | — |   |   |   | 149 |   |   |   | 48,503 |   |   |
| N. Carolina  |       |       | —     |                  |       |                  | 5          |                     |       |                           | —     |             |       |               | 210        |                    |       |   | — |   |   |   | 168 |   |   |   | 13,096 |   |   |
| Ohio         |       |       | 4          |                  |       |                  | 11         |                     |       |                           | —     |             |       |               | 683        |                    |       |   | 14,814 |   |   |   | 124 |   |   |   | 53,210 |   |   |
| Oklahoma     |       |       | —     |                  |       |                  | 6          |                     |       |                           | —     |             |       |               | 221        |                    |       |   | 4,252 |   |   |   | 168 |   |   |   | 12,315 |   |   |
| Oregon       |       |       | 1          |                  |       |                  | 3          |                     |       |                           | —     |             |       |               | 218        |                    |       |   | — |   |   |   | 101 |   |   |   | 10,652 |   |   |
| Pennsylvania |       |       | —     |                  |       |                  | 1          |                     |       |                           | —     |             |       |               | 69         |                    |       |   | — |   |   |   | 136 |   |   |   | 8,327 |   |   |
| S. Carolina  |       |       | —     |                  |       |                  | 3          |                     |       |                           | —     |             |       |               | 128        |                    |       |   | — |   |   |   | 168 |   |   |   | 7,610 |   |   |
| Tennessee    |       |       | 3          |                  |       |                  | —     |                     |       |                           | —     |             |       |               | 201        |                    |       |   | — |   |   |   | 142 |   |   |   | 3,866 |   |   |
| Texas(5)     |       |       | 16         |                  |       |                  | 13         |                     |       |                           | —     |             |       |               | 2,660      |                    |       |   | 4,064 |   |   |   | 147 |   |   |   | 67,904 |   |   |
| Virginia     |       |       | 3          |                  |       |                  | —     |                     |       |                           | —     |             |       |               | 443        |                    |       |   | — |   |   |   | 174 |   |   |   | 12,168 |   |   |
| Washington   |       |       | 1          |                  |       |                  | 8          |                     |       |                           | —     |             |       |               | 431        |                    |       |   | 5,545 |   |   |   | 98 |   |   |   | 26,204 |   |   |
| TOTAL        |       |       | 63         |                  |       |                  | 84         |                     |       |                           | 1          |             |       |               | 11,048     |                    |       |   | $  | 53,811 | (3) |   |   |   |   |   |   | $  | 488,287 | (4) |   |

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1.                 See *Item 1. Business General—Owned Properties* for discussion ofbed/unit count.

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

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

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

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

*MortgageLoans.**  *At December 31,2006, we had 58 mortgage loans secured by first mortgages on 58 skilled nursingproperties with a total of 6,649 beds, 10 assisted living properties with 705units and one school located in 19 states. See*Item 8. FINANCIAL STATEMENTS—Note6. Real Estate Investments* for further description.

Thefollowing table sets forth certain information regarding our mortgage loans asof December 31, 2006 (*dollar amounts inthousands*):

| **Location** | ** ** | ** ** | ** ** | **No. of  SNFs** | ** ** | **No. of  ALFs** | ** ** | **No. of  Schools** | ** ** | **No. of  Beds/  Units(3)** | ** ** | **Interest  Rate %** | ** ** | **Average  Months to  Maturity** | ** ** | **Face Amount  of Mortgage  Loans** | ** ** | **Current Amount  of Mortgage  Loans** | ** ** | **Current  Annual Debt  Service(1)** | ** ** |
|--------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|--------------------------|------------|----------------------------------|------------|---------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------|------------|
| Alabama      |       |       | 1          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 120        |                                          |       | 9.63%                                            |       |                                      | 39         |   |   |   | $ | 3,788 |   |   |   | $ | 3,730 |   |   |   | $ | 402 |   |   |
| Arkansas     |       |       | 1          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 174        |                                          |       | 11.45                                            |       |                                      | 51         |   |   |   | 2,000 |   |   |   | 1,436 |   |   |   | 251 |   |   |
| California   |       |       | 8          |                  |       |                  | 1          |                     |       |                             | —     |                      |       |                                  | 1,177      |                                          |       | 9.85-12.10                                       |       |                                      | 96         |   |   |   | 20,016 |   |   |   | 15,132 |   |   |   | 2,727 |   |   |
| Florida      |       |       | 5          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 537        |                                          |       | 11.20-13.13                                      |       |                                      | 21         |   |   |   | 13,860 |   |   |   | 12,864 |   |   |   | 1,907 |   |   |
| Georgia      |       |       | 4          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 419        |                                          |       | 10.13-12.17                                      |       |                                      | 34         |   |   |   | 10,900 |   |   |   | 10,332 |   |   |   | 1,218 |   |   |
| Iowa         |       |       | 1          |                  |       |                  | 1          |                     |       |                             | —     |                      |       |                                  | 104        |                                          |       | 12.12-12.64                                      |       |                                      | 15         |   |   |   | 5,600 |   |   |   | 5,120 |   |   |   | 714 |   |   |
| Louisiana    |       |       | 1          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 127        |                                          |       | 12.02                                            |       |                                      | 119        |   |   |   | 1,600 |   |   |   | 1,234 |   |   |   | 212 |   |   |
| Michigan     |       |       | 1          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 196        |                                          |       | 12.13                                            |       |                                      | 47         |   |   |   | 3,000 |   |   |   | 2,122 |   |   |   | 392 |   |   |
| Minnesota    |       |       | —     |                  |       |                  | —     |                     |       |                             | 1          |                      |       |                                  | —     |                                          |       | 6.64                                             |       |                                      | 150        |   |   |   | 3,751 |   |   |   | 3,751 |   |   |   | 249 |   |   |
| Missouri     |       |       | 2          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 190        |                                          |       | 9.88-10.35                                       |       |                                      | 75         |   |   |   | 3,000 |   |   |   | 2,488 |   |   |   | 339 |   |   |
| Montana      |       |       | 2          |                  |       |                  | 1          |                     |       |                             | —     |                      |       |                                  | 197        |                                          |       | 12.12-12.89                                      |       |                                      | 29         |   |   |   | 7,946 |   |   |   | 7,195 |   |   |   | 1,015 |   |   |
| Nebraska     |       |       | 1          |                  |       |                  | 4          |                     |       |                             | —     |                      |       |                                  | 245        |                                          |       | 11.03-12.64                                      |       |                                      | 18         |   |   |   | 12,111 |   |   |   | 11,272 |   |   |   | 1,524 |   |   |
| Nevada       |       |       | 1          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 100        |                                          |       | 11.63                                            |       |                                      | 43         |   |   |   | 1,200 |   |   |   | 827 |   |   |   | 152 |   |   |
| Oklahoma     |       |       | 2          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 273        |                                          |       | 12.15                                            |       |                                      | 80         |   |   |   | 2,600 |   |   |   | 1,382 |   |   |   | 243 |   |   |
| S. Dakota    |       |       | —     |                  |       |                  | 1          |                     |       |                             | —     |                      |       |                                  | 34         |                                          |       | 12.64                                            |       |                                      | 27         |   |   |   | 2,346 |   |   |   | 2,242 |   |   |   | 301 |   |   |
| Tennessee    |       |       | 2          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 190        |                                          |       | 9.85-10.38                                       |       |                                      | 74         |   |   |   | 5,675 |   |   |   | 4,686 |   |   |   | 656 |   |   |
| Texas        |       |       | 23         |                  |       |                  | 2          |                     |       |                             | —     |                      |       |                                  | 2,981      |                                          |       | 10.05-12.95                                      |       |                                      | 59         |   |   |   | 42,264 |   |   |   | 29,013 |   |   |   | 5,190 |   |   |
| Washington   |       |       | 2          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 175        |                                          |       | 12.40-12.75                                      |       |                                      | 68         |   |   |   | 2,600 |   |   |   | 1,721 |   |   |   | 532 |   |   |
| Wisconsin    |       |       | 1          |                  |       |                  | —     |                     |       |                             | —     |                      |       |                                  | 115        |                                          |       | 11.00                                            |       |                                      | 122        |   |   |   | 2,200 |   |   |   | 1,725 |   |   |   | 272 |   |   |
| TOTAL        |       |       | 58         |                  |       |                  | 10         |                     |       |                             | 1          |                      |       |                                  | 7,354      |                                          |       |                                             |       |                                      |       |   |   |   | $ | 146,457 |   |   |   | $ | 118,272 | (2) |   |   | $ | 18,296 |   |   |

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1.                  Includes principal and interest payments.

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

3.                  See *Item 1. Business General—OwnedProperties* for discussion of bed/unit count.

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

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affiliateof the borrower. The terms of the mortgage loans generally impose a premiumupon prepayment of the loans depending upon the period in which the prepaymentoccurs, whether such prepayment was permitted or required, and certain otherconditions such as upon the sale of the property under a pre-existing purchaseoption, destruction or condemnation, or other circumstances as approved by us. Oncertain loans, such prepayment amount is based upon a percentage of the thenoutstanding balance of the loan, usually declining ratably each year. For otherloans, the prepayment premium is based on a yield maintenance formula. Inaddition to a lien on the mortgaged property, the loans are generally securedby certain non-real estate assets of the properties and contain certain othersecurity provisions in the form of letters of credit, pledged collateralaccounts, security deposits, cross-default and cross-collateralization featuresand certain guarantees.

**Item 3.**                        LEGALPROCEEDINGS

We are a party from timeto time to various general and professional liability claims and lawsuitsasserted against the lessees or borrowers of our properties, which in ouropinion are not singularly or in the aggregate material to our results of operations or financial condition. Thesetypes of claims and lawsuits may include matters involving general orprofessional liability, which we believe under applicable legal principles arenot our responsibility as a non-possessory landlord or mortgage holder. Webelieve that these matters are the responsibility of our lessees and borrowerspursuant to general legal principles and pursuant to insurance andindemnification provisions in the applicable leases or mortgages. We intend tocontinue to vigorously defend such claims.

**Item 4.**                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

**Item 5.**                        MARKETFOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

***Market Information***

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

| ** **     | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 23.51      |     | $          | 20.78 |   | $ | 20.00 |   | $ | 16.87 |   |
| Second Quarter |       | $        | 23.44      |     | $          | 19.99 |   | $ | 21.95 |   | $ | 16.50 |   |
| Third Quarter  |       | $        | 25.00      |     | $          | 20.77 |   | $ | 23.92 |   | $ | 19.26 |   |
| Fourth Quarter |       | $        | 27.99      |     | $          | 23.84 |   | $ | 22.23 |   | $ | 19.30 |   |

 

***Holders of Record***

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

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***Dividend Information***

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

| ** **     | ** ** | **Declared** | ** ** | **Paid** | ** ** |
|----------------|------------|--------------|------------|----------|------------|
| ** **     | ** ** | **2006**     | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| First Quarter  |       | $            | 0.360      |     | $          | 0.300 |   | $ | 0.360 |   | $ | 0.300 |   |
| Second Quarter |       | $            | —     |     | $          | 0.660 |   | $ | 0.360 |   | $ | 0.330 |   |
| Third Quarter  |       | $            | 0.360      |     | $          | 0.330 |   | $ | 0.360 |   | $ | 0.330 |   |
| Fourth Quarter |       | $            | 0.360      |     | $          | 0.360 |   | $ | 0.360 |   | $ | 0.330 |   |
|           |       | $            | 1.080      |     | $          | 1.650 |   | $ | 1.440 |   | $ | 1.290 |   |

 

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

***Securities Authorized for Issuance under EquityCompensation Plans***

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

**EquityCompensation Plan Information**

| **Plan Category**                                      | ** ** | ** ** | ** ** | **(a)  Number of securities to  be issued upon exercise  of outstanding options  warrants and rights** | ** ** | **(b)  Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **(c)  Number of securities remaining  available for future issuance  under equity compensation  plans (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |       | 64,000     |                                                                                                                                                     |       |                                                                                                             | $          | 10.33                                                                                                                                                                                                                     |       |   |   | 577,850 |   |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                                                     |       |                                                                                                             | —     |                                                                                                                                                                                                                      |       |   | — |   |   |
| Total                                                       |       |       | 64,000     |                                                                                                                                                     |       |                                                                                                             | $          | 10.33                                                                                                                                                                                                                     |       |   |   | 577,850 |   |   |

 

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***Stock Performance Graph***

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

**Total Return StockPerformance**

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

The stock performance depicted in the above graph isnot necessarily indicative of future performance. The stock performance graphand compensation committee report shall not be deemed incorporated by referenceinto any filing by us under the Securities Act of 1933 or the SecuritiesExchange Act of 1934 except to the extent that we specifically incorporate suchinformation by reference, and shall not otherwise be deemed filed under suchActs.

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**Item 6.**                        SELECTEDFINANCIAL INFORMATION

Thefollowing table of selected financial information should be read in conjunctionwith our financial statements and related notes thereto included elsewhere inthis Annual Report on Form 10-K.

| ** **                                                                                | ** ** | **2006**                                                              | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **Operating Information:**                                                                |       |                                                                  |       |       |       |       |       |       |       |       |       |
| Total revenues                                                                            |       | $                                                                     | 73,163     |       | $          | 72,408     |       | $          | 62,177     |       | $          | 58,825 |   | $ | 63,056 |   |
| Income from  continuing operations                                                        |       | 45,485                                                                |       | 50,637     |       | 32,252     |       | 17,106     |       | 16,643     |       |
| Preferred stock  dividends                                                                |       | (17,157                                                               | )          | (17,343    | )          | (17,356    | )          | (16,596    | )          | (15,042    | )          |
| Preferred stock  redemption charge                                                        |       | —                                                                |       | —     |       | (4,029     | )          | (1,241     | )          | —     |       |
| Net income  available to common stockholders                                              |       | 61,631                                                                |       | 35,366     |       | 15,003     |       | 6,482      |       | 16,761     |       |
| **Per  share Information:**                                                               |       |                                                                  |       |       |       |       |       |       |       |       |       |
| Net Income per Common  Share from Continuing Operations Net of Preferred Stock Dividends: |       |                                                                  |       |       |       |       |       |       |       |       |       |
| Basic                                                                                     |       | $                                                                     | 1.21       |       | $          | 1.49       |       | $          | 0.56       |       | $          | 0.08 |   | $ | 0.03 |   |
| Diluted                                                                                   |       | $                                                                     | 1.21       |       | $          | 1.47       |       | $          | 0.56       |       | $          | 0.08 |   | $ | 0.03 |   |
| Net Income Per Common  Share Available to Common Stockholders:                       |       |                                                                  |       |       |       |       |       |       |       |       |       |
| Basic                                                                                     |       | $                                                                     | 2.64       |       | $          | 1.58       |       | $          | 0.77       |       | $          | 0.36 |   | $ | 0.91 |   |
| Diluted                                                                                   |       | $                                                                     | 2.51       |       | $          | 1.56       |       | $          | 0.77       |       | $          | 0.36 |   | $ | 0.91 |   |
| Common Stock  Distributions declared                                                      |       | $                                                                     | 1.08       |       | $          | 1.65       |       | $          | 1.125      |       | $          | 0.65 |   | $ | 0.40 |   |
| Common Stock  Distributions paid                                                          |       | $                                                                     | 1.44       |       | $          | 1.29       |       | $          | 1.125      |       | $          | 0.65 |   | $ | 0.40 |   |
| **Balance  Sheet Information:**                                                           | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                                                              |       | $                                                                     | 567,767    |       | $          | 585,271    |       | $          | 547,880    |       | $          | 574,924 |   | $ | 599,925 |   |
| Total debt(1)                                                                             |       | 53,811                                                                |       | 92,361     |       | 96,764     |       | 149,765    |       | 223,787    |       |

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(1)          Includesbank borrowings, mortgage loans payable, bonds payable and capital leaseobligations and senior participation payable

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**Item 7.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Executive Overview**

***Business***

LTCProperties, Inc. a self-administered, health care real estate investmenttrust (or REIT) commenced operations in 1992. We invest primarily in long-termcare and other health care related properties through mortgage loans, propertylease transactions and other investments. The following table summarizes ourportfolio as of December 31, 2006:

| **Type of Property** | ** ** | ** ** | ** ** | **Gross  Investments  (in thousands)** | ** ** | **Percentage of  Investments** | ** ** | **For the  twelve  months ended  12/31/06  Revenues(2)  (in thousands)** | ** ** | **Percentage  of Revenues** | ** ** | **Number of  Properties** | ** ** | **Number of  Beds/Units(4)** | ** ** | **Investment  per Bed/Unit  (in thousands)** | ** ** | **Number of   Operators(1)** | ** ** | **Number   of  States(1)** | ** ** |
|--------------------------------|------------|------------|------------|---------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| Assisted Living Properties     |       |       | $          | 274,052                                     | (3)        |                                |       | 45.2                                                                                    | %          |                             |       | $                              | 31,672     |                              |       |                                                   | 46.2       | %                                      |       |                            | 94         |   |   |   | 4,449 |   |   |   | $ | 61.60 |   |   |   | 9 |   |   |   | 22 |   |   |
| Skilled Nursing Properties     |       |       | 319,487    |                                        |       |                                | 52.6       | %                                                                                       |       |                             | 35,411     |                           |       |                              | 51.7       | %                                                      |       |                                   | 121        |                            |       |   | 13,953 |   |   |   | 22.90 |   |   |   | 46 |   |   |   | 24 |   |   |
| Schools                        |       |       | 13,020     |                                        |       |                                | 2.2        | %                                                                                       |       |                             | 1,428      |                           |       |                              | 2.1        | %                                                      |       |                                   | 2          |                            |       |   | N/A |   |   |   | N/A |   |   |   | 2 |   |   |   | 2 |   |   |
| Totals                         |       |       | $          | 606,559                                     |       |                                |       | 100.0                                                                                   | %          |                             |       | $                              | 68,511     |                              |       |                                                   | 100.0      | %                                      |       |                            | 217        |   |   |   | 18,402 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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(1)              We have investments in 32 states leased or mortgaged to54 different operators.

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

(3)              In January 2006, we sold four assisted livingproperties operated by Sunwest with a total of 431 units to an entity formed bythe principals of Sunwest for $58.5 million. We received$54.5 million in proceeds after paying approximately $3.8 million of8.75% State of Oregon bond obligations related to one of the properties sold. Asa result of the sale, we recognized a gain of $31.9 million in 2006.

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

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

Substantially all of our revenues and sources of cashflows from operations are derived from operating lease rentals and interestearned on outstanding loans receivable. Our investments in mortgage loans andowned properties represent our primary source of liquidity to funddistributions and are dependent upon the performance of the operators on theirlease and loan obligations and the rates earned thereon. To the extent that theoperators experience operating difficulties and are unable to generatesufficient cash to make payments to us, there could be a material adverseimpact on our consolidated results of operations, liquidity and/or financialcondition. To mitigate this risk, we monitor our investments through a varietyof methods determined by the type of health care facility and operator. Ourmonitoring process includes review of financial statements for each facility,periodic review of operator credit, scheduled property inspections and reviewof covenant compliance relating to real estate taxes and insurance.

In addition to our monitoring and research efforts, wealso structure our investments to help mitigate payment risk. We typicallyinvest in or finance up to 90 percent of the stabilized appraised value of aproperty. Operating leases and loans are normally credit enhanced by guarantiesand/or letters of credit. In addition, operating leases are typicallystructured as master leases and loans are generally cross-defaulted 

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and cross-collateralizedwith other loans, operating leases or agreements between us and the operatorand its affiliates.

For the twelve months ended December 31, 2006, rentalincome and interest income represented 72% and 21%, respectively, of totalgross revenues. Our lease structure most often contains fixed annual rentalescalations, which are generally recognized on a straight-line basis over theminimum lease period. Certain leases have annual rental escalations that arecontingent upon changes in the Consumer Price Index and/or changes in the grossoperating revenues of the property. This revenue is not recognized until theappropriate contingencies have been resolved. This lease structure initiallygenerates lower revenues and net income but enables us to generate additionalgrowth and minimized non-cash straight-line rent over time.

Depending upon theavailability and cost of external capital, we anticipate making additionalinvestments in health care related properties. New investments are generallyfunded from invested cash on hand and temporary borrowings under our unsecuredline of credit and internally generated cash flows. Our investments generateinternal cash from rent and interest receipts and principal payments onmortgage loans receivable. Permanent financing for future investments, whichreplaces funds drawn under our unsecured line of credit, is expected to beprovided through a combination of public and private offerings of debt andequity securities and the incurrence of secured debt. We believe our liquidityand various sources of available capital are sufficient to fund operations,meet debt service obligations (both principal and interest), make dividenddistributions and finance future investments.

***Key Transactions***

During 2006, we sold fourassisted living properties with a total of 431 units and one 174-bedskilled nursing property. We recognized a gain of $32.6 million on the twotransactions and received total net cash proceeds of $54.0 million afterpaying $3.8 million of 8.75% State of Oregon bond obligations related toone of the properties sold. Also during 2006 we purchased five skilled nursingproperties with a total of 373 beds for $13.5 million in cash. One of theproperties was acquired in a like-kind exchange transaction with a fair marketvalue of $3.4 million.

***Key Performance Indicators, Trends and Uncertainties***

We utilize several key performance indicators toevaluate the various aspects of our business. These indicators are discussedbelow and relate to concentration risk and credit strength. Management usesthese key performance indicators to facilitate internal and externalcomparisons to our historical operating results in making operating decisionsand for business planning purposes.

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

| ** **                      | ** ** | **Period Ended**                               | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **12/31/06**                                        | ** ** | **9/30/06** | ** ** | **6/30/06** | ** ** | **3/31/06** | ** ** | **12/31/05** | ** ** |
| ** **                      | ** ** | **(gross investment, in thousands)** | ** ** |
| Asset mix:                      |       |                                                |       |   |   |   |   |   |   |   |   |
| Real property                   |       | $                                                   | 488,287    |   | $ | 485,460 |   | $ | 476,541 |   | $ | 468,435 |   | $ | 500,723 |   |
| Loans receivable                |       | 118,272                                             |       | 119,523 |   | 127,192 |   | 133,264 |   | 149,332 |   |
| Investment asset mix:           |       |                                                |       |   |   |   |   |   |   |   |   |
| Assisted living properties      |       | $                                                   | 274,052    |   | $ | 273,711 |   | $ | 276,720 |   | $ | 280,748 |   | $ | 313,628 |   |
| Skilled nursing properties      |       | 319,487                                             |       | 318,252 |   | 313,993 |   | 307,931 |   | 323,407 |   |
| School                          |       | 13,020                                              |       | 13,020 |   | 13,020 |   | 13,020 |   | 13,020 |   |
| Operator asset mix:             |       |                                                |       |   |   |   |   |   |   |   |   |
| Alterra                         |       | $                                                   | 84,210     |   | $ | 84,194 |   | $ | 84,194 |   | $ | 84,194 |   | $ | 84,194 |   |
| Preferred Care, Inc.(2)    |       | 80,506                                              |       | 72,422 |   | 71,969 |   | 71,550 |   | 71,580 |   |
| Extendicare REIT & ALC |       | 88,034                                              |       | 88,034 |   | 88,034 |   | 88,034 |   | 88,034 |   |
| Sunwest(1)                      |       | —                                              |       | — |   | — |   | — |   | 64,803 |   |
| Remaining operators             |       | 353,809                                             |       | 360,333 |   | 359,536 |   | 357,921 |   | 341,444 |   |
| Geographic asset mix:           |       |                                                |       |   |   |   |   |   |   |   |   |
| California                      |       | $                                                   | 44,439     |   | $ | 44,697 |   | $ | 44,950 |   | $ | 45,198 |   | $ | 54,185 |   |
| Florida                         |       | 45,693                                              |       | 45,204 |   | 48,032 |   | 47,536 |   | 53,935 |   |
| Ohio                            |       | 53,210                                              |       | 52,838 |   | 52,488 |   | 45,939 |   | 50,511 |   |
| Texas                           |       | 96,947                                              |       | 97,339 |   | 97,636 |   | 96,952 |   | 98,781 |   |
| Washington                      |       | 27,925                                              |       | 28,002 |   | 20,952 |   | 21,024 |   | 21,094 |   |
| Remaining states                |       | 338,345                                             |       | 336,903 |   | 426,542 |   | 345,050 |   | 371,549 |   |

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

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

*Credit Strength.**  *We measure our credit strength both in terms ofleverage ratios and coverage ratios. Our leverage ratios include debt to bookcapitalization and debt to market capitalization. The leverage ratios indicatehow much of our balance sheet capitalization is related to long-term debt. Ourcoverage 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 

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based on earnings before interest, taxes, depreciationand amortization. Leverage ratios and coverage ratios are widely used byinvestors, analysts and rating agencies in the valuation, comparison, ratingand investment recommendations of companies. The following table reflects therecent historical trends for our credit strength measures:

| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **12/31/06**                     | ** ** | **9/30/06** | ** ** | **6/30/06** | ** ** | **3/31/06** | ** ** | **12/31/05** | ** ** |
| Debt to book  capitalization ratio   |       |                             | 9.7        | % |   |   | 11.6 | % |   |   | 12.8 | % |   |   | 13.0 | % |   |   | 16.9 | % |   |
| Debt to market  capitalization ratio |       |                             | 5.9        | % |   |   | 7.7 | % |   |   | 9.1 | % |   |   | 8.8 | % |   |   | 11.9 | % |   |
| Interest coverage  ratio             |       |                             | 10.4       | x |   |   | 8.9 | x(1) |   |   | 9.7 | x |   |   | 9.1 | x |   |   | 8.7 | x |   |
| Fixed charge coverage  ratio         |       |                             | 2.8        | x |   |   | 2.6 | x(1) |   |   | 2.8 | x |   |   | 2.8 | x |   |   | 2.7 | x |   |

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

We evaluate our keyperformance indicators in conjunction with current expectations to determine ifhistorical trends are indicative of future results. Our expected results maynot be achieved and actual results may differ materially from our expectations.This may be a result of various factors, including, but not limited to

·       Thestatus of the economy;

·       Thestatus of capital markets, including prevailing interest rates;

·       Compliancewith and changes to regulations and payment policies within the health careindustry;

·       Changesin financing terms;

·       Competitionwithin the health care and senior housing industries; and

·       Changesin federal, state and local legislation.

Management regularlymonitors the economic and other factors listed above. We develop strategic andtactical plans designed to improve performance and maximize our competitiveposition. Our ability to achieve our financial objectives is dependent upon ourability to effectively execute these plans and to appropriately respond toemerging economic and company-specific trends.

**Operating Results**

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

Revenues for the year ended December 31, 2006,were $73.2 million compared to $72.4 million for the same period in2005. Rental income increased $2.6 million primarily as a result ofproperties acquired in 2005 and 2006 ($3.2 million), new leases and rentalincreases provided for in existing lease agreements ($1.6 million) andincrease in straight-line rental income ($1.5 million) partially offset bythe receipt of a note payoff in 2005 as described in *Item 8.FINANCIAL STATEMENTS—Note 8. Notes Receivable*, part of which relatedto past due rents that were not accrued ($3.7 million). Same store rentalincome, (rental income from properties owned for both years ended December 31,2006 and 2005 and excluding straight-line rental income) decreased$2.1 million due to the receipt in 2005 of past due rents that were notpreviously accrued ($3.7 million) partially offset by rental increasesprovided for in existing lease agreements ($1.6 million).

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

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

Interest and other income increased $0.7 millionin 2006 from the prior year primarily as a result of new notes, temporaryinvestments income resulting from higher cash balances, and interest anddividend income from our investment in marketable securities, partially offsetby the effects of a note payoff in 2005, as described in *Item 8.FINANCIAL STATEMENTS—Note 8. Notes Receivable*, part of which relatedto past due interest on the note that was not accrued, and interest received in2005 on notes that paid off in 2005.

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

Depreciation and amortization expense for 2006increased $1.2 million from the prior year due to acquisitions, theconversions of mortgage loans into owned properties, and the renovationprojects on owned properties. See*Item 8. FINANCIALSTATEMENTS—Note 6. Real Estate Investments*.

Legal expenses during 2006 were comparable to 2005.

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

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

Minority interest expense was comparable for 2006 and2005.

For the year ended December 31, 2006, net incomefrom discontinued operations was $33.3 million. During 2006 we sold fourassisted living properties in various states with a total of 431 units and one174-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 theproperties that were sold in 2006. For the year ended December 31, 2005,net income from discontinued operations was $2.1 million. During 2005 we sold a closed skilled nursing propertylocated in Texas and a 53-bed skilled nursing property in New Mexico. Werealized a $1.5 million loss on the two transactions. During 2005 werealized $3.6 million in income from discontinued operations related toproperties that were sold in 2005 and 2006. This reclassification wasmade in accordance with SFAS No. 144 which requires that the financialresults of properties meeting certain criteria be reported on a separate lineitem called “Discontinued Operations.”

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

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

Revenues for the year ended December 31, 2005,were $72.4 million compared to $62.2 million for the same period in2004. Rental income increased $7.9 million primarily as a result ofreceiving the note payoff, as described in *Item 8. FINANCIALSTATEMENTS*—*Note 8. Notes Receivable*,part of which related to past due rents that were not accrued($3.7 million), the receipt of rent from properties acquired in 2004 and2005 ($1.4 million), new leases and rental increases provided for inexisting lease agreements ($2.4 million) and an increase in straight-linerental income ($0.4 million). Same store rental income, (rental incomefrom properties owned for both years ended December 31, 2005 and 2004 andexcluding straight-line rental income) increased $6.0 million due to theeffect of receiving the note payoff, part of which related to past due rentsthat were not accrued ($3.7 million) and rental increases provided for inexisting lease agreements ($2.3 million).

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

Interest income from REMIC Certificates decreased $3.9 millionin 2005 due to the dissolution of the 1994-1 and 1996-1 REMICPools, the amortization of our remaining REMIC Certificates, the early payoffof certain mortgage loans underlying our investment in REMIC Certificates, andthe effective repurchase of the mortgage loans in the remaining REMIC pool asdiscussed in *Item 8. FINANCIAL STATEMENTS*—*Note 6. Real Estate Investments*.

Interest and other income increased $0.9 millionin 2005 from the prior year primarily as a result of receiving the note payoff,as described in *Item 8. FINANCIAL STATEMENTS*—*Note 8. Notes Receivable*, part of which related to past dueinterest on the note that was not accrued ($2.3 million), partially offsetby conversions of notes receivable to mortgage loans, a reduction in loan modificationand extension fees received from the REMIC Trust as per our subservicingagreement and a decrease in interest income from our investment in AssistedLiving Concepts, Inc. Senior and Junior Notes that were redeemed in thefirst quarter of 2004.

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

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

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

Legal expenses during 2005 were comparable to 2004.

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

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

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

For the year ended December 31, 2005, net incomefrom discontinued operations was $2.1 million. During 2005, we sold aclosed skilled nursing property located in Texas to a third party who wanted touse the property to house victims of hurricane Katrina. As part of our company’shurricane relief efforts, we sold the property for $1,000 and in addition,donated $50,000 in cash to the American Red Cross hurricane Katrina relief fund.As a result of the sale, we recognized a loss of $0.8 million. Also, wesold a skilled nursing property with 53 beds in New Mexico for$0.5 million in cash and recognized a loss of $0.7 million. During2005 we realized $3.6 million in income from discontinued operationsrelated to properties that were sold in 2005 and 2006. This reclassificationwas made in accordance with SFAS No. 144 which requires that the financialresults of properties meeting certain criteria be reported on a separate lineitem called “Discontinued Operations” for all periods presented.

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

We did not redeem any of our preferred stock during2005. During 2004, we redeemed all of our outstanding Series A and Series Bpreferred stock. Accordingly, we recognized a $4.0 million preferred stockredemption charge related to the original issue costs of the preferred stockredeemed. Preferred stock dividends in 2005 were comparable to 2004.

Net income available tocommon stockholders for the year ended December 31, 2005, was$35.4 million compared to $15.0 million for the year ended December 31,2004. This increase is due primarily to an increase in rental income andnon-operating income and a decrease in interest expense and preferred stockredemption charges as previously discussed. Excluding the effects of the notepayoff, net income available to common stockholders was $23.7 million in2005. Excluding the effects of the preferred stock redemption charge, netincome available to common stockholders was $19.0 million in 2004.

**Critical AccountingPolicies**

Preparation of the consolidated financial statementsin conformity with generally accepted accounting principles requires managementto make estimates and assumptions that affect the amounts reported in theconsolidated financial statements and accompanying notes. Actual results coulddiffer from those estimates. See*Item 8. FINANCIALSTATEMENTS—Note 2. Summary ofSignificant Accounting Policies* for a description of the significantaccounting policies we followed in preparing the consolidated financialstatements for all periods presented. We have identified the followingsignificant accounting policies as critical accounting policies in that theyrequire significant judgment and estimates and have the most impact onfinancial reporting.

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

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In accordance with SFAS No. 114 *“Accounting by Creditors for Impairment of a Loan”* weevaluate the carrying values of mortgage loans receivable on an individualbasis. Management periodically evaluates the realizability of future cash flowsfrom the mortgages when events or circumstances, such as the non-receipt ofprincipal and interest payments and/or significant deterioration of thefinancial condition of the borrower, indicate that the carrying amount of the mortgageloan receivable may not be recoverable. An impairment charge is recognized incurrent period earnings and is calculated as the difference between thecarrying amount of the mortgage loan receivable and the discounted cash flowsexpected to be received, or if foreclosure is probable, the fair value of thecollateral securing the mortgage.

*MortgageLoans Receivable.*   Mortgage loans receivable arerecorded on an amortized cost basis. We maintain a valuation allowance basedupon the expected collectibility of our mortgage loans receivable. Changes inthe valuation allowance are included in current period earnings.

*RevenueRecognition.**  *Interestincome on mortgage loans and REMIC Certificates is recognized using theeffective interest method. We follow a policy related to mortgage interestwhereby we consider a loan to be non-performing after 60 days of non-payment ofamounts due and do not recognize unpaid mortgage interest income from that loanuntil the amounts have been received.

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

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

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

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Historically, management periodically evaluated therealizability of future cash flows from the mortgages underlying our REMICCertificates. Included in our evaluation, management considered such factors asactual and/or expected loan prepayments, actual and/or expected credit losses,and other factors that may have impacted the amount and timing of REMICCertificate future cash flows. Impairments were recorded when an adverse changein cash flows was evident and was determined to be other than temporary innature. Additionally, interest recognition amortization schedules were adjustedperiodically to reflect changes in expected future cash flows from the REMICCertificates, thus, accordingly adjusting future interest income recognized. AtDecember 31, 2006 and 2005 we did not have any investment in REMICCertificates. See*Item 8. FINANCIAL STATEMENTS*—*Note 6. Real Estate Investments* for discussion of ourhistorical investment in REMIC Certificates.

Net loan fee income andcommitment fee income are amortized over the life of the related loan. Costsassociated with leases are deferred and allocated over the lease term in proportionto the recognition of rental income as required by SFAS No. 13 *“Accounting for Leases.”*

**Liquidity andCapital Resources**

*FinancingActivities:*

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

During 2006, we repurchased and retired 71,493 sharesof common stock for an aggregate purchase price of $1.5 million, anaverage of $20.65 per share. The shares were purchased on the open market undera Board authorization to purchase up to 5,000,000 shares. Including thesepurchases, 2,604,393 shares have been purchased under this authorization. Therefore,we continue to have an open Board authorization to purchase an additional2,395,607 shares.

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

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

During 2006, holders of 159,031 shares of our 8.5% Series ECumulative Convertible Preferred Stock (or Series E Preferred Stock)notified us of their election to convert such shares into 318,062 shares of ourcommon stock at the Series E Preferred Stock conversion rate of $12.50 pershare. Subsequent to December 31, 2006, holders of 2,497 shares of our Series EPreferred Stock notified us of their election to convert such shares into 4,994shares of common stock. Subsequent to this most recent conversion, there are191,147 shares of our Series E Preferred Stock outstanding.

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

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through2011 and thereafter is approximately $1.5 million, $15.5 million,$24.8 million, $8.2 million, $0.5 million, and$3.2 million, respectively.

*Available ShelfRegistrations:*

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

*Operating andInvesting Activities:*

During the year ended December 31, 2006, net cashprovided by operating activities was $56.6 million. At December 31,2006 we had accrued $1.0 million, which is included in operating and otherexpenses, related to a proposed closing agreement pending with the InternalRevenue Service (or IRS). During the 2006 we voluntarily approached the IRS tocorrect our filing for the year 2000, which is a closed year. In September 2006we submitted a closing agreement for IRS approval to correct a technicalviolation which occurred in the spring of 2000. Subsequent to December 31,2006, we received a draft closing agreement from the IRS. We anticipate signinga final agreement and paying the $1.0 million settlement to them in the firstquarter of 2007.

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

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

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

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During 2006, we paid$9.5 million in deferred lease costs related to the termination of ourmaster lease with Centers for Long Term Care, Inc. (or CLC) effective November 1,2006. Also on that date we entered into a new 15-year master lease withPreferred Care for the 25 skilled nursing properties formerly leased to CLC. ThePreferred Care master lease has two five-year renewal options and provided thatmonthly rent for November and December 2006 would be $551,500 permonth. The initial annual minimum rent beginning in January 2007 is$8,188,000 and increases annually by 2.5% on each November 1st thereafter.We committed to provide Preferred Care with up to $3.0 million for capitalimprovements and will invest this amount, if requested by Preferred Care, at noadditional investment return. This commitment expires March 31, 2010. Additionally,we committed to provide Preferred Care with up to $7.1 million for capitalimprovements for specific properties. Preferred Care’s annual minimum rent willincrease by an amount equal to 11.0% of our funding of part or all of the$7.1 million including capitalized interest during any constructionproject. As part of the new agreement, we agreed to provide $0.3 millionfor inventory and equipment needs during the transition of the 25 propertiesfrom CLC to Preferred Care.

*Commitments:*

*As of December 31, 2006, we had the followingcommitments outstanding:*

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

We committed to provide Extendicare REIT & ALC up to$5.0 million per year, under certain conditions, for expansion of the 37properties they lease from us under certain conditions. Should we expend suchfunds, Extendicare REIT & ALC’smonthly minimum rent would increase by an amount equal to (a) 9.5% plusthe positive difference, if any, between the average yield on the U.S. Treasury10-year note for the five days prior to funding, minus 420 basis points(expressed as a percentage), multiplied by (b) the amounts funded. Todate, Extendicare REIT & ALChave not requested any funds under this agreement.

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

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

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

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

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

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

We committed to provide a lessee with a$0.2 million capital improvement allowance for three skilled nursingproperties they lease from us. The commitment includes interest capitalized at10.3% on each advance made from each disbursement date until final distributionof the commitment. The commitment expires on June 30, 2007. Upon finaldistribution of the capital allowance, minimum rent shall increase by the totalcommitment multiplied by 10.3%. During 2006, we funded $0.2 million underthis agreement.

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

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

*ContractualObligations:*

Wemonitor our contractual obligations and commitments detailed above to ensurefunds are available to meet obligations when due. The following tablerepresents our long-term contractual obligations as of December 31, 2006,and excludes the effects of interest (*amounts in thousands*):

| ** **                  | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-2  years** | ** ** | **3-5  years** | ** ** | **After  5 years** | ** ** |
|-----------------------------|------------|-----------|------------|---------------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|
| Mortgage loans  payable     |       | $         | 48,266     |                            |       | $              | 1,101      |           |       | $                       | 39,480     |   | $ | 7,685 |   | $ | — |   |
| Bonds payable               |       | 5,545     |       |                            | 415        |           |       | 905            |       | 1,025                   |       | 3,200 |   |
| Operating lease  obligation |       | 672       |       |                            | 164        |           |       | 344            |       | 164                     |       | — |   |
|                        |       | $         | 54,483     |                            |       | $              | 1,680      |           |       | $                       | 40,729     |   | $ | 8,874 |   | $ | 3,200 |   |

 

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

*Off-Balance SheetArrangements:*

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

*Liquidity:*

In 2005 we increased our Unsecured Credit Agreementfrom $65.0 million to $90.0 million and extended its maturity to November 2008.As a result of the sale of assets described in *Item 8.FINANCIAL STATEMENTS*—*Note 6. Real EstateInvestments*, we have significant cash on hand and the entire$90.0 million available for liquidity.

We believe we haveadditional liquidity and financing capability to fund additional investments in2007, maintain our preferred dividend payments, pay common dividends at leastsufficient to maintain our REIT status and repay borrowings at or prior totheir maturity through our generation of funds from operations, borrowingsunder our Unsecured Credit Agreement, additional opportunistic asset sales,proceeds from mortgage notes receivable, and/or additional financings. Webelieve our liquidity and sources of capital are adequate to satisfy our cashrequirements. We cannot, however, be certain that some or all of these sourcesof funds will be available at a time and upon terms acceptable to us insufficient amounts to meet our liquidity needs.

**Item 7a.**                 Quantitativeand Qualitative Disclosures About Market Risk

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

We are exposed to market risks associated with changesin interest rates as they relate to our mortgage loans receivable and debt. Interestrate risk is sensitive to many factors, including governmental monetary and taxpolicies, domestic and international economic and political considerations andother factors that are beyond our control.

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

Our future earnings, cash flows and estimated fairvalues relating to financial instruments are dependent upon prevalent marketrates of interest, such as LIBOR or term rates of U.S. Treasury Notes. Changesin interest rates generally impact the fair value,but not future earnings or cash flows, of mortgage loans receivable and fixedrate 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 affectfuture earnings and cash flows.

At December 31, 2006, based on the prevailinginterest rates for comparable loans and estimates made by management, the fairvalue of our mortgage loans receivable was approximately $129.9 million. A1% increase in such rates would decrease the estimated fair value of ourmortgage loans by approximately $4.1 million while a 1% decrease in suchrates would increase their estimated fair value by approximately$4.4 million. A 1% increase or decrease in applicable interest rates wouldnot have a material impact on the fair value of our fixed rate debt.

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The estimated impact of changes in interest rates discussedabove are determined by considering the impact of the hypothetical interestrates on our borrowing costs, lending rates and current U.S. Treasury ratesfrom which our financial instruments may be priced. We do not believe thatfuture market rate risks related to our financial instruments will be materialto our financial position or results of operations. These analyses do notconsider the effects of industry specific events, changes in the real estatemarkets, or other overall economic activities that could increase or decreasethe 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 negativeexposure to such changes. However, due to the uncertainty of the specificactions that would be taken and their possible effects, the sensitivityanalysis assumes no changes in our capital structure.

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**Item8.**                        FINANCIALSTATEMENTS

|                                                                                                                             | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent  Registered Public Accounting Firm                                                                    |       |     | 43         |   |   |
| Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                          |       |     | 44         |   |   |
| Consolidated  Statements of Income and Comprehensive Income for the years ended  December 31, 2006, 2005 and 2004 |       |     | 45         |   |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2006, 2005 and 2004       |       |     | 46         |   |   |
| Consolidated Statements  of Cash Flows for the years ended December 31, 2006, 2005 and 2004                            |       |     | 47         |   |   |
| Notes to Consolidated Financial Statements                                                                                  |       |     | 48         |   |   |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders of LTCProperties, Inc.

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

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 toabove present fairly, in all material respects, the consolidated financialposition of LTC Properties, Inc. at December 31, 2006 and 2005, andthe consolidated results of its operations and its cash flows for each of thethree years in the period ended December 31, 2006, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the relatedfinancial statement schedules, when considered in relation to the basicfinancial statements taken as a whole, present fairly in all material respectsthe information set forth therein.

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

/s/ ERNST & YOUNGLLP

Los Angeles, CaliforniaFebruary 21, 2007

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**LTC PROPERTIES, INC.CONSOLIDATED BALANCE SHEETS**(In thousands, exceptper share amounts)

| ** **                                                                                                                   | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ASSETS                                                                                                                       |       |                  |       |   |   |
| Real Estate Investments:                                                                                                     |       |                  |       |   |   |
| Buildings and improvements, net of accumulated  depreciation and amortization: 2006—$102,091; 2005—$88,652         |       | $                     | 351,148    |   | $ | 342,664 |   |
| Land                                                                                                                         |       | 35,048                |       | 32,956 |   |
| Properties held for sale, net of accumulated  depreciation and amortization: 2006—$0; 2005—$7,119                  |       | —                |       | 29,332 |   |
| Mortgage loans receivable, net of allowance for  doubtful accounts: 2006 and 2005—$1,280                           |       | 116,992               |       | 148,052 |   |
| Real estate investments, net                                                                                                 |       | 503,188               |       | 553,004 |   |
| Other Assets:                                                                                                                |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                    |       | 29,887                |       | 3,569 |   |
| Debt issue costs, net                                                                                                        |       | 548                   |       | 1,268 |   |
| Interest receivable                                                                                                          |       | 3,170                 |       | 3,436 |   |
| Prepaid expenses and other assets                                                                                            |       | 16,771                |       | 5,130 |   |
| Notes receivable                                                                                                             |       | 4,264                 |       | 8,931 |   |
| Marketable debt securities                                                                                                   |       | 9,939                 |       | 9,933 |   |
| Total assets                                                                                                                 |       | $                     | 567,767    |   | $ | 585,271 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                   |       |                  |       |   |   |
| Bank borrowings                                                                                                              |       | $                     | —     |   | $ | 16,000 |   |
| Mortgage loans  payable                                                                                                      |       | 48,266                |       | 58,891 |   |
| Bonds payable and  capital lease obligations                                                                                 |       | 5,545                 |       | 5,935 |   |
| Senior mortgage  participation payable                                                                                       |       | —                |       | 11,535 |   |
| Accrued interest                                                                                                             |       | 358                   |       | 524 |   |
| Accrued expenses  and other liabilities                                                                                      |       | 6,223                 |       | 8,427 |   |
| Accrued expenses  and other liabilities related to properties held for sale                                                  |       | —                |       | 3,852 |   |
| Distributions  payable                                                                                                       |       | 3,423                 |       | 11,890 |   |
| Total liabilities                                                                                                            |       | 63,815                |       | 117,054 |   |
| Minority interests                                                                                                           |       | 3,518                 |       | 3,524 |   |
| Stockholders’  Equity:                                                                                                  |       |                  |       |   |   |
| Preferred stock  $0.01 par value: 15,000 shares authorized; shares issued and outstanding: 2006—8,834;  2005—8,993 |       | 209,341               |       | 213,317 |   |
| Common stock:  $0.01 par value; 45,000 shares authorized; shares issued and outstanding:  2006—23,569; 2005—23,276 |       | 236                   |       | 233 |   |
| Capital in excess  of par value                                                                                              |       | 332,149               |       | 331,415 |   |
| Cumulative net  income                                                                                                       |       | 442,833               |       | 364,045 |   |
| Other                                                                                                                        |       | 1,693                 |       | (941 | ) |
| Cumulative  distributions                                                                                                    |       | (485,818              | )          | (443,376 | ) |
| Total stockholders’ equity                                                                                              |       | 500,434               |       | 464,693 |   |
| Total liabilities  and stockholders’ equity                                                                             |       | $                     | 567,767    |   | $ | 585,271 |   |

 

See accompanying notes.

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

| ** **                                                                                | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                                 |       |                                        |       |   |   |   |   |
| Rental income                                                                             |       | $                                           | 52,342     |   | $ | 49,709 |   | $ | 41,844 |   |
| Interest income from  mortgage loans and notes receivable                                 |       | 15,444                                      |       | 14,500 |   | 9,138 |   |
| Interest income from  REMIC Certificates                                                  |       | —                                      |       | 3,480 |   | 7,342 |   |
| Interest and other  income                                                                |       | 5,377                                       |       | 4,719 |   | 3,853 |   |
| Total revenues                                                                            |       | 73,163                                      |       | 72,408 |   | 62,177 |   |
| Expenses:                                                                                 |       |                                        |       |   |   |   |   |
| Interest expense                                                                          |       | 7,028                                       |       | 8,310 |   | 11,523 |   |
| Depreciation and  amortization                                                            |       | 13,892                                      |       | 12,738 |   | 11,823 |   |
| Impairment charge                                                                         |       | —                                      |       | — |   | 274 |   |
| Legal expenses                                                                            |       | 236                                         |       | 194 |   | 193 |   |
| Operating and other  expenses                                                             |       | 6,696                                       |       | 6,397 |   | 5,216 |   |
| Total expenses                                                                            |       | 27,852                                      |       | 27,639 |   | 29,029 |   |
| Income before non-operating  income and minority interest                                 |       | 45,311                                      |       | 44,769 |   | 33,148 |   |
| Non-operating income                                                                      |       | 517                                         |       | 6,217 |   | — |   |
| Minority interest                                                                         |       | (343                                        | )          | (349 | ) | (896 | ) |
| Income from continuing  operations                                                        |       | 45,485                                      |       | 50,637 |   | 32,252 |   |
| Discontinued operations:                                                                  |       |                                        |       |   |   |   |   |
| Income from discontinued  operations                                                      |       | 746                                         |       | 3,576 |   | 3,528 |   |
| Gain (loss) on sale of  assets, net                                                       |       | 32,557                                      |       | (1,504 | ) | 608 |   |
| Net income from  discontinued operations                                                  |       | 33,303                                      |       | 2,072 |   | 4,136 |   |
| Net income                                                                                |       | 78,788                                      |       | 52,709 |   | 36,388 |   |
| Preferred stock  redemption charge                                                        |       | —                                      |       | — |   | (4,029 | ) |
| Preferred stock  dividends                                                                |       | (17,157                                     | )          | (17,343 | ) | (17,356 | ) |
| Net income available to  common stockholders                                              |       | $                                           | 61,631     |   | $ | 35,366 |   | $ | 15,003 |   |
| Net Income per Common Share from Continuing  Operations Net of Preferred Stock Dividends: |       |                                        |       |   |   |   |   |
| Basic                                                                                     |       | $                                           | 1.21       |   | $ | 1.49 |   | $ | 0.56 |   |
| Diluted                                                                                   |       | $                                           | 1.21       |   | $ | 1.47 |   | $ | 0.56 |   |
| Net Income Per Common Share from Discontinued  Operations:                                |       |                                        |       |   |   |   |   |
| Basic                                                                                     |       | $                                           | 1.43       |   | $ | 0.09 |   | $ | 0.21 |   |
| Diluted                                                                                   |       | $                                           | 1.41       |   | $ | 0.09 |   | $ | 0.21 |   |
| Net Income Per Common Share Available to Common  Stockholders:                            |       |                                        |       |   |   |   |   |
| Basic                                                                                     |       | $                                           | 2.64       |   | $ | 1.58 |   | $ | 0.77 |   |
| Diluted                                                                                   |       | $                                           | 2.51       |   | $ | 1.56 |   | $ | 0.77 |   |
| Basic weighted average  shares outstanding                                                |       | 23,366                                      |       | 22,325 |   | 19,432 |   |
| Comprehensive Income:                                                                     |       |                                        |       |   |   |   |   |
| Net income                                                                                |       | $                                           | 78,788     |   | $ | 52,709 |   | $ | 36,388 |   |
| Unrealized gain on  available-for-sale securities                                         |       | —                                      |       | 3,743 |   | 378 |   |
| Reclassification  adjustment                                                              |       | (715                                        | )          | (4,141 | ) | 274 |   |
| Comprehensive income                                                                      |       | $                                           | 78,073     |   | $ | 52,311 |   | $ | 37,040 |   |

 

See accompanying notes.

45

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

| ** **                                                                          | ** ** | **Shares**           | ** ** | ** **        | ** ** | ** **           | ** ** | **Capital in** | ** ** | **Cumulative**                     | ** ** | ** **      | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|----------------------|------------|---------------------|------------|------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                          | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Preferred  Stock** | ** ** | **Common  Stock**   | ** ** | **Excess of  Par Value** | ** ** | **Net  Income** | ** ** | **Other**  | ** ** | **Cumulative  Distributions** | ** ** |
| Balance—December 31, 2003                                                 |       |                 | 8,026      |              |       |                 | 17,807     |                |       | $                                  | 189,163    |            |       | $          | 178        |   |   | $ | 250,055 |   | $ | 274,948 |   | $ | (638 | ) |   | $ | (344,924 | ) |   |
| Payments on stockholder notes                                                       |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | 2,285 |   |   | — |   |   |
| Stock option exercises                                                              |       |                 | —     |              |       |                 | 99         |                |       | —                             |       |            | 1          |       |       | 546 |   | — |   | — |   |   | — |   |   |
| Reclassification adjustment                                                         |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | 274 |   |   | — |   |   |
| Unrealized gain on available-for-sale securities                                    |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | 378 |   |   | — |   |   |
| Conversion of 8.5% Series E Preferred Stock                                    |       |                 | (1,639     | )                 |       |                 | 3,278      |                |       | (40,968                            | )          |            | 33         |       |       | 40,935 |   | — |   | — |   |   | — |   |   |
| Conversion of minority interests                                                    |       |                 | —     |              |       |                 | 208        |                |       | —                             |       |            | 2          |       |       | 3,192 |   | — |   | — |   |   | — |   |   |
| Issue restricted stock                                                              |       |                 | —     |              |       |                 | 12         |                |       | —                             |       |            | —     |       |       | 202 |   | — |   | (202 | ) |   | — |   |   |
| Issue stock options                                                                 |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | 77 |   | — |   | (77 | ) |   | — |   |   |
| 9.5% Series A Preferred Stock redemption                                       |       |                 | (1,838     | )                 |       |                 | —     |                |       | (45,963                            | )          |            | —     |       |       | 1,861 |   | — |   | — |   |   | (1,861 | ) |   |
| 8.0% Series B Preferred Stock redemption                                       |       |                 | (1,988     | )                 |       |                 | —     |                |       | (49,700                            | )          |            | —     |       |       | 2,168 |   | — |   | — |   |   | (2,168 | ) |   |
| Net income                                                                          |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | 36,388 |   | — |   |   | — |   |   |
| Vested stock options                                                                |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | 16 |   |   | — |   |   |
| Vested restricted stock                                                             |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | 399 |   | — |   | 34 |   |   | — |   |   |
| Canceled restricted stock                                                           |       |                 | —     |              |       |                 | (30        | )                   |       | —                             |       |            | —     |       |       | — |   | — |   | — |   |   | — |   |   |
| 8.0% Series F Preferred Stock offering                                         |       |                 | 6,640      |              |       |                 | —     |                |       | 166,000                            |       |            | —     |       |       | (6,695 | ) | — |   | — |   |   | — |   |   |
| Preferred stock dividends                                                           |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | — |   |   | (17,356 | ) |   |
| Common stock cash distributions ($1.125 per share)                                  |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | — |   |   | (22,376 | ) |   |
| Balance—December 31, 2004                                                 |       |                 | 9,201      |              |       |                 | 21,374     |                |       | 218,532                            |       |            | 214        |       |       | 292,740 |   | 311,336 |   | 2,070 |   |   | (388,685 | ) |   |
| Conversion of 8.5% Series E Preferred Stock                                    |       |                 | (208       | )                 |       |                 | 416        |                |       | (5,215                             | )          |            | 4          |       |       | 5,211 |   | — |   | — |   |   | — |   |   |
| Common stock offering                                                               |       |                 | —     |              |       |                 | 1,500      |                |       | —                             |       |            | 15         |       |       | 32,611 |   | — |   | — |   |   | — |   |   |
| Payments on stockholder notes                                                       |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | 282 |   |   | — |   |   |
| Reclassification adjustment                                                         |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | (4,141 | ) |   | — |   |   |
| Unrealized gain on available-for-sale securities                                    |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | 3,743 |   |   | — |   |   |
| Repurchase of stock                                                                 |       |                 | —     |              |       |                 | (184       | )                   |       | —                             |       |            | (2         | )          |       | (3,294 | ) | — |   | — |   |   | — |   |   |
| Net income                                                                          |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | 52,709 |   | — |   |   | — |   |   |
| Vested stock options                                                                |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | 39 |   |   | — |   |   |
| Stock option exercises                                                              |       |                 | —     |              |       |                 | 101        |                |       | —                             |       |            | 1          |       |       | 674 |   | — |   | — |   |   | — |   |   |
| Issue stock options                                                                 |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | 43 |   | — |   | (43 | ) |   | — |   |   |
| Change restricted stock vesting                                                     |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | 1,435 |   | — |   | (1,435 | ) |   | — |   |   |
| Cancel restricted stock                                                             |       |                 | —     |              |       |                 | (11        | )                   |       | —                             |       |            | —     |       |       | (6 | ) | — |   | 6 |   |   | — |   |   |
| Vested restricted stock                                                             |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | 283 |   | — |   | 257 |   |   | — |   |   |
| Issue restricted stock                                                              |       |                 | —     |              |       |                 | 80         |                |       | —                             |       |            | 1          |       |       | 1,718 |   | — |   | (1,719 | ) |   | — |   |   |
| Preferred stock dividends                                                           |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | — |   |   | (17,343 | ) |   |
| Common stock cash distributions ($1.29 per share paid  and $0.36 per share accrued) |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | — |   |   | (37,348 | ) |   |
| Balance—December 31, 2005                                                 |       |                 | 8,993      |              |       |                 | 23,276     |                |       | 213,317                            |       |            | 233        |       |       | 331,415 |   | 364,045 |   | (941 | ) |   | (443,376 | ) |   |
| Conversion of 8.5% Series E Preferred Stock                                    |       |                 | (159       | )                 |       |                 | 318        |                |       | (3,976                             | )          |            | 3          |       |       | 3,973 |   | — |   | — |   |   | — |   |   |
| Payments on stockholder notes                                                       |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | 226 |   |   | — |   |   |
| Reclassification adjustment                                                         |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | (3,123 | ) | — |   | 2,408 |   |   | — |   |   |
| Repurchase of stock                                                                 |       |                 | —     |              |       |                 | (71        | )                   |       | —                             |       |            | (1         | )          |       | (1,476 | ) | — |   | — |   |   | — |   |   |
| Net income                                                                          |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | 78,788 |   | — |   |   | — |   |   |
| Vested stock options                                                                |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | 43 |   | — |   | — |   |   | — |   |   |
| Stock option exercises                                                              |       |                 | —     |              |       |                 | 46         |                |       | —                             |       |            | 1          |       |       | 368 |   | — |   | — |   |   | — |   |   |
| Vested restricted stock                                                             |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | 949 |   | — |   | — |   |   | — |   |   |
| Preferred stock dividends                                                           |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | — |   |   | (17,157 | ) |   |
| Common stock cash distributions ($1.44 per share)                                   |       |                 | —     |              |       |                 | —     |                |       | —                             |       |            | —     |       |       | — |   | — |   | — |   |   | (25,285 | ) |   |
| Balance—December 31,  2006                                                |       |                 | 8,834      |              |       |                 | 23,569     |                |       | $                                  | 209,341    |            |       | $          | 236        |   |   | $ | 332,149 |   | $ | 442,833 |   | $ | 1,693 |   |   | $ | (485,818 | ) |   |

 

See accompanying notes.

46

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

| ** **                                                                         | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| OPERATING ACTIVITIES:                                                              |       |                                       |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 78,788     |   | $ | 52,709 |   | $ | 36,388 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization—continuing operations                           |       | 13,892                                     |       | 12,738 |   | 11,823 |   |
| Depreciation and amortization—discontinued operations                         |       | 52                                         |       | 960 |   | 1,104 |   |
| Minority interest                                                                  |       | 343                                        |       | 349 |   | 896 |   |
| (Gain) loss on sale of real estate and other  investments, net                     |       | (33,074                                    | )          | 1,504 |   | (608 | ) |
| Realization of reserve on note receivable                                          |       | —                                     |       | (3,905 | ) | — |   |
| Realization of deferred gain on note receivable                                    |       | —                                     |       | (3,610 | ) | — |   |
| Non-cash impairment charge                                                         |       | —                                     |       | — |   | 274 |   |
| Straight-line rental income                                                        |       | (3,085                                     | )          | (1,614 | ) | (1,121 | ) |
| Other non-cash items, net                                                          |       | (772                                       | )          | 2,021 |   | 3,079 |   |
| Decrease  (increase) in interest receivable                                        |       | 487                                        |       | (115 | ) | 603 |   |
| Decrease  (increase) in prepaid, other assets and allowance                        |       | 161                                        |       | (362 | ) | 145 |   |
| Decrease in  accrued interest                                                      |       | (172                                       | )          | (97 | ) | (303 | ) |
| (Decrease)  increase in accrued expenses and other liabilities                     |       | (45                                        | )          | 2,975 |   | (154 | ) |
| Net cash provided by operating activities                                          |       | 56,575                                     |       | 63,553 |   | 52,126 |   |
| INVESTING ACTIVITIES:                                                              |       |                                       |       |   |   |   |   |
| Investment in real  estate properties and capital improvements, net                |       | (19,685                                    | )          | (30,135 | ) | (6,768 | ) |
| Conversion of  mortgage loans to owned properties                                  |       | —                                     |       | (459 | ) | (80 | ) |
| Proceeds from sale  of real estate investments, net                                |       | 54,035                                     |       | 605 |   | 4,733 |   |
| Payment of  deferred lease cost                                                    |       | (9,500                                     | )          | — |   | — |   |
| Principal payments  on mortgage loans receivable and REMIC Certificates            |       | 31,509                                     |       | 17,443 |   | 17,563 |   |
| Investment in real  estate mortgages                                               |       | —                                     |       | (38,219 | ) | (19,389 | ) |
| Conversion of  REMIC certificates to mortgage loans                                |       | —                                     |       | (855 | ) | — |   |
| Investment in  marketable debt and equity securities                               |       | (1,440                                     | )          | (9,933 | ) | — |   |
| Proceeds from the  sale of marketable equity securities                            |       | 1,957                                      |       | — |   | — |   |
| Advances under  notes receivable                                                   |       | (1,486                                     | )          | (4,088 | ) | (1,903 | ) |
| Principal payments  received on notes receivable                                   |       | 4,180                                      |       | 15,225 |   | 202 |   |
| Investment in  REMIC certificates                                                  |       | —                                     |       | — |   | (3,898 | ) |
| Proceeds from  redemption of investment in debt securities                         |       | —                                     |       | — |   | 12,281 |   |
| Net cash provided by (used in) investing activities                                |       | 59,570                                     |       | (50,416 | ) | 2,741 |   |
| FINANCING ACTIVITIES:                                                              |       |                                       |       |   |   |   |   |
| Bank borrowings                                                                    |       | 2,000                                      |       | 30,700 |   | 36,500 |   |
| Repayment of bank  borrowings                                                      |       | (18,000                                    | )          | (14,700 | ) | (36,500 | ) |
| Repayment of  senior mortgage participation                                        |       | (11,535                                    | )          | (3,872 | ) | (2,843 | ) |
| Principal payments  on mortgage loans, bonds payable and capital leases            |       | (11,021                                    | )          | (9,478 | ) | (53,359 | ) |
| Proceeds from  common and preferred stock offerings                                |       | —                                     |       | 32,626 |   | 159,305 |   |
| Repurchase of  common stock                                                        |       | (1,476                                     | )          | (3,296 | ) | — |   |
| Distributions paid  to stockholders                                                |       | (50,909                                    | )          | (46,419 | ) | (38,498 | ) |
| Repayment of  stockholder loans                                                    |       | 226                                        |       | 282 |   | 2,285 |   |
| Preferred Stock  redemption                                                        |       | —                                     |       | — |   | (126,305 | ) |
| Distributions paid  to minority interests                                          |       | (349                                       | )          | (531 | ) | (1,189 | ) |
| Conversion of  minority interests                                                  |       | —                                     |       | — |   | (8,496 | ) |
| Other                                                                              |       | 1,237                                      |       | 805 |   | 629 |   |
| Net cash used in financing activities                                              |       | (89,827                                    | )          | (13,883 | ) | (68,471 | ) |
| Increase  (decrease) in cash and cash equivalents                                  |       | 26,318                                     |       | (746 | ) | (13,604 | ) |
| Cash and cash  equivalents, beginning of year                                      |       | 3,569                                      |       | 4,315 |   | 17,919 |   |
| Cash and cash  equivalents, end of year                                            |       | $                                          | 29,887     |   | $ | 3,569 |   | $ | 4,315 |   |
| Supplemental  disclosure of cash flow information:                                 |       |                                       |       |   |   |   |   |
| Interest paid                                                                      |       | $                                          | 7,045      |   | $ | 8,216 |   | $ | 11,653 |   |
| Non-cash investing  and financing transactions:                                    |       |                                       |       |   |   |   |   |
| *See Note  4: Supplemental Cash Flow Information*for further discussion.           |       |                                       |       |   |   |   |   |

 

See accompanying notes.

47

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**LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1. The Company**

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

**2. Summary ofSignificant Accounting Policies**

*Basisof Presentation.**  *Theaccompanying consolidated financial statements include the accounts of LTC, ourwholly-owned subsidiaries and our controlled partnership. All intercompanyinvestments, accounts and transactions have been eliminated. Control over thepartnership is based on the provisions of the partnership agreement thatprovides us with a controlling financial interest in the partnership. Under theterms of the partnership agreement,we are responsible for the management of the partnership’s assets, business andaffairs. Our rights and duties in management of the partnership include makingall operating decisions, setting the capital budget, executing all contracts,making all employment decisions, and the purchase and disposition of assets,among others. The general partner is responsible for the ongoing, major, andcentral operations of the partnership and makes all management decisions. Inaddition, the general partner assumes the risk for all operating losses,capital losses, and is entitled to substantially all capital gains(appreciation).

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

Statement of AccountingFinancial Standard (or SFAS) No. 150 *“Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”* requires certain financial instruments that embodyobligations of the issuer and have characteristics of both liabilities andequity to be classified as liabilities. Any non-controlling minority interestthat may be redeemed with equity of any entity (including equity of an entityother than the subsidiary) does not meet the definition of a mandatorilyredeemable financial instrument and thus does not fall under SFAS No. 150guidelines. Since the partnership agreement with our limited partners (minorityinterests) specifies that the limited partners’ exchange rights may be settledin our common stock or cash at our option SFAS No. 150 does not have animpact on the financial statement presentation or accounting for our minorityinterests.

Financial Accounting Standards Board (or FASB)Interpretation No. 46(R) “*Consolidation of VariableInterest Entities”* (or FIN 46) addresses when a company shouldinclude in its financial statements the assets, liabilities and activities ofanother 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 interestentity’s” activities, or are entitled to receive a majority of the entity’sresidual returns, or both. FIN 46 also requires disclosure about 

48

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

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

Certain reclassificationshave been made to the prior period financial statements to conform to thecurrent year presentation as required by SFAS No. 144 “*Accounting for the Impairment or Disposal ofLong-Lived Assets*.”

*Useof Estimates.**  *Preparationof the consolidated financial statements in conformity with accountingprinciples generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the consolidated financial statements and accompanyingnotes. Actual results could differ from those estimates.

*CashEquivalents.**  *Cash equivalents consist of highly liquidinvestments with a maturity of three months or less when purchased and arestated at cost which approximates market.

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

*MortgageLoans Receivable.*   Mortgage loans receivable we originate are recorded on an amortizedcost basis. Mortgage loans we acquire are recorded at fair value at the time ofpurchase net of any related premium or discount which is amortized as a yieldadjustment to interest income over the life of the loan.

*Allowancefor Loan Losses.*   We maintain an allowance forloan losses in accordance with SFAS No. 114 *“Accountingby 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 theexpected collectibility of the mortgage loans receivable and is maintained at alevel believed adequate to absorb potential losses in our loans receivable. Indetermining the allowance we perform a quarterly evaluation of all outstandingloans. If this evaluation indicates that there is a greater risk of loancharge-offs, additional allowances are recorded in current period earnings.

*Impairments.*   Impairmentlosses are recorded when events or changes in circumstances indicate the assetis impaired and the estimated undiscounted cash flows to be generated by theasset are less than its carrying amount. Management assesses the impairment of properties individuallyand impairment losses are calculated as the excess of the carrying amount overthe fair value of assets to be held and used, and carrying amount over the fairvalue less cost to sell in instances where management has determined that wewill dispose of the property, as required by SFAS No. 144 “*Accounting for the Impairment or Disposal ofLong-Lived Assets*.”  Indetermining fair value, we use current appraisals or other third party opinionsof value and other estimates of fair value such as estimated discounted futurecash flows.

In accordance with SFAS No. 114 *“Accounting by Creditors for Impairment of a Loan”* weevaluate the carrying values of mortgage loans receivable on an individualbasis. Management periodically evaluates the realizability of future cash flowsfrom the mortgages when events or circumstances, such as the non-receipt ofprincipal and interest payments and/or significant deterioration of thefinancial condition of the borrower, indicate that the carrying amount of themortgage loan receivable may not be recoverable. An impairment charge isrecognized in current period earnings and is calculated as the differencebetween the 

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

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

EITF 03-1, “*The Meaning ofOther-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 isother-than-temporary and the measurement of an impairment loss. The guidancealso includes accounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. Comparative information for periods prior to initial applicationis not required. On November 3, 2005, the FASB issued FASB Staff Position(or FSP) FAS No. 115-1 which replaces the impairment evaluationguidance of EITF No. 03-1. We have adopted FSP FAS No. 115-1as required.

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

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

Thecarrying value and fair value of our financialinstruments as of December 31, 2006 and 2005 were as follows (*in thousands*):

| ** **                             | ** ** | **At December 31, 2006** | ** ** | **At December 31, 2005** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **Carrying  Value**                     | ** ** | **Fair  Value**                         | ** ** | **Carrying  Value** | ** ** | **Fair  Value** | ** ** |
| Mortgage loans  receivable             |       | $                                       | 116,992    |                                    | $          | 129,882 |   | $ | 148,052 |   | $ | 153,606 |   |
| Marketable debt  securities            |       | 9,939                                   |       | 11,000                                  |       | 9,933 |   | 9,933 |   |
| Mortgage loans  payable                |       | 48,266                                  |       | 48,266                                  |       | 58,891 |   | 58,891 |   |
| Bonds payable                          |       | 5,545                                   |       | 5,545                                   |       | 9,759 |   | 9,759 |   |
| Senior mortgage  participation payable |       | —                                  |       | —                                  |       | 11,535 |   | 11,860 |   |
|                                        |            |                                         |            |                                         |            |  |  |  |  |  |  |  |  |

 

For discussion of our investments in mortgage loansreceivable see *Note 6.Real Estate Investments.*For discussion of ourinvestment in marketable debt securities see *Note 9. Marketable Securities*. For discussion ofour mortgage loans payable, bonds payable and senior mortgage participationpayable, see *Note 10. Debt Obligations*.

*Investments.*   Investmentsand marketable debt and equity securities are accounted for in accordance withSFAS No. 115 *“Accounting for Certain Investments in Debtand Equity Securities”* which requires that we categorize ourinvestments as trading, available-for-sale or held-to-maturity. Available-for-sale

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

securities are stated atfair value, with the unrealized gains and losses, reported in othercomprehensive income until realized. Realized gains and losses and declines invalue judged to be other-than-temporary on available-for-sale securities areincluded in net income. The cost of securities sold is based on the specificidentification method. Interest and dividends on securities classified asavailable-for-sale are included in interest and other income. Our investment inmarketable debt securities is classified as held-to-maturity because we havethe positive intent and ability to hold the securities to maturity. Held-to-maturitysecurities are stated at amortized cost, adjusted for amortization of premiumsand accretion of discounts to maturity.

*RevenueRecognition.**  *Interestincome on mortgage loans is recognized using the effective interest method. Wefollow a policy related to mortgage interest whereby we consider a loan to be non-performing after 60 days ofnon-payment of amounts due and do not recognize unpaid mortgage interest incomefrom that loan until the past due amounts have been received.

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

Rental revenues relating to leases that containspecified rental increases over the life of the lease are recognized on thestraight-line basis when we believe that all of the rent related to aparticular lease will be collected according to the terms of the lease. Inevaluating whether we believe all the rent will be collected  we have determined that all of the followingconditions must be met: (i) the property has been operated by the sameoperator for at least six months (adding a new property to a master lease withan operator that otherwise qualifies does not disqualify the lease from beingstraight-lined); (ii) payments for any monetary obligations due under thelease, or any other lease such operator has with us have been received late nomore than four times during last eight fiscal quarters; (iii) the operatorof the property has not during the last eight fiscal quarters (a) beenunder the protection of any Bankruptcy court; (b) admitted in writing itsinability to pay it debts generally as they come due; (c) made anassignment for the benefit of creditors; or, (d) been under thesupervision of a trustee, receiver or similar custodian; and (iv) theproperty operating income has covered the applicable lease payment in each ofthe prior four fiscal quarters.

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

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

payment is received forpast due rents. If it appears that we will not collect future rent under the “non-accruallease” we will record an impairment charge related to the straight-line rentasset.

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

Net loan fee income and commitment fee income areamortized over the life of therelated loan. Costs associated with leases are deferred and allocated over thelease term in proportion to the recognition of rental income as required bySFAS No. 13 “*Accounting for Leases*”.

*FederalIncome Taxes.*   LTC qualifies as a REIT under theInternal Revenue Code of 1986, as amended, and as such, no provision forFederal income taxes has been made. A REIT is required to distribute at least90% of its taxable income to its stockholders and a REIT may deduct dividendsin computing taxable income. If a REIT distributes 100% of its taxable incomeand complies with other Internal Revenue Code requirements, it will generallynot be subject to Federal income taxation.

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

At December 31, 2006 we had accrued $950,000related to a proposed closing agreement pending with the Internal RevenueService (or IRS). During the 2006 we voluntarily approached the IRS to correctour filing for the year 2000, which is a closed year. In September 2006 wesubmitted a closing agreement for IRS approval to correct a technical violationwhich occurred in the spring of 2000. Subsequent to December 31, 2006, wereceived a draft closing agreement from the IRS. We anticipate signing a finalagreement and paying the $950,000 settlement to them in the first quarter of2007.

*Concentrationsof Credit Risks.**  *Financialinstruments which potentially subject us to concentrations of credit riskconsist primarily of cash and cash equivalents, mortgage loans receivable andoperating leases on owned properties. Our financial instruments, mortgage loansreceivable and operating leases, are subject to the possibility of loss of carrying value as a result of the failureof other parties to perform according to their contractual obligations orchanges in market prices which may make the instrument less valuable. We obtainvarious collateral and other protective rights, and continually monitor theserights, in order to reduce such possibilities of loss. In addition, we providereserves for potential losses based upon management’s periodic review of ourportfolio.

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

*DiscontinuedOperations.**  *Inaccordance with SFAS No. 144 “*Accounting for theImpairment or Disposal of Long-Lived Assets,”* propertiesheld-for-sale on the balance sheet includes only those properties available forimmediate sale in their present condition and for which management believesthat it is probable that a sale of the property will be completed within oneyear. Properties held-for-sale are carried at the lower of cost or fair valueless estimated selling costs. No depreciation expense is recognized on propertiesheld-for-sale once they have been classified as such. The operating results ofreal estate assets designated as held-for-sale are included in discontinuedoperations in the consolidated statement of operations. In addition, all gainsand losses from real estate sold are also included in discontinued operations. Asrequired by SFAS No. 144, gains and losses on prior years related toassets included in discontinued operations in 2006 have been reclassified todiscontinued operations in prior years for comparative purposes. See *Note 6. Real Estate Investments*, for a detailof the components of the net income from discontinued operations. Additionally,we reclass for the prior period balance sheet to reflect properties soldsubsequent to that balance sheet date as held-for-sale as required by SFAS No. 144*“Accounting for the Impairment or Disposal ofLong-Lived Assets.”*

*NetIncome Per Share.*   Basic earnings per share iscalculated using the weighted-average shares of common stock outstanding duringthe period excluding common stock equivalents. Diluted earnings per shareincludes the effect of all dilutive common stock equivalents.

*Stock-BasedCompensation.*   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 APBOpinion No. 25, *“Accounting for StockIssued to Employees” (APB 25), and amends SFAS No. 95 “Statement of CashFlows.”*  Generally, theapproach in SFAS No. 123(R) is similar to the approach described inSFAS No. 123. However, SFAS No. 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values. Pro formadisclosure is no longer an alternative. We adopted SFAS No. 123(R), usingthe “modified prospective” method, effective January 1, 2006. The adoptionof SFAS No. 123(R) did not have a significant impact on ourconsolidated financial statements. We adopted the fair-value-based method ofaccounting for share-based payments effective January 1, 2003 under SFAS No. 123using the “prospective method” described in SFAS No. 148 *“Accounting for Stock-Based Compensation-Transition and Disclosure”*and therefore have recognized compensation expense related to all employeestock-based awards granted, modified or settled after January 1, 2003.

We use the Black-Scholes-Merton formula to estimatethe value of stock options granted to employees. This model requires managementto make certain estimates including stock volatility, discount rate and thetermination discount factor. If management incorrectly estimates thesevariables, the results of operations could be affected. Because No. 123(R) mustbe applied not only to new awards but to previously granted awards that are notfully vested on the effective date, and because we adopted SFAS No. 123using the prospective transition method (which applied only to awards granted,modified or settled after the adoption date), compensation cost for somepreviously granted awards that were not recognized under SFAS No. 123 werebe recognized under SFAS No. 123(R). However, had we adopted SFAS No. 123(R) inprior periods, the impact of that standard would have approximated the impactof SFAS No. 123 as described in the disclosure of pro forma net income andearnings per share in *Note 11. Stockholders’Equity*. SFAS No. 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required undercurrent literature. Because we qualify as a REIT under the Internal RevenueCode of 1986, 

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

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

*SegmentDisclosures.**  *SFAS No. 131*“Disclosures About Segments of an Enterprise andRelated Information”* establishes standards for the manner in whichpublic business enterprises report information about operating segments. Managementbelieves that substantially all of our operations comprise one operatingsegment.

*New AccountingPronouncements.**  *In July 2006,the FASB issued Interpretation No. 48, *“Accounting forUncertainty in Income Taxes”* (or FIN 48), which clarifies theaccounting for income taxes by prescribing the minimum recognition threshold atax position is required to meet before being recognized in the financialstatements. 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 onits 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 taxbenefit is measured as the largest amount of benefit (determined on acumulative probability basis) that is more likely than not to be realized uponultimate settlement. FIN 48 is effective for fiscal years beginning after December 15,2006. We do not expect the adoption of FIN 48 to have a significant impact onour financial position or results of operations.

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

**3. Major Operators**

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

| ** **                                       | ** ** | **Extendicare  REIT & ALC** | ** ** | **Brookdale**           | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **(in thousands)**                   | ** ** | **(in thousands)** | ** ** |
| Current assets                                   |       |                                      | $          | 26,671                  |       |   |   | $ | 274,328 |   |   |
| Non-current assets                               |       |                                      | 399,113    |                    |       |   | 4,381,328 |   |   |
| Current liabilities                              |       |                                      | 37,074     |                    |       |   | 527,440 |   |   |
| Non-current liabilities                          |       |                                      | 160,608    |                    |       |   | 2,295,918 |   |   |
| Stockholders’ equity                        |       |                                      | 228,102    |                    |       |   | 1,832,298 |   |   |
| Gross revenue                                    |       |                                      | 172,594    |                    |       |   | 877,653 |   |   |
| Operating expenses                               |       |                                      | 115,355    |                    |       |   | 886,985 |   |   |
| Income(loss) from  continuing operations         |       |                                      | 5,936      |                    |       |   | (70,730 | ) |   |
| Net income (loss)                                |       |                                      | 4,438      |                    |       |   | (70,730 | ) |   |
| Cash provided by  operations                     |       |                                      | 27,128     |                    |       |   | 53,677 |   |   |
| Cash used in investing  activities               |       |                                      | (12,439    | )                       |       |   | (1,820,597 | ) |   |
| Cash provided (used in)  by financing activities |       |                                      | (9,674     | )                       |       |   | 1,789,498 |   |   |

 

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

Alterra, a wholly owned subsidiary of Brookdale,leases 35 assisted living properties with a total of 1,416 units owned by usrepresenting approximately 11.5%, or $65,239,000, of our total assets at December 31,2006 and 14.7% of rental revenue received and of interest income recognized in2006 excluding the effects of straight-line rent.

Preferred Care, Inc. (or Preferred Care), throughvarious wholly owned subsidiaries, operates 32 skilled nursing properties witha total of 3,871 beds that we own or on which we hold mortgages secured byfirst trust deeds. This represents approximately 10.9% or $62,126,000 of ourtotal assets as December 31, 2006 and 11.8% of rental revenue received andof interest income recognized in 2006 excluding the effects of straight-linerent.

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

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

**4. Supplemental Cash Flow Information**

| ** **                                                                                                                              | ** ** | **For the year ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                              | ** ** | **(in thousands)**                                  | ** ** |
| Non-cash investing and  financing transactions:                                                                                         |       |                                                     |       |   |   |   |   |
| Assumption of  mortgage loans payable related to acquisitions of real estate properties                                                 |       | $                                                        | —     |   | $ | — |   | $ | 2,098 |   |
| Property exchange                                                                                                                       |       | 3,410                                                    |       | — |   | — |   |
| Transfer of REMIC  certificates to mortgage loans receivable                                                                            |       | —                                                   |       | 31,120 |   | 12,025 |   |
| Elimination of  loans payable resulting from repurchase of REMIC certificates                                                           |       | —                                                   |       | 7,125 |   | — |   |
| Loans receivable  settled in connection with real estate acquisitions                                                                   |       | —                                                   |       | 3,029 |   | 9,492 |   |
| Refinance of  notes receivable into mortgage loans receivable                                                                           |       | —                                                   |       | — |   | 7,059 |   |
| Exchange of  limited partnership units for common stock                                                                                 |       | —                                                   |       | — |   | 3,194 |   |
| (Decrease)  Increase in short term notes receivable related to the disposition of real  estate properties                               |       | (1,500                                                   | )          | 1,500 |   | — |   |
| Preferred stock  redemption charge relating to the original issuance costs of Series A  and Series B preferred stock redeemed |       | —                                                   |       | — |   | 4,029 |   |
| Conversion of  preferred stock to common stock                                                                                          |       | 3,976                                                    |       | 5,215 |   | 40,968 |   |
| Restricted stock  issued, net of cancellations                                                                                          |       | —                                                   |       | 1,713 |   | 202 |   |
| Modification of  vesting on previously issued restricted stock                                                                          |       | —                                                   |       | 1,435 |   | — |   |
| Capital  expenditure hold back from investments in notes receivable                                                                     |       | 432                                                      |       | 620 |   | — |   |
| Application of a prior  year capital expenditure funding                                                                                |       | 489                                                      |       | — |   | — |   |
|                                                                                                                                         |            |                                                          |            |  |  |  |  |  |  |  |

 

**5. ImpairmentCharge**

We periodically perform a comprehensive evaluation ofour real estate investment portfolio in accordance with SFAS No. 144 “*Accounting for the Impairment or Disposal ofLong-Lived Assets.*”  Wecalculate the impairment losses as the excess of the carrying value over thefair value of assets to be held and used, and the carrying value over the fairvalue less cost to sell in instances where management has determined that wewill dispose of the property. In the past the long-term care industryexperienced significant adverse changes, which resulted in operating losses bycertain of our lessees and borrowers and in some instances the filing bycertain lessees and borrowers for bankruptcy protection. As a result weidentified certain investments in skilled nursing properties that we determinedhad been impaired. These assets were determined to be impaired primarilybecause the estimated undiscounted future cash flows to be received from theseinvestments are less than the carrying values of the investments. We follow thedisclosure guidance required by EITF 03-01 “*The Meaningof Other-Than-Temporary Impairment and its Application to Certain Investments*”.See *Note 6. Real Estate Investments* fordiscussion of the fair value 

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

methodology used invaluing our investment in REMIC Certificates and related disclosures requiredby EITF 03-1.

No impairment charges were recorded during 2006 or2005. During 2004, we recorded an impairment charge of $274,000 reclassifying aportion of the fair market value adjustment on available-for-sale interest-onlyREMIC Certificates from comprehensive income to realized loss to reflect theestimated impact on future cash flows for loan prepayments related to certainsubordinated REMIC Certificates we held. As of December 31, 2005, we nolonger had any investments in REMIC Certificates.

We believe we haverecorded valuation adjustments on all assets for which there are other thantemporary impairments. However in past years, the long-term care industry hasexperienced significant adverse changes which resulted in operating losses bycertain of our lessees and borrowers and in some instances the filing bycertain lessees and borrowers for bankruptcy protection. Thus, we cannotpredict what, if any, impairment charge may be needed in the future.

**6. Real EstateInvestments**

*MortgageLoans.*   During the year ended December 31,2006, we received $26,716,000 related to the payoff of 12 mortgage loanssecured by nine skilled nursing properties and three assisted living propertieslocated in various states and two partial principal pay downs on two mortgageloan secured by two skilled nursing properties. We also received $4,793,000 inregularly scheduled principal payments.

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

At December 31, 2006, we had 58 mortgage loanssecured by first mortgages on 58 skilled nursing properties with a total of6,649 beds, 10 assisted living residences with 705 units and one school locatedin 19 states. At December 31, 2006, the mortgage loans had interest ratesranging from 6.6% to 13.1% and maturities ranging from 2007 to 2019. Inaddition, the loans contain certain guarantees, provide for certain facility feesand generally have 25-year amortization schedules. The majority of themortgage loans provide 

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

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

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

During 2006, we sold four assisted living propertiesin various states with a total of 431 units and one 174-bed skillednursing property in Arizona. We recognized a gain of $32,557,000 on the twotransactions and received total net proceeds of $3,410,000 in propertyassociated with the exchange described above and $54,035,000 in cash, afterpaying both closing costs and a $3,800,000 8.75% State of Oregon bondobligation related to one of the properties sold. See *Note 10. Debt Obligations*for further discussion of the debt payoff. In 2005 we sold an option topurchase the four assisted living properties to Sunwest Management Inc. (orSunwest) for $2,000,000. In exchange for the right to purchase the propertiesfor $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 tothe proceeds of the sale of the four assisted living properties in 2006.

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

During 2006, we paid $9,500,000 in deferred leasecosts related to the termination of our master lease with Centers for Long TermCare, Inc. (or CLC) effective November 1, 2006. Also on that date weentered into a new 15-year master lease with Preferred Care for the 25skilled nursing properties formerly leased to CLC. The Preferred Care masterlease has two five-year renewal options and provided that monthly rent for November andDecember 2006 would be $551,500 per month. The initial annual minimum rentbeginning in January 2007 is $8,188,000 and increases annually by 2.5% oneach November 1st thereafter. We committed to provide Preferred Care withup to $3,000,000 for capital improvements and will invest this amount, ifrequested by Preferred Care, at no additional investment return. Thiscommitment expires March 31, 2010. Additionally, we committed to providePreferred Care with up to $7,100,000 for capital improvements for specificproperties. Preferred Care’s annual minimum rent will increase by an amountequal to 11.0% of our funding of part or all of the $7,100,000 includingcapitalized interest during any construction project. As part of the newagreement, we agreed to provide $300,000 for inventory and equipment needsduring the transition of the 25 properties from CLC to Preferred Care.

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

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

Owned properties are leased pursuant to non-cancelableoperating leases generally with an initial term of 10 to 30 years. Many of theleases contain renewal options. The leases provide for fixed minimum base rentduring the initial and renewal periods. The majority of our leases containprovisions for specified annual increasesover the rents of the prior year and are generally computed in one of four waysdepending on specific provisions of each lease: (i) a specified percentageincrease over the prior year, generally 2%; (ii) the higher of (i) ora calculation based on the Consumer Price Index; (iii) as a percentage offacility net patient revenues in excess of base amounts or (iv) specificdollar increases. Each lease is a triple net lease which requires thelessee to pay all taxes, insurance, maintenance and repairs, capital andnon-capital expenditures and other costs necessary in the operations of thefacilities. Contingent rent income for the years ended December 31, 2006,2005 and 2004 was not significant in relation to contractual base rent income.

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

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

Setforth in the table below are the components of the net income from discontinuedoperations (*in thousands*):

| ** **                           | ** ** | **For the year ended  December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Rental income                        |       | $                                                        | 725        |   | $ | 4,899 |   | $ | 5,060 |   |
| Interest and  other income           |       | 97                                                       |       | — |   | — |   |
| Total revenues                       |       | 822                                                      |       | 4,899 |   | 5,060 |   |
| Interest expense                     |       | 17                                                       |       | 338 |   | 343 |   |
| Depreciation and  amortization       |       | 52                                                       |       | 960 |   | 1,104 |   |
| Operating and other  expenses        |       | 7                                                        |       | 25 |   | 85 |   |
| Total expenses                       |       | 76                                                       |       | 1,323 |   | 1,532 |   |
| Income from discontinued  operations |       | $                                                        | 746        |   | $ | 3,576 |   | $ | 3,528 |   |

* *

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

During 2005, the 1996-1 REMIC Pool was fullyretired. We paid $855,000 in cash and exchanged our remaining interest in the1996-1 REMIC Certificates with a book value of $9,568,000 and we receivedfive mortgage loans with and estimated fair value of $10,398,000 and anunamortized principal balance of $10,469,000. Accordingly, we recorded a$71,000 discount on these loans which is being amortized as a yield adjustmentto increase interest income over the remaining life of the loans. Additionally,we are amortizing the $1,051,000 balance in Other Comprehensive Income thatresulted from transferring the loans at fair value as required by SFAS No. 115*“Accounting for Certain Investments in debt andEquity Securities”* as a yield adjustment to increase interest incomeover the life of the related loans. During 2005, a loan was paid off in the 1998-1REMIC pool, which caused the Senior Certificate holders entitled to any 

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

principal payments to bepaid off in full. See paragraph two under Mortgage Loans for a description ofthis event.

Incomeon the subordinated certificates was as follows for the years ended December 31,2006, 2005 and 2004 (*dollar amounts inthousands*):

| ** **  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------|------------|----------|------------|----------|------------|----------|------------|
| 1993-1 Pool |       |     | $          | —   |       |     | $          | — |   | $ | — |   |
| 1994-1 Pool |       |     | —     |     |       | —   |       | 967 |   |
| 1996-1 Pool |       |     | —     |     |       | 551      |       | 1,598 |   |
| 1998-1 Pool |       |     | —     |     |       | 2,929    |       | 4,777 |   |
|        |       |     | $          | —   |       |     | $          | 3,480 |   | $ | 7,342 |   |

 

As sub-servicer for all of the above REMIC pools, wewere responsible for performing substantially all of the servicing dutiesrelating to the mortgage loans underlying the REMIC Certificates and acted asthe special servicer to restructure any mortgage loans that defaulted.

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

At December 31, 2006 and 2005 and we did not haveany investment in REMIC Certificates. Unrealized holding gains onavailable-for-sale certificates of $0, $3,743,000 and $378,000 were included incomprehensive income for the years ended December 31, 2006, 2005 and 2004,respectively. We used certain assumptions and estimates in determining the fairvalue allocated to the retained interest at the time of initial sale andsubsequent measurement dates in accordance with SFAS No. 140. Theseassumptions and estimates included projections concerning the expected leveland timing of future cash flows, current interest rate environment, estimatedspreads over the U.S. Treasury Rate at which the retained certificates mighttrade, expectations regarding credit losses, if any, expected weighted-averagelife of the underlying collateral and discount rates commensurate with therisks involved. These assumptions were reviewed periodically by management.

During the years we hadinvestments in REMIC Certificates, to the extent there were defaults,unrecoverable losses or prepayments of principal on the underlying mortgagesresulting in reduced cash flow, the subordinated REMIC Certificateshistorically held by us would have borne the first risk of loss. Duringmanagement’s periodic evaluation of the realizability of expected future cashflows from the mortgages underlying our historical investment in REMICCertificates there were indications that a portion of the underlying mortgagecollateral would not be realized by the REMIC Trust. Accordingly, we recordedimpairment charges of $274,000 during 2004 to reflect the estimated impact onfuture cash flows from loan prepayments occurring during, or expected to occurrelated to certain subordinated REMIC Certificates we held. No impairmentcharge was recorded in 2005. See *Note 5.Impairment Charge* for a discussion of the impairment indicators.

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

**7.  Asset Securitizations**

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

From our past securitizations, we received annualsub-servicing fees, which ranged from 1.0 to 2.0 basis points of the outstandingmortgage loan balances in each of the REMIC pools. Additionally, through theREMIC Certificates historically retained by us from past securitizations, wereceived cash flows and the rights to future cash flows resulting from cashreceived on the underlying mortgage loans in the REMIC pools. All of theinvestors in the REMIC Certificates and the REMIC Trusts themselves had norecourse to our assets for failure by any obligor to the REMIC Trust assets(the mortgages) to pay when due, or comply with any provisions of the mortgagecontracts. The REMIC Certificates are classified separately on the balancesheet and interest income earned shown separately on the income statement.Sub-servicing fees and related fees associated with the REMIC Certificates areincluded in other income.

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

| ** **                                         | ** ** | **Year Ended** | ** ** |
|----------------------------------------------------|------------|---------------------|------------|
| ** **                                         | ** ** | **2006**            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flow  received on retained REMIC Certificates |       |                | $          | — |   |   | $ | 7,454 |   | $ | 13,303 |   |
| Servicing and  related fees received               |       |                | —     |   |   | 25 |   | 109 |   |
| Servicing  advances made                           |       |                | —     |   |   | 176 |   | 544 |   |
| Repayments of servicing  advances                  |       |                | —     |   |   | 193 |   | 480 |   |
|                                                    |            |                     |            |  |  |  |  |  |  |  |  |  |

 

Currentlyin our portfolio we have no mortgage loans held for securitization. Quantitativeinformation relating to subserviced mortgage loans including delinquencies andnet credit losses is as follows: *(dollaramounts in thousands)*

| ** **                                                                        | ** ** | **Year Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                        | ** ** | **2006**            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Average balance  of loans in REMIC pools                                          |       |                | $          | — |   |   | $ | 39,036 |   | $ | 150,291 |   |
| Year-end balance  of loans in REMIC pools                                         |       |                | —     |   |   | — |   | $ | 87,351 |   |
| Net credit losses                                                                 |       |                | —     |   |   | — |   | $ | 274 |   |
| Net credit losses  to average REMIC pool loans                                    |       |                | —     |   |   | — |   | 0.2 | % |
| Average delinquencies  (greater than 30 days) in REMIC pool loans during the year |       |                | —     |   |   | 1.2 | % | 1.4 | % |
|                                                                                   |            |                     |            |  |  |  |  |  |  |  |  |  |

 

**8. Notes Receivable**

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

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

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

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

**9. MarketableSecurities**

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

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

**10. DebtObligations**

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

Under financial covenants contained in the UnsecuredCredit Agreement which are measured quarterly we are required to maintain,among other things, (i) a ratio, of total indebtedness to total assetvalue, not greater than .5 to 1.0, (ii) a ratio not greater than .35 to1.0 of secured debt to total asset value (iii) a ratio not less than 2.5to 1.0 of EBITDA to interest expense, and (iv) a ratio of not less than1.50 to 1.0 of EBITDA to fixed charges. Based on our covenant compliance at December 31,2006, any borrowings under the line could be at the lowest interest ratesprovided for in the Unsecured Credit Agreement.

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

*Mortgage Loans Payable.**  *Maturity dates, weighted average interest rates andyear-end balances on our mortgage loans payable were (*dollaramounts in thousands*):

| ** **   | ** ** | **Total Loan Balance at** | ** ** | ** **                      | ** ** | **Total Loan Balance at** | ** ** | ** **                      | ** ** |
|--------------|------------|------------------------------------------|------------|---------------------------------|------------|------------------------------------------|------------|---------------------------------|------------|
| **Maturity** | ** ** | ** **                               | ** ** | **December 31, 2006** | ** ** | **Rate**                                 | ** ** | **December 31, 2005** | ** ** | **Rate** | ** ** |
| 2007         |       |                                     | $          | —                          |       |                                     | —     |                            |       | $ | — |   |   | — |   |
| 2008         |       |                                     | 14,813     |                            |       | 7.27                                     | %          |                            | 15,217     |   |   | 7.27 | % |
| 2009         |       |                                     | 25,308     |                            |       | 8.68                                     | %          |                            | 25,790     |   |   | 8.68 | % |
| 2010         |       |                                     | 8,145      |                            |       | 8.69                                     | %          |                            | 8,274      |   |   | 8.69 | % |
| 2011         |       |                                     | —     |                            |       | —                                   |       |                            | —     |   |   | — |   |
| Thereafter   |       |                                     | —     |                            |       | —                                   |       |                            | —     |   |   | — |   |
|         |       |                                     | $          | 48,266                          |       |                                     |       |                            |       | $ | 49,281 |   |   |   |   |
|              |            |                                          |            |                                 |            |                                          |            |                                 |            |  |  |  |  |  |  |  |  |

 

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

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

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

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

*SeniorMortgage Participation Payable.*   In 2002, wecompleted a loan participation transaction whereby we issued a $30,000,000Senior Participation interest in 22 of our first mortgage loans that had atotal unpaid principal balance of $58,627,000 in the Participation Loan Pool. TheParticipation Loan Pool had a weighted average interest rate of 11.6% and aweighted average scheduled term to maturity of 77 months. The SeniorParticipation was secured by the entire Participation Loan Pool. We receivednet proceeds from the issuance of the Senior Participation of $29,750,000 thatwas used to reduce commitments and amounts outstanding under our SecuredRevolving Credit.

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

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

the underlying maturitiesof loans in the Participation Loan Pool. We accounted for the participationtransaction as a secured borrowing under SFAS No. 140 *“Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities.”*

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

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

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

**11. Stockholders’Equity**

*Preferred Stock.**  *Preferred Stock is comprised of the series summarizedas follows:

| ** **                                            | ** ** | **Shares outstanding at  December 31,** | ** ** | **Liquidation  Value** | ** ** | **Dividend** | ** ** | **Carrying Value at  December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------|------------|--------------|------------|----------------------------------------------------|------------|
| **Issuance**                                          | ** ** | ** **                                             | ** ** | **2006**               | ** ** | **2005**     | ** ** | **Per share**                                 | ** ** | **Rate** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Series C  Cumulative Convertible Preferred Stock |       | 2,000,000                                              |       | 2,000,000              |       |         | $          | 19.25                                              |       |   |   | 8.5 | % |   | $ | 18.80 |   | $ | 18.80 |   |
| Series E  Cumulative ConvertiblePreferred Stock  |       | 193,644                                                |       | 352,675                |       |         | $          | 25.00                                              |       |   |   | 8.5 | % |   | $ | 23.84 |   | $ | 23.84 |   |
| Series F Cumulative  Preferred Stock             |       | 6,640,000                                              |       | 6,640,000              |       |         | $          | 25.00                                              |       |   |   | 8.0 | % |   | $ | 23.99 |   | $ | 23.99 |   |
|                                                       |            |                                                        |            |                        |            |              |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our Series C Cumulative Convertible PreferredStock is convertible into 2,000,000 shares of our common stock at $19.25 pershare. Dividends are payable quarterly. Total shares reserved for issuance ofcommon stock related to the conversion of Series C Preferred Stock were2,000,000 shares at December 31, 2006 and 2005.

Our Series E Cumulative Convertible PreferredStock (or Series E Preferred Stock) is convertible at any time into shares ofour common stock at a conversion price of $12.50 per share of common stock,subject to adjustment under certain circumstances. On or after September 19,2006 and before September 19, 2008, we have the right but not theobligation, upon not less than 30 nor more than 60 days’ written notice, toredeem shares of the Series E Preferred Stock, in whole or in part, ifsuch notice is given within fifteen trading days of the end of the 30 dayperiod in which the closing price of our common stock on the NYSE equals orexceeds 125% of the applicable conversion price for 20 out of 30 consecutivetrading days, for cash at a redemption price of $25.00 per share, plus allaccrued and unpaid dividends thereon. We may not otherwise redeem the Series EPreferred Stock before September 19, 2008, except in order to preserve ourstatus as a real estate investment trust. Dividends are payable quarterly. During2006, holders of 159,031 shares of Series E Preferred Stock notified us oftheir election to convert such shares into 318,062 shares of common stock. During2005, holders of 208,594 shares of Series E Preferred Stock notified us oftheir election to convert such shares into 417,188 shares of common stock. During2004 holders of 1,638,731 shares of Series E Preferred Stock notified usof their election to convert such shares 

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

into 3,277,462 shares ofcommon stock. Total shares reserved for issuance of common stock related to theconversion of Series E Preferred Stock were 387,288 at December 31,2006. Subsequent to December 31, 2006, holders of 2,497 shares of Series EPreferred Stock notified us of their election to convert such shares into 4,994shares of common stock. Subsequent to this most recent conversion, there are191,147 shares of our Series E Preferred Stock outstanding.

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

While outstanding, the liquidation preferences of thepreferred stocks are *pari passu*. Nonehave any voting rights, any stated maturity, nor are they subject to anysinking fund or mandatory redemption.

*CommonStock.*   During 2005 we sold 1,500,000 shares ofcommon stock in a registered direct placement for $22.08 per share and used netproceeds of $32,626,000 for general corporate purposes including acquisitions,loan originations and debt retirement.

During 2006 we repurchased 71,493 shares of common stockfor an aggregate purchase price of $1,476,000 or $20.65 per share. During 2005,we repurchased and retired 184,700 shares of common stock for an aggregatepurchase price of $3,296,000 at an average purchase price of $17.85 per share. Theshares were purchased on the open market under a Board authorization topurchase up to 5,000,000 shares. Including these purchases, 2,604,393 shareshave been purchased under this authorization. Therefore, we continue to have anopen Board authorization to purchase an additional 2,395,607 shares. During2004 we did not repurchase any common stock.

In 2004 we filed a prospectus to cover the possibleresale of up to 865,387 shares of our common stock which were contingentlyissuable under certain partnership agreements. During 2004, partners in sevenof our limited partnerships elected to exchange their interests in thepartnerships. In accordance with the partnership agreements, at our option, weissued 208,401 shares of our common stock related to five limited partnerships,paid approximately $109,000 for the redemption of 7,027 shares owned by anotherlimited partner and paid approximately $8,387,000 to other limited partners inexchange for their partnership interests. At December 31, 2006, we haveonly one limited partnership remaining and there remains 201,882 shares of ourcommon stock reserved for this partnership agreement.

*AvailableShelf Registrations.**  *OnMarch 31, 2004, we filed a Form S-3 “shelf” registration whichbecame effective April 5, 2004 and provides us with the capacity to offerup to $200,000,000 in our debt and/or equity securities. At December 31,2006 we had $104,761,000 available under the “shelf” registration.

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

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

| ** **      | ** ** | **Year ended December 31, 2006** | ** ** | **Year ended December 31, 2005** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **      | ** ** | **Declared**                                         | ** ** | **Paid**                                             | ** ** | **Declared** | ** ** | **Paid** | ** ** |
| Preferred Stock |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Series C   |       |                                                 | $          | 3,272                                                |       |   |   | $ | 3,272 |   |   |   | $ | 3,272 |   |   |   | $ | 3,272 |   |   |
| Series E   |       |                                                 | 605        |                                                 |       |   | 689 |   |   |   | 791 |   |   |   | 902 |   |   |
| Series F   |       |                                                 | 13,280     |                                                 |       |   | 13,280 |   |   |   | 13,280 |   |   |   | 13,280 |   |   |
| Total Preferred |       |                                                 | 17,157     |                                                 |       |   | 17,241 |   |   |   | 17,343 |   |   |   | 17,454 |   |   |
| Common Stock    |       |                                                 | 25,285     | (2)                                                  |       |   | 33,668 | (3) |   |   | 37,348 | (4) |   |   | 28,965 | (5) |   |
| Total           |       |                                                 | $          | 42,442                                               | (1)        |   |   | $ | 50,909 | (1) |   |   | $ | 54,691 | (1) |   |   | $ | 46,419 | (1) |   |

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(1)          Difference betweendeclared and paid is the change in accrued distributions payable on the balancesheet.

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

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

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

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

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

In 2004, we redeemed of all of the remaining 1,838,520outstanding shares of Series A Preferred Stock and all of the1,988,000 outstanding shares of Series B Preferred Stock. Accordingly, in2004 we recognized the $1,861,000 and $2,168,000 of original issue costsrelated to the Series A and Series B Preferred Stock, respectively,as a preferred stock redemption charge in the first quarter of 2004.

*Other Equity.*   Otherequity consists of the following (*amounts inthousands*):

| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Notes receivable  from stockholders           |       | $                     | —     |   | $ | (226 | ) |
| Unamortized  balance on deferred compensation |       | —                |       | (3,123 | ) |
| Accumulated  comprehensive income             |       | 1,693                 |       | 2,408 |   |
| Total Other  Equity                           |       | $                     | 1,693      |   | $ | (941 | ) |

 

*NotesReceivable from Stockholders.*   In 1997, the Boardof Directors adopted a loan program designed to encourage executives, keyemployees, consultants and directors to acquire common stock 

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

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

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

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

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

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

*UnamortizedBalance on Defined Compensation.**  *Deferred compensation is the value of unvestedrestricted stock awards granted to employees. See *“Stock BasedCompensation Plans”* below.

*AccumulatedComprehensive Income.*   This balance representsthe net unrealized holding gains on available-for-sale REMIC Certificatesrecorded in 2005 when we repurchased the loans in the underlying loan pool. Thisamount is being amortized to increase interest income over the remaining lifeof the loans that we repurchased from the REMIC Pool. See *Note 6. RealEstate Investments* for further discussion of the repurchase of theloans underlying our investment in REMIC Certificates.

*StockBased Compensation Plans.**  *During2004 we adopted and our stockholders approved The 2004 Stock Option Plan underwhich 500,000 shares of common stock have been reserved for incentive andnonqualified stock option grants to officers, employees, non-employee directorsand consultants. The terms of the awards granted under The 2004 Stock OptionPlan are set by our compensation committee at its discretion. Total sharesavailable for future grant under The 2004 Stock Option Plan as of December 31,2006, 2005 and 2004 were 470,000, 470,000 and 470,000, respectively.  Alloptions outstanding that were granted under The 2004 Stock Option Plan vestover three years from the original date of grant.  Unexercised optionsexpire seven years after the date of vesting.

Our stockholders have approved the 1998 EquityParticipation Plan under which 500,000 shares of common stock were reserved. Theplan 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 underthe Plan are set by our compensation committee at its discretion; however, inthe case of incentive stock options, the term may not exceed 10 years from thedate 

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

of grant. Total sharesavailable for future grant under the 1998 Equity Participation Plan as of December 31,2006, 2005 and 2004 were 99,616, 99,616 and 99,816, respectively. All optionsoutstanding that were granted under the 1998 Equity Participation Plan vestover five years from the original date of grant. Unexercised options expireseven years after the date of vesting.

Nonqualifiedstock option activity for the years ended December 31, 2006, 2005 and2004, was as follows:

| ** **                     | ** ** | **Shares** | ** ** | **Weighted Average Price** | ** ** |
|--------------------------------|------------|------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **2006**   | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Outstanding,  January 1   |       | 110,200    |       | 200,300                              |       | 285,871 |   | $ | 9.26 |   | $ | 7.15 |   | $ | 5.63 |   |
| Granted                        |       | —     |       | 15,000                               |       | 30,000 |   | — |   | $ | 19.62 |   | $ | 15.13 |   |
| Exercised                      |       | (46,200    | )          | (101,100                             | )          | (99,171 | ) | $ | 7.77 |   | $ | 6.68 |   | $ | 5.51 |   |
| Canceled                       |       | —     |       | (4,000                               | )          | (16,400 | ) | — |   | $ | 7.63 |   | $ | 5.27 |   |
| Outstanding,  December 31 |       | 64,000     |       | 110,200                              |       | 200,300 |   | $ | 10.33 |   | $ | 9.26 |   | $ | 7.15 |   |
| Exercisable,  December 31 |       | 40,000     |       | 58,600                               |       | 75,100 |   | $ | 7.07 |   | $ | 5.46 |   | $ | 5.68 |   |

 

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

Restrictedstock activity for the years ended December 31, 2006, 2005 and 2004 was asfollows:

| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Outstanding,  January 1       |       | 177,495  |       | 132,772  |       | 150,912  |       |
| Granted                            |       | —   |       | 80,000   |       | 12,100   |       |
| Vested                             |       | (46,973  | )          | (24,143  | )          | —   |       |
| Canceled                           |       | —   |       | (11,134  | )          | (30,240  | )          |
| Outstanding,  December 31     |       | 130,522  |       | 177,495  |       | 132,772  |       |
| Compensation Expense for  the year |       | $        | 953,000    |     | $          | 540,000  |       | $ | 434,000 |   |
|                                    |            |          |            |          |            |          |            |  |  |  |

 

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

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

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

four years. Accordingly, werecorded $1,435,000 in deferred compensation based on the closing market priceper share on the date the award was modified. Prior to January 1, 2006,deferred compensation related to the award modification was being amortized tocompensation expense over the service period. Effective January 1, 2006,we adopted SFAS No. 123(R) which requires that an equity instrumentsuch as restricted stock, not be recognized until the compensation cost relatedto 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 incapital with an offsetting contra-equity account, deferred compensation, whichwas 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 itagainst additional paid-in capital) on January 1, 2006. Effective January 1,2006, additional paid-in capital and associated compensation expense related torestricted stock vesting is being recognized over the service period.

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

Prior to January 1, 2003, we accounted for stockoption grants in accordance with APB 25 and related Interpretations. Historically,we granted stock options for a fixed number of shares to employees with anexercise price equal to the fair value of the shares at the date of grant. UnderAPB 25, because the exercise price of our employee stock options equaled themarket price of the underlying stock on the date of grant, no compensationexpense was recognized. Therefore, for options that had been granted prior to January 1,2003 that vested in 2005 and 2004, no compensation expense was recognized inaccordance with APB 25. Effective January 1, 2003, we adopted SFAS No. 123and SFAS No. 148 “*Accounting forStock-Based Compensation—Transition and Disclosure,*” (or SFAS No. 148)on a “prospective basis” for all employee awards granted, modified or settledon or after January 1, 2003. Therefore, for options granted since January 1,2003, compensation expense was recognized in accordance with SFAS No. 123and SFAS No. 148. Effective January 1, 2006, we adopted SFAS No. 123(R) whichrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the income statement based on their fairvalues. Thus, for all options that vested during 2006, regardless of when theywere granted, compensation expense was recognized during 2006 according to SFASNo. 123(R).

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

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

Thefollowing table illustrates the effect on net income and earnings per share asif the fair value recognition provision of SFAS No. 123(R) had beenapplied to all outstanding and unvested stock options in each period presented.For purposes of this pro forma disclosure, the value of the options isestimated using a Black-Scholes-Merton option-pricing formula and amortized toexpense over the options’ vesting periods *(in thousands)*:

| ** **                                                                                                                                                                                                                    | ** **   | **Year Ended December 31,** | ** **   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------------------------------|--------------|
| ** **                                                                                                                                                                                                                    | *** *** | **2006  (actual)**                         | *** *** | **2005  (proforma)** | *** *** | **2004  (proforma)** | *** *** |
| Net income  available to common stockholders, as reported                                                                                                                                                                     |         | $                                          | 61,631       |   |   | $ | 35,366 |   |   |   | $ | 15,003 |   |   |
| Add: Stock-based  compensation expense in the period                                                                                                                                                                          |         | 49                                         |         |   | 39 |   |   |   | 17 |   |   |
| Deduct: Total stock-based  compensation expense            determined under  fair value method for             all awards |         | (49                                        | )            |   | (54 | ) |   |   | (30 | ) |   |
| Pro forma net  income available to common stockholders                                                                                                                                                                        |         | $                                          | 61,631       |   |   | $ | 35,351 |   |   |   | $ | 14,990 |   |   |
| Net income per common  share available to common stockholders:                                                                                                                                                                |         |                                       |         |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                                                                                                                                        |         | $                                          | 2.64         |   |   | $ | 1.58 |   |   |   | $ | 0.77 |   |   |
| Basic—pro forma                                                                                                                                                                                                          |         | $                                          | 2.64         |   |   | $ | 1.58 |   |   |   | $ | 0.77 |   |   |
| Diluted—as reported                                                                                                                                                                                                      |         | $                                          | 2.51         |   |   | $ | 1.56 |   |   |   | $ | 0.77 |   |   |
| Diluted—pro forma                                                                                                                                                                                                        |         | $                                          | 2.51         |   |   | $ | 1.56 |   |   |   | $ | 0.77 |   |   |

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*Note: Adjustments to compensation expense relatedto restricted shares have been excluded from this table since expense forrestricted shares is already reflected in net income and is the same under APB No. 25and SFAS No. 123(R). Above pro forma disclosures are provided for 2005 and2004 because employee stock options issued prior to January 1, 2003, thedate we adopted SFAS No. 123 and SFAS No. 148, were not accounted forusing the fair value method during that period. Disclosures are provided for2006 for comparative purposes since share-based payments have been accountedfor under SFAS No. 123(R)’s fair value method beginning January 1,2006.*

As of December 31,2006, 2005 and 2004, there were 64,000, 110,200 and 200,300 optionsoutstanding, respectively. The fair value of these options was estimatedutilizing the Black-Scholes-Merton valuation model and assumptions as of eachrespective grant date. No options were granted in 2006. In determining theestimated fair value for the options granted in 2005, the weighted averageexpected life assumption was three years, the weighted average volatility was0.31, the weighted average risk free interest rate was 3.47% and the expecteddividend yield was 6.12%. The weighted average fair value of the optionsgranted was estimated to be $2.87. In determining the estimated fair value forthe options granted in 2004, the weighted average expected life assumption wasthree years, the weighted average volatility was 0.39, the weighted averagerisk free interest rate was 3.18% and the expected dividend yield was 7.27%. Theweighted average fair value of the options granted was estimated to be $2.58. Theweighted average exercise price of the options was $10.33, $9.26 and $7.15 andthe weighted average remaining contractual life was 0.5, 1.1 and 1.2 years asof December 31, 2006, 2005 and 2004, respectively.

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

**12. Commitments andContingencies**

It is our current policyand we intend to continue this policy that all borrowers of funds from us andlessees of any of our properties secure adequate comprehensive property andgeneral and professional liability insurance that covers us as well as theborrower and/or lessee. Even though that is our policy, certain borrowers andlessees have been unable to obtain general and professional liability insurancebecause the cost of such insurance has increased substantially and someinsurers have stopped offering such insurance for long-term care facilities. Additionally,insurance companies have filed for bankruptcy protection leaving certain of ourborrowers and/or lessees without coverage for periods that were believed to becovered prior to such bankruptcies. The unavailability and associated exposureas well as increased cost of such insurance could have a material adverseeffect on the lessees and borrowers, including their ability to make lease ormortgage payments. Although we contend that as a non-possessory landlord we arenot generally responsible for what takes place on real estate we do notpossess, claims including general and professional liability claims, may stillbe asserted against us which may result in costs and exposure for whichinsurance is not available. Certain risks may be uninsurable, not economicallyinsurable or insurance may not be available and there can be no assurance thatwe, a borrower or lessee will have adequate funds to cover all contingencies. Ifan uninsured loss or a loss in excess of insured limits occurs with respect toone or more of our properties, we could be subject to an adverse claimincluding claims for general or professional liability, could lose the capitalthat we have invested in the properties, as well as the anticipated futurerevenue for the properties and, in the case of debt which is with recourse tous, we would remain obligated for any mortgage debt or other financialobligations related to the properties. Certain losses such as losses due tofloods or seismic activity if insurance is available may be insured subject tocertain limitations including large deductibles or co-payments and policylimits.

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

We committed to provide to Alterra $2,500,000 overthree years ending December 4, 2009 to expand the 35 properties they leasefrom us. This investment would be made at a 10% annual return to us. To date,Alterra has not requested any funds under this agreement.

We committed to provide Extendicare REIT & ALC up to$5,000,000 per year, under certain conditions, for expansion of the 37properties they lease from us under certain conditions. Should we expend such funds,Extendicare REIT & ALC’smonthly minimum rent would increase by an amount equal to (a) 9.5% plusthe positive difference, if any, between the average yield on the U.S. Treasury10-year note for the five days prior to funding, minus 420 basis points (expressedas a percentage), multiplied by (b) the amounts funded. To date, Extendicare REIT & ALC havenot requested any funds under this agreement.

We committed to provide Preferred Care $3,000,000 forcapital improvements on 25 of the skilled nursing properties they lease from usunder a new master lease. During 2006, we funded $96,000 under this agreement. Subsequentto 2006, we funded $213,000 under this agreement. We also committed to investup to $7,100,000 on specific projects on five skilled nursing properties theylease from us. The $7,100,000 commitment includes interest capitalized at 11% on eachadvance made from each disbursement date until final distribution by specificproject. Upon final distribution for each specific project, minimum rent shallincrease by the total project cost multiplied by 11%. To date no fundshave been requested under this agreement. These commitments expire on March 31,2010. We alsocommitted to provide Preferred Care with a $500,000 capital allowance for askilled nursing property they lease from us under a separate lease. This 

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

commitment expires on June 30, 2007. Monthlyminimum rent increases by the previous month’s capital funding multiplied by10%. To date no funds have been requested under this agreement.

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

We committed to provide a lessee of a skilled nursingproperty an accounts receivable financing. The loan has a credit limit not toexceed $75,000 and an interest rate of 10%. The commitment expires on June 30,2007. To date $25,000 has been requested under this agreement. We have alsocommitted to replace the roof and install a fire sprinkler system for thisproperty. The lessee’s monthly minimum rent will increase by an amount equal to11% of our investment in these capital improvements. During 2006, we funded$95,000 under this agreement.

We committed to provide a lessee of three skillednursing properties with the following: up to $260,000 to invest in capital improvements to a property theylease from us; up to $735,000 to invest in capital improvements on twoproperties they lease from us, however, under this commitment, the monthlyminimum rent will increase by the amount of the capital funding multiplied by11%; and up to $3,000,000 to purchase land, construct and equip a new propertyin the general vicinity of an existing property they lease from us with acorresponding increase in the monthly minimum rent of 11% multiplied by theamount funded plus capitalized interest costs associated with the constructionof the new property. To date no funds have been requested under theseagreements.

We committed to provide a lessee with a $410,000capital improvement allowance for two skilled nursing properties and anassisted living property they lease from us. The commitment includes interestcapitalized at 10% on each advance made from each disbursement date until finaldistribution of the commitment. The commitment expires on March 31, 2007. Uponfinal distribution of the capital allowance, minimum rent shall increase by thetotal commitment multiplied by 10%. During 2006, we funded $238,000 under theseagreements.

We committed to provide a lessee with a $200,000capital improvement allowance for three skilled nursing properties they leasefrom us. The commitment includes interest capitalized at 10.3% on each advancemade from each disbursement date until final distribution of the commitment. Thecommitment expires on June 30, 2007. Upon final distribution of thecapital allowance, minimum rent shall increase by the total commitmentmultiplied by 10.3%. During 2006, we funded $175,000 under this agreement.

We committed to provide a lessee of a skilled nursingproperty $1,700,000 to invest in leasehold improvements to the property theylease from us. The commitment includes interest capitalized at 10% on eachadvance made from each disbursement date until final distribution of thecommitment. The leasehold improvements must be completed by March 31, 2007.Upon final distribution of the capital allowance, minimum rent shall increaseby the total commitment multiplied by 10%. During 2006, we funded $920,000under this agreement. Subsequent to December 31, 2006, we funded anadditional $111,000 under this agreement.

We committed to provide alessee of an assisted living property with a $1,000,000 capital improvementallowance for a property they lease from us. Monthly minimum rent increases bythe previous month’s capital funding multiplied by 8%. The commitment willmature in February 2008. During 2006, we funded 

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

$351,000under this agreement. Subsequent to December 31, 2006, we funded anadditional $282,000 under this agreement.

**13. Distributions**

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

For federal tax purposes, distributions tostockholders are treated as ordinary income, capital gains, return of capitalor a combination thereof. Distributions for 2006, 2005 and 2004 were cashdistributions.

Thefederal income tax classification of the per share common stock distributionsare (*unaudited*):

|                            | ** ** | **Year Ended** | ** ** |
|---------------------------------|------------|---------------------|------------|
| ** **                      | ** ** | **2006**            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Ordinary income                 |       | $                   | 0.405      |   | $ | 0.920 |   | $ | 0.615 |   |
| Non-taxable  distribution       |       | —              |       | 0.370 |   | 0.510 |   |
| Section 1250  capital gain |       | 0.243               |       | — |   | — |   |
| Long term capital  gain         |       | 0.792               |       | — |   | — |   |
| Total                           |       | $                   | 1.44       |   | $ | 1.29 |   | $ | 1.125 |   |

 

**14. Net Income Per Common Share**

Basic and diluted netincome per share were as follows *(in thousands except pershare amounts)*:

| ** **                                               | ** ** | **For the year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                               |       | $                                                            | 78,788     |   | $ | 52,709 |   | $ | 36,388 |   |
| Preferred stock  redemption                              |       | —                                                       |       | — |   | (4,029 | ) |
| Preferred  dividends                                     |       | (17,157                                                      | )          | (17,343 | ) | (17,356 | ) |
| Net income for  basic net income per common share        |       | 61,631                                                       |       | 35,366 |   | 15,003 |   |
| Other dilutive  securities                               |       | 4,219                                                        | (3)        | 790 | (2) | — | (1) |
| Net income for  diluted net income per common share |       | $                                                            | 65,850     |   | $ | 36,156 |   | $ | 15,003 |   |
| Shares for basic  net income per common share            |       | 23,366                                                       |       | 22,325 |   | 19,432 |   |
| Stock options                                            |       | 50                                                           |       | 73 |   | 135 |   |
| Other dilutive  securities                               |       | 2,770                                                        | (3)        | 744 | (2) | — | (1) |
| Shares for  diluted net income per common share          |       | 26,186                                                       |       | 23,142 |   | 19,567 |   |
| Basic net income  per common share                       |       | $                                                            | 2.64       |   | $ | 1.58 |   | $ | 0.77 |   |
| Diluted net income per  common share                     |       | $                                                            | 2.51       |   | $ | 1.56 |   | $ | 0.77 |   |

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(1)          The Series CCumulative Convertible Preferred Stock, the Series E CumulativeConvertible Preferred Stock and the convertible limited partnership units havebeen excluded from the computation of diluted net income per share as suchinclusion would be anti-dilutive.

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

(2)          The Series CCumulative Convertible Preferred Stock and the convertible limited partnershipunits have been excluded from the computation of diluted net income per shareas such inclusion would be anti-dilutive.

(3)          IncludesSeries C Cumulative Convertible Preferred Stock, the Series ECumulative Convertible Preferred Stock and the convertible limited partnershipunits.

**15. QuarterlyFinancial Information (Unaudited)**

| ** **                                                                          | ** **   | **For the quarter ended**                             | ** **   |
|-------------------------------------------------------------------------------------|--------------|----------------------------------------------------------------------|--------------|
| ** **                                                                          | ** **   | **March 31,**                                                   | ** **   | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                          | *** *** | **(in thousands except per share amounts)** | *** *** |
| ***2006***                                                                          |         |                                                                 |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues(1)                                                                         |         |                                                                 | $            | 18,034 |   |   | $ | 18,646 |   |   | $ | 18,131 |   |   |   | $ | 18,352 |   |   |
| Net income from discontinued operations                                             |         |                                                                 | 32,504       |   |   | 122 |   |   | 677 |   |   |   | — |   |   |
| Net income available to common stockholders                                         |         |                                                                 | 39,432       |   |   | 7,683 |   |   | 6,809 |   |   |   | 7,707 |   |   |
| Net income per common share from continuing  operations net of preferred dividends: |         |                                                                 |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                               |         |                                                                 | $            | 0.30 |   |   | $ | 0.32 |   |   | $ | 0.26 |   |   |   | $ | 0.33 |   |   |
| Diluted                                                                             |         |                                                                 | $            | 0.30 |   |   | $ | 0.32 |   |   | $ | 0.26 |   |   |   | $ | 0.33 |   |   |
| Net income per common share from discontinued  operations:                          |         |                                                                 |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                               |         |                                                                 | $            | 1.39 |   |   | $ | 0.01 |   |   | $ | 0.03 |   |   |   | $ | — |   |   |
| Diluted                                                                             |         |                                                                 | $            | 1.28 |   |   | $ | 0.01 |   |   | $ | 0.03 |   |   |   | $ | — |   |   |
| Net income per common share available to common  stockholders:                      |         |                                                                 |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                               |         |                                                                 | $            | 1.69 |   |   | $ | 0.33 |   |   | $ | 0.29 |   |   |   | $ | 0.33 |   |   |
| Diluted                                                                             |         |                                                                 | $            | 1.55 |   |   | $ | 0.33 |   |   | $ | 0.29 |   |   |   | $ | 0.33 |   |   |
| Dividends per share declared                                                        |         |                                                                 | $            | 0.36 | (6) |   | $ | — | (7) |   | $ | 0.36 |   |   |   | $ | 0.36 |   |   |
| Dividend per share paid                                                             |         |                                                                 | $            | 0.36 |   |   | $ | 0.36 |   |   | $ | 0.36 |   |   |   | $ | 0.36 |   |   |
| ***2005***                                                                          |         |                                                                 |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues(1)                                                                         |         |                                                                 | $            | 21,634 |   |   | $ | 15,783 |   |   | $ | 16.965 |   |   |   | $ | 18,026 |   |   |
| Net income from discontinued operations                                             |         |                                                                 | 897          |   |   | 905 |   |   | 40 |   |   |   | 230 |   |   |
| Net income available to common stockholders                                         |         |                                                                 | 17,157       | (2) |   | 5,793 |   |   | 5,927 |   |   |   | 6,489 |   |   |
| Net income per common share from continuing  operations net of preferred dividends: |         |                                                                 |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                               |         |                                                                 | $            | 0.76 |   |   | $ | 0.23 |   |   | $ | 0.26 |   |   |   | $ | 0.27 |   |   |
| Diluted                                                                             |         |                                                                 | $            | 0.71 |   |   | $ | 0.23 |   |   | $ | 0.26 |   |   |   | $ | 0.27 |   |   |
| Net income per common share from discontinued  operations:                          |         |                                                                 |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                               |         |                                                                 | $            | 0.04 |   |   | $ | 0.04 |   |   | $ | — |   |   |   | $ | 0.01 |   |   |
| Diluted                                                                             |         |                                                                 | $            | 0.04 |   |   | $ | 0.04 |   |   | $ | — |   |   |   | $ | 0.01 |   |   |
| Net income per common share available to common  stockholders:                      |         |                                                                 |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                               |         |                                                                 | $            | 0.80 |   |   | $ | 0.27 |   |   | $ | 0.26 |   |   |   | $ | 0.28 |   |   |
| Diluted                                                                             |         |                                                                 | $            | 0.74 |   |   | $ | 0.27 |   |   | $ | 0.26 |   |   |   | $ | 0.28 |   |   |
| Dividends per share declared                                                        |         |                                                                 | $            | 0.30 |   |   | $ | 0.66 | (3) |   | $ | 0.33 | (4) |   |   | $ | 0.36 | (5) |   |
| Dividend per share paid                                                             |         |                                                                 | $            | 0.30 |   |   | $ | 0.33 |   |   | $ | 0.33 |   |   |   | $ | 0.33 |   |   |

----

(1)                          As required by SFAS No. 144, revenuesrelated to properties sold in 2006 and 2005 have been reclassified todiscontinued operations for all periods presented.

(2)                          Includes $11,696 in income related to thecollection of a note receivable. See *Note 8.Notes Receivable* for further discussion.

(3)                          Represents second and third quarter 2005dividends.

(4)                          Represents fourth quarter 2005 dividends.

(5)                          Represents first quarter 2006 dividends.

(6)                          Represents second quarter 2006 dividends. Firstquarter 2006 dividends were declared in the fourth quarter 2005.

74

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

(7)                          Second quarter 2006 dividends weredeclared in first quarter 2006. Third quarter 2006 dividends were declared inthird quarter 2006.

NOTE:     Quarterly and year-to-date computations of per shareamounts are made independently. Therefore, the sum of per share amounts for thequarters may not agree with the per share amounts for the year. Computations ofper share amounts from continuing operations, discontinued operations and netincome (loss) are made independently. Therefore, the sum of per share amountsfrom continuing operations and discontinued operations may not agree with theper share amounts from net income (loss) available to common stockholders.

75

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**Item 9.**                        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**Item 9A.**                CONTROLSAND PROCEDURES

**Evaluation ofDisclosure Controls and Procedures.**

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, haveevaluated the effectiveness of our disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities and Exchange Act of 1934, as amended (or Exchange Act”). As ofthe end of the period covered by this report based on such evaluation our ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of such period, our disclosure controls and procedures are effective toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission’s rules and forms and that it is accumulated and communicatedto management, including the Chief Executive Officer, Chief Financial Officerand Audit Committee, as appropriate to allow timely decisions regardingrequired disclosure.

**Design andEvaluation of Internal Control Over Financial Reporting.**

Management Report onInternal Control Over Financial Reporting and the Report of IndependentRegistered Public Accounting Firm thereon are set forth on pages 77 and 78.

**Changes in InternalControl Over Financial Reporting.**

There has been no change in our internal control overfinancial reporting during the fourth fiscal quarter ended December 31,2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

76

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**MANAGEMENT REPORTON INTERNAL CONTROL OVER FINANCIAL REPORTING**

The management ofLTC Properties, Inc. is responsible for establishing and maintainingadequate internal control over financial reporting. Internal control overfinancial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgatedunder the Securities Exchange Act of 1934 as a process designed by, or underthe supervision of, the company’s principal executive and principal financialofficers and effected by the company’s board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles andincludes those policies and procedures that:

·       Pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the company;

·       Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and

·       Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

The company’s management assessed the effectiveness ofthe company’s internal control over financial reporting as of December 31,2006. In making this assessment, the company’s management used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in Internal Control-Integrated Framework.

Based on our assessment, management believes that, asof December 31, 2006, the company’s internal control over financialreporting is effective based on those criteria.

The company’s independent auditors have issued anaudit report on our assessment of the company’s internal control over financialreporting. This report appears on the following page.

77

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Stockholders of LTC Properties, Inc.

We have audited management’sassessment, included in the accompanying Management Report on Internal ControlOver Financial Reporting, that LTC Properties, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2006, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). LTC Properties, Inc.’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

In our opinion, management’sassessment that LTC Properties, Inc. maintained effective internal controlover financial reporting as of December 31, 2006, is fairly stated, in allmaterial respects, based on the COSO criteria. Also, in our opinion, LTCProperties, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2006, based on theCOSO criteria.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of LTC Properties, Inc.as of December 31, 2006 and 2005, and the related consolidated statementsof income and comprehensive income, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2006 of LTCProperties, Inc. and our report dated February 21, 2007 expressed anunqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, CaliforniaFebruary 21, 2007

78

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**Item 10.**                 DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Theinformation with respect to directors, set forth in our Proxy Statementrelating to the Annual Meeting of Stockholders to be held May 15, 2007under the caption “Election of Directors” is incorporated herein by reference. Ourexecutive officers as of February 22, 2007 are:

| **Name**              | ** ** | ** ** | ** ** | **Age** | ** ** | **Position**                                                                          | ** ** |
|-----------------------|------------|------------|------------|---------|------------|---------------------------------------------------------------------------------------|------------|
| Andre C.  Dimitriadis |       |       | 66         |    |       | Chairman,  Chief Executive Officer, and Director                                      |       |
| Wendy L. Simpson      |       |       | 57         |    |       | President, Chief Operating Officer, Chief Financial  Officer,  Treasurer and Director |       |

 

Andre C. Dimitriadis founded LTC Properties in 1992and has been our Chairman and Chief Executive Officer since inception. In 2000 Mr. Dimitriadis also assumed the position ofPresident. In October 2005, Mr. Dimitriadis resigned from theposition of President but remains Chairman and Chief Executive Officer.

Wendy L. Simpson has been a director since 1995, ViceChairman from April 2000 through October 2005, Chief FinancialOfficer since July 2000, Treasurer since January 2005 and Presidentand Chief Operating Officer since October 2005.

Subsequent to December 31, 2006, Andre C.Dimitriadis was appointed Executive Chairman of our Board of Directors andWendy L. Simpson was appointed Chief Executive Officer, President and Director,effective March 1, 2007.

Thefollowing person has been appointed by our Board of Directors to be anexecutive officer effective March 1, 2007:

| **Name**                | ** ** | ** ** | ** ** | **Age** | ** ** | **Position**                                       | ** ** |
|-------------------------|------------|------------|------------|---------|------------|----------------------------------------------------|------------|
| Pamela  Shelley-Kessler |       |       | 41         |    |       | Senior  Vice President and Chief Financial Officer |       |
|                         |            |            |            |         |            |                                                    |            |  |  |

 

Pamela Shelley-Kessler joined our company as VicePresident and Controller in July 2000.

The other informationrequired by this Item 10 is incorporated by reference to our definitive ProxyStatement relating to the Annual Meeting of Stockholders to be held on May 15,2007.

**Code of Ethics**

Information relating toour Code of Business Conduct and Ethics that applies to our principal executiveofficer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions is included in Part I,Item 1 of this report.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Information with respectto compliance with Section 16(a) of the Securities Exchange Act of1934, as amended, set forth in our Proxy Statement relating to the AnnualMeeting of Stockholders to be held on May 15, 2007 under the caption “SecurityOwnership of Certain Beneficial Owners and Management—Section 16(a) BeneficialOwnership Reporting Compliance,” is incorporated herein by reference.

**Item 11.**                 EXECUTIVECOMPENSATION

Information relating toexecutive compensation, set forth in our Proxy Statement relating to the AnnualMeeting of Stockholders to be held on May 15, 2007, under the caption “ExecutiveCompensation,” is incorporated herein by reference. The Compensation CommitteeReport included in the Proxy Statement is expressly not incorporated herein byreference.

79

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**Item 12.**                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Information relating to the security ownership ofmanagement and certain beneficial owners, set forth our Proxy Statementrelating to the Annual Meeting of Stockholders to be held May 15, 2007under the caption “Security Ownership of Certain Beneficial Owners andManagement,” is incorporated herein by reference.

Information relating tosecurities authorized for issuance under our equity compensation plans, is setforth in Part I, Item 5 of this report under the caption “EquityCompensation Plan Information.”

**Item 13.**                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information relating tocertain relationships and related transactions, set forth in our ProxyStatement relating to the Annual Meeting of Stockholders to be held on May 15,2007 under the caption “Certain Relationships and Related Transactions” and “DirectorIndependence” is incorporated herein by reference.

**Item 14.**                 PRINCIPALACCOUNTANT FEES AND SERVICES

Information relating tothe fees paid to our accountant, set forth in our Proxy Statement relating tothe Annual Meeting of Stockholders to be held on May 15, 2007, under thecaption “Audit Committee—Audit and Non-Audit Fees,” is incorporated herein byreference.

**Item 15.**                 FINANCIALSTATEMENT SCHEDULES AND EXHIBITS

(a)   Financial Statement Schedules

The financial statement schedules listed in theaccompanying index to financial statement schedules are filed as part of thisannual report.

(b)   Exhibits

The exhibits listed in the accompanying index toexhibits are filed as part of this annual report.

80

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**LTC PROPERTIES, INC.INDEX TO FINANCIAL STATEMENT SCHEDULES(Item 15(a))**

| II.  |   | Valuation and Qualifying Accounts        |   | 82 |   |
|------|--------|------------------------------------------|--------|----|--------|
| III. |   | Real Estate and Accumulated Depreciation |   | 83 |   |
| IV.  |   | Mortgage Loans on Real Estate            |   | 87 |   |

 

All other schedules have been omitted since therequired information is not present or not present in amounts sufficient torequire submission of the schedule.

81

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**LTC PROPERTIES, INC.SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS (in thousands)**

| ** **                        | ** ** | **Balance at  Beginning of Period** | ** ** | **Charge to  Operations** | ** ** | **Balance at  End of Period** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------|------------|
| Allowance for Doubtful  Accounts: |       |                                               |       |                           |       |                                         |       |   |   |   |   |   |   |
| 2006                              |       |                                               | $          | 1,280                          |       |                                         |       | $ | — |   |   |   | $ | 1,280 |   |   |
| 2005                              |       |                                               | $          | 1,280                          |       |                                         |       | $ | — |   |   |   | $ | 1,280 |   |   |
| 2004                              |       |                                               | $          | 1,280                          |       |                                         |       | $ | — |   |   |   | $ | 1,280 |   |   |

 

82

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

| ** **                   | ** ** | ** **       | ** ** | **Initial Cost to   Company** | ** ** | **Costs   Capitalized   Subsequent** | ** ** | **Gross Amount at which   Carried   at December 31, 2006** | ** **               | ** ** | ** ** | **Construction/**                    | ** **                                         | ** **   | ** ** |
|------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------------------------------------------|--------------------------|------------|------------|--------------------------------------|----------------------------------------------------|--------------|------------|
| ** **                   | ** ** | **Encumbrances** | ** ** | **Land**                                | ** ** | **Building and   Improvements** | ** ** | **to   Acquisition**                                                                     | ** **               | **Land**   | ** ** | **Building and   Improvements** | ** **                                         | **Total(1)** | ** ** | **Accum.   Deprec.(2)** | ** ** | **Renovation   Date** | ** ** | **Acq.   Date** | ** ** |
| Skilled Nursing  Properties: |       |             |       |                                    |       |                                 |       |                                                                                     |                     |       |       |                                 |                                               |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Alamogordo, NM               |       |             | —     |                                    |       | $    210         |       |                                                                                     | $   2,590 |       |       |                                 | $        3 |         |       | $    210 |   |   | $   2,593 |   |   | $   2,803 |   |   | $      355 |   |   | 1985 |   | Dec-01 |   |
| Albuquerque, NM              |       |             | —     |                                    |       | 1,696                                |       |                                                                                     | 3,891                    |       |       |                                 | 6                                                  |         |       | 1,696 |   |   | 3,897 |   |   | 5,593 |   |   | 191 |   |   | 1967 |   | Sep-05 |   |
| Albuquerque, NM              |       |             | —     |                                    |       | 2,414                                |       |                                                                                     | 8,910                    |       |       |                                 | 10                                                 |         |       | 2,414 |   |   | 8,920 |   |   | 11,334 |   |   | 437 |   |   | 1982 |   | Sep-05 |   |
| Albuquerque, NM              |       |             | —     |                                    |       | 2,463                                |       |                                                                                     | 7,647                    |       |       |                                 | 9                                                  |         |       | 2,463 |   |   | 7,656 |   |   | 10,119 |   |   | 375 |   |   | 1970 |   | Sep-05 |   |
| Altoona, IA                  |       |             | —     |                                    |       | 105                                  |       |                                                                                     | 2,309                    |       |       |                                 | 398                                                |         |       | 105 |   |   | 2,707 |   |   | 2,812 |   |   | 924 |   |   | 1973 |   | Jan-96 |   |
| Aransas Pass, TX             |       |             | —     |                                    |       | 154                                  |       |                                                                                     | 1,276                    |       |       |                                 | 38                                                 |         |       | 154 |   |   | 1,314 |   |   | 1,468 |   |   | 74 |   |   | 1973 |   | Dec-04 |   |
| Atlanta, GA                  |       |             | —     |                                    |       | 175                                  |       |                                                                                     | 1,282                    |       |       |                                 | 3                                                  |         |       | 175 |   |   | 1,285 |   |   | 1,460 |   |   | 433 |   |   | 1968 |   | Sep-99 |   |
| Atmore, AL                   |       |             | —     |                                    |       | 131                                  |       |                                                                                     | 2,877                    |       |       |                                 | 196                                                |         |       | 131 |   |   | 3,073 |   |   | 3,204 |   |   | 1,010 |   |   | 1967/1974 |   | Jan-96 |   |
| Beaumont, TX                 |       |             | —     |                                    |       | 370                                  |       |                                                                                     | 1,160                    |       |       |                                 | 177                                                |         |       | 370 |   |   | 1,337 |   |   | 1,707 |   |   | 53 |   |   | 1950 |   | Dec-05 |   |
| Beeville, TX                 |       |             | —     |                                    |       | 186                                  |       |                                                                                     | 1,197                    |       |       |                                 | 32                                                 |         |       | 186 |   |   | 1,229 |   |   | 1,415 |   |   | 68 |   |   | 1974 |   | Dec-04 |   |
| Benbrook, TX                 |       |             | —     |                                    |       | 503                                  |       |                                                                                     | 2,121                    |       |       |                                 | 102                                                |         |       | 503 |   |   | 2,223 |   |   | 2,726 |   |   | 168 |   |   | 1976 |   | Jan-05 |   |
| Bradenton, FL                |       |             | —     |                                    |       | 330                                  |       |                                                                                     | 2,720                    |       |       |                                 | 136                                                |         |       | 330 |   |   | 2,856 |   |   | 3,186 |   |   | 1,125 |   |   | 1989/2002 |   | Sep-93 |   |
| Brownsville, TX              |       |             | —     |                                    |       | 302                                  |       |                                                                                     | 1,856                    |       |       |                                 | 32                                                 |         |       | 302 |   |   | 1,888 |   |   | 2,190 |   |   | 184 |   |   | 1968 |   | Apr-04 |   |
| Canyon, TX(7)                |       |             | —     |                                    |       | 196                                  |       |                                                                                     | 506                      |       |       |                                 | 211                                                |         |       | 196 |   |   | 717 |   |   | 913 |   |   | 297 |   |   | 1985/86 |   | Jun-00 |   |
| Carroll, IA                  |       |             | —     |                                    |       | 47                                   |       |                                                                                     | 1,033                    |       |       |                                 | 201                                                |         |       | 47 |   |   | 1,234 |   |   | 1,281 |   |   | 407 |   |   | 1969 |   | Jan-96 |   |
| Chesapeake, VA               |       |             | —     |                                    |       | 388                                  |       |                                                                                     | 3,469                    |       |       |                                 | 133                                                |         |       | 388 |   |   | 3,602 |   |   | 3,990 |   |   | 1,360 |   |   | 1977/2002 |   | Oct-95 |   |
| Clovis, NM                   |       |             | —     |                                    |       | 561                                  |       |                                                                                     | 5,539                    |       |       |                                 | 250                                                |         |       | 561 |   |   | 5,789 |   |   | 6,350 |   |   | 827 |   |   | 1970/2006 |   | Dec-01 |   |
| Clovis, NM                   |       |             | —     |                                    |       | 598                                  |       |                                                                                     | 5,902                    |       |       |                                 | —                                             |         |       | 598 |   |   | 5,902 |   |   | 6,500 |   |   | 876 |   |   | 1969/95 |   | Dec-01 |   |
| Commerce City, CO            |       |             | —     |                                    |       | 236                                  |       |                                                                                     | 3,217                    |       |       |                                 | 91                                                 |         |       | 236 |   |   | 3,308 |   |   | 3,544 |   |   | 304 |   |   | 1964 |   | Jun-04 |   |
| Commerce City, CO            |       |             | —     |                                    |       | 161                                  |       |                                                                                     | 2,160                    |       |       |                                 | 21                                                 |         |       | 161 |   |   | 2,181 |   |   | 2,342 |   |   | 200 |   |   | 1967 |   | Jun-04 |   |
| Del Norte, CO                |       |             | —     |                                    |       | 103                                  |       |                                                                                     | 930                      |       |       |                                 | 97                                                 |         |       | 103 |   |   | 1,027 |   |   | 1,130 |   |   | 53 |   |   | 1955/2006 |   | Jun-05 |   |
| Des Moines, IA(7)            |       |             | —     |                                    |       | 115                                  |       |                                                                                     | 2,096                    |       |       |                                 | 1,384                                              |         |       | 115 |   |   | 3,480 |   |   | 3,595 |   |   | 982 |   |   | 1972 |   | Sep-99 |   |
| Dresden, TN                  |       |             | —     |                                    |       | 31                                   |       |                                                                                     | 1,529                    |       |       |                                 | 123                                                |         |       | 31 |   |   | 1,652 |   |   | 1,683 |   |   | 374 |   |   | 1966/2002 |   | Nov-00 |   |
| Gardendale, AL               |       |             | —     |                                    |       | 84                                   |       |                                                                                     | 6,316                    |       |       |                                 | —                                             |         |       | 84 |   |   | 6,316 |   |   | 6,400 |   |   | 2,083 |   |   | 1976/1984 |   | May-96 |   |
| Gardner, KS                  |       |             | —     |                                    |       | 896                                  |       |                                                                                     | 4,478                    |       |       |                                 | 757                                                |         |       | 896 |   |   | 5,235 |   |   | 6,131 |   |   | 1,197 |   |   | 1961/1974 |   | Dec-99 |   |
| Granger, IA                  |       |             | —     |                                    |       | 62                                   |       |                                                                                     | 1,356                    |       |       |                                 | 163                                                |         |       | 62 |   |   | 1,519 |   |   | 1,581 |   |   | 502 |   |   | 1979 |   | Jan-96 |   |
| Grapevine, TX                |       |             | —     |                                    |       | 431                                  |       |                                                                                     | 1,449                    |       |       |                                 | 170                                                |         |       | 431 |   |   | 1,619 |   |   | 2,050 |   |   | 350 |   |   | 1974 |   | Jan-02 |   |
| Griffin, GA                  |       |             | —     |                                    |       | 500                                  |       |                                                                                     | 2,900                    |       |       |                                 | —                                             |         |       | 500 |   |   | 2,900 |   |   | 3,400 |   |   | 805 |   |   | 1969 |   | Sep-99 |   |
| Hereford, TX(7)              |       |             | —     |                                    |       | 106                                  |       |                                                                                     | (106                     | )          |       |                                 | 11                                                 |         |       | 106 |   |   | (95 | ) |   | 11 |   |   | 2 |   |   | 1985 |   | Oct-01 |   |
| Holyoke, CO                  |       |             | —     |                                    |       | 211                                  |       |                                                                                     | 1,513                    |       |       |                                 | 257                                                |         |       | 211 |   |   | 1,770 |   |   | 1,981 |   |   | 607 |   |   | 1963 |   | Nov-00 |   |
| Houston, TX                  |       |             | —     |                                    |       | 202                                  |       |                                                                                     | 4,458                    |       |       |                                 | 1,061                                              |         |       | 202 |   |   | 5,519 |   |   | 5,721 |   |   | 1831 |   |   | 1961 |   | Jun-96 |   |
| Houston, TX                  |       |             | —     |                                    |       | 365                                  |       |                                                                                     | 3,769                    |       |       |                                 | 1,525                                              |         |       | 365 |   |   | 5,294 |   |   | 5,659 |   |   | 1,697 |   |   | 1964/1968 |   | Jun-96 |   |
| Houston, TX                  |       |             | —     |                                    |       | 202                                  |       |                                                                                     | 4,458                    |       |       |                                 | 921                                                |         |       | 202 |   |   | 5,379 |   |   | 5,581 |   |   | 1,804 |   |   | 1967 |   | Jun-96 |   |
| Jacksonville, FL             |       |             | —     |                                    |       | 486                                  |       |                                                                                     | 1,981                    |       |       |                                 | 30                                                 |         |       | 486 |   |   | 2,011 |   |   | 2,497 |   |   | 382 |   |   | 1986 —  1987 |   | Mar-02 |   |
| Jefferson, IA                |       |             | —     |                                    |       | 86                                   |       |                                                                                     | 1,883                    |       |       |                                 | 256                                                |         |       | 86 |   |   | 2,139 |   |   | 2,225 |   |   | 704 |   |   | 1968/1972 |   | Jan-96 |   |
| Lecanto, FL                  |       |             | —     |                                    |       | 351                                  |       |                                                                                     | 2,665                    |       |       |                                 | 2,729                                              |         |       | 351 |   |   | 5,394 |   |   | 5,745 |   |   | 1,835 |   |   | 1988/2006 |   | Sep-93 |   |
| Manchester, TN               |       |             | —     |                                    |       | 50                                   |       |                                                                                     | 954                      |       |       |                                 | 87                                                 |         |       | 50 |   |   | 1,041 |   |   | 1,091 |   |   | 308 |   |   | 1957/67/78/2002 |   | Nov-00 |   |
| Marion, OH                   |       |             | —     |                                    |       | 119                                  |       |                                                                                     | 1,156                    |       |       |                                 | 715                                                |         |       | 119 |   |   | 1,871 |   |   | 1,990 |   |   | 87 |   |   | 1950/2006 |   | May-05 |   |
| Marion, OH                   |       |             | —     |                                    |       | 48                                   |       |                                                                                     | 2,466                    |       |       |                                 | —                                             |         |       | 48 |   |   | 2,466 |   |   | 2,514 |   |   | 53 |   |   | 1997 |   | May-06 |   |
| Mesa, AZ                     |       |             | —     |                                    |       | 305                                  |       |                                                                                     | 6,909                    |       |       |                                 | 1,876                                              |         |       | 305 |   |   | 8,785 |   |   | 9,090 |   |   | 2,696 |   |   | 1975/1996 |   | Jun-96 |   |
| Mesa, AZ(8)                  |       |             | —     |                                    |       | 1,095                                |       |                                                                                     | 2,330                    |       |       |                                 | —                                             |         |       | 1,095 |   |   | 2,330 |   |   | 3,425 |   |   | 37 |   |   | 1979 |   | Aug-06 |   |
| Midland, TX                  |       |             | —     |                                    |       | 33                                   |       |                                                                                     | 2,285                    |       |       |                                 | 26                                                 |         |       | 33 |   |   | 2,311 |   |   | 2,344 |   |   | 825 |   |   | 1973 |   | Feb-96 |   |
| Montgomery, AL               |       |             | —     |                                    |       | 242                                  |       |                                                                                     | 5,327                    |       |       |                                 | 115                                                |         |       | 242 |   |   | 5,442 |   |   | 5,684 |   |   | 1,852 |   |   | 1967/1974 |   | Jan-96 |   |
| Nacogdoches, TX              |       |             | —     |                                    |       | 100                                  |       |                                                                                     | 1,738                    |       |       |                                 | 108                                                |         |       | 100 |   |   | 1,846 |   |   | 1,946 |   |   | 580 |   |   | 1973 |   | Oct-97 |   |
| Norwalk, IA                  |       |             | —     |                                    |       | 47                                   |       |                                                                                     | 1,033                    |       |       |                                 | 139                                                |         |       | 47 |   |   | 1,172 |   |   | 1,219 |   |   | 392 |   |   | 1975 |   | Jan-96 |   |
| Olathe, KS                   |       |             | —     |                                    |       | 520                                  |       |                                                                                     | 1,872                    |       |       |                                 | 203                                                |         |       | 520 |   |   | 2,075 |   |   | 2,595 |   |   | 514 |   |   | 1968 |   | Sep-99 |   |
| Orrville, OH                 |       |             | —     |                                    |       | 107                                  |       |                                                                                     | 1,946                    |       |       |                                 | 86                                                 |         |       | 107 |   |   | 2,032 |   |   | 2,139 |   |   | 36 |   |   | 1956 |   | Jun-06 |   |
| Phoenix, AZ                  |       |             | —     |                                    |       | 334                                  |       |                                                                                     | 3,383                    |       |       |                                 | 297                                                |         |       | 334 |   |   | 3,680 |   |   | 4,014 |   |   | 381 |   |   | 1982 |   | Apr-04 |   |
| Phoenix, AZ                  |       |             | —     |                                    |       | 300                                  |       |                                                                                     | 9,703                    |       |       |                                 | 92                                                 |         |       | 300 |   |   | 9,795 |   |   | 10,095 |   |   | 2,224 |   |   | 1985 |   | Aug-00 |   |
| Polk City, IA                |       |             | —     |                                    |       | 63                                   |       |                                                                                     | 1,376                    |       |       |                                 | 124                                                |         |       | 63 |   |   | 1,500 |   |   | 1,563 |   |   | 501 |   |   | 1976 |   | Jan-96 |   |
| Portland, OR                 |       |             | —     |                                    |       | 100                                  |       |                                                                                     | 1,925                    |       |       |                                 | 1,378                                              |         |       | 100 |   |   | 3,303 |   |   | 3,403 |   |   | 781 |   |   | 1956/1974/2006 |   | Jun-97 |   |
| Richland Hills, TX           |       |             | —     |                                    |       | 144                                  |       |                                                                                     | 1,656                    |       |       |                                 | 324                                                |         |       | 144 |   |   | 1,980 |   |   | 2,124 |   |   | 353 |   |   | 1976 |   | Dec-01 |   |
| Richmond, VA                 |       |             | —     |                                    |       | 356                                  |       |                                                                                     | 3,180                    |       |       |                                 | 2,839                                              |         |       | 356 |   |   | 6,019 |   |   | 6,375 |   |   | 1,506 |   |   | 1970/75/80/2002/2006 |   | Oct-95 |   |
| Ripley, TN                   |       |             | —     |                                    |       | 20                                   |       |                                                                                     | 985                      |       |       |                                 | 87                                                 |         |       | 20 |   |   | 1,072 |   |   | 1,092 |   |   | 291 |   |   | 1951/2002 |   | Nov-00 |   |
| Roswell, NM                  |       |             | —     |                                    |       | 568                                  |       |                                                                                     | 5,232                    |       |       |                                 | 3                                                  |         |       | 568 |   |   | 5,235 |   |   | 5,803 |   |   | 716 |   |   | 1975 |   | Dec-01 |   |
| Rusk, TX                     |       |             | —     |                                    |       | 34                                   |       |                                                                                     | 2,399                    |       |       |                                 | 335                                                |         |       | 34 |   |   | 2,734 |   |   | 2,768 |   |   | 1,110 |   |   | 1969 |   | Mar-94 |   |
| Sacramento, CA               |       |             | —     |                                    |       | 220                                  |       |                                                                                     | 2,929                    |       |       |                                 | —                                             |         |       | 220 |   |   | 2,929 |   |   | 3,149 |   |   | 1,003 |   |   | 1968 |   | Feb-97 |   |
| Salina, KS(7)                |       |             | —     |                                    |       | 100                                  |       |                                                                                     | 1,153                    |       |       |                                 | 601                                                |         |       | 100 |   |   | 1,754 |   |   | 1,854 |   |   | 553 |   |   | 1985 |   | May-97 |   |
| Tacoma, WA                   |       |             | —     |                                    |       | 723                                  |       |                                                                                     | 6,401                    |       |       |                                 | —                                             |         |       | 723 |   |   | 6,401 |   |   | 7,124 |   |   | 98 |   |   | 1993 |   | Aug-06 |   |
| Tappahannock, VA(7)          |       |             | —     |                                    |       | 375                                  |       |                                                                                     | 1,327                    |       |       |                                 | 102                                                |         |       | 375 |   |   | 1,429 |   |   | 1,804 |   |   | 933 |   |   | 1977/1978 |   | Oct-95 |   |
| Tucson, AZ                   |       |             | —     |                                    |       | 276                                  |       |                                                                                     | 8,924                    |       |       |                                 | 112                                                |         |       | 276 |   |   | 9,036 |   |   | 9,312 |   |   | 2,047 |   |   | 1985/92 |   | Aug-00 |   |
| Tyler, TX                    |       |             | —     |                                    |       | 300                                  |       |                                                                                     | 3,071                    |       |       |                                 | 22                                                 |         |       | 300 |   |   | 3,093 |   |   | 3,393 |   |   | 275 |   |   | 1974 |   | Mar-04 |   |
| Wooster, OH                  |       |             | —     |                                    |       | 118                                  |       |                                                                                     | 1,711                    |       |       |                                 | 90                                                 |         |       | 118 |   |   | 1,801 |   |   | 1,919 |   |   | 32 |   |   | 1952/62/71 |   | Jun-06 |   |
| Skilled Nursing  Properties  |       |             | —     |                                    |       | $ 22,154                        |       |                                                                                     | $ 186,708           |       |       |                                 | $ 21,294                                      |         |       | $ 22,154 |   |   | $ 208,002 |   |   | $ 230,156 |   |   | $ 45,060 |   |   |   |   |   |   |

83

----

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

 

| Assisted Living Properties: |   |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |             |   |   |   |
|-----------------------------|--------|--------|---------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------------|--------|--------|--------|
| Ada, OK                     |   |   | $      — |   |   | 100    |   |   | 1,650  |   |   |   | — |   |   | 100    |   |   | 1,650  |   |   | 1,750  |   |   | 443    |   |   | 1996             |   | Dec96  |   |
| Arlington, OH               |   |   | —                                      | (6)    |   | 629    |   |   | 6,973  |   |   |   | — |   |   | 629    |   |   | 6,973  |   |   | 7,602  |   |   | 947    |   |   | 1993             |   | Dec01  |   |
| Arvada, CO                  |   |   | 6,294                                       | (4)    |   | 100    |   |   | 2,810  |   |   |   | 276    |   |   | 100    |   |   | 3,086  |   |   | 3,186  |   |   | 749    |   |   | 1997             |   | Aug97  |   |
| Athens, TX                  |   |   | —                                      |   |   | 96     |   |   | 1,510  |   |   |   | 1      |   |   | 96     |   |   | 1,511  |   |   | 1,607  |   |   | 441    |   |   | 1995             |   | Jan96  |   |
| Bakersfield, CA             |   |   | 8,567                                       |   |   | 834    |   |   | 11,986 |   |   |   | 20     |   |   | 834    |   |   | 12,006 |   |   | 12,840 |   |   | 1,878  |   |   | 1998/2002        |   | Dec01  |   |
| Battleground, WA            |   |   | —                                      |   |   | 100    |   |   | 2,500  |   |   |   | — |   |   | 100    |   |   | 2,500  |   |   | 2,600  |   |   | 661    |   |   | 1996             |   | Nov96  |   |
| Beatrice, NE                |   |   | —                                      |   |   | 100    |   |   | 2,173  |   |   |   | — |   |   | 100    |   |   | 2,173  |   |   | 2,273  |   |   | 534    |   |   | 1997             |   | Oct97  |   |
| Bexley, OH                  |   |   | 14,814                                      | (6)    |   | 306    |   |   | 4,196  |   |   |   | — |   |   | 306    |   |   | 4,196  |   |   | 4,502  |   |   | 571    |   |   | 1992             |   | Dec01  |   |
| Bullhead City, AZ           |   |   | —                                      |   |   | 100    |   |   | 2,500  |   |   |   | — |   |   | 100    |   |   | 2,500  |   |   | 2,600  |   |   | 615    |   |   | 1997             |   | Aug97  |   |
| Burley, ID                  |   |   | —                                      |   |   | 100    |   |   | 2,200  |   |   |   | — |   |   | 100    |   |   | 2,200  |   |   | 2,300  |   |   | 545    |   |   | 1997             |   | Sep97  |   |
| Caldwell, ID                |   |   | —                                      |   |   | 100    |   |   | 2,200  |   |   |   | — |   |   | 100    |   |   | 2,200  |   |   | 2,300  |   |   | 545    |   |   | 1997             |   | Sep97  |   |
| Camas, WA                   |   |   | —                                      | (3)    |   | 100    |   |   | 2,175  |   |   |   | — |   |   | 100    |   |   | 2,175  |   |   | 2,275  |   |   | 605    |   |   | 1996             |   | May96  |   |
| Central, SC                 |   |   | —                                      |   |   | 100    |   |   | 2,321  |   |   |   | — |   |   | 100    |   |   | 2,321  |   |   | 2,421  |   |   | 442    |   |   | 1998             |   | Mar99  |   |
| Cordele, GA                 |   |   | —                                      |   |   | 153    |   |   | 1,455  |   |   |   | 82     |   |   | 153    |   |   | 1,537  |   |   | 1,690  |   |   | 396    |   |   | 1987/88/2002     |   | Jul00  |   |
| Denison, IA                 |   |   | —                                      |   |   | 100    |   |   | 2,713  |   |   |   | — |   |   | 100    |   |   | 2,713  |   |   | 2,813  |   |   | 609    |   |   | 1998             |   | Jun98  |   |
| Dodge City, KS              |   |   | —                                      |   |   | 84     |   |   | 1,666  |   |   |   | 4      |   |   | 84     |   |   | 1,670  |   |   | 1,754  |   |   | 514    |   |   | 1995             |   | Dec95  |   |
| Durant, OK                  |   |   | —                                      |   |   | 100    |   |   | 1,769  |   |   |   | — |   |   | 100    |   |   | 1,769  |   |   | 1,869  |   |   | 458    |   |   | 1997             |   | Apr97  |   |
| Edmond, OK                  |   |   | —                                      | (5)    |   | 100    |   |   | 1,365  |   |   |   | 526    |   |   | 100    |   |   | 1,891  |   |   | 1,991  |   |   | 467    |   |   | 1996             |   | Aug97  |   |
| Elkhart, IN                 |   |   | —                                      |   |   | 100    |   |   | 2,435  |   |   |   | — |   |   | 100    |   |   | 2,435  |   |   | 2,535  |   |   | 579    |   |   | 1997             |   | Dec97  |   |
| Erie, PA                    |   |   | —                                      |   |   | 850    |   |   | 7,477  |   |   |   | — |   |   | 850    |   |   | 7,477  |   |   | 8,327  |   |   | 1,796  |   |   | 1998             |   | Oct99  |   |
| Eugene, OR                  |   |   | —                                      |   |   | 100    |   |   | 2,600  |   |   |   | — |   |   | 100    |   |   | 2,600  |   |   | 2,700  |   |   | 638    |   |   | 1997             |   | Sep97  |   |
| Fremont, OH                 |   |   | —                                      |   |   | 100    |   |   | 2,435  |   |   |   | — |   |   | 100    |   |   | 2,435  |   |   | 2,535  |   |   | 604    |   |   | 1997             |   | Aug97  |   |
| Ft. Collins, CO             |   |   | —                                      |   |   | 100    |   |   | 2,961  |   |   |   | — |   |   | 100    |   |   | 2,961  |   |   | 3,061  |   |   | 611    |   |   | 1998             |   | Mar99  |   |
| Ft. Collins, CO             |   |   | —                                      |   |   | 100    |   |   | 3,400  |   |   |   | — |   |   | 100    |   |   | 3,400  |   |   | 3,500  |   |   | 664    |   |   | 1999             |   | Jul99  |   |
| Ft. Meyers, FL              |   |   | —                                      |   |   | 100    |   |   | 2,728  |   |   |   | 9      |   |   | 100    |   |   | 2,737  |   |   | 2,837  |   |   | 631    |   |   | 1998             |   | Mar98  |   |
| Gardendale, AL              |   |   | —                                      |   |   | 16     |   |   | 1,234  |   |   |   | — |   |   | 16     |   |   | 1,234  |   |   | 1,250  |   |   | 407    |   |   | 1988             |   | May96  |   |
| Goldsboro, NC               |   |   | —                                      |   |   | 100    |   |   | 2,385  |   |   |   | 1      |   |   | 100    |   |   | 2,386  |   |   | 2,486  |   |   | 419    |   |   | 1998             |   | Mar99  |   |
| Grandview, WA               |   |   | —                                      | (3)    |   | 100    |   |   | 1,940  |   |   |   | — |   |   | 100    |   |   | 1,940  |   |   | 2,040  |   |   | 555    |   |   | 1996             |   | Mar96  |   |
| Great Bend, KS              |   |   | —                                      |   |   | 80     |   |   | 1,570  |   |   |   | 21     |   |   | 80     |   |   | 1,591  |   |   | 1,671  |   |   | 513    |   |   | 1995             |   | Dec95  |   |
| Greeley, CO                 |   |   | —                                      |   |   | 100    |   |   | 2,310  |   |   |   | 270    |   |   | 100    |   |   | 2,580  |   |   | 2,680  |   |   | 634    |   |   | 1997             |   | Aug97  |   |
| Greenville, NC              |   |   | —                                      |   |   | 100    |   |   | 2,478  |   |   |   | 2      |   |   | 100    |   |   | 2,480  |   |   | 2,580  |   |   | 494    |   |   | 1998             |   | Mar99  |   |
| Greenville, TX              |   |   | —                                      |   |   | 42     |   |   | 1,565  |   |   |   | — |   |   | 42     |   |   | 1,565  |   |   | 1,607  |   |   | 455    |   |   | 1995             |   | Jan96  |   |
| Greenwood, SC               |   |   | —                                      |   |   | 100    |   |   | 2,638  |   |   |   | — |   |   | 100    |   |   | 2,638  |   |   | 2,738  |   |   | 536    |   |   | 1998             |   | Mar99  |   |
| Hayden, ID                  |   |   | —                                      |   |   | 100    |   |   | 2,450  |   |   |   | 243    |   |   | 100    |   |   | 2,693  |   |   | 2,793  |   |   | 704    |   |   | 1996             |   | Dec96  |   |
| Hoquiam, WA                 |   |   | —                                      |   |   | 100    |   |   | 2,500  |   |   |   | — |   |   | 100    |   |   | 2,500  |   |   | 2,600  |   |   | 620    |   |   | 1997             |   | Aug97  |   |
| Jacksonville, TX            |   |   | —                                      |   |   | 100    |   |   | 1,900  |   |   |   | — |   |   | 100    |   |   | 1,900  |   |   | 2,000  |   |   | 547    |   |   | 1996             |   | Mar96  |   |
| Kelso, WA                   |   |   | —                                      |   |   | 100    |   |   | 2,500  |   |   |   | — |   |   | 100    |   |   | 2,500  |   |   | 2,600  |   |   | 717    |   |   | 1996             |   | Nov96  |   |
| Kennewick. WA               |   |   | —                                      | (3)    |   | 100    |   |   | 1,940  |   |   |   | — |   |   | 100    |   |   | 1,940  |   |   | 2,040  |   |   | 559    |   |   | 1996             |   | Feb96  |   |
| Klamath Falls, OR           |   |   | —                                      |   |   | 100    |   |   | 2,300  |   |   |   | — |   |   | 100    |   |   | 2,300  |   |   | 2,400  |   |   | 606    |   |   | 1996             |   | Dec96  |   |
| Lake Havasu, AZ             |   |   | —                                      |   |   | 100    |   |   | 2,420  |   |   |   | — |   |   | 100    |   |   | 2,420  |   |   | 2,520  |   |   | 601    |   |   | 1997             |   | Aug97  |   |
| Lakeland, FL                |   |   | —                                      |   |   | 519    |   |   | 2,313  |   |   |   | 433    |   |   | 519    |   |   | 2,746  |   |   | 3,265  |   |   | 641    |   |   | 1968/74/96/02/06 |   | Jul00  |   |
| Longmont, CO                |   |   | —                                      | (4)    |   | 100    |   |   | 2,640  |   |   |   | — |   |   | 100    |   |   | 2,640  |   |   | 2,740  |   |   | 599    |   |   | 1998             |   | Jun98  |   |
| Longview, TX                |   |   | —                                      |   |   | 38     |   |   | 1,568  |   |   |   | 1      |   |   | 38     |   |   | 1,569  |   |   | 1,607  |   |   | 463    |   |   | 1995             |   | Oct95  |   |
| Loveland, CO                |   |   | —                                      | (4)    |   | 100    |   |   | 2,865  |   |   |   | 270    |   |   | 100    |   |   | 3,135  |   |   | 3,235  |   |   | 752    |   |   | 1997             |   | Sep97  |   |
| Lufkin, TX                  |   |   | —                                      |   |   | 100    |   |   | 1,950  |   |   |   | — |   |   | 100    |   |   | 1,950  |   |   | 2,050  |   |   | 554    |   |   | 1996             |   | Apr96  |   |
| Madison, IN                 |   |   | —                                      |   |   | 100    |   |   | 2,435  |   |   |   | — |   |   | 100    |   |   | 2,435  |   |   | 2,535  |   |   | 594    |   |   | 1997             |   | Oct97  |   |
| Marshall, TX                |   |   | —                                      |   |   | 38     |   |   | 1,568  |   |   |   | 451    |   |   | 38     |   |   | 2,019  |   |   | 2,057  |   |   | 587    |   |   | 1995             |   | Oct95  |   |
| McPherson, KS               |   |   | —                                      |   |   | 79     |   |   | 1,571  |   |   |   | 4      |   |   | 79     |   |   | 1,575  |   |   | 1,654  |   |   | 507    |   |   | 1994             |   | Dec95  |   |
| Millville, NJ               |   |   | —                                      |   |   | 100    |   |   | 2,825  |   |   |   | — |   |   | 100    |   |   | 2,825  |   |   | 2,925  |   |   | 696    |   |   | 1997             |   | Aug97  |   |
| Nampa, ID                   |   |   | —                                      |   |   | 100    |   |   | 2,240  |   |   |   | 23     |   |   | 100    |   |   | 2,263  |   |   | 2,363  |   |   | 596    |   |   | 1997             |   | Jan97  |   |
| New Bern, NC                |   |   | —                                      |   |   | 100    |   |   | 2,427  |   |   |   | 1      |   |   | 100    |   |   | 2,428  |   |   | 2,528  |   |   | 434    |   |   | 1998             |   | Mar99  |   |
| Newark, OH                  |   |   | —                                      |   |   | 100    |   |   | 2,435  |   |   |   | — |   |   | 100    |   |   | 2,435  |   |   | 2,535  |   |   | 594    |   |   | 1997             |   | Oct97  |   |
| Newport Richey, FL          |   |   | —                                      |   |   | 100    |   |   | 5,845  |   |   |   | 652    |   |   | 100    |   |   | 6,497  |   |   | 6,597  |   |   | 1,607  |   |   | 1986/1995        |   | Jan98  |   |
| Newport, OR                 |   |   | —                                      |   |   | 100    |   |   | 2,050  |   |   |   | — |   |   | 100    |   |   | 2,050  |   |   | 2,150  |   |   | 612    |   |   | 1996             |   | Dec96  |   |
| Niceville, FL               |   |   | —                                      |   |   | 100    |   |   | 2,680  |   |   |   | — |   |   | 100    |   |   | 2,680  |   |   | 2,780  |   |   | 607    |   |   | 1998             |   | Jun98  |   |
| Norfolk, NE                 |   |   | —                                      |   |   | 100    |   |   | 2,123  |   |   |   | — |   |   | 100    |   |   | 2,123  |   |   | 2,223  |   |   | 535    |   |   | 1997             |   | Jun97  |   |
| Rocky Mount, NC             |   |   | —                                      |   |   | 100    |   |   | 2,494  |   |   |   | 1      |   |   | 100    |   |   | 2,495  |   |   | 2,595  |   |   | 463    |   |   | 1998             |   | Mar99  |   |
| Rocky River, OH             |   |   | —                                      |   |   | 760    |   |   | 6,963  |   |   |   | — |   |   | 760    |   |   | 6,963  |   |   | 7,723  |   |   | 1,606  |   |   | 1998             |   | Oct99  |   |
| Salina, KS                  |   |   | —                                      |   |   | 79     |   |   | 1,571  |   |   |   | 4      |   |   | 79     |   |   | 1,575  |   |   | 1,654  |   |   | 507    |   |   | 1994             |   | Dec95  |   |
| San Antonio, TX             |   |   | —                                      | (5)    |   | 100    |   |   | 1,900  |   |   |   | — |   |   | 100    |   |   | 1,900  |   |   | 2,000  |   |   | 490    |   |   | 1997             |   | May97  |   |
| San Antonio, TX             |   |   | —                                      | (5)    |   | 100    |   |   | 2,055  |   |   |   | — |   |   | 100    |   |   | 2,055  |   |   | 2,155  |   |   | 523    |   |   | 1997             |   | Jun97  |   |
| Shelby, NC                  |   |   | —                                      |   |   | 100    |   |   | 2,805  |   |   |   | 2      |   |   | 100    |   |   | 2,807  |   |   | 2,907  |   |   | 634    |   |   | 1998             |   | Jun98  |   |
| Spring Hill, FL             |   |   | —                                      |   |   | 100    |   |   | 2,650  |   |   |   | — |   |   | 100    |   |   | 2,650  |   |   | 2,750  |   |   | 601    |   |   | 1998             |   | Jun98  |   |
| Springfield, OH             |   |   | —                                      |   |   | 100    |   |   | 2,035  |   |   |   | 270    |   |   | 100    |   |   | 2,305  |   |   | 2,405  |   |   | 565    |   |   | 1997             |   | Aug97  |   |
| Sumter, SC                  |   |   | —                                      |   |   | 100    |   |   | 2,351  |   |   |   | — |   |   | 100    |   |   | 2,351  |   |   | 2,451  |   |   | 461    |   |   | 1998             |   | Mar99  |   |
| Tallahassee, FL             |   |   | —                                      | (5)    |   | 100    |   |   | 3,075  |   |   |   | — |   |   | 100    |   |   | 3,075  |   |   | 3,175  |   |   | 698    |   |   | 1998             |   | Apr98  |   |

84

----

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

 

| Tiffin, OH                 |   |   | —        |   |   | 100           |   |   | 2,435          |   |   |   | —        |   |   | 100           |   |   | 2,435          |   |   | 2,535          |   |   | 604            |   |   | 1997      |   | Aug97  |   |
|----------------------------|--------|--------|---------------|--------|--------|---------------|--------|--------|----------------|--------|--------|--------|---------------|--------|--------|---------------|--------|--------|----------------|--------|--------|----------------|--------|--------|----------------|--------|--------|-----------|--------|--------|--------|
| Troy, OH                   |   |   | —        |   |   | 100           |   |   | 2,435          |   |   |   | 306           |   |   | 100           |   |   | 2,741          |   |   | 2,841          |   |   | 685            |   |   | 1997      |   | May97  |   |
| Tulsa, OK                  |   |   | —        | (5)    |   | 200           |   |   | 1,650          |   |   |   | —        |   |   | 200           |   |   | 1,650          |   |   | 1,850          |   |   | 436            |   |   | 1997      |   | Feb97  |   |
| Tulsa, OK                  |   |   | —        | (5)    |   | 100           |   |   | 2,395          |   |   |   | —        |   |   | 100           |   |   | 2,395          |   |   | 2,495          |   |   | 605            |   |   | 1997      |   | Jun97  |   |
| Tyler, TX                  |   |   | 10,446        | (5)    |   | 100           |   |   | 1,800          |   |   |   | —        |   |   | 100           |   |   | 1,800          |   |   | 1,900          |   |   | 481            |   |   | 1996      |   | Dec96  |   |
| Vacaville, CA              |   |   | 8,145         |   |   | 1,662         |   |   | 11,634         |   |   |   | 19            |   |   | 1,662         |   |   | 11,653         |   |   | 13,315         |   |   | 1,848          |   |   | 1998/2002 |   | Dec01  |   |
| Vancouver, WA              |   |   | —        | (3)    |   | 100           |   |   | 2,785          |   |   |   | —        |   |   | 100           |   |   | 2,785          |   |   | 2,885          |   |   | 773            |   |   | 1996      |   | Jun96  |   |
| Waco, TX                   |   |   | —        |   |   | 100           |   |   | 2,235          |   |   |   | —        |   |   | 100           |   |   | 2,235          |   |   | 2,335          |   |   | 566            |   |   | 1997      |   | Jun97  |   |
| Wahoo, NE                  |   |   | —        |   |   | 100           |   |   | 2,318          |   |   |   | —        |   |   | 100           |   |   | 2,318          |   |   | 2,418          |   |   | 577            |   |   | 1997      |   | Jul97  |   |
| Walla Walla, WA            |   |   | 5,545         | (3)    |   | 100           |   |   | 1,940          |   |   |   | —        |   |   | 100           |   |   | 1,940          |   |   | 2,040          |   |   | 551            |   |   | 1996      |   | Apr96  |   |
| Watauga, TX                |   |   | —        |   |   | 100           |   |   | 1,668          |   |   |   | —        |   |   | 100           |   |   | 1,668          |   |   | 1,768          |   |   | 420            |   |   | 1996      |   | Aug97  |   |
| Wetherford, OK             |   |   | —        |   |   | 100           |   |   | 1,669          |   |   |   | 592           |   |   | 100           |   |   | 2,261          |   |   | 2,361          |   |   | 553            |   |   | 1996      |   | Aug97  |   |
| Wheelersburg, OH           |   |   | —        |   |   | 29            |   |   | 2,435          |   |   |   | —        |   |   | 29            |   |   | 2,435          |   |   | 2,464          |   |   | 594            |   |   | 1997      |   | Sep97  |   |
| Wichita Falls, TX          |   |   | —        |   |   | 100           |   |   | 1,850          |   |   |   | —        |   |   | 100           |   |   | 1,850          |   |   | 1,950          |   |   | 493            |   |   | 1996      |   | Dec96  |   |
| Wichita Falls, TX          |   |   | —        |   |   | 100           |   |   | 2,750          |   |   |   | —        |   |   | 100           |   |   | 2,750          |   |   | 2,850          |   |   | 673            |   |   | 1997      |   | Sep97  |   |
| Worthington, OH            |   |   | —        | (6)    |   | —        |   |   | 6,102          |   |   |   | —        |   |   | —        |   |   | 6,102          |   |   | 6,102          |   |   | 1,267          |   |   | 1993      |   | Dec01  |   |
| Worthington, OH            |   |   | —        | (6)    |   | —        |   |   | 3,402          |   |   |   | —        |   |   | —        |   |   | 3,402          |   |   | 3,402          |   |   | 748            |   |   | 1995      |   | Dec01  |   |
| York, NE                   |   |   | —        |   |   | 100           |   |   | 2,318          |   |   |   | —        |   |   | 100           |   |   | 2,318          |   |   | 2,418          |   |   | 577            |   |   | 1997      |   | Aug97  |   |
| Assisted Living Properties |   |   | 53,811        |   |   | 12,794        |   |   | 231,583        |   |   |   | 4,484         |   |   | 12,794        |   |   | 236,067        |   |   | 248,861        |   |   | 54,687         |   |   |      |   |   |   |
| School                     |   |   |          |   |   |          |   |   |           |   |   |   |          |   |   |          |   |   |           |   |   |           |   |   |           |   |   |      |   |   |   |
| Trenton, NJ                |   |   | —        |   |   | 100           |   |   | 6,000          |   |   |   | 3,170         |   |   | 100           |   |   | 9,170          |   |   | 9,270          |   |   | 2,344          |   |   | 1930/1998 |   | Dec98  |   |
| School                     |   |   | —        |   |   | 100           |   |   | 6,000          |   |   |   | 3,170         |   |   | 100           |   |   | 9,170          |   |   | 9,270          |   |   | 2,344          |   |   |      |   |   |   |
|                       |   |   | $ 53,811 |   |   | $ 35,048 |   |   | $ 424,291 |   |   |   | $ 28,948 |   |   | $ 35,048 |   |   | $ 453,239 |   |   | $ 488,287 |   |   | $ 102,091 |   |   |      |   |   |   |

----

(1)                 The aggregate cost for federal income tax purposes.

(2)                 Depreciation for building is calculated using a 35 to40 year life for buildings and additions to properties. Depreciation forfurniture and fixtures is calculated based on a 5 to 10 year life for allproperties.

(3)                 Single note backed by five facilities in Washington.

(4)                 Single note backed by three facilities in Colorado

(5)                 Single note backed by one facility in Florida, threefacilities in Oklahoma, and three facilities in Texas

(6)                 Single note backed by four facilities in Ohio.

(7)                 An impairment charge totaling $4,587 was taken against5 facilities based on the Company’s estimate of the excess carrying value overthe fair value of assets to be held and used, and the carrying value over thefair value

85

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

Activityfor the years ended December 31, 2004, 2005 and 2006 is as follows:

| ** **                                                               | ** ** | **Real Estate**     | ** **     | **Accumulated**  | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|----------------|------------------|------------|
| ** **                                                               | ** ** | **& Equipment** | ** **     | **Depreciation** | ** ** |
| Balance at  December 31, 2003                                       |       |                     | $ 456,001 |             |       |   | $ 73,376 |   |   |
| Additions                                                                |       |                     | 9,541          |             |       |   | 12,376 |   |   |
| Conversion of mortgage loans into owned properties                       |       |                     | 9,492          |             |       |   | 191 |   |   |
| Increase due to step up in basis resulting from  partnership conversions |       |                     | 2,288          |             |       |   | 18 |   |   |
| Impairment charges                                                       |       |                     | —         |             |       |   | — |   |   |
| Cost of real estate sold                                                 |       |                     | (8,205         | )                |       |   | (2,592 | ) |   |
| Balance at  December 31, 2004                                       |       |                     | $ 469,117 |             |       |   | $ 83,369 |   |   |
| Additions                                                                |       |                     | 30,979         |             |       |   | 13,255 |   |   |
| Conversion of mortgage loans into owned properties                       |       |                     | 3,636          |             |       |   | 45 |   |   |
| Impairment charges                                                       |       |                     | —         |             |       |   | — |   |   |
| Cost of real estate sold                                                 |       |                     | (3,009         | )                |       |   | (898 | ) |   |
| Balance at December 31,  2005                                       |       |                     | $ 500,723 |             |       |   | $ 95,771 |   |   |
| Additions                                                                |       |                     | 24,016         |             |       |   | 13,581 |   |   |
| Conversion of mortgage loans into owned properties                       |       |                     | —         |             |       |   | — |   |   |
| Impairment charges                                                       |       |                     | —         |             |       |   | — |   |   |
| Cost of real estate sold                                                 |       |                     | (36,452        | )                |       |   | (7,261 | ) |   |
| Balance at  December 31, 2006                                       |       |                     | $ 488,287 |             |       |   | $ 102,091 |   |   |

 

86

----

**LTCPROPERTIES, INC.SCHEDULE IVMORTGAGE LOANS ON REAL ESTATE(dollars in thousands)**

| ** ** | ** ** | **Number of** | ** ** | **Interest**   | ** ** | **Final  Maturity** | ** ** | **Balloon** | ** ** | **Current  Monthly  Debt** | ** ** | **Face  Amount of** | ** ** | **Carrying  Amount of  Mortgages  December 31, ** | ** ** | **Principal  Amount  of Loans  Subject to  Delinquent  Principal or** | ** ** |
|------------|------------|--------------------|------------|----------------|------------|---------------------|------------|-------------|------------|----------------------------|------------|--------------------------|------------|------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **State**  | ** ** | ** **         | ** ** | **Facilities** | ** ** | **Units/Beds(4)**   | ** ** | **Rate(1)** | ** ** | **Date**                   | ** ** | **Amount(2)**            | ** ** | **Service**                                                      | ** ** | **Mortgages**                                                                        | ** ** | **2006** | ** ** | **Interest** | ** ** |
| MT, NE, IA |       |               | 4          |           |       |                | 305        | (3)         |       | 12.12%                     |       | 2007                     |       |                                                             | 8,752      |                                                                                 |       |   | 106 |   |   |   | 10,000 |   |   |   | 8,847 |   |   |   | — |   |   |
| FL         |       |               | 3          |           |       |                | 256        |        |       | 11.20%                     |       | 2009                     |       |                                                             | 6,557      |                                                                                 |       |   | 69 |   |   |   | 6,850 |   |   |   | 6,748 |   |   |   | — |   |   |
| GA         |       |               | 1          |           |       |                | 104        |        |       | 10.13%                     |       | 2010                     |       |                                                             | 4,760      |                                                                                 |       |   | 46 |   |   |   | 5,000 |   |   |   | 4,935 |   |   |   | — |   |   |
| TX         |       |               | 1          |           |       |                | 140        |        |       | 11.00%                     |       | 2007                     |       |                                                             | 4,412      |                                                                                 |       |   | 44 |   |   |   | 4,510 |   |   |   | 4,446 |   |   |   | — |   |   |
| TX         |       |               | 5          |           |       |                | 583        |        |       | 12.70%                     |       | 2011                     |       |                                                             | 904        |                                                                                 |       |   | 91 |   |   |   | 8,000 |   |   |   | 4,440 |   |   |   | — |   |   |
| MN         |       |               | 1          |           |       |                | 0          |        |       | 6.64%                      |       | 2019                     |       |                                                             | 3,751      |                                                                                 |       |   | 21 |   |   |   | 3,751 |   |   |   | 3,751 |   |   |   | — |   |   |
| AL         |       |               | 1          |           |       |                | 120        |        |       | 9.63%                      |       | 2010                     |       |                                                             | 3,589      |                                                                                 |       |   | 33 |   |   |   | 3,788 |   |   |   | 3,730 |   |   |   | — |   |   |
| FL         |       |               | 1          |           |       |                | 191        |        |       | 12.63%                     |       | 2007                     |       |                                                             | 3,366      |                                                                                 |       |   | 51 |   |   |   | 4,500 |   |   |   | 3,568 |   |   |   | — |   |   |
| Various    |       |               | 52         |           |       |                | 5,655      |        |       | 6.64% - 13.1%    |       | 2007 - 2019              |       |                                                             | 43,415     |                                                                                 |       |   | 1,064 |   |   |   | 100,058 |   |   |   | 76,527 |   |   |   | — |   |   |
|       |       |               | 69         |           |       |                | 7,354      | (5)         |       |                       |       |                     |       |                                                             | $          | 79,506                                                                               |       |   |   | $ | 1,525 |   |   |   | $ | 146,457 |   |   |   | $ | 116,992 |   |   |   | — |   |   |
|            |            |                    |            |                |            |                     |            |             |            |                            |            |                          |            |                                                                  |            |                                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)             Represents current stated interest rate. Generally,the loans have 25-year amortization with principal and interest payableat varying amounts over the life to maturity with annual interest adjustmentsthrough specified fixed rate increases effective either on the firstanniversary or calendar year of the loan.

(2)             Balloon payment is due upon maturity,generally the 10th year of the loan, with various prepayment penalties (asdefined in the loan agreement).

(3)             Includes four facilities secured by oneloan in three different states.

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

(5)             Includes 58 first-lien mortgage loans asfollows:

| **# of Loans** | ** ** | ** ** | ** **                                   | **Original loan amounts** | ** ** |
|--------------------------|------------|------------|----------------------------------------------|-------------------------------------|------------|
| 31                       |       |       | $   500 -  $  2,000 |                                |       |
| 12                       |       |       | $2,001 - $  3,000                  |                                |       |
| 8                        |       |       | $3,001 - $  4,000                  |                                |       |
| 4                        |       |       | $4,001 - $  5,000                  |                                |       |
| 0                        |       |       | $5,001 - $  6,000                  |                                |       |
| 1                        |       |       | $6,001 - $  7,000                  |                                |       |
| 2                        |       |       | $7,001 - $10,000                             |                                |       |

 

Activityfor the years ended December 31, 2004, 2005 and 2006 is as follows:

| Balance at  December 31, 2003           |   | $       | 71,465  |   |
|----------------------------------------------|--------|---------|---------|--------|
| Conversion of  notes to owned properties     |   | (9,277  | )       |
| Conversion of  other notes to mortgage notes |   | 3,751   |    |
| Conversion of  REMIC certificates to loans   |   | 12,025  |    |
| Investment in real  estate mortgages         |   | 22,817  |    |
| Mortgage premium                             |   | (60     | )       |
| Collections of  principal                    |   | (9,843  | )       |
| Balance at  December 31, 2004           |   | $       | 90,878  |   |
| Conversion of  notes to owned properties     |   | (3,029  | )       |
| Conversion of  REMIC certificates to loans   |   | 35,694  |    |
| Investment in real  estate mortgages         |   | 38,500  |    |
| Mortgage premium                             |   | (131    | )       |
| Loan  prepayments/payoffs                    |   | (10,320 | )       |
| Collections of  principal                    |   | (3,540  | )       |
| Balance at  December 31, 2005           |   | $       | 148,052 |   |
| Mortgage premium                             |   | 449     |    |
| Loan  prepayments/payoffs                    |   | (26,496 | )       |
| Collections of  principal                    |   | (5,013  | )       |
| Balance at  December 31, 2006           |   | $       | 116,992 |   |

 

87

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**LTC PROPERTIES, INC.INDEX TO EXHIBITS(Item 15(b))**

| Exhibit   Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                        | ** ** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 3.1              |       | Amended  and Restated Articles of Incorporation of LTC Properties, Inc.  (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s  Current Report on Form 8-K dated June 19, 1997)                                                                                                                                                                            |       |
| 3.2              |       | Amended and  Restated By-Laws of LTC Properties, Inc. (incorporated by reference to  Exhibit 3.1 to LTC Properties, Inc.’s Form 10-Q for the  quarter ended June 30, 1996)                                                                                                                                                                                               |       |
| 3.3              |       | Articles of  Amendment of LTC Properties, Inc. (incorporated by reference to  Exhibit 3.3 to LTC Properties, Inc.’s Current Report on Form 8-K  dated June 19, 1997)                                                                                                                                                                                                     |       |
| 3.4              |       | Certificate of  Amendment to Amended and Restated Bylaws of LTC Properties, Inc.  (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended  September 30, 1998)                                                                                                                                          |       |
| 3.5              |       | Articles  Supplementary Classifying 2,000,000 Shares of 8.5% Series C Cumulative  Convertible Preferred Stock of LTC Properties, Inc. (incorporated by  reference to Exhibit 3.2 to LTC Properties, Inc.’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 1998)                                                                                 |       |
| 3.6              |       | Articles  Supplemental reclassifying 5,000,000 shares of Common Stock into Preferred  Stock of LTC Properties, Inc. (incorporated by reference to  Exhibit 3.1 to LTC Properties, Inc.’s Registration Statement on  Form S-3 filed June 27, 2003)                                                                                                                        |       |
| 3.7              |       | Certificate of  Amendment to Amended and Restated Bylaws of LTC Properties, Inc.  (incorporated by reference to Exhibit 3.10 to LTC Properties, Inc.’s  Registration Statement on Form S-3, Amendment No. 2 filed  August 29, 2003)                                                                                                                                 |       |
| 3.8              |       | Articles  Supplementary Classifying 2,200,000 shares of 8.5% Series E Cumulative  Convertible Preferred Stock of LTC Properties, Inc. (incorporated by  reference to Exhibit 3.2 to LTC Properties, Inc.’s Registration  Statement on Form 8-K filed September 16, 2003)                                                                                            |       |
| 3.9              |       | Articles  Supplementary Classifying 4,000,000 shares of 8.0% Series F Cumulative  Preferred Stock of LTC Properties, Inc. (incorporated by reference to  Exhibit 4.1 to LTC Properties, Inc.’s Current Report on Form 8-K  filed February 19, 2004)                                                                                                                 |       |
| 3.10             |       | Articles  Supplementary Reclassifying 40,000 Shares of Series D Junior  Participating Preferred Stock into unclassified shares of Preferred Stock of  LTC Properties, Inc. (incorporated by reference to Exhibit 4.1 to  LTC Properties, Inc.’s Current Report on Form 8-K filed on  March 19, 2004)                                                                |       |
| 3.11             |       | Articles  Supplementary Reclassifying 3,080,000 Shares of 9.5% Series A Cumulative  Preferred Stock and 2,000,000 Shares of 9% Series B Cumulative Preferred  Stock into unclassified shares of Preferred Stock of LTC  Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC  Properties, Inc.’s Form 10-Q for the quarter ended  March 31, 2004) |       |
| 3.12             |       | Articles of  Amendment replacing Section 7.1 regarding authorized shares of stock of  LTC Properties, Inc. (incorporated by reference to Exhibit 3.12 to  LTC Properties, Inc.’s Form 10-Q for the quarter ended  July 31, 2004)                                                                                                                                    |       |

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| 3.13   |   | Articles  Supplementary Classifying an Additional 2,640,000 shares of 8.0%  Series F Cumulative Preferred Stock of LTC Properties, Inc.  (incorporated by reference to Exhibit 3.13 to LTC  Properties, Inc.’s Form 10-Q for the quarter ended  July 31, 2004)                                                                                                                                                                                                                                                                               |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.14   |   | Certificate of  Correction to Articles of Amendment filed on June 24, 2004.  (incorporated by reference to Exhibit 3.14 to LTC  Properties, Inc.’s Form 10-Q for the quarter ended  September 30, 2004)                                                                                                                                                                                                                                                                                                                                           |   |
| 4.1    |   | Rights Agreement  dated as of May 2, 2000 (incorporated by reference to Exhibit 4.1  to LTC Properties, Inc.’s Registration Statement on Form 8-A  filed on May 9, 2000)                                                                                                                                                                                                                                                                                                                                                                          |   |
| 4.2    |   | Amendment  No. 1 to Rights Agreement dated as of March 19, 2004 (incorporated  by reference to Exhibit 4.1 to LTC Properties, Inc.’s Current  Report on Form 8-K filed on March 19, 2004)                                                                                                                                                                                                                                                                                                                                                    |   |
| 4.3    |   | Amended and  Restated Agreement of Limited Partnership of LTC Partners I, L.P. and  Exchange Rights Agreement dated June 30, 1995 (incorporated by reference  to Exhibit 4.1 to LTC Properties, Inc.’s Form S-3 filed  on May 28, 2004)                                                                                                                                                                                                                                                                                                           |   |
| 4.4    |   | Amended and  Restated Agreement of Limited Partnership of LTC Partners II, L.P. and  Exchange Rights Agreement dated May 1, 1996 (incorporated by reference  to Exhibit 4.2 to LTC Properties, Inc.’s Form S-3 filed  on May 28, 2004)                                                                                                                                                                                                                                                                                                            |   |
| 4.5    |   | Amended and  Restated Agreement of Limited Partnership of LTC Partners III, L.P. and  Exchange Rights Agreement dated January 30, 1996 (incorporated by  reference to Exhibit 4.3 to LTC Properties, Inc.’s Form S-3  filed on May 28, 2004)                                                                                                                                                                                                                                                                                                      |   |
| 4.6    |   | Amended and  Restated Agreement of Limited Partnership of LTC Partners IV, L.P. and  Exchange Rights Agreement dated January 30, 1996 (incorporated by  reference to Exhibit 4.4 to LTC Properties, Inc.’s Form S-3  filed on May 28, 2004)                                                                                                                                                                                                                                                                                                       |   |
| 4.7    |   | Amendment to  Agreement of Limited Partnership dated January 1, 1999 and Amendment  No. 1 to Amended and Restated Agreement of Limited Partnership dated  January 30, 1998 and Amended and Restated Agreement of Limited  Partnership of LTC Partners V, L.P. dated June 13, 1996 and Amendment  No. 1 to Exchange Rights Agreement dated January 30, 1998 and  Exchange Rights Agreement dated June 14, 1996 (incorporated by reference  to Exhibit 4.5 to LTC Properties, Inc.’s Form S-3 filed  on May 28, 2004) |   |
| 4.8    |   | Amended and  Restated Agreement of Limited Partnership of LTC Partners VI, L.P. and  Exchange Rights Agreement dated June 14, 1996 (incorporated by reference  to Exhibit 4.6 to LTC Properties, Inc.’s Form S-3 filed  on May 28, 2004)                                                                                                                                                                                                                                                                                                          |   |
| 4.9    |   | Amended and  Restated Agreement of Limited Partnership of LTC Partners VII, L.P. dated  June 14, 1996 and Amendment No. 1 to Exchange Rights Agreement  dated January 30, 1998 and Exchange Rights Agreement dated June 14,  1996 (incorporated by reference to Exhibit 4.7 to LTC  Properties, Inc.’s Form S-3 filed on May 28, 2004)                                                                                                                                                                                             |   |
| 4.10   |   | Amended and  Restated Agreement of Limited Partnership of LTC Partners IX, L.P. and  Exchange Rights Agreement dated February 11, 1998 (incorporated by  reference to Exhibit 4.8 to LTC Properties, Inc.’s Form S-3  filed on May 28, 2004)                                                                                                                                                                                                                                                                                                      |   |
|   |   | Certain  instruments defining the rights of holders of long-term debt securities are  omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The  Registrant hereby undertakes to furnish to the SEC, upon request, copies of  any such instruments.                                                                                                                                                                                                                                                                                                                   |   |

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| 10.1+  |   | The  2004 Stock Option Plan (incorporated by reference to Exhibit 4.1 to LTC  Properties, Inc.’s Form S-8 dated May 25, 2004)                                                                                                                                                                                                                                                                                                            |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.2+  |   | The 2004  Restricted Stock Plan (incorporated by reference to Exhibit 4.1 to LTC  Properties, Inc.’s Form S-8 dated May 25, 2004)                                                                                                                                                                                                                                                                                                        |   |
| 10.3+  |   | Form of  Stock Option Agreement under the 2004 Stock Option Plan (incorporated by  reference to Exhibit 10.50 to LTC Properties, Inc.’s Annual Report  on Form 10-K for the year ended December 31, 2004)                                                                                                                                                                                                                           |   |
| 10.4+  |   | Form of  Restricted Stock Agreement under the 2004 Restricted Stock Plan (incorporated  by reference to Exhibit 10.50 to LTC Properties, Inc.’s Annual  Report on Form 10-K for the year ended December 31, 2004)                                                                                                                                                                                                                   |   |
| 10.5   |   | Form of  Purchase Agreement dated as of July 12, 2005 by and between LTC  Properties, Inc. and the purchasers of certain shares of common stock of  LTC Properties, Inc. (incorporated by reference to Exhibit 10.1 to  LTC Properties, Inc.’s Current Report on Form 8-K dated  July 12, 2005)                                                                                                                      |   |
| 10.6   |   | Placement Agent  Agreement dated July 12, 2005 between LTC Properties, Inc. and  Cohen & Steers Capital Advisors, LLC (incorporated by reference to  Exhibit 10.2 to LTC Properties, Inc.’s Current Report on  Form 8-K dated July 12, 2005)                                                                                                                                                                          |   |
| 10.7   |   | Amended and  Restated Credit Agreement dated as of November 7, 2005 among LTC  Properties, Inc. and Bank of Montreal, Chicago Branch, as Administrative  Agent, Harris Nesbitt Corp. Co-Lead Arranger and Book Manager and Key Bank  National Association as Co-Lead Arranger and Syndication Agent. (incorporated  by reference to Exhibit 10.1 to LTC Properties, Inc.’s Current  Report on Form 8-K dated November 8, 2005) |   |
| 10.8+  |   | Amended and  Restated Employment Agreement of Wendy Simpson dated May 22, 2006  (incorporated by reference to Exhibit 10.1 to LTC  Properties, Inc.’s Form 10-Q for the quarter ended  June 30, 2006)                                                                                                                                                                                                                               |   |
| 10.9+  |   | Amended and  Restated Employment Agreement of Pamela Shelley-Kessler dated  December 5, 2006                                                                                                                                                                                                                                                                                                                                                                 |   |
| 10.10+ |   | Amended and  Restated Employment Agreement of Peter Lyew dated December 5, 2006                                                                                                                                                                                                                                                                                                                                                                              |   |
| 10.11+ |   | Amended and  Restated Employment Agreement of Clint Malin dated December 5, 2006                                                                                                                                                                                                                                                                                                                                                                             |   |
| 10.12+ |   | 2007 Amended and  Restated Employment Agreement of Wendy Simpson, effective as of March 1,  2007 (incorporated by reference to Exhibit 10.1 to LTC  Properties, Inc.’s Current Report on Form 8-K dated  February 6, 2007)                                                                                                                                                                                                          |   |
| 10.13+ |   | 2007 Amended and  Restated Employment Agreement of Andre Dimitriadis, effective as of  March 1, 2007 (incorporated by reference to Exhibit 10.2 to LTC  Properties, Inc.’s Current Report on Form 8-K dated  February 6, 2007)                                                                                                                                                                                                      |   |
| 10.14+ |   | Second Amended  and Restated Employment Agreement of Pamela Kessler, effective as of  March 1, 2007 (incorporated by reference to Exhibit 10.3 to LTC  Properties, Inc.’s Current Report on Form 8-K dated  February 6, 2007)                                                                                                                                                                                                       |   |
| 10.15+ |   | First Amendment  to 2007 Amended and Restated Employment Agreement of Wendy Simpson, dated  February 21, 2007                                                                                                                                                                                                                                                                                                                                                     |   |

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| 10.16+ |   | First Amendment  to 2007 Amended and Restated Employment Agreement of Andre Dimitriadis, dated  February 21, 2007                                                                                                                                         |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 21.1   |   | List of  subsidiaries                                                                                                                                                                                                                                     |   |
| 23.1   |   | Consent of  Ernst & Young LLP with respect to the financial information of the  Company                                                                                                                                                          |   |
| 24.1   |   | Powers of Attorney (included on signature page)                                                                                                                                                                                                           |   |
| 31.1   |   | Certification of the Chief Executive Officer of LTC  Properties, Inc. pursuant to Rule 13a-14 of the Securities  Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 (filed herewith)  |   |
| 31.2   |   | Certification of  the Chief Financial Officer of LTC Properties, Inc. pursuant to  Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed  herewith) |   |
| 32     |   | Certifications pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act  of 2002 (furnished herewith).                                                                                                                     |   |

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+                Managementcontract or compensatory plan or arrangement in which an executive officer ordirector of the Company participates.

91

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**LTC PROPERTIES, INC.SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                          | LTC Properties, Inc. |
|--------------------------|---------------------------|
|                     | Registrant                |
| Dated: February 22, 2007 |                      |   |
|                     | By:                       | /s/ WENDY L. SIMPSON |
|                     |                      | Wendy L. Simpson |
|                     |                      | *President, Chief Operating Officer,  Chief Financial Officer, Treasurer and Director  (Principal Financial Officer)* |

 

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Andre C. Dimitriadis andWendy L. Simpson, and each of them severally, his true and lawfulattorney-in-fact with power of substitution and resubstitution to sign in hisname, place and stead, in any and all capacities, to do any and all things andexecute any and all instruments that such attorney may deem necessary oradvisable under the Securities Exchange Act of 1934 and any rules, regulationsand requirements of the U.S. Securities and Exchange Commission in connectionwith the Annual Report on Form 10-K and any and all amendmentshereto, as fully for all intents and purposes as he might or could do inperson, and hereby ratifies and confirms all said attorneys-in-fact and agents,each acting alone, and his substitute or substitutes, may lawfully do or causeto be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.
| /s/ ANDRE C. DIMITRIADIS |     | Chairman  of the Board,                                                     |   | February 22,  2007 |
|--------------------------|----------|-----------------------------------------------------------------------------|--------|-------------------------|
| Andre  C. Dimitriadis    | * * | Chief  Executive Officer and Director*(Principal Executive Officer)*        |   |                    |
| /s/ WENDY L.  SIMPSON    |     | President, Chief Operating Officer, Chief                                   |   | February 22, 2007  |
| Wendy  L. Simpson        | * * | Financial  Officer, Treasurer and Director *(Principal Financial  Officer)* |   |                    |
| /s/ BOYD  HENDRICKSON    |     | Director                                                                    |   | February 22, 2007  |
| Boyd  Hendrickson        |     |                                                                        |   |                    |
| /s/ EDMUND C.  KING      |     | Director                                                                    |   | February 22, 2007  |
| Edmund  C. King          |     |                                                                        |   |                    |
| /s/ TIMOTHY J.  TRICHE   |     | Director                                                                    |   | February 22, 2007  |
| Timothy  Triche          |     |                                                                        |   |                    |
| /s/ SAM YELLEN           |     | Director                                                                    |   | February 22, 2007  |
| Sam  Yellen              |     |                                                                        |   |                    |

 

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