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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20459

FORM 10-Q

          Indicate by check mark whether Registrant (1) has filed all reports to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Shares of Registrant’s common stock, $.01 par value, outstanding at May 8, 2003 – 17,716,322

LTC PROPERTIES, INC.

FORM 10-Q

March 31, 2003

INDEX

2

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

See accompanying notes.

3

LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)

See accompanying notes.

4

LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

See accompanying notes.

5

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

1.     General

LTC Properties, Inc. (the “Company”), a Maryland corporation, is a real estate investment trust (“REIT”) that invests primarily in long term care facilities through mortgage loans, facility lease transactions and other investments.

The consolidated financial statements included herein have been prepared by the Company without audit and in the opinion of management include all adjustments necessary for a fair presentation of the results of operations for the three months ended March 31, 2003 and 2002 pursuant to the rules and regulations of the Securities and Exchange Commission.  The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and controlled partnerships.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Control over those partnerships is based on the provisions of the partnership agreements that provide the Company with a controlling financial interest in the partnerships.  Under the terms of the partnership agreements, the Company, as general partner, is responsible for the management of the partnerships’ assets, business and affairs.  The Company’s rights and duties in management of the partnerships include making all operating decisions, setting the capital budgets, 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, and central operations of the partnership and makes all management decisions.  In addition, the general partner assumes the risk for all operating losses, capital losses, and is entitled to substantially all capital gains (appreciation).

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

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

Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation as required by Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.  The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results for a full year.

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

2.     Real Estate Investments

Owned Properties.  At March 31, 2003, the Company owned 59 skilled nursing facilities with a total of 6,896 beds, 88 assisted living facilities with 4,182 units and one school located in 23 states. 

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, which was required to be adopted in fiscal years

6

LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)

beginning after December 15, 2001.  SFAS No. 144 on asset impairment supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and provides a single accounting model for long-lived assets to be disposed of.  Subsequent to January 1, 2002, and in accordance with SFAS No. 144, properties held for sale on the balance sheet includes only those properties available for immediate sale in their present condition and for which management believes that it is probable that a sale of the property will be completed within one year.  Properties held for sale are carried at the lower of cost or fair value less estimated selling costs.  No depreciation expense is recognized on properties held for sale once they have been classified as such.  In accordance with the implementation provisions of SFAS No. 144, the operating results of real estate assets designated as held for sale subsequent to January 1, 2002 are included in discontinued operations in the consolidated statement of operations.  In addition, all gains and losses from real estate sold are also included in discontinued operations.

Set forth in the table below are the components of the net loss from discontinued operations for the three months ended March 31, 2003 and 2002 (unaudited, in thousands):

Mortgage Loans.  At March 31, 2003 the Company had 38 mortgage loans secured by first mortgages on 35 skilled nursing facilities with a total of 3,895 beds and eight assisted living facilities with a total of 369 units located in 20 states.  At March 31, 2003, the mortgage loans had interest rates ranging from 9.4% to 12.9% and maturities ranging from 2003 to 2018.  In addition, the loans contain certain guarantees, provide for certain facility fees and generally have 25-year amortization schedules.  The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points.

REMIC Certificates.  As of March 31, 2003, the outstanding certificate principal balance and the weighted average pass-through rate for the senior REMIC Certificates (all held by outside third parties) was $178,241,000 and 7.21%.  As of March 31, 2003, the carrying value of the subordinated REMIC Certificates held by the Company was $64,122,000.  The effective yield on the subordinated REMIC Certificates held by the Company, based on expected future cash flows discounted to give effect to potential risks associated with prepayments and unanticipated credit losses was 16.43% at March 31, 2003.

Interest only certificates and certificates with an investment rating of “BB” or higher are classified as available-for-sale and unrated certificates and certificates with an investment rating of “B” or lower are classified as held-to-maturity.  As of March 31, 2003, available-for-sale certificates were recorded at their fair value of approximately $12,281,000.  An unrealized holding gain on available-for-sale certificates of $28,000 was included in comprehensive income for the three months ended March 31, 2002.  During the three months ended March 31, 2003, a $1,303,000 impairment charge was recorded related to certain interest-only REMIC Certificates held by the Company.  The impairment charge resulted from the changes in assumptions relating to the likelihood of occurrence of prepayments on mortgages underlying the REMIC Certificaes.  As such, the $1,303,000 impairment charge was

7

LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)

reclassified from unrealized losses (related to fair market value adjustments on available-for-sale certificates) previously recorded in comprehensive income when the Company determined that the change in assumptions may result in declines in certificate values that would be other than temporary.  See Note 3. Impairment Charge for further discussion.

At March 31, 2003 held-to-maturity certificates had a book value of $51,841,000 and a fair value of $36,304,000.  As of March 31, 2003, the effective yield on the available-for-sale certificates and the held-to-maturity certificates, based on expected future cash flows discounted to give effect to potential risks associated with prepayments and unanticipated credit losses, was 34.99% and 11.94%, respectively.

3.     Impairment Charge

The Company periodically performs a comprehensive evaluation of its real estate investment portfolio.  During 2002, the Company adopted SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” and therefore calculates the impairment losses as the excess of the carrying value over the fair value of assets to be held and used, and the carrying value over the fair value less cost to sell in instances where management has determined that the Company will dispose of the property. Prior to 2002, the Company calculated impairment losses using the same methodology as per SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.”  The long-term care industry has experienced significant adverse changes, which have resulted in continued operating losses by certain of the Company’s lessees and borrowers and in some instances the filing by certain lessees and borrowers for bankruptcy protection.  As a result of the adverse changes in the long-term care industry, the Company has identified certain investments in skilled nursing properties that it determined had been impaired.  These assets were determined to be impaired primarily because the estimated undiscounted future cash flows to be received from these investments are less than the carrying values of the investments.

During the three months ended March 31, 2003, the Company recorded an impairment charge of $1,260,000.  Of this charge, $31,000 was to fully reserve a mortgage loan on one skilled nursing facility that was closed in 2002 and not reopened or sold.  Additionally, the Company recorded $1,303,000 impairment related to certain interest-only REMIC Certificates net of a $74,000 adjustment of an impairment loss, recognized in the fourth quarter of 2002, related to the Company’s investment in REMIC Certificates.  $1,303,000 of the net impairment charge had been previously recognized in comprehensive income as a fair market value adjustment on available-for-sale REMIC Certificates as described in Note 2. Real Estate Investments.  As more fully described in Note 2. Summary of Significant Accounting Policies of the Company’s 10-K for the year ending December 31, 2002, to the extent there are defaults, unrecoverable losses or prepayments of principal on the underlying mortgages resulting in reduced cash flows, the subordinated REMIC Certificates held by the Company would bear the first risk of loss.  During management’s periodic evaluation of the realizability of expected future cash flows from the mortgages underlying the Company’s REMIC Certificates, there were indications that certain expected future cash flows would not be realized by the REMIC Trust.  Accordingly, the Company recorded a net $1,229,000 impairment in current period earnings to reflect the estimated impact on future cash flows from loan prepayments occurring during, or expected to occur subsequent to, the first quarter of 2003 related to certain subordinated REMIC Certificates held by the Company.  

The Company believes it has recorded valuation adjustments on all assets for which there are other than temporary impairments.  However, the long-term care industry has experienced significant adverse changes, which have resulted in, continued operating losses by certain of the Company’s operators and in

8

LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)

some instances the filing by certain operators for bankruptcy protection.  Thus, the Company cannot predict what, if any, impairment charge may be needed in the future.

4.     CLC Healthcare, Inc.

As of March 31, 2003, 23 skilled nursing facilities with 2,617 beds and a net book value of $46,473,000 or 7.8% of the Company’s total assets were operated by CLC Healthcare, Inc. (“CLC”).  These facilities are leased to CLC under individual leases that provide for total rents of $3,000,000; $4,000,000; $4,750,000; $5,350,000; $5,900,000 and $6,500,000 respectively, in years 2002 through 2007.  The leases contain two five-year renewal options with increases of 2% annually.  These leases have a provision for acceleration should there be a change of control of CLC, as defined in the leases.  In 2002, the Company sold a wholly-owned subsidiary, LTC-Fort Tucum, Inc. to CLC for a $500,000 note bearing no interest for one year and thereafter interest at 8% annually for two years.  CLC has certain rights to extend the note at its maturity.  LTC-Fort Tucum, Inc. then acquired two skilled nursing facilities in New Mexico subject to a mortgage loan payable to a REMIC pool originated by the Company.  During the three months ended March 31, 2003 and 2002, the Company was due rental income of approximately $1,000,000 and $750,000, respectively, from CLC.  For the three months ended March 31, 2003 and 2002, the Company classified the rents due from CLC as non-accrual rents.

CLC’s Form 10-K for the year ended December 31, 2002 contained a “going concern” qualified opinion from CLC’s outside auditors.  CLC has sustained operating losses and net losses every year since inception, currently has no outside financing availability other than the line of credit with the Company, discussed below, and at December 31, 2002 had recorded an actuarially based accrual for general and professional liability of approximately $12,599,000.  See below for discussion of CLC’s insurance coverage.

The Company has discussed with CLC’s Board of Directors the possible transfer of the 23 leased properties to other lessees.  The independent directors of CLC’s Board have agreed, at this time, to permit the Company to solicit other lessees for these properties.  The Company has agreed that until June 30, 2003, and contingent on its reaching an agreement with another lessee, the Company would purchase from CLC the leasehold improvements, furniture, fixtures and equipment and pay CLC a mutually agreeable breakage fee for any property leased to a new lessee.  The Company also agreed to give CLC a rent abatement through June 30, 2003 effective March 1, 2003 on the 23 properties.

Management cannot predict, at this time, when or if any or all CLC leases will be transferred to other lessees or what value any new leases would represent for the properties leased.  Such new leases may result in a future impairment charge if the net book value of the properties exceeds the undiscounted cash flow from the new leases.

These discussions with CLC could involve a significant restructuring of CLC by the Board and management of CLC and during this process it is likely that the Company will need to advance working capital or offer additional rent concessions to CLC for its reorganization.  The amount of a potential advance and the eventual realization of all CLC’s obligations to us, including future advances, is not, at this time estimable.

Effective October 1, 2002, the Company and CLC amended the secured line of credit extended by the Company to CLC.  The amendment reduced the line from $20,000,000 to $10,000,000 and added certain restrictions as to the use of funds drawn under the agreement.  The line of credit continues to bear

9

LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)

interest at 10%, mature on April 1, 2008 and contains a provision for acceleration should there be a change of control of CLC.  In consideration of this amendment, the Company waived until November 30, 2002, defaults under its leases with CLC for non-payment of rent.  The independent Board members of each company’s board approved this amendment. At March 31, 2003 and December 31, 2002, there was $4,745,000 and $4,741,000, respectively, outstanding under the line of credit.  During the three months ended March 31, 2003, the Company advanced CLC $950,000 under the line of credit and CLC paid $946,000 for rent and interest which the Company applied to reduce the line of credit.  During the three months ended March 31, 2003 and 2002, the Company did not record interest income under the line of credit.  Subsequent to March 31, 2003, the Company advanced CLC $500,000 under the line of credit.

Additionally, the Company holds a Promissory Note (“Note”) issued by Healthcare Holdings, Inc. (“Holdings”), a wholly owned subsidiary of CLC, in the face amount of $7,000,000.  The Note was received in December 2001 in exchange for the Company’s right to receive 1,238,076 shares of Assisted Living Concepts, Inc. (“ALC”) common stock distributed concurrently with ALC’s emergence from bankruptcy on December 31, 2002.  The Note is for a term of five years and bears interest at 5.0% compounded annually and accruing to the principal balance plus interest at 2.0% on the original principal of $7,000,000 payable in cash annually.  The Company did not accrue any interest income on the Note during the first three months of 2003 or 2002.  The Note is a full recourse obligation of Holdings and is secured by all the assets owned now or in the future by Holdings and contains a provision for acceleration should there be a change of control of Holdings or CLC.  At March 31, 2003 Holdings owned 1,452,794 shares of ALC common stock with a fair market value based on the closing price of the stock on March 31, 2003 of $5,085,000 and $1,225,000 face value of ALC Senior Subordinated Debentures and $578,000 face value of Junior Subordinated Debentures.  At March 31, 2003, the book value of the Note was $3,095,000, which represented the fair market value of the 1,238,076 shares acquired by Holdings on December 31, 2002.  Subsequent to March 31, 2003, the Company purchased from Holdings $500,000 face value of ALC Senior Subordinated Debentures for $500,000 plus accrued interest.

Our Chairman, President and Chief Executive Officer, Chief Financial Officer, Chief Investment Officer and Vice President, Taxes served as officers of CLC and have resigned as officers of CLC.  Our Chairman, President and Chief Executive Officer, Chief Financial Officer and Chief Investment Officer remain as Board members of CLC.  Additionally, we have an indemnification agreement covering these officers who also serve as Board members of CLC and one current CLC outside director.

5.     Debt Obligations

At March 31, 2003, $48,421,000 was outstanding under the Company’s Senior Secured Revolving Line of Credit (the “Secured Revolving Credit”) and commitments were $69,942,000.  During the three months ended March 31, 2003, pricing under the Secured Revolving Credit was LIBOR plus 2.50%.  At March 31, 2003, the Company’s weighted average interest rate was 3.80%.

At maturity, January 2, 2002, the Company redeemed $2,408,000 of convertible subordinated debentures.  Subsequent to March 31, 2003, the Company paid $3,554,000 of mortgage debt that was scheduled to mature in September 2003.  The two mortgages repaid were held in a REMIC pool originated by the Company.

10

LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)

6.     Senior Mortgage Participation Payable

On August 1, 2002, the Company completed a loan participation transaction whereby the Company issued a $30,000,000 senior participating interest in 22 of its first mortgage loans that had a total unpaid principal balance of $58,627,000 (the “Participation Loan Pool”) to a private bank.  The Participation Loan Pool had a weighted average interest rate of 11.6% and a weighted average scheduled term to maturity of 77 months.  The $30,000,000 senior participation is secured by the entire Participation Loan Pool.  The Company received net proceeds from the issuance of the senior participation of $29,750,000 that it used to reduce commitments and amounts outstanding under its Secured Revolving Credit.

The senior participation receives interest at a rate of 9.25% per annum, payable monthly in arrears, on the then outstanding principal balance of the senior participation.  In addition, the senior participation receives all mortgage principal collected on the Participation Loan Pool until the senior participation balance has been reduced to zero.  The Company retains interest received on the Participation Loan Pool in excess of the 9.25% paid to the senior participation.  The ultimate extinguishments of the senior participation is tied to the underlying maturities of loans in the Participation Loan Pool, which range from 1 to 185 months.  The Company has accounted for the participation transaction as a secured borrowing under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

During the three months ended March 31, 2003, the senior participation received principal payments of $212,000.  At March 31, 2003, $29,455,000 was outstanding under the senior mortgage participation.

7.     Stockholders’ Equity

Other equity consists of the following (unaudited, amounts in thousands):

During the three months ended March 31, 2003, the Company declared and paid cash dividends on its Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock totaling $1,822,000, $1,121,000 and $818,000 (paid on April 1, 2003), respectively.  During the first quarter of 2003 and 2002 the Company declared and paid cash dividends of $0.10 per share on its common stock totaling $1,816,000 and $1,843,000, respectively.

Subsequent to March 31, 2003 the Company declared a cash dividend of $0.15 per share on its common stock payable on June 30, 2003 to stockholders of record on June 20, 2003.

During the three months ended March 31, 2003, a total of 129,000 stock options were exercised at a total option value of approximately $691,000 and a total market value as of the dates of exercise of approximately $807,000.  Additionally, 2,500 restricted shares previously issued were cancelled as a result of an employee’s resignation.

Subsequent to March 31, 2003, an additional 20,000 options were exercised for a total of approximately $108,000 and a market value of approximately $125,000. 

11

LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)

For the three months ended March 31, 2003, the Company repurchased 305,500 shares of its common stock for a total price of approximately $1,896,000, 5,000 shares of its Series A Preferred stock for a total purchase price of approximately $100,000 and 5,000 of its Series B Preferred stock for a total purchase of approximately $97,000.

Subsequent to March 31, 2003, the Company purchased 180,000 shares of its common stock for a total of $1,368,000.

The common shares were purchased on the open market under a Board authorization to purchase up to 5,000,000 common shares.  A total of 2,350,700 shares have been purchased under this authorization.  Therefore, the Company continues to have an open Board authorization to purchase an additional 2,649,300 common shares.

The preferred shares were purchased on the open market under a February 2003 Board authorization to purchase up to 100,000 shares each of the Company’s Series A and Series B Preferred Stock.

Prior to January 1, 2003, the Company accounted for stock option grants in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations.  Historically, the Company granted stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant.  Under APB 25, because the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized.  Effective January 1, 2003, the Company adopted SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, on a prospective basis for all employee awards granted, modified or settled on or after January 1, 2003.  The Company did not grant any options during the three months ended March 31, 2003.

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

12

LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)

8.     Major Operators

The Company has two operators that lease properties directly from the Company and/or operate properties secured by mortgage loans, that each represent between 10% and 20% of the Company’s total assets.  The following table summarizes the Company’s major lessees’ assets, stockholders’ equity, annual revenue and net income (loss) from continuing operations as of or for the year ended December 31, 2002 per the lessees’ public filings:

Assisted Living Concepts, Inc.  (“ALC”) leases 37 assisted living properties with a total of 1,434 units owned by the Company representing approximately 12.4%, or $74,159,000, of the Company’s total assets at March 31, 2003. 

Additionally, as of March 31, 2003 the Company owns $7,083,000 face value of ALC’s new Senior Secured Notes bearing interest at 10% per annum, payable semi-annually in arrears, and $3,272,000 face value of new Junior Secured Notes bearing interest payable in additional new Junior Secured Notes for three years at 8% and thereafter payable in cash at 12% per annum, payable semi-annually in arrears. See Note 4.  CLC Healthcare, Inc. for a discussion of a note the Company has with Holdings which is secured by 1,452,794 shares of ALC’s common stock and ALC Senior and Junior Secured Notes owned by Holdings.

Alterra Healthcare Corporation (“Alterra”) leases 35 assisted living properties with a total of 1,416 units owned by the Company representing approximately 12.2%, or $72,885,000, of the Company’s total assets at March 31, 2003.  Alterra announced on January 22, 2003 that it had filed a voluntary petition with the U.S. Bankruptcy Court for the District of Delaware to reorganize under Chapter 11 of the U.S. Bankruptcy Code.  Alterra’s senior management informed the Company that they expect all leases with the Company will be affirmed.  While no assurances can be given in a bankruptcy, such affirmation would result in no adverse impact to the Company as a result of Alterra’s reorganization.  Alterra is current on all rents due to the Company through May 2003.

These two companies are publicly traded companies, and as such are subject to the filing requirements of the Securities and Exchange Commission.  The Company’s financial position and its ability to make distributions may be adversely affected by further financial difficulties experienced by ALC and Alterra or any of the Company’s other lessees and borrowers, including additional bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such

13

LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)

operator, or in the event any such operator does not renew and/or extend its relationship with the Company or the Company’s borrowers when it expires.

9.     Earnings per Share

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

14

Operating Results

Three months ended March 31, 2003 compared to three months ended March 31, 2002

Revenues for the three months ended March 31, 2003 decreased to $16.1 million from $17.2 million for the same period in 2002.  Rental income for the three months ended March 31, 2003 decreased $0.7 million compared to the same period of 2002 primarily as a result of the elimination of rents from sold properties ($0.5 million) and the effect of classifying nine properties leased to Sun Healthcare Group, Inc. as non-accrual rents ($0.7 million), partially offset by new leases and rental increases provided for in existing lease agreements ($0.5 million).  Same store rental income, properties owned for the three months ended March 31, 2003 and the three months ended March 31, 2002, decreased $0.3 million due to the effect of classifying nine properties leased to Sun as non-accrual rents, partially offset by new leases and normal rental rate increases, as set forth in the lease agreements.  Interest income from mortgage loans and notes receivable decreased $0.1 million primarily as a result of the early payoff of three mortgage loans.  Interest income from REMIC Certificates for the three months ended March 31, 2003 decreased $0.5 million compared to the same period of 2002 due to the amortization of the related asset and the early payoff of certain mortgage loans underlying the Company’s investment in REMIC Certificates.  Interest and other income for the three months ended March 31, 2003 increased $0.1 million from the same period in 2002 due primarily to the receipt of interest on the Company’s investment in ALC bonds.

Interest expense decreased by $0.2 million to $5.2 million for the three months ended March 31, 2003 from $5.4 million during the same period in 2002, due to a decrease in average borrowings outstanding during the period and a decrease in interest rates on the Company’s Senior Secured Revolving Line of Credit partially offset by an increase in the Company’s overall weighted average interest rate resulting from the sale of the Senior Mortgage Participation as discussed in Note 6. Senior Mortgage Participation Payable.  Depreciation and amortization expense for the first quarter of 2003 decreased $0.3 million from the first quarter of 2002 due to properties sold in 2002 and a lower basis of certain assets due to impairment charges taken in 2002.  The Company recorded a $1.3 million impairment charge during the first quarter of 2003.  See Note 3. Impairment Charge for further discussion.  No impairment charge was taken in the same quarter of the prior year.  Operating and other expenses increased $0.6 million due to a one-time severance payment and higher legal costs for general litigation defense.

During the quarter ended March 31, 2002, the Company reported a net loss from discontinued operations of $0.1 million.  This reclassification was made in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” which requires that the financial results of properties meeting certain criteria be reported on a separate line item called “Discontinued Operations.”  During the three months ended March 31, 2002, the Company sold two skilled nursing facilities in Illinois for $2.1 million, which resulted in a net loss of $0.1 million.

Net income available to common stockholders decreased to $0.1 million for the three months ended March 31, 2003 from $2.4 million for the same period in 2002 due to the reduction in revenue and impairment charge in 2003 as discussed above.

Liquidity and Capital Resources

At March 31, 2003 the Company’s real estate investment portfolio (before accumulated depreciation and amortization) consisted of $469.5 million invested primarily in owned long-term care facilities, mortgage loans of approximately $82.3 million (net of a $1.3 million reserve) and subordinated REMIC Certificates of approximately $64.1 million with a weighted average effective yield of 16.4%.  At March 31, 2003 the outstanding certificate principal balance and the weighted average pass-through rate for the senior REMIC Certificates (all held by outside third parties) was $178.2 million and 7.2%.  The Company’s portfolio consists of direct investments (properties that the Company either owns or on which the Company holds promissory notes secured by first mortgages) in 95 skilled nursing facilities, 96 assisted living facilities and one school in 30 states.

15

For the three months ended March 31, 2003, the Company had net cash provided by operating activities of $7.4 million.  The Company invested $0.1 million for renovation of owned properties and sold licensed beds from two closed skilled nursing facilities resulting in net cash proceeds of $0.2 million.  The Company received $0.4 million in principal payments on mortgage loans receivable.

During the three months ended March 31, 2003, the Company paid $0.2 million in principal to the non-recourse senior mortgage participation holder and $1.0 million in principal payments on mortgage loans and capital lease obligations.

Subsequent to March 31, 2003, the Company paid $3.6 million of mortgage debt that was scheduled to mature in September 2003.  The two mortgages repaid were held in a REMIC pool originated by the Company. 

Additionally, subsequent to March 31, 2003, the Company purchased $0.5 million face value ALC Senior Subordinated Debentures for face value plus accrued interest.  See Note 4. CLC Healthcare, Inc. for further discussion.  In May 2003, the Company received a total of $0.8 million in early pay-offs of two notes receivable.  A portion of one of the notes represented past due rents owed to the Company and was fully reserved for at March 31, 2003.  Since the Company had not previously recognized rental income related to the reserved portion of the note, the Company will recognize $0.5 million additional rental income in the second quarter of 2003 related to the payment of this note.

During the three months ended March 31, 2003, the Company declared paid cash dividends on its Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock totaling $1.8 million, $1.1 million, and $0.8 million (paid April 1, 2003), respectively.  Additionally, the Company paid a cash dividend on its common stock totaling $1.8 million.  The Company has declared a $0.15 dividend per share on its common stock payable on June 30, 2003; however, the Company is giving no assurances that this amount or any amount will be a continuing common dividend in the near future.

During the three months ended March 31, 2003, the Company purchased and retired 305,000 shares of common stock for an aggregate purchase price of $1.9 million, an average of $6.21 per share.  Additionally, the Company purchased 10,000 shares of LTC Series A Preferred Stock and Series B Preferred Stock for an aggregate purchase price of $0.2 million, an average of $19.70 per share.  All shares were purchased on the open market.  Subsequent to March 31, 2003, the Company purchased 180,000 shares of common stock for an aggregate purchase price of $1.4 million.

Subsequent to March 31, 2003, the Company signed a 15-year lease beginning May 1, 2003 on two properties in New Mexico previously operated by Sun.  The lease provides for annual rent of $0.6 million in year one, increasing by 2% per year thereafter.

The Company expects its future income and ability to make distributions from cash flows from operations to depend on the collectibility of its mortgage loans receivable, REMIC Certificates and rents.  The collection of these loans, certificates and rents will be dependent, in large part, upon the successful operation by the operators of the skilled nursing facilities and assisted living facilities owned by or pledged to the Company and the school owned by the Company.  The operating results of the facilities will be impacted by various factors over which the operators/owners may have no control.  Those factors include, without limitation, the status of the economy, changes in supply of or demand for competing long-term care facilities, ability to control rising operating costs, and the potential for significant reforms in the long-term care industry.  In addition, the Company’s future growth in net income and cash flow may be adversely impacted by various proposals for changes in the governmental regulations and financing of the long-term care industry.  The Company cannot presently predict what impact these proposals may have, if any.  The Company believes that an adequate provision has been made for the possibility of loans proving uncollectible but will continually evaluate the status of the operations of the skilled nursing facilities, assisted living facilities and the school.  In addition, the Company will monitor its borrowers and the underlying collateral for mortgage loans and will make future revisions to the provision, if considered necessary.

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Should an insufficient amount be raised to meet the Company’s debt obligations through asset sales or financings, the Company would need to again suspend paying a common dividend and perhaps some of the preferred dividends in order to apply funds from operations to debt reductions.

The Company’s investments, principally its investments in mortgage loans, REMIC Certificates, and owned properties, are subject to the possibility of loss of their carrying values as a result of changes in market prices, interest rates and inflationary expectations.  The effects on interest rates may affect the Company’s costs of financing its operations and the fair market value of its financial assets.  The Company generally made loans that have predetermined increases in interest rates and leases that have agreed upon annual increases.  Inasmuch as the Company initially funded its investments with its Senior Secured Revolving Line of Credit, the Company is at risk of net interest margin deterioration if medium and long-term rates were to increase. 

The REMIC Certificates retained by the Company are subordinate in rank and right of payment to the certificates sold to third-party investors and as such would, in most cases, bear the first risk of loss in the event of impairment to any of the underlying mortgages.  The returns on the Company’s investment in REMIC Certificates are subject to certain uncertainties and contingencies including, without limitation, the level of prepayments, estimated future credit losses, prevailing interest rates, and the timing and magnitude of credit losses on the underlying mortgages collateralizing the securities that are a result of the general condition of the real estate market or long-term care industry.  As these uncertainties and contingencies are difficult to predict and are subject to future events that may alter management’s estimations and assumptions, no assurance can be given that current yields will not vary significantly in future periods.  To minimize the impact of prepayments, the mortgage loans underlying the REMIC Certificates generally prohibit prepayment unless the property is sold to an unaffiliated third party (with respect to the borrower).

The Company believes that its current cash flow from operations available for distribution or reinvestment and its current borrowing capacity are sufficient to provide for payment of its operating costs, meet debt obligations, provide funds for distribution to the holders of the Company’s preferred stock and pay common dividends at least sufficient to maintain our REIT status and repay borrowings at, or prior to, their maturity. 

Critical Accounting Policies

Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure”.  SFAS No. 148 amends SFAS No. 123 “Accounting for Stock-Based Compensation” to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation.  SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28 “Interim Financial Reporting” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy for stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.  SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123 for stock-based employee compensation.  In addition to the prospective method originally provided under SFAS No. 123, SFAS No. 148 provides for a modified prospective method and a retroactive restatement method.  The Company has adopted the prospective method and therefore will recognize compensation expense related to all employee stock-based awards granted, modified or settled after January 1, 2003. 

The Company uses the Black-Scholes model for calculating stock option expense.  This model requires management to make certain estimates including stock volatility, discount rate and the termination discount factor.  If management incorrectly estimates these variables, the results from operations could be affected.  Prior to January 1, 2003, the Company accounted for stock option grants in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related Interpretations.  Historically, the Company granted stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant.  Under APB 25, because the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of the grant, no compensation expense was recognized.

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As of March 31, 2003, there were 414,300 options outstanding subject to the disclosure requirements of SFAS No. 148.  The fair value of these options was estimated utilizing the Black-Scholes valuation model and assumptions as of each respective grant date.  In determining the estimated fair values for the options granted in prior years, the weighted average expected life assumption was five years, the weighted average volatility was 0.49 and the weighted average risk free interest rate was 3.80%.  At March 31, 2003, the weighted average fair value of the options outstanding was estimated to be $0.82, the weighted average exercise price of the options was $5.60 and the weighted average remaining contractual life was 2.4 years.  See Note 7.  Stockholder’s Equity for further discussion.

In April 2003, the Financial Accounting Standards Board issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”.  SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”.  In addition, SFAS No. 149 clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows.  SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.  In addition, all provisions of SFAS No. 149 should be applied prospectively.  At March 31, 2003, the Company had no interest rate contracts or any other derivative financial instrument outstanding. 

For further discussion of the Company’s critical accounting policies, see the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2002.

Statement Regarding Forward Looking Disclosure

Certain information contained in this report includes forward looking statements, which can be identified by the use of forward looking terminology such as “may”, “will”, “expect”, “should” or comparable terms or negatives thereof.  These statements involve risks and uncertainties that could cause actual results to differ materially from those described in the statements.  These risks and uncertainties include (without limitation) the following: the effect of economic and market conditions and changes in interest rates, government policy changes relating to the health care industry including changes in reimbursement levels under the Medicare and Medicaid programs, changes in reimbursement by other third party payors, the financial strength of the operators of the Company’s facilities as it affects the continuing ability of such operators to meet their obligations to the Company under the terms of the Company’s agreements with its borrowers and operators, the amount and the timing of additional investments, access to capital markets and changes in tax laws and regulations.

Not Applicable.

The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.

PART II

LTC PROPERTIES, INC.

OTHER INFORMATION

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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Form 10-Q Section 302 Certification

CERTIFICATION

Form 10-Q Section 302 Certification

CERTIFICATION