LTC

Business Context and Reporting Period

LTC Properties, Inc. is a self-administered health care real estate investment trust (REIT) incorporated in Maryland. The company invests primarily in long-term care properties, including skilled nursing facilities and assisted living residences, through mortgage loans and property lease transactions. This Form 10-K covers the fiscal year ended December 31, 2009.

As of year-end, the portfolio consisted of 98 skilled nursing properties (11,319 beds), 104 assisted living properties (4,790 units), and two charter schools across 29 states. The company maintains REIT status by distributing at least 90% of its taxable income to stockholders.

Key Financial Metrics

Liquidity: The company held $8.9 million in cash and had $66.5 million available under an $80.0 million unsecured credit agreement. Additionally, $74.2 million was available under an equity distribution agreement.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased slightly to $69.9 million from $69.4 million in 2008. This was driven by a $2.4 million increase in rental income, partially offset by a $1.2 million decrease in interest income from mortgage loans due to payoffs and conversions.
• Debt Reduction: Total debt decreased significantly to $25.4 million from $36.8 million. The company paid off three mortgage loans totaling $23.9 million during 2009.
• Expense Increases: Operating and other expenses rose by $0.5 million, primarily due to new FASB accounting guidance requiring the expensing of acquisition-related transaction costs and increased accounting fees.
• Provisions for Doubtful Accounts: Increased by $0.7 million, largely due to a higher reserve for straight-line rent receivables.
• Portfolio Activity: The company acquired three assisted living properties for $13.0 million and invested $3.2 million in capital improvements. No properties were sold in 2009.

Guidance, Outlook, and Risks

Outlook and Guidance: Management projects cash rental income to increase from $56.5 million in 2009 to approximately $58.9 million in 2010 (excluding new investments). Straight-line rental income is expected to decrease. The company believes its liquidity position is sufficient to fund operations, meet debt obligations, and maintain REIT distributions.

Subsequent Events: Following year-end, the company purchased two skilled nursing properties (286 beds) for $16.9 million, funded by borrowing $17.0 million under its credit agreement.

Risk Factors:

• Regulatory Changes: The health care industry is heavily regulated. Reductions in Medicare/Medicaid reimbursement rates (e.g., a 1.1% reduction in Medicare payments for FY2010) could adversely affect lessee/borrower ability to pay.
• Operator Concentration: The company relies on a few major operators. Extendicare REIT/ALC, Brookdale Senior Living, and Preferred Care each represent over 12% of total assets and significant portions of rental revenue.
• Capital Markets: Access to capital may be limited during periods of tight credit, potentially slowing growth.
• REIT Qualification: Failure to maintain REIT status would subject the company to corporate income taxes, significantly reducing distributions.

Investor Verification Checklist

• Operator Solvency: Verify the financial health of major lessees (Extendicare, Brookdale, Preferred Care) given their concentration in the portfolio.
• Reimbursement Trends: Monitor state and federal Medicaid/Medicare reimbursement rate changes and their impact on lessee cash flows.
• Debt Covenants: Confirm continued compliance with the Unsecured Credit Agreement covenants (e.g., debt-to-asset ratio, EBITDA coverage).
• Dividend Sustainability: Assess whether funds from operations (FFO) continue to cover the $0.13 monthly common dividend.
• Capital Improvement Commitments: Review the $18.0 million in open capital improvement commitments and their expected yields.