Executive Overview

Business

LTC Properties, Inc., a self-administered health care real estate investment trust (or REIT) commenced operations in 1992. We invest primarily in long-term care and other health care related properties through mortgage loans, property lease transactions and other investments. The following table summarizes our portfolio as of September 30, 2008:

                                                For the
                                              Nine Months        For the
                                                 Ended         Nine Months
                                                9/30/08           Ended                                             Investment
                   Gross                        Rental           9/30/08        Percentage                Number       per                    Number
                Investments    Percentage       Income           Interest           of         Number       of       Bed/Unit     Number of     of
Type of             (in            of             (in           Income (2)       Revenues        of       Beds/        (in        Operators   States
Property        thousands)     Investments    thousands)      (in thousands)       (3)       Properties   Units     thousands)       (1)       (1)
Assisted
Living
Properties     $     282,304          48.2 % $      21,261   $          2,276         46.1 %        101    4,598   $      61.40          11       22
Skilled
Nursing
Properties           289,913          49.6 %        21,203              5,179         51.7 %        102   11,986          24.19          37       19
Schools               13,020           2.2 %           875                230          2.2 %          2      N/A            N/A           2        2
Totals         $     585,237         100.0 % $      43,339   $          7,685        100.0 %        205   16,584

(2) Includes Interest Income from Mortgage Loans.

(3) Includes Rental Income and Interest Income from Mortgage Loans.

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

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

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

For the nine months ended September 30, 2008, rental income and interest income from mortgage loans represented 82% and 15%, respectively, of total gross revenues. Our lease structure contains fixed annual rental escalations, which are generally recognized on a straight-line basis over the minimum lease

period in accordance with SFAS No. 13. "Accounting for Leases." Certain leases have annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property. This revenue is not recognized until the appropriate contingencies have been resolved. This lease structure initially generates lower revenues and net income but enables us to generate additional growth and minimize non-cash straight-line rent over time. For the nine months ended September 30, 2008 and 2007, we recorded $2.6 million and $3.6 million, respectively, in straight-line rental income. We currently expect that straight-line rent on a same store basis will decrease from $3.5 million for projected annual 2008 to $2.8 million for projected annual 2009 assuming no new leased investments are added to our portfolio. During the nine months ended September 30, 2008 we received $41.2 million of cash rental revenue and recorded $0.5 million of lease inducement cost. At September 30, 2008 and December 31, 2007, the straight-line rent receivable balance recorded under the caption "Prepaid Expenses and Other Assets" on the balance sheet was $13.2 million and $10.5 million, respectively.

Economic Climate

Through the third quarter of 2008, the U.S has experienced challenging financial markets, tighter credit conditions, and slower growth. For the nine months ended September 30, 2008, continued concerns about the systemic impact of inflation, energy costs, declining business and consumer confidence, and a weakened real estate market have contributed to increased market volatility and diminished expectations for the U.S. economy. As a result, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Continued turbulence in the U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our operators.

We believe our business model has enabled and will continue to allow us to maintain the integrity of our property investments, including in response to financial difficulties that may be experienced by operators. Traditionally, we have taken a conservative approach to managing our business, choosing to maintain liquidity and exercise patience until favorable investment opportunities arise.

At September 30, 2008, we had $16.2 million of cash on hand. Subsequent to September 30, 2008 we received $2.6 million in early payment on a loan due in 2018 and received notice of prepayment to be received in November 2008 of a $2.4 million loan also due in 2018. In calendar year 2009, we have debt maturities of $8.1 million due in October 2009 at an interest rate of 8.43% and $15.8 million due in December 2009 at an interest rate of 8.81%. The October maturity may be paid 90 days early and the December maturity may be paid six months early. In calendar year 2009, we have mortgage receivables of $7.6 million maturing in November. Additionally, we have an undrawn $80.0 million Unsecured Revolving Credit Agreement with no schedule maturities other than the maturity date of July 17, 2011.

As a result, we believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance some future investments should we determine such future investments are financially feasible.

Key Transactions

During the three months ended September 30, 2008, we invested $1.6 million, at an average yield of 10.3%, under agreements to expand and renovate eight properties operated by four operators. We also amended and extended our Unsecured Revolving Credit Agreement at an initial commitment amount of $80.0 million. The Credit Agreement provides for the opportunity to increase the credit amount up to a total of $120.0 million. The prior agreement did not have an expansion provision. The Credit Agreement provides a revolving line of credit with no scheduled maturities other than the maturity date of July 17, 2011. The pricing under the amended Unsecured Revolving Credit Agreement remains the same as under our prior credit agreement, either Prime Rate plus 0.50% or LIBOR plus 1.50% depending on our borrowing election. At the time of borrowing, we may elect the 1, 2, 3 or 6 month LIBOR rate.

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

During the third quarter of 2008 we did not receive August or September payments on a $1.5 million loan at an interest rate of 11.15% and secured by a first mortgage on a 165-unit assisted living property in Mesquite, Texas operated by Sunwest. However, in October we received from non-Sunwest equity investors in this property the payment of all past due interest, property tax impounds, attorney's fees and a $0.1 million replacement reserve. Interest on the loan, which matures November 19, 2011, represented 1.8% of our interest income from mortgage loans for the quarter ended September 30, 2008. On October 31, 2008 we completed an assignment and assumption of the loan to an entity formed by the non-Sunwest equity investors. Sunwest continues to operate the property until the new borrower selects a replacement operator.

During the third quarter of 2008 we did not receive August or September payments on a $4.7 million loan at an interest rate of 11.15% and secured by a first mortgage on a 140-unit independent living property in Fort Worth, Texas operated by Sunwest. Accordingly we did not record interest income of $0.1 million in the third quarter of 2008 related to this mortgage loan. Interest on the loan represents 5.0% of our interest income from mortgage loans for the three months ended June 30, 2008. On October 7, 2008 we acquired the property through foreclosure for $4.7 million, the amount of the debt outstanding. The property is being operated by a third party operator we selected and we are in the process of entering into a long-term lease with this new operator. As a result, we expect to receive some amount of rental income to offset, in whole or in part, the interest income we otherwise would have received from Sunwest. However, we have not reached a definitive agreement yet with the expected new operator as to the lease rate or capital dollars we may need to invest in this property.

During the third quarter of 2008 we did not receive August or September payments on a master lease covering a 109-unit assisted living property in Vacaville, California and a 113-unit assisted living property in Bakersfield, California operated by Sunwest. The total monthly lease payment under the master lease agreement is approximately $0.2 million per month or approximately 4.5% of our current monthly rental income. Accordingly we did not record rental income of $0.4 million and wrote-off $0.1 million of straight-line rent receivable in the third quarter of 2008 related to this lease. Our total gross investment in the properties under the master lease is approximately $26.2 million or 4.5% of our gross investments in real estate as of September 30, 2008. As of September 30, 2008, single purpose subsidiaries owned by us owed debt obligations totaling $16.1 million on the master lease properties and secured by the master lease properties. Specifically, the outstanding principal balance on the Bakersfield property was $8.2 million at a rate of 8.43% and is due October 1, 2009, and the outstanding principal balance on the Vacaville property was $7.9 million at a rate of 8.69% and is due August 1, 2010. The master lease is guaranteed by owners of Sunwest and their respective spouses. To date, we have not sent a notice of termination of the master lease to Sunwest or its affiliates. We are in the process of negotiating with another operator to lease these properties. However, we have not reached a definitive agreement yet with the expected new operator as to the provisions of the master lease.

Key Performance Indicators, Trends and Uncertainties

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

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

                                                   Period Ended
                              9/30/08     6/30/08     3/31/08    12/31/07     9/30/07
                                         (gross investment, in thousands)
Asset mix:
Real property                $ 497,656   $ 496,114   $ 495,202   $ 492,880   $ 492,844
Loans receivable                87,581      91,040      91,955      92,168      86,500

Investment mix:
Assisted living properties   $ 282,304   $ 282,406   $ 275,313   $ 274,333   $ 274,428
Skilled nursing properties     289,913     291,728     298,824     297,695     291,896
Schools                         13,020      13,020      13,020      13,020      13,020

Operator mix:
Alterra                      $  84,210   $  84,210   $  84,210   $  84,210   $  84,210
Preferred Care, Inc. (1)        87,281      87,490      93,197      92,042      85,326
ALC                             88,034      88,034      88,034      88,034      88,034
Remaining operators            325,712     327,420     321,716     320,762     321,774

Geographic mix:
Colorado                     $  27,581   $  27,581   $  27,581   $  27,518   $  27,459
Florida                         43,930      43,975      47,368      46,385      46,444
Ohio                            56,804      55,862      55,121      54,010      53,943
Texas                          104,637     106,568     102,245     101,721      95,768
Washington                      27,376      27,412      27,504      27,593      27,680
Remaining states               324,909     325,756     327,338     327,821     328,050

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

                                                        Three Months Ended
                                       9/30/08     6/30/08    3/31/08    12/31/07    9/30/07
Debt to book capitalization ratio      7.4 %       7.4 %(1)     10.0 %       9.8 %      9.8 %
Debt to market capitalization ratio    4.2 %       4.6 %(1)      6.2 %       6.4 %      6.6 %

Interest coverage ratio               17.1 x(2)   15.0 x(2)     13.6 x      13.0 x     13.3 x
Fixed charge coverage ratio            3.2 x       3.3 x         3.2 x       2.9 x      3.0 x

(2) Increase primarily due to decrease in interest expense relating to repayment of a $14.2 million mortgage loan secured by four assisted living properties located in Ohio

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

†          The status of the economy;

†          The status of capital markets, including prevailing interest rates
and availability of capital;

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

†          Changes in financing terms;

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

†          Changes in federal, state and local legislation.

Management regularly monitors the economic and other factors listed above. We develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. Changes in capital markets environment may impact the availability of cost-effective capital. See Business above for further discussion.

Operating Results

Three months ended September 30, 2008 compared to three months ended September 30, 2007

Revenues for the three months ended September 30, 2008 decreased to $17.0 million from $18.2 million for the same period in 2007 primarily due to decreases resulting from Sunwest non-payment of rental and interest income, decreases in interest income from mortgage loans and decreases in interest and other income, as discussed below. See Key Transactions above for further discussion on Sunwest non-payment of rental income and interest income. Rental income for the three months ended September 30, 2008 decreased $0.4 million from the same period in 2007 primarily as a result of rental decreases resulting from Sunwest non-payment of rental income ($0.4 million) and lower straight-line rental income net of

amortization of lease costs ($0.4 million), partially offset by increases provided for in existing lease agreements ($0.4 million). Same store cash rental income, properties owned for the three months ended September 30, 2008, and the three months ended September 30, 2007, increased $0.4 million due to rental increases provided for in existing lease agreements.

Interest income from mortgage loans for the three months ended September 30, 2008 decreased $0.2 million from the same period in 2007 primarily due to payoffs and Sunwest non-payment of interest income, as described in Key Transactions above.

Interest and other income for the three months ended September 30, 2008 decreased $0.7 million from the same period in 2007 primarily due to lower interest income from our investments of cash resulting from lower interest rates and lower cash balances.

Interest expense for the three months ended September 30, 2008 was $0.3 million lower than the same period in 2007 due to a decrease in average debt outstanding during the period resulting from the repayment of a $14.2 million mortgage loan and normal amortization of existing mortgage loans.

Depreciation and amortization expense for the three months ended September 30, 2008 increased $0.1 million from the same period in 2007 due to acquisitions in 2007 and 2008 and capital improvements to existing properties.

Operating and other expenses were $0.2 million lower in the three months ended September 30, 2008 as compared to the same period in 2007 primarily due to a decrease in restricted stock vesting, as described in Item 1. FINANCIAL STATEMENTS-Note 6. Stockholders' Equity.

Minority interest expense was comparable for each of the three month periods ended September 30, 2008 and 2007. The partial redemption of one of our limited partners, as described in Item 1. FINANCIAL STATEMENTS-Note 6. Stockholders' Equity, had an immaterial effect on minority interest expense.

Net income available to common stockholders for the three months ended September 30, 2008 decreased $0.4 million from the same period in 2007 due to the changes previously described above and a $0.4 million decrease in preferred stock dividends primarily due to the repurchase of our Series F preferred stock. See Item 1. FINANCIAL STATEMENTS-Note 6. Stockholders' Equity for further discussion on the Series F preferred stock buyback.

Nine months ended September 30, 2008 compared to nine months ended September 30, 2007

Revenues for the nine months ended September 30, 2008 decreased to $52.7 million from $56.8 million for the same period in 2007 primarily due to decreases resulting from Sunwest non-payment of rental and interest income, decreases in interest income from mortgage loans and decreases in interest and other income, as discussed below. See Key Transactionsabove for further discussion on Sunwest non-payment of rental and interest income. Rental income for the nine months ended September 30, 2008 increased $0.1 million from the same period in 2007 primarily as a result of rental increases provided for in existing lease agreements ($1.4 million) partially offset by decreases resulting from Sunwest non-payment of rental income ($0.4 million) and lower straight-line rental income net of amortization of lease costs ($0.9 million). Same store cash rental income, properties owned for the nine months ended September 30, 2008, and the nine months ended September 30, 2007, increased $1.4 million due to rental increases provided for in existing lease agreements.

Interest income from mortgage loans for the nine months ended September 30, 2008 decreased $2.2 million from the same period in 2007 primarily due to mortgage payoffs and Sunwest non-payment of interest income, as described in Key Transactions above.

Interest and other income for the nine months ended September 30, 2008 decreased $1.9 million from the same period in 2007 primarily due to the early redemption of $3.5 million face value of the Skilled Healthcare Group, Inc. (or SHG) Senior Subordinated Notes in 2007 and lower interest income from our investments of cash resulting from lower interest rates and lower cash balances.

Interest expense for the nine months ended September 30, 2008 was $0.6 million lower than the same period in 2007 due to a decrease in average debt outstanding during the period resulting from the repayment of a $14.2 million mortgage loan and normal amortization of existing mortgage loans.

Depreciation and amortization expense for the nine months ended September 30, 2008 increased $0.5 million from the same period in 2007 due to acquisitions in 2007 and 2008 and capital improvements to existing properties.

Operating and other expenses were $0.4 million lower in the nine months ended September 30, 2008 as compared to the same period in 2007 primarily due to a decrease in restricted stock vesting, as described in Item 1. FINANCIAL STATEMENTS-Note 6. Stockholders' Equity, partially offset by a reduction of our allowance for loan loss reserve resulting from payoffs of mortgage loans.

Minority interest expense was comparable for each of the nine month periods ended September 30, 2008 and 2007. The partial redemption of one of our limited partners, as described in Item 1. FINANCIAL STATEMENTS-Note 6. Stockholders' Equity, had an immaterial effect on minority interest expense.

Net income available to common stockholders for the nine months ended September 30, 2008 decreased $1.3 million from the same period in 2007 due to the changes previously described above and offset by a $0.1 million gain on sale of a vacant parcel of land adjacent to a skilled nursing property, a $1.0 million preferred stock buyback related to the repurchase of 636,300 shares of our 8.0% Series F Cumulative Preferred Stock (or Series F preferred stock) and a $1.2 million decrease in preferred stock dividends primarily due to the repurchase of our Series F preferred stock. See Item 1. FINANCIAL STATEMENTS-Note 6. Stockholders' Equity for further discussion on the Series F preferred stock buyback. During the nine months ended September 30, 2007, we recognized a $0.1 million gain related to the sale of one closed and previously impaired skilled nursing property.

Liquidity and Capital Resources

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