Form: 10-K/A

Annual report [Section 13 and 15(d), not S-K Item 405]

December 8, 1997

Documents

10-K/A: Annual report [Section 13 and 15(d), not S-K Item 405]

Published on December 8, 1997



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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

COMMISSION FILE NUMBER: 1-11314

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

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


300 Esplanade Drive, Suite 1860
Oxnard, California 93030
(Address of principal executive offices)

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

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



Title of Stock Name of each exchange on which registered
- ---------------------------------------------------- -------------------------------------------

Common stock, $.01 Par Value New York Stock Exchange
9.75% Convertible Subordinated Debentures due 2004 New York Stock Exchange
8.50% Convertible Subordinated Debentures due 2000 New York Stock Exchange
8.50% Convertible Subordinated Debentures due 2001 New York Stock Exchange
7.75% Convertible Subordinated Debentures due 2002 New York Stock Exchange
8.25% Convertible Subordinated Debentures due 2001 New York Stock Exchange


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

Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10-K. [X]

The aggregate market value of voting stock held by nonaffiliates of the
Company is approximately $400,532,793 as of January 31, 1997.

22,098,361
(Number of shares of common stock outstanding as of January 31, 1997)

Part III is incorporated by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 19, 1997.
===============================================================================


ITEM 1. BUSINESS

GENERAL

LTC Properties, Inc. (the "Company"), a health care real estate investment
trust (a "REIT"), was organized on May 12, 1992 in the State of Maryland and
commenced operations on August 25, 1992. The Company invests in long-term care
and other health care related facilities through mortgage loans, facility lease
transactions and other investments. The primary objective of the Company is to
provide current income for distribution to stockholders through real estate
investments in long-term care facilities and other health care related
facilities managed by experienced operators providing quality care. To meet
this objective, the Company attempts to invest in properties that provide
opportunity for additional returns to its stockholders and diversify its
investment portfolio by geographic location, operator and form of investment.

The Company was organized to qualify, and intends to continue to qualify, as a
REIT. So long as the Company so qualifies, with limited exceptions, the Company
will not be taxed under federal income tax laws at the corporate level on its
taxable income as long as it distributes at least 95 percent of that amount to
its stockholders. The Company has distributed, and intends to continue to make
distributions to its stockholders, in order to eliminate any federal tax
liability.

At December 31, 1996, the Company had investments in 248 skilled nursing
facilities with 28,628 beds and 35 assisted living facilities with 1,456 units
in 32 states operated by 84 healthcare providers.

OWNED PROPERTIES

During 1996, the Company acquired for approximately $113,858,000 22 assisted
living facilities and 20 skilled nursing facilities. Sixteen of the skilled
nursing facilities were acquired by six newly formed limited partnerships of
which the Company, through certain of its subsidiaries, is the general partner
and were purchased subject to mortgage loans of approximately $9,641,000. Under
the partnership agreements, the Company has guaranteed payment of a 10%
preferred return to the holders of $8,932,000 in limited partnership interests.
Under certain circumstances, the limited partnership interests can be exchanged,
at the option of the holders, into 628,511 shares of the Company's common stock
at exercise prices ranging from $13.00 to $15.00 beginning in 1997. Also during
1996, the Company sold four assisted living facilities for their approximate net
book value of $7,589,000. The Company's long-term facilities are leased to
operators pursuant to long-term "triple net" leases and provide for increases in
the rent based upon specified rent increases or, to a lesser extent, upon
participation in revenue increases over defined base periods or increases based
on consumer price indices.

MORTGAGE LOANS

As part of the Company's strategy of making long-term investments in
properties used in the provision of long-term health care services, the Company
provides mortgage financing on such properties based on the investment
underwriting criteria established by the Company. (See "Investment and Other
Policies" in this Section.)

The Company maintains a long-term investment interest in its mortgages
either through the direct retention of mortgages or through the retention of
REMIC certificates originated in the Company's securitizations. The Company may,
from time-to-time, securitize a portion of its mortgage loan portfolio when a
securitization provides the Company with the best available form of raising
capital to make additional long-term investments. In addition, the Company
believes that the certificates retained by the Company in its securitizations
provide its shareholders with a more diverse real estate investment while
maintaining the returns desired by the Company. As of December 31, 1996, the
Company had securitized $354,000,000 of mortgage loans that were originated by
the Company. Because the Company anticipates securitizing

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additional portions of its mortgage loan portfolio in the future, its mortgage
loan investments are carried at the lower of cost-or-market.

REMIC CERTIFICATES

On March 29, 1996, the Company securitized mortgage loans with an aggregate
outstanding principal balance of approximately $112,487,000 by creating a Real
Estate Mortgage Investment Conduit ("REMIC") which, in turn, issued mortgage
pass-through certificates ("REMIC Certificates") aggregating approximately the
same amount. A total of approximately $90,552,000 of REMIC Certificates were
subsequently sold to third parties by the Company. The Company retained the
remaining $21,935,000 face amount of the REMIC Certificates, which are
effectively subordinated in right of payment to the Certificates sold to third
parties. A portion of the other REMIC Certificates the Company retained, which
have no principal amount, are interest-only certificates and entitle the Company
to receive cash flows designated as interest. The proceeds from the sale were
used to pay down outstanding borrowings under the Company's lines of credit. At
December 31, 1996, the Company had investments in REMIC Certificates with an
estimated fair value of $98,934,000 approximately ($92,545,000 at amortized
cost) secured by 148 long-term care facilities with a total of 16,064 beds in 24
states. (See "Part 1, Item 2 -- Properties -- REMIC Certificates.")

FINANCING AND OTHER TRANSACTIONS

In February 1996, the Company sold, through a public offering, $30,000,000
aggregate principal amount of 7.75% Convertible Subordinated Debentures due
2002. The debentures are convertible at any time prior to maturity into shares
of the Company's common stock at a conversion price of $16.50 per share. The
net proceeds were used to repay borrowings under the Company's lines of credit.
In March 1996, the Company filed a shelf-registration statement with the
Securities and Exchange Commission covering up to $125,000,000 of debt and
equity securities to be sold from time to time in the future. The registration
statement was declared effective on April 4, 1996. Pursuant to the shelf
registration, the Company, in August 1996, completed the sale of $30,000,000 of
8.25% Convertible Subordinated Debentures due 2001. The debentures are
convertible into shares of the Company's common stock at a price of $17.25 per
share. Net proceeds from the offering were used to repay short-term borrowings.
Also in 1996, the Company repurchased and retired 120,000 shares of common stock
for an aggregate purchase price of approximately $1,831,000.

INVESTMENT AND OTHER POLICIES

OBJECTIVES AND POLICIES

The Company currently invests in income-producing long-term care
facilities. The Company invests either (1) directly in mortgage loans secured by
long-term care facilities (2) in the fee ownership of long-term care facilities
which are leased to operators (3) or may participate in such investments
indirectly through investments in partnerships, joint ventures or other entities
that themselves make direct investments in such loans or facilities.

In evaluating potential investments, the Company considers such factors as
(i) type of property, (ii) the location, construction quality, condition and
design of the property, (iii) the property's current and anticipated cash flow
and its adequacy to meet operational needs and lease obligations or debt service
obligations, (iv) the quality and reputation of the property's operator, (v) the
growth, tax and regulatory environments of the communities in which the
properties are located, (vi) the occupancy and demand for similar long-term care
facilities in the area surrounding the property and (vii) the Medicaid
reimbursement policies and plans of the state in which the property is located.

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The Company places primary emphasis on investing in long-term care
facilities that have low investment per bed ratios and do not have to rely on a
high percentage of private pay patients or ancillary services to cover debt
service or lease obligations. The Company seeks to invest in facilities that are
located in suburban and rural areas of states with improving reimbursement
climates. Prior to every investment, the Company conducts a facility site review
to assess the general physical condition of the facility, the potential of
additional sub-acute services and the quality of care the operator provides. In
addition, the Company reviews the environmental reports, state survey and
financial statements of the facility before the investment is made. The Company
prefers to invest in facilities that have a significant market presence in its
community and where state licensing procedures limit the entry of competing
facilities. To date, most of the Company's investments have been made in the
form of mortgage loans secured by skilled nursing facilities. Due to
management's belief that assisted living facilities are an increasingly
important sector in the long-term care market, a larger portion of the Company's
future investments will be made in the form of direct ownership of assisted
living facilities. Management believes that assisted living facilities represent
a lower cost of long-term care alternative for senior adults than skilled
nursing facilities. The Company invests in assisted living facilities that
attract the moderate-income private pay patients in smaller communities,
preferably in states that have adopted Medicaid waiver programs or are in the
process of adopting or reviewing their policies and reimbursement program to
provide funding for assisted living residences. The Company believes that
locating residences in a state with a favorable regulatory reimbursement climate
should provide a stable source of residents eligible for Medicaid reimbursement
to the extent private-pay residents are not available, and should provide
alternative sources of income for residents when their private funds are
depleted and they become Medicaid eligible.

There are no limitations on the amount or percentage of the Company's total
assets that may be invested in any one property or joint venture, except for
investments in assisted living facilities ("ALFs"). The Board of Directors
authorized the Company to invest up to 20% of the Company's adjusted gross real
estate investment portfolio (adjusted to include approximately $278,881,000 of
mortgage loans to third parties underlying the December 31, 1996 balance of
investment in REMIC Certificates ) in ALFs, with a 10% limit on investments in
properties operated by Assisted Living Concepts, Inc. ("ALC"). ALC is an owner,
operator and developer of assisted living facilities. Three executive officers
of the Company own approximately 5.5% of ALC's common stock as of December 31,
1996 and two of the Company's executive officers serve as members of the Board
of Directors of ALC. The Company has discussed with its Board of Directors and
anticipates increasing the percentage of its adjusted gross real estate
investment portfolio that can be invested in ALFs and properties operated by ALC
to 30% and 15%, respectively during 1997. Except for ALFs, no other limits have
been set on the number of properties in which the Company will seek to invest,
or of the concentration of investments in any one facility or any one city or
state, or the type or form of investment.

BORROWING POLICIES

The Company may incur additional indebtedness when, in the opinion of the
directors, it is advisable. The Company may incur such indebtedness to make
investments in additional long-term care facilities or to meet the distribution
requirements imposed upon REITs under the Internal Revenue Code of 1986, as
amended (the "Code") (see Taxation of the Company -- Requirements for
Qualifications). For other short-term purposes, the Company may, from time to
time, negotiate lines of credit, or arrange for other short-term borrowings from
banks or otherwise. The Company may also arrange for long-term borrowings
through public offerings or from institutional investors.

In addition, the Company may incur mortgage indebtedness on real estate
which it has acquired through purchase, foreclosure or otherwise. The Company
may also obtain mortgage financing for unleveraged or underleveraged properties
in which it has invested or may refinance properties acquired on a leveraged
basis. There is no limitation on the number or amount of mortgages which may be
placed on any

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one property, and the Company has no policy with respect to limitations on
borrowing, whether secured or unsecured.

PROHIBITED INVESTMENTS AND ACTIVITIES

The policies of the Company, subject to change by the Board of Directors
without stockholder approval, impose certain prohibitions and restrictions on
various investment practices or activities of the Company including prohibition
against:

(i) acquiring any real property unless the consideration paid for such real
property is based on the fair market value of the property;

(ii) investing in any junior mortgage loan unless by appraisal or other method,
the directors determine that (a) the capital invested in any such loan is
adequately secured on the basis of the equity of the borrower in the
property underlying such investment and the ability of the borrower to
repay the mortgage loan or (b) such loan is a financing device entered into
by the Company to establish the priority of its capital investment over the
capital invested by others investing with the Company in a real estate
project;

(iii)investing in commodities or commodity futures contracts (other than
interest rate futures, when used solely for hedging purposes);

(iv) investing more than 1% of the Company's total assets in contracts for sale
of real estate unless such contracts are recordable in the chain of title;

(v) holding equity investments in unimproved, non-income producing real
property, except such properties as are currently undergoing development or
are presently intended to be developed within one year, together with
mortgage loans on such property (other than first mortgage development
loans), aggregating to more than 10% of the Company's assets.

COMPETITION

The Company competes with other REITs, real estate partnerships, health
care providers and other investors, including commercial banks, institutional
banks and insurance companies, many of which will have greater financial
resources and lower cost of funds than the Company, in the acquisition, leasing
and financing of long-term care facilities. The operators compete on a local and
regional basis with operators of facilities that provide comparable services.
Operators compete for patients based on quality of care, reputation, physical
appearance of facilities, services offered, family preferences, physician
referrals, staff and price.

INSURANCE

The Company obtains title insurance with respect to each of its
investments. The Company generally requires: (i) with respect to each owned
property, an American Land Title Association ("ALTA") Extended Coverage Owner's
Policy of Title Insurance with an insured amount equal to the purchase price,
insuring that the Company holds fee simple title to the property subject only to
those liens and encumbrances approved by the Company; and (ii) with respect to
each mortgaged property, an ALTA Extended Coverage Lender's Policy of Title
Insurance with an insured amount equal to the loan amount, insuring the
Company's first-lien security interest in the property subject only to those
liens and encumbrances approved by the Company. However, ALTA Extended Coverage
Policies of Title Insurance are not available in all

5

states, in which event the Company requires the broadest form of title coverage
available in the particular jurisdiction.

In addition, the Company requires that its tenants (in the case of owned
properties) and borrowers (in the case of mortgaged properties) maintain
comprehensive liability insurance and casualty insurance with policy
specifications and insured limits customarily carried for similar properties and
cause their insurers to name the Company as an additional insured, loss payee
and/or mortgagee, as appropriate depending on the particular type of policy. In
the case of casualty insurance, the insured limits may not be less than the full
replacement cost of the improvements constructed on the property, and coverage
is typically provided in the form of an "all-risk" policy. However, there are
certain types of losses which may either be uninsurable or not economically
insurable. For example, the Company generally requires its tenants and
borrowers to carry flood insurance if the property is located within a flood
plain area as designated by the applicable governmental authority, and
earthquake insurance if the property is located in a state, such as California,
where the risk of earthquake damage is high. Such flood and earthquake coverage
is not always an insurable risk or may not be obtainable in amounts at least
equal to the full replacement cost of the improvements constructed on the
property. Accordingly, there is no assurance that adequate coverage exists with
respect to each investment should there be serious flooding, seismic activities
or other uninsurable casualty in the areas where the properties constituting the
Company's investments are located. Should an uninsured (or less than fully
insured) loss occur, the Company could lose its investment in, and anticipated
profits and cash flow from, a property.

EMPLOYEES

The Company currently employs 13 persons.

GOVERNMENT FINANCING AND REGULATION OF HEALTH CARE

GENERAL

Medicaid programs or the equivalent are currently in existence in all of
the states in which the Company has nursing facility investments. While these
programs differ in certain respects from state to state, they are all subject to
certain federally imposed requirements, as a substantial portion of the funds
available under these programs is provided by the federal government. Medicaid
programs provide for payments to participating health care facilities on behalf
of the indigent and certain other eligible persons. California and Texas provide
for reimbursement at flat daily rates, as determined by the responsible state
agency and depending on certain levels of care. In all other states, payments
are based upon specific cost reimbursement formulas established by the
applicable state.

Medicare and most state Medicaid programs utilize a cost-based
reimbursement system for nursing facilities which reimburses facilities for the
reasonable direct and indirect allowable costs incurred in providing routine
services (as defined by the programs) plus, in certain states, a return on
equity, subject to certain cost ceilings. These costs normally include
allowances for administrative and general costs as well as the costs of property
and equipment (depreciation and interest, fair rental allowance or rental
expense). In certain states, cost-based reimbursement is typically subject to
retrospective adjustment through cost report settlement, and for certain states,
payments made to a facility on an interim basis that are subsequently determined
to be less than or in excess of allowable costs may be adjusted through future
payments to the affected facility and to other facilities owned by the same
owner. State Medicaid reimbursement programs vary as to the methodology used to
determine the level of allowable costs which are reimbursed to operators.

6

The Medicaid and Medicare programs are subject to statutory and regulatory
changes, administrative rulings, interpretations of policy, intermediary
determinations and governmental funding restrictions, all of which may
materially increase or decrease program reimbursement to health care facilities.
No assurance can be given as to whether the future funding of such programs will
remain at levels comparable to the present levels.

Both the Medicaid and Medicare programs contain specific requirements which
must be adhered to at all times by health care facilities in order to qualify
under the programs. Based upon such information as periodically received by the
Company from the operators over the term of the loan, the Company believes that
the nursing facilities in which it has investments are in substantial compliance
with the various regulatory requirements applicable to them, although there can
be no assurance that the operators are in compliance or will be so at any time.

In addition to the requirements to be met by the nursing facilities for
participation in the Medicaid and Medicare programs, the nursing facilities are
subject to regulatory and licensing requirements of federal, state and local
authorities. The operator of each long-term care facility is licensed annually
by the board of health or other applicable agency in each state. In granting
and renewing licenses, regulatory agencies consider, among other things, the
physical buildings and equipment, the qualifications of the administrative
personnel and nursing staff, the quality of care and continuing compliance with
the laws and regulations relating to the operation of the facilities. State
licensing of facilities is a prerequisite to certification under Medicaid and
Medicare programs. In the ordinary course of business, the operators receive
notices of deficiencies for failure to comply with various regulatory
requirements and take appropriate corrective and preventive actions. The
Company believes that the nursing facilities in which it has investments are in
compliance with the applicable licensing or other regulation although there can
be no assurance that the operators are or will be in compliance at any time.

The Company has increased its investments in ALFs during 1996. ALFs are
subject to certain state regulations and licensing requirements. In order to
qualify as a state licensed facility, ALFs must comply with regulations which
address, among other things, staffing, physical design, required services and
resident characteristics. ALFs are also subject to various local building codes
and other ordinances, including fire safety codes. These requirements vary from
state to state and are monitored to varying degrees by state agencies.

Currently, ALFs are not regulated as such by the federal government. State
standards required for ALF providers are less stringent than those required of
other licensed health care operators. There can be no assurance that federal
regulations governing the operation of ALFs will not be implemented in the
future or that existing state regulations will not be expanded. In addition,
only certain states have adopted laws or regulations permitting individuals with
higher acuity levels to remain in assisted living communities who may otherwise
qualify for placement in a nursing facility. While only certain states
presently provide for any Medicaid reimbursement for assisted living residences,
several states are currently reviewing their policies and reimbursement programs
to provide funding for assisted living residences. There can be no assurance
that such states will adopt the Medicaid waiver program.

HEALTH CARE REFORM

The health care industry is facing various challenges, including increased
government and private payor pressure on health care providers to control costs,
the migration of patients from acute care facilities into extended care and home
care settings and the vertical and horizontal consolidation of health care
providers. The pressure to control health care costs intensified during 1993
and 1994 as a result of the national health care

7

reform debate and will continue with renewed efforts in 1997 to balance the
federal budget. The need to slow the growth rate in federal health care
expenditures will be a priority. President Clinton's current budget proposal,
for example, seeks $138 billion dollars in reductions in Medicare expenditures
needed to address the short term solvency of the federal program, including
significant limitations on growth in provider reimbursement. It is anticipated
that further debate on overall structural reform of federal health care programs
will affect additional legislative action on cost-containment.

The Company believes that government and private efforts to contain and
reduce health care costs will continue. These trends are likely to lead to
reduced or slower growth in reimbursement for certain services provided by some
of the Company's borrowers and lessees. The Company believes that the vast
nature of the health care industry, the financial strength and operating
flexibility of its operators and the diversity of its portfolio will mitigate
against the impact of any such diminution in reimbursement. However, the Company
cannot predict whether any of the above proposals or any other proposals will be
adopted and, if adopted, no assurance can be given that the implementation of
such reforms will not have a material adverse effect on the Company's financial
condition or results of operations.

TAXATION OF THE COMPANY

GENERAL

The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code commencing with its taxable year ended December 31,
1992. The Company believes, that commencing with such taxable year, it has been
organized and has operated in such a manner as to qualify for taxation as a REIT
under the Code, and the Company intends to continue to operate in such a manner.
However, no assurance can be given that the Company has operated or will be able
to continue to operate in a manner to so qualify or remain qualified.

If the Company qualifies for taxation as a REIT, it will generally not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. However, under certain
circumstances, the Company will continue to be subject to federal income tax.

The following is a general summary of the provisions that govern the
federal income tax treatment of a REIT and its stockholders. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.

REQUIREMENTS FOR QUALIFICATIONS

The Code defines a REIT as a corporation, trust or association (i) which is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which would be taxable as a domestic corporation but
for Sections 856 through 859 of the Code; (iv) which is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi)
during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, actually or constructively, by five or
fewer individuals (as defined in the Code to include certain entities); and
(vii) which meets certain other tests, described below. The Code provides that
conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that condition (v) 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.

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To qualify as a REIT for a taxable year under the Code, the Company must
elect or previously have elected to be so treated and must meet other
requirements, certain of which are summarized below, including percentage tests
relating to the sources of its gross income, the nature of the Company's assets
and the distribution of its income to stockholders.

INCOME TESTS

In order to maintain its qualification as a REIT, the Company annually must
satisfy three gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from certain sales of property held
primarily for sale) for each taxable year must be derived directly or indirectly
from investments in real property (other than gains from property held primarily
for sale), mortgages on real property, or certain qualified temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income form certain sales of property held primarily for sale) for each taxable
year must be derived from such real property investments described with respect
to the 75% test, dividends, interest and gain from the sale or disposition of
stock or securities (other than gains from certain sales of property held
primarily for sale). Third, short-term gain from the sale or other disposition
of stock or securities, gain from certain sales of property held primarily for
sale, and gain from the sale or other disposition of real property held for less
than four years (apart from involuntary conversions and sales of foreclosure
property) must represent less than 30% of the Company's gross income for each
taxable year.

ASSET TEST

At the close of each quarter of its taxable year, the Company must also
satisfy three tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets (including the assets held by its
subsidiaries and its allocable share of the assets held by partnerships in which
it or its subsidiaries is a partner) must be represented by real estate assets
(including interests in a qualifying REMIC and shares in a REIT), cash, cash
items and government securities. Second, no more than 25% of the Company's
total assets (including the assets held by its subsidiaries and its allocable
share of the assets held by partnerships in which it or its subsidiaries is a
partner) may be represented by securities other than those includable in the 75%
asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities.

DISTRIBUTION REQUIREMENTS

The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (A) the sum of (i) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends paid deduction and by excluding the
Company's net capital gain) and (ii) 95% of the net income (after tax), if any,
from foreclosure property, minus (B) the excess of the sum of certain items of
non-cash income over 5% of "REIT taxable income" as described in clause (A)(i)
above. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year, if paid on or before the first regular
dividend payment date after such declaration and if the Company so elects and
specifies the dollar amount in its tax return. To the extent that the Company
does not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its "REIT taxable income", as adjusted, it will be subject to
tax thereon at regular corporate tax rates. Furthermore, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company would

9

be generally subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.

FAILURE TO QUALIFY

If the Company should fail to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
However, it is not possible to state whether in all circumstances the Company
would be entitled to such statutory relief. If the relief provisions do not
apply, the Company would be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. Distributions to
stockholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. Unless entitled
to relief under specific statutory provisions, the Company would also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification is lost. Failure to qualify for even one year
could result in the Company's incurring substantial indebtedness (to the extent
borrowings are feasible) or liquidating substantial investments in order to pay
the resulting taxes.

TAXATION OF STOCKHOLDERS - GENERAL

As long as the Company qualifies as a REIT, distributions made to the
Company's stockholders out of current or accumulated earnings and profits (and
not designated as capital gain dividends) will be taken into account by them as
ordinary income (which will not be eligible for the dividends received deduction
for corporations). Distributions that are designated as capital gain dividends
will be taxed as long-term capital gains to the extent they do not exceed the
Company's actual net capital gain for the taxable year, although corporate
stockholders may be required to treat up to 20% of any such capital gain
dividend as ordinary income. Distributions in excess of current or accumulated
earnings and profits will not be taxable to a stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's common stock, but
rather will reduce the adjusted basis of such shares. To the extent such
distributions exceed the adjusted basis of a stockholder's common stock, they
will be included in income as long-term capital gain (or short-term capital gain
if the shares have been held for one year or less) assuming the shares are held
as a capital asset in the hands of the stockholder. Under special tax rules for
REITs, dividends declared in the last quarter of the calendar year and paid by
January 31 of the following year are treated as paid on December 31 of the year
declared. Stockholders may not include in their individual income tax returns
any net operating losses or capital losses of the Company.

The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. Other federal, state and local tax considerations
may apply depending on the Company's and its stockholders' circumstances.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Many of the statements herein are forward-looking in nature, and,
accordingly, whether they prove to be accurate is subject to many risks and
uncertainties. The actual results that the Company achieves may differ
materially from many forward-looking statements herein. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed below and those contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as those discussed
elsewhere herein.

10

GOVERNMENT REGULATION

Health Care Reform. The health care industry is facing various challenges,
including increased government and private payor pressure on health care
providers to control costs, the migration of patients from acute care facilities
into extended care and home care settings and the vertical and horizontal
consolidation of health care providers. The pressure to control health care
costs intensified during 1993 and 1994 as a result of the national health care
reform debate and will continue with renewed efforts in 1997 to balance the
federal budget. The need to slow the growth rate in federal health care
expenditures will be a priority. President Clinton's current budget proposal,
for example, seeks $138 billion in reductions in Medicare expenditures needed to
address the short term solvency of the federal program, including significant
limitations on growth in provider reimbursement. It is anticipated that further
debate on overall structural reform of federal health care programs will affect
additional legislative action on cost-containment.

The Company believes that government and private efforts to contain and
reduce health care costs will continue. These trends are likely to lead to
reduced or slower growth in reimbursement for certain services provided by some
of the Company's borrowers and lessees. The Company believes that the vast
nature of the health care industry, the financial strength and operating
flexibility of its operators and the diversity of its portfolio will mitigate
against the impact of any such diminution in reimbursement. However, the Company
cannot predict whether any of the above proposals or any other proposals will be
adopted, and if adopted, no assurance can be given that the implementation of
such reforms will not have a material adverse effect on the Company's financial
condition or results of operations.

Potential Operator Loss of Licensure or Certification. The health care
industry is highly regulated by federal, state and local law, and is directly
affected by state and local licensure, fines, and loss of certification to
participate in the Medicare and Medicaid programs, as well as potential criminal
penalties. The failure of any borrower or lessee to comply with such laws,
requirements and regulations could affect its ability to operate the facility or
facilities and could adversely affect such borrower's or lessee's ability to
make debt or lease payments to the Company.

In the past several years, due to rising health care costs, there has been
an increased emphasis on detecting and eliminating fraud and abuse in the
Medicare and Medicaid programs. Payment of any consideration in exchange for
referral of Medicare and Medicaid patients is generally prohibited by federal
statute, which subjects violators to severe penalties, including exclusion from
the Medicare and Medicaid programs, fines, and even prison sentences. In recent
years, both federal and state governments have significantly increased
investigation and enforcement activity to detect and punish wrongdoers. In
addition, legislation has been adopted at both state and federal levels that
severely restricts the ability of physicians to refer patients to entities in
which they have a financial interest.

It is anticipated that the trend toward increased investigation and
informant activity in the area of fraud and abuse, as well as self-referral,
will continue in future years. In the event that any borrower or lessee were to
be found in violation of laws regarding fraud, abuse or self-referral, that
borrower's or lessee's ability to operate a health care facility could be
jeopardized, which could adversely affect the borrower's or lessee's ability to
make debt or lease payments to the Company and, thereby, adversely affect the
Company.

Reliance on Government Reimbursement. A significant portion of the revenue
of the Company's borrowers and lessees is derived from governmentally-funded
reimbursement programs, such as Medicare and Medicaid. These programs are highly
regulated and subject to frequent and substantial changes resulting from
legislation, adoption of rules and regulations, and administrative and judicial
interpretations

11

of existing law. In recent years, there have been fundamental changes in the
Medicare program which have resulted in reduced levels of payment for a
substantial portion of health care services. Moreover, health care facilities
have experienced increasing pressures from private payers attempting to control
health care costs, and reimbursement from private payers has in many cases
effectively been reduced to levels approaching those of government payers.

In many instances, revenues from Medicaid programs are already insufficient
to cover the actual costs incurred in providing care to those patients.
Governmental and popular concern regarding health care costs may result in
significant reductions in payment to health care facilities, and there can be no
assurance that future payment rates for either governmental or private health
care plans will be sufficient to cover cost increases in providing services to
patients. Any changes in reimbursement policies which reduce reimbursement to
levels that are insufficient to cover the cost of providing patient care could
adversely affect revenues of the Company's borrowers and lessees and thereby
adversely affect those borrowers' and lessees' abilities to make their debt or
lease payments to the Company. Failure of the borrowers or lessees to make their
debt or lease payments would have a direct and material adverse impact on the
Company.

COMPETITION

The Company competes with other REITs, real estate partnerships, health
care providers and other investors, including but not limited to banks and
insurance companies, many of which will have greater financial resources than
the Company, in the acquisition, leasing and financing of health care
facilities. There can be no assurance that suitable investments will be
identified or that investments can be consummated on commercially reasonable
terms.

ENVIRONMENTAL MATTERS

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

Although the Company's mortgage loans and leases require the borrower and
the lessee to indemnify the Company for certain environmental liabilities, the
scope of such obligations may be limited and there can be no assurance that any
such borrower or lessee would be able to fulfill its indemnification
obligations.

HEALTH CARE REAL ESTATE INVESTMENT RISKS

Volatility of Value of Real Estate. Real property investments in the health
care industry are subject to varying degrees of risk. The economic performance
and values of health care real estate can be affected by many factors including
governmental regulation, economic conditions, and demand for health care
services. There can be no assurance that the value of any property acquired by
the Company will appreciate

12

or that the value of property securing any of the Company's mortgage loans or
any property acquired by the Company will not depreciate.

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

Illiquidity of Real Estate Investments. Real estate investments are
relatively illiquid and, therefore, tend to limit the ability of the Company to
vary its portfolio promptly in response to changes in economic or other
conditions. All of the Company's properties are "special purpose" properties
that could not be readily converted to general residential, retail or office
use. Transfers of operations of nursing homes and other health care-related
facilities are subject to regulatory approvals not required for transfers of
other types of commercial operations and other types of real estate. Thus, if
the operation of any of the Company's properties becomes unprofitable due to
competition, age of improvements or other factors such that the borrower or
lessee becomes unable to meet its obligations on the debt or lease, the
liquidation value of the property may be substantially less -- relative to the
amount owing on the mortgage loan -- than would be the case if the property were
readily adaptable to other uses. The receipt of liquidation proceeds could be
delayed by the approval process of any state agency necessary for the transfer
of the property. In addition, certain significant expenditures associated with
real estate investment (such as real estate taxes and maintenance costs) are
generally not reduced when circumstances cause a reduction in income from the
investment. Should such events occur, the Company's income and funds available
for distribution would be adversely affected.

Uninsured Loss. The Company currently requires, and it is the intention of
the Company to continue to require, all borrowers and lessees to secure adequate
comprehensive property and liability insurance that covers the Company as well
as the borrower and/or lessee. Certain risks may, however, be uninsurable or
not economically insurable and there can be no assurance the Company or a lessee
will have adequate funds to cover all contingencies itself. Should such an
uninsured loss occur, the Company could lose its invested capital.

Dependence on Lease Income and Mortgage Payments from Real Property. Since
a substantial portion of the Company's income is derived from mortgage payments
and lease income from real property, the Company's income would be adversely
affected if a significant number of the Company's borrowers were unable to meet
their obligations to the Company or if the Company were unable to lease its
properties or make mortgage loans on economically favorable terms. There can be
no assurance that any lessee will exercise its option to renew its lease upon
the expiration of the initial term or that if such failure to renew were to
occur, the Company could lease the property to others on favorable terms.

13

Item 2. PROPERTIES

PORTFOLIO

As of December 31, 1996, the Company`s real estate investment portfolio
consisted of investments in skilled nursing and assisted living facilities
(described below) in 32 states. The Company had approximately $223,578,000
(before accumulated depreciation of $11,640,000) invested in long-term care
facilities owned by the Company and leased to operators, approximately
$178,262,000 invested in mortgage loans (before allowance for doubtful accounts
of $1,000,000), and approximately $98,934,000, at estimated fair value,
($92,545,000 at amortized cost) invested in REMIC Certificates.

Skilled nursing facilities (SNFs). At December 31, 1996, the Company had
investments in 248 skilled nursing facilities with a total of 28,628 beds, in
the form of direct ownership or mortgage loan interests, including interests in
mortgages underlying the Company's investment in REMIC certificates. Skilled
nursing facilities provide restorative, rehabilitative and nursing care for
people not requiring the more extensive and sophisticated treatment available at
acute care hospitals. Many of the skilled nursing facilities provide ancillary
services which include occupational, speech, physical, respiratory and IV
therapies, as well as provide sub-acute care services. Such services are paid
either by the patient or the patient's family, or through the federal Medicare
or state Medicaid programs.

Assisted living facilities (ALFs). At December 31, 1996, the Company had
investments in 35 assisted living facilities with 1,456 units. Assisted living
facilities serve elderly persons who require assistance with activities of daily
living, but who do not require the constant supervision skilled nursing
facilities provide. Services are generally available 24-hours a day and include
personal supervision and assistance with eating, bathing, grooming and
administering medication. The facilities provide a combination of housing,
supportive services, personalized assistance and health care designed to respond
to individual needs.


OWNED PROPERTIES

At December 31, 1996, the Company owned and leased to health care operators
49 skilled nursing facilities with a total of 6,520 beds and 24 assisted living
facilities with a total of 868 units in 17 states, representing a net investment
of approximately $211,938,000. These long-term care facilities are leased
pursuant to non-cancelable leases generally with an initial term of ten to
twelve years. Many of the leases contain renewal options and some contain
options that permit the operators to purchase the facilities.

The following table sets forth certain information regarding the Company's
owned properties as of December 31, 1996:



Average
No. of Remaining
No. of No. of Beds Lease Term Purchase Current Annual
Location SNFs ALFs /Units Encumbrances (in Months) Price Rent Payments
- -----------------------------------------------------------------------------------------------------------------

Alabama 8 1 912 $14,608,044 95 $ 29,287,996 $ 3,274,779
Arizona 3 587 18,909,717 44 18,486,509 2,335,600
California 3 473 52 7,378,468 896,172
Florida 9 1,116 102 39,064,291 4,061,847
Georgia 1 100 137 2,500,000 248,750
Idaho 1 39 144 2,550,000 266,220
Illinois 1 148 96 6,627,159 746,640
Iowa 6 448 8,748,149 36 9,401,943 1,073,564
Kansas 4 134 5,739,360 108 6,700,000 633,820
Montana 1 278 4,335,297 72 3,830,608 420,365


14




Average
Remaining
No. of No. of Beds No. of Lease Term Purchase Current Annual
Location SNFs ALFs /Units Encumbrances (in Months) Price Rent Payments
- -----------------------------------------------------------------------------------------------------------------

New Mexico 2 236 72 6,898,696 785,951
Oklahoma 1 37 120 1,750,000 168,525
Oregon 2 71 144 4,550,000 463,410
Tennessee 2 224 137 5,550,000 552,225
Texas 8 8 1,685 4,974,739 93 45,630,908 4,980,779
Virginia 3 443 105 11,012,655 1,211,748
Washington 2 7 457 10,928,853 198 22,358,630 2,185,380
- -----------------------------------------------------------------------------------------------------------------
TOTAL 49 24 7,388 $68,244,159 (1) $223,577,863 (2) $24,305,775
=================================================================================================================


(1) The amounts comprising the $68,244,159 of encumbrances include 1)
$54,205,000 of non-recourse mortgages payable by the Company secured by 22
skilled nursing facilities containing a total of 2,634 beds, 2) $8,300,000
of tax-exempt bonds secured by 5 assisted living facilities in Washington
with 184 units, and 3) $5,739,159 of capital lease obligations on 4
assisted living facilities in Kansas with 134 units.

(2) Of the total purchase price, $175,969,598 relates to investments in 49 SNFs
with 6,520 beds and $47,608,265 relates to investments in 24 ALFs with 868
units.

The leases provide for a fixed minimum base rent during the initial and
renewal periods. Most of the leases provide for annual fixed rent increases or
increases based on consumer price indices over the term of the lease. In
addition, certain of the Company's leases provide for additional rent through
revenue participation (as defined in the lease agreement) in incremental
revenues generated by the facilities, over a defined base period, effective at
various times during the term of the lease. Each lease is a triple net lease
which requires the lessee to pay additional charges including all taxes,
insurance, assessments, maintenance and repair (capital and non-capital
expenditures), and other costs necessary in the operation of the facility.

MORTGAGE LOANS

At December 31, 1996, the Company had 67 mortgage loans secured by first
mortgages on 73 skilled nursing facilities with a total of 8,672 beds and 11
assisted living residences with 588 units located in 23 states. The mortgage
loans, which individually range from $302,500 to $11,240,000 in principal
amount, have current interest rates ranging from 9.16% to 13.2% generally have
25-year amortization schedules, have balloon payments due from 1997 to 2017 and
provide for certain facility fees. Almost all of the mortgage loans provide for
annual increases in the interest rate based upon a specified increase of 10 to
12.5 basis points. Approximately $9,825,000 of the loans due in 1997 will be
paid off once the Company completes a sale leaseback transaction for the same
amount on assisted living facilities that are being constructed.
The following table sets forth certain information regarding the Company's
mortgage loans as of December 31, 1996:



Average
No. of Number of
No. of No. of Beds Interest Months to Face Amount of Current Amount of Current Annual
Location SNFs ALFs /Units Rate % Maturity Mortgage Loans Mortgage Loans Debt Service (1)
- ------------------------------------------------------------------------------------------------------------------------------------


Alabama 1 142 11.18% 100 $ 4,100,000 $ 4,060,562 $ 489,706
Arizona 2 1 479 10.58-11.70% 87 10,650,000 10,599,851 1,238,740
Arkansas 2 274 10.00-10.20% 171 3,400,000 3,361,692 396,918
California 11 1,587 10.00-13.20% 107 22,805,000 23,501,020 2,888,344
Colorado 4 373 10.00-11.92% 108 6,330,000 5,284,620 615,460
Florida 8 1 1,106 9.16-11.85% 96 30,944,862 31,726,985 3,644,254
Georgia 1 2 287 9.75% 116 8,050,000 8,030,186 929,512

15




Average
No. of Number of
No. of No. of Beds Interest Months to Face Amount of Current Amount of Current Annual
Location SNFs ALFs /Units Rate % Maturity Mortgage Loans Mortgage Loans Debt Service (1)
- ------------------------------------------------------------------------------------------------------------------------------------

Illinois 2 322 9.76-11.10% 107 6,200,000 6,185,008 643,244
Iowa 3 214 11.62-11.70% 95 4,000,000 3,940,365 493,338
Kansas 4 233 9.90-11.87% 108 4,320,000 3,995,045 474,810
Louisiana 1 127 10.89% 239 1,600,000 1,600,000 196,745
Mississippi 3 400 10.32% 117 11,250,000 11,240,003 1,216,767
Missouri 1 174 10.75% 45 2,801,000 2,872,520 375,658
Nebraska 1 4 266 9.00-14.32% 59 5,348,980 5,434,382 601,749
Nevada 1 100 10.38% 163 1,200,000 1,173,996 142,523
North
Carolina 2 201 10.70-11.85% 66 3,770,000 3,728,490 449,556
Ohio 1 150 10.19% 111 5,200,000 5,173,773 575,408
Oklahoma 1 161 10.90% 174 1,300,000 1,292,252 159,961
Oregon 1 3 261 9.76-9.90% 33 8,160,000 8,157,238 810,999
South
Carolina 5 509 11.70% 73 11,250,000 11,229,957 1,357,532
Tennessee 3 201 10.73% 105 5,861,000 4,826,639 561,609
Texas 11 1,383 10.00-11.60% 115 16,650,000 16,364,741 1,998,690
Washington 4 310 11.00-11.70% 168 4,500,000 4,482,365 551,282
- ------------------------------------------------------------------------------------------------------------------------------------

TOTAL 73 11 9,260 $179,690,842 $178,261,690 (2) $20,812,805
==================================================================================================================================


(1) Includes principal and interest payments.
(2) Of the total current principal balance, $159,698,336 relates to investments
in 73 SNFs with 8,672 beds and $18,563,354 relates to investments in 11
ALFs with 588 units.

In general, the Company's mortgage loans may not be prepaid except in the
event of the sale of the facility to a third party that is not affiliated with
the borrower. The Company's mortgage loans impose a penalty upon prepayment of
the loans depending upon the period in which the prepayment occurs, whether such
prepayment was permitted or required, and certain other conditions such as upon
the sale of the facility under pre-existing purchase option, destruction or
condemnation, or other circumstances as approved by the Company. Such
prepayment amount is based upon a percentage of the then outstanding balance
declining ratably each year. In addition to a lien on the mortgaged property,
the loans are generally secured by certain non-real estate assets of the
facilities and contain certain other security provisions in the form of letters
of credit, pledged collateral accounts, security deposits, cross-default and
cross-collateralization features and certain guarantees. During 1996, the
Company received a $941,000 payment with respect to the prepayment of one loan.

16

REMIC CERTIFICATES

At December 31, 1996, the estimated fair value of the Company's REMIC
Certificate investments was $98,934,000 ($92,545,000, at amortized cost). 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 bear
the first risk of loss in the event of an impairment to any of the underlying
mortgages. Management believes it employs conservative underwriting policies
and to date there have been no credit losses on any of the mortgages underlying
the Certificates nor are any credit losses currently anticipated. The REMIC
Certificates are collateralized by three pools consisting of 85 first mortgage
loans secured by 148 skilled nursing facilities with a total of 16,064 beds in
24 states. Each mortgage loan, all of which were originated by the Company, is
evidenced by a promissory note and secured by a mortgage, deed of trust, or
other similar instrument that creates a first mortgage lien on a fee simple
estate in real property (a "Mortgaged Property"). The $278,881,000 current
principal amount of mortgage loans represented by the REMIC Certificates have
individual principal balances ranging from approximately $297,000 to
$13,760,000, have a weighted average interest rate of approximately 11.21%, and
have remaining terms to scheduled maturities ranging from 28 months to 220
months.

The following table sets forth certain information regarding the three
pools of mortgage loans securing the REMIC Certificates as of December 31, 1996:

17



Original Principal Current Principal Amount
Number of Number of Amount of Remaining of Remaining Mortgage Current Annual
Location Facilities Beds Mortgage Loans Loans (1) Debt Service


- --------------------------------------------------------------------------------------------------------------------------------

Alabama 8 1,069 $ 18,425,800 $ 18,074,641 $ 2,253,561
Arizona 5 955 26,018,000 25,708,985 2,863,918
California 16 1,705 27,404,786 25,753,046 3,588,009
Connecticut 4 499 10,656,000 10,478,251 1,297,858
Florida 3 330 13,160,000 12,875,952 1,533,085
Georgia 10 1,078 20,822,000 20,566,473 2,498,370
Illinois 6 679 12,426,000 12,150,073 1,495,306
Iowa 10 750 13,531,000 13,782,238 1,493,545
Kansas 1 66 1,200,000 1,191,133 140,033
Kentucky 1 67 726,000 711,348 88,862
Michigan 3 444 6,800,000 6,698,413 828,043
Mississippi 1 120 2,800,000 2,773,733 332,810
Missouri 5 545 9,489,000 9,297,497 1,161,454
Montana 5 658 14,278,000 14,073,620 1,536,239
Nebraska 4 378 6,614,000 6,545,787 770,105
New Mexico 5 350 9,007,000 8,757,245 1,127,306
North Carolina 2 256 5,350,000 5,217,532 649,726
Ohio 3 243 7,000,000 6,732,363 815,867
Oklahoma 1 112 1,300,000 1,262,522 167,409
S. Dakota 1 50 585,000 574,982 64,189
Tennessee 4 297 6,952,000 6,884,490 822,951
Texas 45 5,020 64,280,000 62,341,306 7,773,876
Washington 4 289 4,583,000 4,502,040 544,601
Wisconsin 1 104 2,075,000 1,927,543 264,000
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL 148 16,064 $285,482,586 $278,881,213 $34,111,123
================================================================================================================================


(1) Included in the balances of the mortgages underlying the REMIC Certificates
are $54,205,000 of non-recourse mortgages payable by the Company. These
mortgages were originated by the Company and were transferred to the REMIC.
Subsequently, the properties securing the mortgages were acquired by the
Company in unrelated transactions, subject to the related mortgage debt.
The properties and the mortgage debt are reflected in the Company's balance
sheet.

Such mortgage loans generally have 25-year amortization schedules with
balloon payments due from 1999 to 2015, unless prepaid prior thereto.
Contractual principal and interest distributions with respect to the amortized
cost basis $92,545,000 of Certificates retained by the Company are subordinated
to distributions of interest and principal with respect to the $192,210,000
Certificates held by third parties. Thus, based on the terms of the underlying
mortgages and assuming no unscheduled prepayments occur, contractual principal
reductions on the REMIC Certificates retained by the Company will commence in
August 2004 with final maturity in April 2015. Distributions on any of the REMIC
Certificates will depend, in large part, on the amount and timing of payments,
collections, delinquencies and defaults with respect to the mortgage loans
represented by the REMIC Certificates, including the exercise of certain
purchase options under existing facility leases or the sale of the Mortgaged
Properties. Each of the mortgage loans securing the REMIC Certificates contain
similar prepayment and certain security provisions with respect to the Company's
mortgage loans.

18

As part of the REMIC transactions discussed above, the Company serves as
the sub-servicer and, in such capacity, is responsible for performing
substantially all of the servicing duties relating to the mortgage loans
represented by the REMIC Certificates. The Company receives monthly fees equal
to a fixed percentage of the then outstanding mortgage loans in the REMIC which,
in management's opinion, represent currently prevailing terms for similar
transactions. Because the fees received for such servicing result in only
adequate compensation after considering the costs to service the loans, the
Company does not recognize a separate asset for servicing rights. In addition,
the Company will act as the special servicer to restructure any mortgage loans
in the REMIC that become in default.

At December 31, 1996, the REMIC Certificates held by the Company have an
effective interest rate of approximately 15.84% based on the expected future
cash flows with no unscheduled prepayments.

MAJOR OPERATORS

As of December 31, 1996, Retirement Care Associates ("RCA"), Horizon
Healthcare Corporation ("HHC"), Sun Healthcare Group, Inc. ("Sun") and Assisted
Living Concepts, Inc. ("ALC") operated, on a combined basis, 115 facilities
representing 43.6% ($273.2 million) of the Company's adjusted gross real estate
investment portfolio (adjusted to include the mortgage loans to third parties
underlying the $92.5 million--amortized cost basis--investment in REMIC
Certificates). At December 31, 1996, RCA, HHC, Sun and ALC operated 34, 36, 26
and 19, facilities, respectively, representing approximately 14.3% ($89.8
million), 13.8% ($86.2 million), 9.0% ($56.6 million) and 6.5% ($40.6 million),
respectively, of the Company's adjusted gross portfolio. RCA, HHC, Sun and ALC
are publicly traded companies, and other information regarding these operators
is on file with the Securities and Exchange Commission. The financial position
of the Company and its ability to make distributions may be adversely affected
by financial difficulties experienced by any of such operators, or any other
major operator of the Company, including bankruptcy, insolvency or general
downturn in business of any such operator, or in the event any such operator
does not renew and/or extend its relationship with the Company or its borrowers
as it expires.

19

Item 3. LEGAL PROCEEDINGS

None.

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

None.

ITEM 4a. EXECUTIVE OFFICERS




NAME Age Position
- ----------------------- ------- -----------------------------------------------------

Andre C. Dimitriadis 56 Chairman, Chief Executive Officer and Director
William McBride III 36 President, Chief Operating Officer and Director
James J. Pieczynski 33 Senior Vice President and Chief Financial Officer


Mr. Dimitriadis co-founded the Company in 1992 and was employed by Beverly
Enterprises, Inc., an owner/operator of long-term care facilities, retirement
living facilities and pharmacies, from October 1989 to May 1992, where he served
as Executive Vice President and Chief Financial Officer. Prior to that, he was
employed by American Medical International, Inc., an owner/operator of
hospitals, from 1985 to 1989, where he served as Executive Vice President -
Finance, Chief Financial Officer and Director. Mr. Dimitriadis serves as
Chairman of the board of directors of Health Management, Inc. and a member of
the board of directors of Assisted Living Concepts, Inc. and Magellan Health
Services.

Mr. McBride co-founded the Company in 1992 and was employed by Beverly
Enterprises, Inc., an owner/operator of long-term care facilities, retirement
living facilities and pharmacies, from April 1988 to July 1992, where he served
as Vice President, Controller and Chief Accounting Officer from April 1988.
Prior to that, he was employed by Ernst & Young LLP, an international accounting
firm, from 1982 to 1988. Mr. McBride serves as Chairman of the board of
directors of Assisted Living Concepts, Inc. and a member of the board of
directors of Malan Realty Investors, Inc.

Mr. Pieczynski has served as Senior Vice President and Chief Financial
Officer of the Company since May 1994. He joined the Company in December 1993 as
Vice President and Treasurer. Prior to that, he was employed by American Medical
International, Inc., an owner/operator of hospitals, from May 1990 to December
1993, where he served as Assistant Controller and Director of Development. From
1984 to 1990, he was employed by Arthur Andersen & Co. LLP, an international
accounting firm.

20

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

(a) The Company's common stock is listed on the New York Stock Exchange. Set
forth below are the high and low reported sale prices for the Company's
common stock as reported on the New York Stock Exchange.



PRICE PER SHARE
High Low
------------------------ -----------------------

1995
- ----
First Quarter 13.625 12.500
Second Quarter 13.750 12.625
Third Quarter 15.250 13.125
Fourth Quarter 15.500 14.000

1996
- ----
First Quarter 17.125 14.875
Second Quarter 16.625 15.125
Third Quarter 17.250 15.875
Fourth Quarter 18.875 16.250

1997
- ----
First Quarter 18.250 17.750
(through February 1, 1997)

(b) As of January 31, 1997, there were approximately 675 stockholders of record
of the Company's common stock. At the date of filing of this Annual Report
on Form 10-K/A, the Company is unable to estimate the number of additional
stockholders whose shares are held for them in street name or nominee
accounts.
(c) The Company has declared total cash distributions for the two years 1995
and 1996 as set forth below:



Distributions Declared Per Share
--------------------------------
1995
- ----

Quarter ended March 31 $ .29
Quarter ended June 30 .29
Quarter ended September 30 .315
Quarter ended December 31 .315
------
$ 1.21
======
1996
- ----
Quarter ended March 31 $ .315
Quarter ended June 30 .34
Quarter ended September 30 .34
Quarter ended December 31 .34
------
$1.335
======


The Company intends to distribute to its stockholders a majority of its
funds from operations and, in any event, an amount at least sufficient to
satisfy the distribution requirements of a REIT. Cash flows from operating
activities available for distribution to stockholders will be derived primarily
from interest and rental payments from its real estate investments. All
distributions will be made by the Company subject to approval of the Board of
Directors and will depend on the earnings of the Company, its financial
condition and such other factors as the Board of Directors deem relevant. In
order to qualify for the beneficial tax treatment accorded to REITs by Sections
856 through 860 of the Code, the Company is required to make distributions to
holders of its shares equal to at least 95% of the Company's "REIT taxable
income."

21

ITEM 6. SELECTED FINANCIAL INFORMATION

The following table of selected financial information for the twelve months
ended December 31, 1996, 1995, 1994 and 1993 and for the period from August 25,
1992 (commencement of operations) to December 31, 1992 should be read in
conjunction with the Company's financial statements and related notes thereto
included elsewhere in this Annual Report on Form 10-K/A.



(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESTATED(3)
------------------------------------
1996 1995 1994 1993 1992(1)
--------- ---------- --------- --------- -----------

OPERATING INFORMATION:
Revenues $ 54,930 $ 35,569 $ 27,641 $ 15,847 $ 4,012
Expenses:
Interest expense 20,604 9,407 6,563 6,400 2,597
Depreciation and amortization 6,298 3,072 1,781 799 41
Amortization of Founders' stock 114 221 372 481 281
Provision for loan losses - - 550 372 75
Minority interest 898 57 - - -
Operating and other expenses 4,479 2,772 3,037 948 255
-------- --------- -------- -------- --------
Total expenses 32,393 15,529 12,303 9,000 3,249
-------- --------- -------- -------- --------
Other income (loss) 6,173 (1,656) 667 - -
-------- --------- -------- -------- --------
Income before cumulative effect of
change in accounting 28,710 18,384 16,005 6,847 763
Cumulative effect of accounting change - - 1,205 - -
-------- --------- -------- -------- --------
Net Income $ 28,710 $ 18,384 $ 17,210 $ 6,847 $ 763
======== ========= ======== ======== ========
Weighted average shares outstanding 19,257 18,257 15,443 9,169 7,962
======== ========= ======== ======== ========

PER SHARE INFORMATION:
Net income before cumulative effect of
accounting change $ 1.49 $ 1.01 $ 1.04 $ 0.75 $ 0.10
Cumulative effect on prior year (year ended
December 31, 1993) of a change in method
of accounting for REMIC Certificates - - 0.07 - -
-------- --------- -------- -------- --------
Net income $ 1.49 $ 1.01 $ 1.11 $ 0.75 $ 0.10
======== ========= ======== ======== ========

Distributions declared (2) $ 1.335 $ 1.21 $ 1.10 $ 1.02 $ 0.35

BALANCE SHEET INFORMATION:
Real estate investments, net $488,134 $ 340,441 $220,025 $147,269 $ 94,802
Total assets 500,538 357,378 239,369 154,303 148,562
Total debt 283,472 174,083 55,835 61,804 73,192
Total liabilities 299,207 185,458 66,148 69,156 78,250
Minority interest 10,528 1,098 - - -
Total stockholders' equity 190,803 170,822 175,093 85,147 70,312

OTHER INFORMATION: 1996 1995 1994 1993 1992
-------- --------- -------- -------- --------
Cash flows from operating activities $ 33,789 $ 24,197 $ 19,242 $ 8,863 $ 3,268
Cash flows used in investing activities (94,210) (111,459) (73,546) (52,706) (94,578)
Cash flows provided by (used) in financing
activities 62,135 74,430 65,465 (2,817) 141,075
Weighted average shares outstanding 19,257 18,257 15,443 9,169 7,962


(1) From August 25, 1992 (commencement of operations) to December 31, 1992.
(2) Distributions may exceed current or accumulated net income.
(3) As further discussed in Note 1 of Consolidated Financial Statements
included herein, the Company has restated its 1996, 1995 and 1994 results
of operations to effect a change in the method used to account for its
REMIC Certificates.

In March 1995, NAREIT adopted the following definition of Funds From
Operations ("FFO"): net income (computed in accordance with GAAP) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation of real property and after adjustments for unconsolidated entities
in which a REIT holds an interest. In addition, the Company excludes any
unrealized gains or losses resulting from temporary

22

changes in the estimated fair value of its REMIC Certificates in the computation
of FFO. The Company implemented this new definition of FFO effective as of the
NAREIT-suggested adoption date of January 1, 1996. For the year ended December
31, 1996, the Company's FFO was $28,793,000 representing net income of
$28,710,000 plus depreciation on real estate investments of $6,256,000, less
unrealized gains on its REMIC Certificate investments of $6,173,000

The Company believes that FFO is an important supplemental measure of
operating performance. FFO should not be considered as an alternative to net
income or any other GAAP measurement of performance as an indicator of operating
performance or as an alternative to cash flows from operations, investing, and
financing activities as a measure of liquidity. The Company believes that FFO
is helpful in evaluating a real estate investment portfolio's overall
performance considering the fact that historical cost accounting implicitly
assumes that the value of real estate assets diminishes predictably over time.
The term FFO was designed by the REIT industry to provide useful supplemental
information. FFO provides an alternative measurement criteria, exclusive of
certain non-cash charges included in GAAP income, by which to evaluate the
performance of such investments. FFO, used by the Company in accordance with
the NAREIT definition may not be comparable to similarly entitled items reported
by other REITs that have not adopted the NAREIT definition.

23

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

OPERATING RESULTS

Year ended December 31, 1996 compared to the year ended December 31, 1995

Total revenues for the twelve months ended December 31, 1996 increased by
$19,361,000 or 54% to $54,930,000 from $35,569,000. The increase was primarily
due to increased rental income of $10,594,000, increased mortgage interest
income of $4,382,000 and increased interest income from REMIC Certificates of
$3,480,000. Rental income increased $7,375,000 as a result of $113,858,000 of
property acquisitions made in 1996 and by $3,011,000 as a result of a full
year's effect on rental revenue of facilities acquired during 1995. Rental
revenue also increased by $109,000 due to contingent rents received from certain
facilities based on increases in the facilities' incremental operating revenues
(as defined in the respective leases). "Same-store" rentals (rents from
facilities owned for all of 1995 and 1996) increased by $99,000 as a result of
additional rents received in 1996 on facilities that are subject to rental
increases tied to increases in Consumer Price Indices (CPI). The increase in
mortgage interest income resulted from the higher overall mortgage investment
base in 1996 as compared to the 1995 investment base. Interest from REMIC
Certificates increased as a result of the third securitization transaction which
closed in March 1996. The remaining increase in income of $905,000 was
primarily due to penalties the Company received in 1996 from prepayments of one
mortgage loan and eight loans underlying the REMIC Certificates held by the
Company.

Total expenses for the twelve months ended December 31, 1996 increased by
$16,864,000 or 109% to $32,393,000 from $15,529,000 a year ago. The increase
resulted primarily from increases in interest expense of $11,197,000,
depreciation and amortization expense of $3,119,000, and from operating and
other expense of $1,707,000. Interest expense increased primarily due to a
higher borrowing base in 1996 that resulted from convertible debt issuances
totaling $60,000,000 offset by $18,813,000 of conversions, increases in net bank
borrowings of $30,930,000 and increases in net mortgage financing of
$37,498,000. During 1996, the Company acquired 22 assisted living facilities
and 20 skilled nursing facilities resulting in an increase in depreciation and
amortization expense. Operating and other expenses increased by $1,707,000 or
62% due to approximately $1,445,000 in additional salaries and bonuses.
Approximately $1,299,000 of the increase in salaries and bonuses were
attributable to higher wages and bonuses paid to existing personnel and
approximately $146,000 was due to additional staffing. The remaining portion of
the increase in operating expense was due to higher administrative costs.
Minority interest expense increased $841,000 due to the addition of six new
partnership transactions in 1996.

Total expenses for the twelve months ended December 31, 1996, as a
percentage of revenues, increased 35% as compared to the prior period. The
relatively higher increase in expenses when compared to revenues was primarily
due to financing activities in the latter part of 1995 and 1996 which utilized
more debt than equity. As a result, interest expense, as a percentage of
revenues, increased by approximately 42%. In addition, the investments funded
with these borrowings generally resulted in lower spreads as a result of market
interest rate pressures, when compared to prior investments which utilized more
equity financing. Depreciation and amortization expense increased by 33% as a
percentage of revenues due to the increase in the Company's owned properties
asset base in 1996 by approximately $113,858,000. Minority expense also
increased 920% as a percentage of revenues as a result of the six additional
partnership transactions completed in 1996 and the full year impact of the
partnership transaction completed in 1995. Operating and other expenses
increased by 5% as a percentage of revenues primarily due to higher salaries and
bonuses paid to existing staff during 1996.

24

Other income (loss) increased in 1996 over 1995 due to the higher estimated
fair value of the Company's REMIC Certificate investments when compared to prior
year's. The higher estimated fair value was attributable to the Company's third
securitization which was completed in March 1996. On an overall basis, the
Certificates' estimated fair value was $6,389,000 greater than book value as of
December 31, 1996.

As a result of the foregoing, net income for the twelve months ended
December 31, 1996 increased $10,326,000 over the same period a year earlier.

Year ended December 31, 1995 compared to the year ended December 31, 1994

Total revenues increased $7,928,000 primarily as a result of increased
rental income of $4,292,000, increased interest income on REMIC Certificates of
$2,980,000 and increased interest income on mortgage loans of $280,000. The
increase in rental income of $4,292,000 was due primarily to additional rents of
$1,748,000 resulting from property acquisitions made in 1995 and by $2,362,000
as a result of a full year's effect on rental revenue of facilities acquired
during 1994. "Same-store" rentals (rents from facilities owned for all of 1995
and 1994) increased by $116,000 primarily as a result of an additional $107,000
of rent associated with the expansion of one skilled nursing facility on which
60 new beds were constructed and by $9,000 resulting from increased rent on one
facility due to a rent adjustment tied to increases in CPI. Rental revenue also
increased by increased by $66,000 due to contingent rents received based on
increases in the facilities' incremental operating revenues (as defined in the
respective leases). Interest income on REMIC Certificates increased $2,980,000
primarily due to the full year impact of the securitization transaction
completed in 1994. Interest income on mortgage loans increased $6,443,000 due to
the investments completed in 1995 and $3,996,000 due to the full year impact of
mortgage loan investments completed in 1994. The increases were offset by
reductions in interest income of $9,506,000 relating to the sale of mortgages to
the REMIC and $653,000 resulting from the prepayment of certain mortgages in
1994. The remaining increase in total revenues of $376,000 was primarily due to
an increase of $158,000 in prepayment penalties received by the Company in 1995
and increases in facility fees and other income of $218,000.

Total expenses for the twelve months ended December 31, 1995 increased
$3,226,000 primarily due to increases in interest expense of $2,844,000 and
depreciation and amortization of $1,140,000. Interest expense increased by
approximately $3,581,000 due to the issuance of $30,000,000 of convertible
debentures in September 1994 and $61,500,000 of convertible debentures in
September 1995. Interest expense also increased by approximately $899,000 due
to increased levels of bank borrowings and by approximately $954,000 due to the
assumption of non-recourse mortgages. These increases were offset by a decrease
of $2,590,000 in interest expense in connection with the conversion of a portion
of the Company's 9.75% convertible debentures in 1995. Increased expenses were
also attributable to increased depreciation and amortization totaling $1,140,000
as a result of acquisitions in 1995 and 1994. During 1995, the Company acquired
11 skilled nursing facilities and six assisted living residences. The above
increases were offset by decreases in operating and other expenses of $265,000.
Reduction in operating and other expenses resulted primarily from a decrease in
compensation expense of $764,000 offset by increased staffing and administrative
costs. Minority interest increased by $57,000 due to a partnership formed by
the Company in 1995.

Total expenses for the twelve months ended December 31, 1995, as a
percentage of revenues, decreased by approximately 2% as compared to the prior
period. Although on an overall basis revenues compared to expenses were stable
between the periods, there were some changes with respect to certain expense
categories. Interest expense, as a percentage of revenues, increased 11% as a
result of a greater proportion of debt being used to finance the 1995
investments as compared to 1994, which utilized debt and

25

equity more proportionately. Depreciation and amortization expense increased by
34% as a percentage of revenues due to the additional investments in 1995 and
the full impact of 1994 owned property investments which primarily occurred
during the second half of 1994. These increases were offset by decreases in the
provision for loan or lease losses of 100%. Operating and other expenses
decreased by approximately 29% as a percentage of revenues primarily due to
comparatively lower compensation expense recorded in 1995.

The decrease in other income (loss) for the year ended December 31, 1995
was due the lower estimated fair value of the Company's REMIC Certificate
investments as of December 31, 1995 when compared to estimated fair value at
December 31, 1994. On an overall basis, the Certificates' estimated fair value
was $216,000 greater than book value as of December 31, 1995.

As more fully described in Note 1 of the Consolidated Financial statements
included herein, the Company restated its earnings to adopt the fair value
accounting provisions of Statement of Financial Accounting Standards No. 115. As
a result, the cumulative effect on earnings of $1,205,000 on the date of
adoption (January 1, 1994) has been reflected as a separate component in the
Consolidated Statement of Income for the year ended December 31, 1994.

As a result of the foregoing, net income for the twelve months ended
December 31, 1995 increased $1,174,000 over the same period a year earlier.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1996, the Company had investments in 248 skilled nursing
facilities with a total of 28,628 beds and 35 assisted living facilities with a
total of 1,456 units in 32 states. The Company's real estate investment
portfolio consisted of approximately $178,262,000 invested in mortgage loans
(before allowance for doubtful accounts of $1,000,000), approximately
$98,934,000 of REMIC Certificates at estimated fair value ($92,545,000 cost
basis), and approximately $223,578,000 (before accumulated depreciation of
$11,640,000) invested in long-term care facilities owned by the Company and
leased to operators.

During 1996, the Company completed investments totaling over $205,000,000
which consisted of purchases of 42 long-term care facilities for approximately
$113,858,000 and mortgage loans of $99,440,000 net of the sale of four
properties in Texas for $7,589,000. The Company financed its investments
through the sale of $60,000,000 aggregate principal amount of convertible
debentures in February and August 1996, the sale of $90,552,000 of REMIC
Certificates in March 1996, the assumption of non-recourse mortgage loans
totaling $9,641,000, the issuance of $8,932,000 in limited partnership
interests, short-term borrowings and cash on hand. During 1996, the Company
repurchased and retired 120,000 shares of common stock for an aggregate price of
approximately $1,831,000. The Company also paid off one of its outstanding
mortgage loans totaling $3,331,000.

Under the Credit Agreement, the Company has an unsecured line of credit in
the amount of $45,000,000 which expires on May 31, 1998. Borrowings under the
credit line bear interest at LIBOR plus 1.5% and are subject to standard
affirmative and negative covenants. As of February 1, 1997, the Company had
$38,700,000 in borrowings outstanding under the Credit Agreement bearing a
weighted average interest rate of approximately 7.2%. In addition, the Company
has entered into the Repurchase Agreement with a financial institution under
which it can borrow up to $84,000,000. The scheduled maturity of the Repurchase
Agreement is November 15, 1997; however, the Company has historically been able
to renew the Repurchase Agreement. Borrowings under the Repurchase Agreement
bear interest at LIBOR plus 2% and are secured by a pledge of certain mortgage
loans. At February 1, 1997, $50,000,000 was outstanding under the Company's
Repurchase Agreement bearing an average interest rate of approximately 7.7%.

The credit and repurchase agreements (collectively "lines of credit") limit
the amount of borrowings available to between 50% and 60% of the Company's
borrowing base. Under the Credit Agreement, the Company's borrowing base is
comprised of certain owned properties and mortgage loans. At December 31, 1996,
the borrowing base under the Credit Agreement is limited to 50% of the cost of
the total applicable value of the properties and 60% of the total applicable
value of eligible mortgage loans in the borrowing base or

26

approximately $45,000,000. Under the Repurchase Agreement, the borrowing base
consists of various loans which have been assigned to the financial institution.
The Company can borrow up to 60% of the loans which have been assigned. Based on
the current level of collateral and borrowings at February 1, 1997, there was
approximately $28,451,000 available under the Company's Repurchase Agreement
which the Company anticipates will be increased to $34,000,000 when additional
collateral is accepted. In addition, the Company had registered in a shelf
registration but had not issued up to $77,250,000 of additional securities for
future issuance from time to time.

In July 1996, in connection with obtaining a $50,180,000 commitment to
enter into a sale leaseback transaction with Assisted Living Concepts, Inc.
("ALC"), the Company agreed to sell four assisted living facilities ("ALFs") it
acquired during 1996 in Texas to ALC for approximately $7,589,000. There was no
gain or loss recognized on the sale; however, the Company received an
administration fee of approximately $214,000 in conjunction with the sale of the
four ALFs. In connection with the commitment, the Company entered into a one-
year forward ten-year interest rate swap agreement (the "November 1996
Agreement"). The terms of the commitment provide for an initial lease term of
twelve years and an lease rate of 9.90% on each facility acquired. The Company
will finance this commitment with fixed rate financing, and as such, has
utilized an interest rate swap to "lock-in" the rate at which such financing
will be obtained. Interest rate swaps are contractual agreements between the
Company and third parties to exchange fixed and floating interest payments
periodically without the exchange of the underlying principal amounts (notional
amounts). Under the November 1996 Agreement, the Company will be credited with
interest at the three-month LIBOR and will incur interest at a fixed rate of
6.835% on a $40,000,000 notional amount beginning on November 7, 1997. The
November 1996 Agreement will be terminated on or before November 7, 1998 which
is the latest date on which the Company expects to fully fund the commitment and
have long-term financing in place. At December 31, 1996, the Company had an
unrealized gain of $251,000 under the November 1996 Agreement.

The Company also anticipates completing a securitization transaction within
the next year, the proceeds of which will be used to repay borrowings
outstanding under its Repurchase Agreement and its Credit Agreement. In
connection with such securitization, the Company, in September 1995, entered
into a seven-year forward interest rate swap agreement (the "September 1995
Agreement"). Under the September 1995 Agreement, beginning on March 31, 1997 and
continuing semi-annually thereafter, the Company is to be credited interest at
the six month LIBOR and incur interest at a fixed rate of 6.64% on a notional
amount of $60,000,000 which is being accounted for as a hedge. This effectively
"locked-in" the net interest margin on $60,000,000 principal amount of senior
certificates the Company anticipates will be sold in the securitization
transaction. Concurrent with the closing of the hedged transaction, any gains
and losses associated with the interest rate swap will be included as a
component of the proceeds of the transaction. The September 1995 Agreement will
be terminated at the earlier of (i) an anticipated securitization transaction to
be completed during the second half of 1997 or (ii) November 17, 1997. At
December 31, 1996, the Company had an unrealized loss of $253,000 under the
September 1995 Agreement.

The Company has the option to redeem, without penalty, its currently
outstanding $843,000 aggregate principal amount of 9.75% Convertible
Subordinated Debentures at any time. Since such debentures are convertible into
common stock of the Company at a conversion price of $10.00 per share, the
Company anticipates that substantially all of such debentures will be converted
if it elects to redeem the debentures.

During January 1997, the Company provided mortgage loans totaling
approximately $18,530,000 and acquired one skilled nursing facility for
$2,556,000. Included in the mortgage loans are approximately $17,330,000 of
mortgage loans on assisted living facilities which will be paid off once the
Company

27

completes a sale leaseback transaction for the same amount on assisted living
facilities that are being constructed. As of February 1, 1997, the Company had
outstanding investment commitments totaling $82,790,000, consisting of
approximately $22,650,000 in commitments to make mortgage loans and commitments
for the acquisition of one nursing and 25 assisted living facilities for an
aggregate purchase price of approximately $60,140,000, including the remaining
$35,330,000 commitment to Assisted Living Concepts, Inc. discussed previously.
The Company expects to fund substantially all of these commitments by the end of
1997. In addition, in January 1997, the Company sold 1,000,000 shares of common
stock at $17.75 per share through a public offering. Of the net proceeds,
$17,300,000 was used to pay borrowings under the unsecured line of credit.

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 and assisted living facilities
owned by or pledged to the Company. The operating results of the facilities
will depend on 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 and assisted living facilities,
the Company's borrowers and the underlying collateral for mortgage loans and
make future revisions to the provision, if considered necessary.

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 makes loans which have predetermined
increases in interest rates and leases which have agreed upon annual increases.
Inasmuch as the Company initially funds its investments with its revolving bank
line and repurchase agreement, the Company is at risk of net interest margin
deterioration if medium and long-term rates were to increase between the time
the Company originates the investment and the time it securitizes the loans or
replaces the short-term variable rate borrowings with a fixed rate financing.
To help reduce the negative impact of changes in interest rates, the Company
partially hedges, or locks in, its net interest rate spread on its investments
with interest rate swaps, as previously described.

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 bear the first risk of loss in the event of an 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). Additionally,
management believes it employs conservative underwriting policies and to date
there have

28

been no credit losses on any of the mortgages underlying the certificates nor
are any credit losses currently anticipated.

Certain of the Certificates retained by the Company have designated
certificate principal balances and a stated certificate interest "pass-through"
rate. These Certificates are subject to credit risk to the extent that there
are estimated or realized credit losses on the underlying mortgages, and as such
their effective yield would be negatively impacted by such losses. The Company
also retains the interest-only (I/O) Certificates, which provide cash flow
(interest-only) payments that result from the difference between the interest
collected from the underlying mortgages and interest paid on all the outstanding
pass-through rate certificates. In addition to the risk from credit losses, the
I/O Certificates are also subject to prepayment risk, in that prepayments of the
underlying mortgages reduce future interest payments of which a portion flows to
the I/O Certificates, thus, reducing their effective yield. The Certificates'
fair values are estimated, in part, based on a spread over the applicable U.S
Treasury rate, and consequently, are inversely affected by increases or
decreases in such interest rates. There is no active market in these securities
from which to readily determine their value. The estimated fair values of both
classes of Certificates are subject to change based on the estimate of future
prepayments and credit losses, as well as fluctuations in interest rates and
market risk. Although the Company is required to report its REMIC Certificate
investments at fair value, many of the factors considered in estimating their
fair value are difficult to predict and are beyond the control of the Company's
management, consequently, changes in the reported fair values may vary widely
and may not be indicative of amounts immediately realizable if the Company was
forced to liquidate any of the Certificates.

The Company believes that its current cash flow from operations available
for distribution or reinvestment, its remaining borrowing capacity under its
lines of credit and anticipated securitization transaction are sufficient to
provide for payment of its operating costs, fund investments and provide funds
for distribution to its stockholders. In addition to its borrowing capacity, the
Company is considering various other proposals for additional long-term
financing to meet the needs of the Company.

29


Item 8. FINANCIAL STATEMENTS



Page
----


Report of Independent Auditors.................................................................25

Consolidated Balance Sheets as of December 31, 1996 and 1995...................................26

Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994...............................................................27

Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994.........................................................28

Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994...............................................................29

Notes to Consolidated Financial Statements.....................................................30


30

REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Stockholders
LTC Properties, Inc.

We have audited the accompanying consolidated balance sheets of LTC
Properties, Inc. as of December 31, 1996 and 1995 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. Our audits also included the
financial statement schedules listed in the index at Item 14(a). These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of LTC Properties,
Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.

As discussed in Note 1, the Company has restated its financial statements,
after discussions with the Staff of the Securities and Exchange Commission, to
adopt the fair value accounting provisions of SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities", for its investment in REMIC
certificates, as opposed to the previously reported amortized cost accounting.
As a result of this change in accounting, the Company earnings increased in 1996
by $6,173,000 ($0.32 per share), decreased in 1995 by $1,656,000 ($0.09 per
share), and increased in 1994 by $1,872,000 ($0.12 per share).

/s/ ERNST & YOUNG LLP



Los Angeles, California
January 13, 1997, except Note 10, as to
which the date is February 1, 1997

31

LTC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS



(RESTATED)
--------------------------------------------
DECEMBER 31, December 31,
1996 1995
------------------- ------------------
ASSETS (In thousands)

Real Estate Investments:
Buildings and improvements, net of accumulated depreciation and
amortization: 1996 - $11,640; 1995 - $5,487 $199,591 $104,546
Land 12,347 7,236
Mortgage loans receivable, held for sale, net of allowance for
doubtful accounts: 1996 - $1,000; 1995 - $997 177,262 161,059
REMIC Certificates, at estimated fair value 98,934 67,600
------------------- ------------------
Real estate investments, net 488,134 340,441
Other Assets:
Cash and cash equivalents 3,148 1,434
Restricted cash - 8,300
Debt issue costs, net 4,150 3,331
Interest receivable 2,817 2,093
Prepaid expenses and other assets 2,289 1,779
------------------- ------------------
12,404 16,937
------------------- ------------------
Total assets $500,538 $357,378
=================== ==================

LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible subordinated debentures due 1999 - 2004 $135,828 $ 94,641
Bank borrowings 79,400 48,470
Mortgage loans payable 54,205 16,707
Bonds payable and capital lease obligations 14,039 14,265
Accrued interest 6,015 3,196
Accrued expenses and other liabilities 3,041 2,415
Distributions payable 6,679 5,764
------------------- ------------------
Total liabilities 299,207 185,458

Minority interest 10,528 1,098

Commitments - -
Stockholders' equity:
Preferred stock $0.01 par value: 10,000,000 shares - -
authorized; none issued and outstanding
Common stock $0.01 par value; 40,000,000 shares authorized; shares issued
and outstanding: 1996 - 19,484,208; 1995 - 18,297,254 195 183
Capital in excess of par value 195,297 178,453
Cumulative net income 71,914 43,204
Cumulative distributions (76,603) (51,018)
------------------- ------------------
Total stockholders' equity 190,803 170,822
------------------- ------------------
Total liabilities and stockholders' equity $500,538 $357,378
=================== ==================


See accompanying notes

32

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands except per share amount)




YEARS ENDED DECEMBER 31,
-----------------------------------------------
(RESTATED)
-----------------------------------------------
1996 1995 1994
-------------- ------------ ------------

Revenues:

Rental income $20,529 $ 9,935 $ 5,643
Interest income from mortgage loans 17,498 13,116 12,836
Interest income from REMIC Certificates 14,383 10,903 7,923
Interest and other income 2,520 1,615 1,239
-------------- ------------ ------------

Total revenues 54,930 35,569 27,641

Expenses:
Interest expense 20,604 9,407 6,563
Depreciation and amortization 6,298 3,072 1,781
Amortization of Founders' stock 114 221 372
Provision for loan losses - - 550
Minority interest 898 57 -
Operating and other expenses 4,479 2,772 3,037
-------------- ------------ ------------

Total expenses 32,393 15,529 12,303
-------------- ------------ ------------

Other income/(loss):
Unrealized holding gain/(loss) on changes
in estimated fair value of REMIC
Certificates 6,173 (1,656) 667
-------------- ------------ ------------
Income before cumulative effect of
accounting change 28,710 18,384 16,005
Cumulative effect of accounting change - - 1,205
-------------- ------------ ------------
Net income $28,710 $18,384 $17,210
============== ============ ============

Per share amounts:
Income before cumulative effect of
accounting charge $ 1.49 $ 1.01 $ 1.04
Cumulative effect on prior year (year ended
December 31, 1993) of a change in method
of accounting for REMIC Certificates - - 0.07
-------------- ------------ ------------
Net income $ 1.49 $ 1.01 $ 1.11
============== ============ ============

Weighted average shares outstanding 19,257 18,257 15,443
============== ============ ============


See accompanying notes

33

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Restated)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)




Capital in Total
Common Stock excess of Cumulative Cumulative Stockholders'
Shares Amount par value Net Income Distributions Equity

----------------------------------------------------------------------------------------------

Balances at December 31, 1993 9,737 $ 97 $ 89,698 $ 7,610 $(12,258) $ 85,147
Amortization of Founders' stock - - 372 - - 372
Issuance of common stock, net 4,800 48 59,570 - - 59,618
Conversions of debentures, net of
unamortized issue costs of 3,330 34 32,261 - - 32,295
$1,237
Repurchase of common stock (209) (2) (2,666) - - (2,668)
Net income - - - 17,210 - 17,210
Distributions ($1.10 per share) - - - - (16,881) (16,881)
----------------------------------------------------------------------------------------------
Balances at December 31, 1994 17,658 177 179,235 24,820 (29,139) 175,093
----------------------------------------------------------------------------------------------
Amortization of Founders' stock - - 221 - - 221
Exercise of stock options 2 - 24 - - 24
Conversions of debentures, net of -
unamortized issue costs of 1,936 19 18,924 - 18,943
$651
Repurchase of common stock (1,299) (13) (18,076) - - (18,089)
Repurchase of warrants - - (1,875) - - (1,875)
Net income - - - 18,384 - 18,384
Distributions ($1.21 per share) - - - - (21,879) (21,879)
----------------------------------------------------------------------------------------------
Balances at December 31, 1995 18,297 183 178,453 43,204 (51,018) 170,822
----------------------------------------------------------------------------------------------
Amortization of Founders' stock - - 114 - - 114
Exercise of options 3 - 39 - - 39
Conversions of debentures, net of -
unamortized issue costs of 1,304 13 18,521 - 18,534
$576
Repurchase of common stock (120) (1) (1,830) - - (1,831)
Net income - - - 28,710 - 28,710
Distributions ($1.335 per share) - - - - (25,585) (25,585)
----------------------------------------------------------------------------------------------
Balances at December 31, 1996 $19,484 $195 $195,297 $71,914 $(76,603) $190,803
==============================================================================================



See accompanying notes

34

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


Year ended December 31,
----------------------------------------------------------
(Restated)
----------------------------------------------------------
1996 1995 1994
---------------- ----------------- -----------------

OPERATING ACTIVITIES:
Net income $ 28,710 $ 18,384 $ 17,210
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,999 4,998 2,956
Unrealized holding gain/(loss) on changes in
estimated fair value of REMIC Certificates (6,173) 1,656 (667)
Cumulative effect of accounting change - - (1,205)
Noncash charges 296 237 226
Net change in other assets and liabilities 2,957 (1,078) 722
--------- --------- ---------
Net cash provided by operating activities 33,789 24,197 19,242

INVESTING ACTIVITIES:
Investment in real estate mortgages (99,440) (101,908) (120,472)
Acquisitions of real estate properties, net (95,285) (23,403) (41,136)
Sale of real estate properties, net 7,589 - -
Deferred facility fees, net 233 251 558
Proceeds from sale of REMIC Certificates, net 86,674 19,216 80,203
Principal payments on real estate mortgages 2,272 2,634 8,550
Restricted cash 8,300 (8,300) -
Principal payments on mortgage loans payable (3,893) (37) -
Other (660) 88 (1,249)
--------- --------- ---------
Net cash used in investing activities (94,210) (111,459) (73,546)

FINANCING ACTIVITIES:
Proceeds from issuance of convertible debenture offerings 60,000 61,500 30,000
Proceeds from issuance of common stock, net 39 - 59,618
Proceeds from issuance of bonds - 8,300 -
Debt issue costs (2,167) (2,409) (1,101)
Repurchase of warrants - (1,875) -
Distributions paid (24,670) (21,237) (14,388)
Borrowings under the lines of credit 219,000 133,220 109,800
Repayment of bank borrowings (188,070) (84,750) (115,800)
Repurchase of common stock (1,831) (18,089) (2,668)
Other (166) (230) 4
--------- --------- ---------
Net cash provided by (used in) financing activities 62,135 74,430 65,465
--------- --------- ---------
(Decrease) increase in cash and cash equivalents 1,714 (12,832) 11,161
Cash and cash equivalents, beginning of year 1,434 14,266 3,105
--------- --------- ---------
Cash and cash equivalents, end of year $ 3,148 $ 1,434 $ 14,266
========= ========= =========

Supplemental disclosure of cash flow information:
Interest paid during the year $ 16,631 $ 7,428 $ 6,909
========= ========= =========


See accompanying notes

35

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. THE COMPANY

Organization and Investments

LTC Properties, Inc. (the "Company") was incorporated on May 12, 1992 in
the State of Maryland and commenced operations on August 25, 1992. The Company,
which is organized as a real estate investment trust, invests in long-term care
facilities through mortgage loans, facility lease transactions and other
investments. As of December 31, 1996, the Company had investments in 248
properties ("the Properties") located in 32 states and operated by 84 health
care providers. The Properties include 248 skilled nursing facilities with a
total of 28,628 beds and 35 assisted living residences with a total of 1,456
units. At December 31, 1996, the Company's real estate investment portfolio
consisted of approximately $223,578,000 (before accumulated depreciation of
$11,640,000) invested in 73 long-term care facilities owned by the Company and
leased to operators, approximately $178,262,000 (before allowance for doubtful
accounts of $1,000,000) invested in 67 mortgage loans secured by 73 skilled
nursing facilities and 11 assisted living facilities ("ALFs") and approximately
$92,545,000 invested in REMIC Certificates secured by 148 skilled nursing
facilities.

Restatement

As previously disclosed in the current and prior years, the Company has
securitized portions of its mortgage loan portfolio and retained a portion of
the resulting REMIC Certificates to hold as long-term investments.
Historically, the Company has accounted for its REMIC Certificate investments at
amortized cost and provided fair value disclosures because of the highly
specialized nature of the collateral underlying the REMIC Certificates, the lack
of marketability of the Certificates and the Company's intent and investment
posture to hold its real estate investments for long-term purposes. Moreover,
the Company believes that the fair value accounting provisions of SFAS 115,
which require the recognition of unrealized gains or losses resulting from
temporary changes in the fair value of originated mortgage-backed securities
(the REMIC Certificates) that are retained by the Company, may reflect equity
or earnings in the Company's financial statements that may not be ultimately
realized and portray a level of liquidity with respect to its REMIC Certificates
that may not exist. Furthermore, the Company believed that the accounting
literature supported the accounting for the REMIC Certificates at amortized
cost. However, after reconsideration following discussions with the Staff of
the Securities and Exchange Commission, the Company decided to adopt the fair
value accounting provisions of SFAS 115 as opposed to the amortized cost
accounting the Company believed applicable under SFAS 115. The fair value
accounting provisions require the recognition in earnings of temporary changes
in the fair values of the Company's REMIC Certificates investments, irrespective
of the Company's reservations about the realizability of such earnings.
Accordingly, the 1996 financial statements, which include the results of
operations for the years ended December 31, 1996, 1995 and 1994, have been
restated to reflect the adjustment to estimated fair value, of the Company's
REMIC Certificate investments. As a result, the Company has increased earnings
by $6,173,000 for the year ended 1996, decreased earnings by $1,656,000 in 1995
and increased earnings by $1,872,000 in 1994, to record the temporary changes in
the fair value of its REMIC Certificate investments during each reporting
period.

36

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries and controlled partnerships. All
intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Revenue Recognition

Interest income on mortgage loans and REMIC Certificates is recognized on
the accrual basis using the effective interest method. The total amount of the
base rent payments from operating leases is accrued as earned over the term of
the lease. Contingent rental income, which is generated by a percentage of
increased revenue over a specified base period revenue of the long-term care
facilities, is recognized as earned.

Cash Equivalents

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

Land, Buildings and Improvements

Land, buildings and improvements are recorded at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of the related
assets which range from 7 years for equipment to 40 years for buildings.
Depreciation expense on buildings and improvements, including facilities owned
under capital leases, was $6,214,000, $2,996,000 and $1,740,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.

During the year, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of". This pronouncement requires that
impairment losses for such assets be based on the fair value of the asset. In
accordance with this pronouncement, the Company records impairment losses on
long-lived assets when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by these assets are less than their
carrying amounts. Management assesses the potential for impairment on a
property by property basis. The adoption of SFAS No. 121 had no impact on the
Company's consolidated financial statements as no impairment write-downs were
necessary.

37

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Mortgage Loans Receivable

The Company maintains a long-term investment interest in its mortgages
either through the direct retention of mortgages or through the retention of
REMIC certificates originated in the Company's securitizations. The Company may,
from time-to-time, securitize a portion of its mortgage loan portfolio in
transactions accounted for as sales, when a securitization provides the Company
with the best available form of raising capital to make additional long-term
investments. Because portions of the Company's mortgage loan portfolio are
anticipated to be securitized in the future, the Company is required to classify
its mortgages as held for sale and account for them at the lower of cost-or-
market under the provisions of SFAS 65. However, historically, the Company has
sold its mortgages solely in connection with its REMIC securitizations and does
not anticipate selling any of its mortgages other than in the course of
completing future securitizations.

The Company considers mortgages that have not yet been securitized to be
"uncommitted mortgages" (as defined under SFAS No. 65) until they have been
accepted for securitization by two independent rating agencies. In determining
the estimated market value for such mortgages, the Company considers estimated
prices and yields, which are based in part on a spread over the applicable U.S.
Treasury Note Rate, sought by qualified institutional buyers of the REMIC
certificates originated in the Company's securitizations. As of December 31,
1996, the estimated market value of Company's mortgage loan investments, all
which are considered uncommitted mortgages, exceeded their amortized cost. The
Company determines the lower of cost or market of its mortgage loans on an
aggregate basis. To the extent that the aggregate cost basis exceeds the
aggregate market value, a valuation allowance is established with the resulting
amount included in the determination of net income. Changes in the valuation
allowance are included in current period earnings.

Hedging of Anticipated Transactions

As further discussed in Notes 4 and 9, the Company has entered into forward
interest rate swap agreements to hedge certain firm commitments and to hedge
anticipated securitization transactions. Firm commitments subject the Company to
interest rate risk to the extent that debt or other fixed rate financing will be
used to fund such investments. In such circumstances, the Company may elect to
hedge such financings thereby reducing its exposure to interest rate risk. The
Company designates such interest rate swaps as hedges when the significant
characteristics and expected terms of the anticipated transaction are identified
and when it is probable that the anticipated transaction will occur. Any gains
or losses on the qualifying hedges are recognized upon the completion of the
hedged transaction.

Federal Income Taxes

No provision has been made for federal income taxes. The Company qualifies
as a real estate investment trust under Sections 856 through 869 of the Internal
Revenue Code of 1986, as amended. As such, the Company is not taxed on its
income which is distributed to stockholders, provided that such distribution is
at least 95 percent of its taxable income. At December 31, 1996, the reported
amount of the Company's net assets and liabilities exceeds the tax bases by
approximately $21,000,000.

For Federal Tax purposes, depreciation is taken on the Company's owned
properties based on the assets' tax bases (which is materially the same as GAAP
book value) calculated, in general, at a rate of 3.6%, using the straight-line
method over a period of 27.5 years.

Earnings and profits, which determine the taxability of dividends to
stockholders, differ from net income for financial statement purposes due to the
treatment required under the Internal Revenue Code of certain interest income
and expense items, depreciable lives and bases of assets.

38

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Investments in REMIC Certificates

Income on investments in the Company's REMIC Certificates, including
interest-only Certificates, is recognized based on the effective interest
method using the anticipated yield over the expected life of these investments.
These Certificates are recorded at their estimated fair value at the time of the
transactions and are accounted for under the provisions of SFAS No. 115 (as
described before in "Debt Securities"). Impairment adjustments are made if the
projected yield of a certificate class is less than the risk-free rate of return
on an investment with similar duration. Such projected yields are based on
management's best estimate of future cash flows at each reporting date.

Concentrations of Credit Risk

The Company's credit risks primarily relate to cash and cash equivalents,
the investment in REMIC Certificates, mortgage loans receivable, facility leases
and interest rate swaps. Cash and cash equivalents are primarily held in bank
accounts and overnight investments. The REMIC Certificates relate to
participating interests in real estate mortgage investment conduits ("REMICs")
as discussed in Note 4. The Company's mortgage loans receivable relate primarily
to loans secured by long-term care facilities as discussed in Note 4. The
facility leases relate to the long-term care facilities the Company owns and
leases to third party operators.

The Company's financial instruments, principally its investment in REMIC
Certificates and mortgage loans receivable, are subject to the possibility of
loss of the carrying values as a result of either the failure of other parties
to perform according to their contractual obligations or changes in market
prices which may make the instrument less valuable. The Company obtains various
collateral and other protective rights, and continually monitors these rights,
in order to reduce such possibilities of loss. In addition, the Company
provides reserves for potential losses based upon management's periodic review
of its portfolio.

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 bear the first risk of loss in the event of an 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). Additionally,
management believes it employs conservative underwriting policies and to date
there have been no credit losses on any of the mortgages underlying the
certificates nor are any credit losses currently anticipated.

Certain of the Certificates retained by the Company have designated
certificate principal balances and a stated certificate interest "pass-through"
rate. These Certificates are subject to credit risk to the extent that there
are estimated or realized credit losses on the underlying mortgages, and as such
their

39

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

effective yield would be negatively impacted by such losses. The Company
also retains the interest-only (I/O) Certificates, which provide cash flow
(interest-only) payments that result from the difference between the interest
collected from the underlying mortgages and interest paid on all the outstanding
pass-through rate certificates. In addition to the risk from credit losses, the
I/O Certificates are also subject to prepayment risk, in that prepayments of the
underlying mortgages reduce future interest payments of which a portion flows to
the I/O Certificates, thus, reducing their effective yield. The Certificates'
fair values are estimated, in part, based on a spread over the applicable U.S
Treasury rate, and consequently, are inversely affected by increases or
decreases in such interest rates. There is no active market in these securities
from which to readily determine their value. The estimated fair values of both
classes of Certificates are subject to change based on the estimate of future
prepayments and credit losses, as well as fluctuations in interest rates and
market risk.

Net Income Per Share

Computation of net income per share is based on weighted average number of
shares of common stock outstanding and dilutive common stock equivalents
(principally stock options).

Debt Securities

The Company's investment in debt securities is limited to its investments
in REMIC Certificates, which resulted from its past securitizations. It is the
Company's intent to hold its REMIC Certificate investments as long-term
investments. SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), requires that securities retained which resulted from
the origination and securitization of mortgage loans be recorded and accounted
for at fair value, with changes in the securities' fair value reflected as a
separate component of earnings in the current period, irrespective of an
organization's intent or ability to hold such securities or the level of
marketability, if any, with respect to such securities. As such, the Company
reflects the change in the Certificates' estimated fair value as a separate
component of earnings at each reporting period. The Company believes that any
unrealized gains and/or losses reflected in its income statement, as required by
SFAS 115, would not be immediately realizable because of the investment posture
of the Company and the illiquid nature of certain of the Certificates retained
from its securitizations.

In estimating the Certificates' fair value, significant judgment is used
since there is no market for these Certificates. In arriving at such estimates,
management considers factors which affect the Certificates' projected cash flows
including, but not limited to, actual and estimated prepayments, projected
credit losses, if any, on the underlying mortgages, as well as general economic
and regulatory factors affecting the long-term care industry and prevailing
market interest rate conditions. Since many of these factors are difficult to
predict and are beyond the control of the Company's management, changes in the
reported fair values may vary widely and may not be indicative of amounts
immediately realizable if the Company was forced to liquidate any of the
Certificates.

Securitization Transactions

Under the Company's securitization structure (see Note 4), transfers of
mortgage loans to a Real Estate Mortgage Investment Conduit ("REMIC Trust"), a
qualifying special-purpose entity, are accounted for as a sale upon completion
of the transaction with any gain or loss recorded in earnings

40

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

at the time of the transaction. In determining a gain or loss, the Company
compares the carrying value of the mortgages sold, net of any transaction costs
incurred and any gains or losses associated with the underlying hedge, to the
cash proceeds and fair market value of any subordinated certificates received.
Subordinated certificates received by the Company are recorded at their
estimated fair value on the date of the transaction. Additionally, under this
structure, the Company has no controlling interest in the REMIC since the
majority of the beneficial ownership interests (in the form of REMIC
certificates) are sold to third-party investors. Consequently, the financial
statements of the REMIC Trust are not consolidated with those of the Company for
financial reporting purposes.

Stock-Based Compensation

In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" (Statement 123) which provides companies an alternative to
accounting for stock-based compensation as prescribed under APB Opinion No. 25
(APB 25). Statement 123 encourages, but does not require companies to recognize
expense for stock-based awards based on their fair value at date of grant.
Statement 123 allows companies to continue to follow existing accounting rules
(intrinsic value method under APB 25) provided that pro-forma disclosures are
made of what net income and earnings per share would have been had the new fair
value method been used. The Company has elected to adopt the disclosure
requirements of Statement 123 but will continue to account for stock-based
compensation under APB 25. Statement 123's disclosure requirements are
applicable to stock-based awards granted in fiscal years beginning after
December 15, 1994.

Mortgage Servicing Rights

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 122 "Mortgage Servicing Rights" (SFAS 122). SFAS 122
requires the recognition of a separate asset for the right to service mortgage
loans that are acquired through either the purchase or origination of mortgage
loans. The pronouncement also requires the allocation of costs among servicing
rights and the loans, based on their relative fair values. Currently, the
Company serves as the sub-servicer on its REMIC transactions comprising 85 loans
at December 31, 1996. In that capacity, the Company receives fees which are
determined based on prevailing market rates for such services at the time of
each REMIC transaction. Because the fees received for such servicing result in
only adequate compensation after considering the costs to service the loans, the
Company does not recognize a separate asset for servicing rights.

With respect to servicing rights associated with mortgage loans originated
by the Company, the estimated fair value of such rights would be determined
based on the underlying characteristics of the mortgages the Company services in
its REMIC securitizations. Since the fair value of such rights only
sufficiently covers the cost of such servicing, no separate servicing asset is
recognized since it would be immaterial. Therefore, the entire cost of
originating the mortgage loans is allocated to such mortgages.

New Accounting Pronouncement

In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125)
which is effective for transactions occurring after December

41

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

31, 1996 and applicable to assets held on or acquired after January 1, 1997.
SFAS 125 amends SFAS No. 115 and supersedes SFAS No. 77 "Reporting by
Transferors for Transfers of Receivables with Recourse." In addition, Statement
125 amends certain other accounting literature which provided guidance with
respect to the Company's REMIC securitization transactions.

SFAS 125 provides specific criteria for determining whether or not a
transfer of assets is a sale or a secured borrowing. In order for sales
accounting to apply, the new criteria specifies that 1) transferred assets must
be isolated from the transferor 2) the transferee obtains the right free of any
conditional constraints to pledge or exchange the assets, or the transferee is a
qualifying special purpose entity of which the holders of the beneficial
interests have the right free of any conditional constraints to pledge or
exchange those interests, and 3) the transferor does not maintain effective
control over the transferred assets. The Company believes that the structure of
its securitizations would continue to meet the sales accounting standards
established in SFAS 125, however, to the extent that recent interpretations of
certain provisions of SFAS 125 would require modification to the REMIC
structure, the Company would make the necessary modifications to allow for its
future securitizations to continue to be accounted for as sales. In addition,
SFAS 125 provides that upon completion of a sale, the assets received and the
liabilities incurred, if any, shall be recognized at their fair values at the
time of the transaction with any gains or losses recognized in earnings.
Management believes that these new provisions will not have a material impact on
the financial position or results of operations of the Company with respect to
any future securitizations.

SFAS 125 also requires the measurement of servicing assets and liabilities
when an entity undertakes an obligation to service financial assets. The
Company currently provides servicing on the loans from its three previous REMIC
securitizations and would expect to do so in any future REMIC. However,
historically, the Company receives only adequate compensation for such servicing
and, as such, has determined that any servicing asset would be immaterial.
Therefore, management believes that this provision of SFAS 125 will not
materially impact the Company's financial position.

Furthermore, SFAS 125 modifies the accounting for certain financial assets
that can contractually be prepaid or otherwise settled in such a way that the
holder would not substantially recover all of its recorded investment to be
accounted for at their fair value under SFAS 115. The Company currently accounts
for its investments in REMIC Certificates at estimated fair value, consequently,
there would be no material effect on the financial position or results of
operations of the Company resulting from the adoption of these provisions of
SFAS 125.

3. SUPPLEMENTAL CASH FLOW INFORMATION

The details of net changes in other assets and liabilities for the years
ended December 31, 1996, 1995 and 1994 are as follows:



1996 1995 1994
--------------- --------------- --------------

(Increase) in interest receivable $ (875) $ (741) $ (462)
(Increase) decrease in prepaid, other assets and allowance (99) (285) 475
Increase (decrease) in accrued interest 2,819 1,224 (755)
Increase (decrease) in accrued expenses and other liabilities 1,112 (1,276) 1,464
------- ------- --------
Net change $ 2,957 $(1,078) $ 722
======= ======= ========

Non-cash investing and financing transactions:
Securitization of mortgage loans for REMIC Certificates $80,962 $ - $127,640



42

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



1996 1995 1994
-------------- ------------- -------------

Issuance of mortgage loans payable for REMIC Certificates
31,525 - -
Conversion of debentures into common stock 18,813 19,357 33,306
Assumption of mortgage loans payable relating to
acquisitions of real estate properties 9,641 13,407 3,337

Assumption of capital lease obligations - 5,965 -
Minority interest 8,932 1,041 -


4. REAL ESTATE INVESTMENTS

MORTGAGE LOANS

During 1996, the Company invested $99,440,000 in mortgage loans secured by,
among other things, first mortgages on 31 skilled nursing facilities with a
total of 4,077 beds and five assisted living residences with a total of 177
units and certain borrower guarantees. The mortgage loans, which individually
range from $305,000 to $11,250,000 in principal amount, have an initial weighted
average interest rate of 10.42%, have stated maturities of 5 to 20 years,
generally have 25-year amortization schedules, and provide for certain facility
fees. Most of the loans provide for annual interest rate increases in the
initial rate based upon a specified increase, which range from 10 to 12.5 basis
points. Approximately $9,825,000 of the loans due in 1997 will be paid off once
the Company completes a sale-leaseback transaction for the same amount on
assisted living facilities that are being constructed.

In March 1996, the Company provided non-recourse mortgage loans secured by
long-term care facilities to three of its wholly owned subsidiaries and to
certain partnerships in which the Company was a general partner totaling
$31,525,000. Concurrent with the closing of the loans, the Company completed a
real estate investment conduit ("REMIC") transaction in which loans totaling
$112,487,000, including the $31,525,000 originated in 1996, were exchanged for
mortgage pass-through certificates for an equal amount. See "REMIC
Certificates." See Note 5 - Other Long-term Obligations.

At December 31, 1996, the Company had 67 mortgage loans receivable secured
by first mortgage loans on 73 skilled nursing facilities with a total of 8,672
beds and 11 assisted living residences with 588 units located in 23 states. The
mortgage loans, which have a carrying amount of approximately $177,262,000 at
December 31, 1996, are reflected in the Company's financial statements net of
$1,000,000 of loan loss reserves. The mortgage loans, which individually range
from $302,500 to $11,240,000 in principal amount, have current interest rates
ranging from 9.16% to 13.2% with final payments due from 1997 to 2017. The
minimum future principal payments from the mortgage loans at December 31, 1996
are as follows: $11,617,000 in 1997, $3,035,000 in 1998, $5,095,000 in 1999,
$7,189,000 in 2000, $7,327,000 in 2001 and $143,999,000 thereafter.

43

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


REMIC CERTIFICATES

REMIC Structure

The Company has organized itself as a REIT, and, as such, makes its
investments with the intent to hold them for long-term purposes. However, from
time-to-time, securitization transactions may be entered into when a
securitization provides the Company with the best available form of raising
capital to be used to make additional long-term investments, considering the
Company's current and expected future interest rate posture, liquidity and
leverage position, as well as overall economic and financial market trends. As
of December 31, 1996 the Company had completed three REMIC securitizations (the
"1993-1 Pool", the "1994-1 Pool" and the "1996-1 Pool").

The Company structures its securitizations through the creation of a REMIC
in a two-step process. Under this structure, a wholly-owned special-purpose
bankruptcy remote corporation (LTC REMIC Corp.) is formed and the mortgages to
be securitized are transferred to such entity without recourse by the Company.
From this special-purpose corporation, the loans are transferred to a trust (the
"REMIC Trust") and exchanged for commercial mortgage pass-through certificates
(the "REMIC certificates") issued by the REMIC Trust which represent beneficial
ownership interests in the REMIC Trust assets (the mortgages). The certificates
include various levels of senior and subordinated certificate classes, as well
as interest only (I/O) certificates and a minor residual class. The senior
certificates and the residual class (which historically have represented between
66% and 81% of the certificates for the three securitization transactions) are
then sold to outside third-party investors through a private placement under
Rule 144A of the Securities Act of 1933, as amended. The subordinated
certificates, which generally provide a level of credit enhancement to the
senior certificates, along with the cash proceeds from the sale of the senior
certificates are retained by LTC REMIC Corp. as consideration for the initial
transfer of the mortgage loans to the REMIC Trust. Neither the Company nor LTC
REMIC Corp. is obligated to purchase any of the REMIC Trust assets or assume any
liabilities.

General Description of the Certificates

With respect to the Company's REMIC securitizations, the certificates
issued represent beneficial ownership interests in the REMIC Trust and can be
grouped into four categories; senior, subordinated, interest-only
(subordinated), and residuals. The certificates are designated in alphabetical
format (e.g. "A", "B", "C", etc.) with each class of certificates having a later
alphabetical designation being subordinated to each class of certificates having
an earlier alphabetical designation (except for in general, the class R and LR
certificates which share in seniority rank to the class "A" certificates). The
certificates sold to outside third-party investors are referred to herein as the
"Senior certificates" while the certificates transferred to and retained by the
Company as part of the sale proceeds are referred to as the "Subordinated
Certificates." Both classes of these certificates have stated principal
balances, as well as stated interest rates known as the "pass-through rate." In
addition, the I/O certificates have no principal denomination, but rather they
are entitled to interest distributions which typically represent the spread
between the monthly cash interest received from the underlying mortgage
collateral and the monthly amount paid by the REMIC Trust in interest
distributions on the outstanding pass-through certificates. Interest on each
outstanding class of the certificates accrues in arrears at the respective pass-
through rate applicable to the certificates and is

44

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

payable monthly. In addition, monthly principal distributions are also made. The
interest and principal distributions are made from the allocated cash flows
received by the REMIC Trust from the underlying mortgages. Payments are made
first to satisfy the certificates' pass-through rate requirements and then
principal distributions are made, both in order of certificate seniority. As
such, to the extent there are defaults or unrecoverable losses on the underlying
mortgages resulting in reduced cash flows, the Subordinated Certificates held by
the Company would bear the first risk of loss. As of December 31, 1996 none of
the three REMIC pools had experienced any realized losses nor had any of the
Company's REMIC Certificate investments been determined to be permanently
impaired.

REMIC Transactions

On March 29, 1996, the Company securitized approximately $112,487,000 of
loans by creating a REMIC which, in turn, issued mortgage pass-through
certificates for the same amount in the form of various classes of certificates
(the "1996-1 Pool"). As part of the securitization, the Company sold
approximately $90,552,000 of certificates to third parties at an effective
interest rate of 7.19%. The Company retained the remaining $21,935,000 face
amount of such Certificates which are effectively subordinated in right of
payment to the certificates sold to third parties. Included in the REMIC
Certificates are interest-only certificates which have no face amount but are
entitled to receive cash flows designated as interest. The net proceeds from
the REMIC transaction were used to repay borrowings outstanding under the
Company's lines of credit. The mortgage loans represented by the certificates
consisted of 34 mortgage loans, including the loans provided to the Company's
wholly owned subsidiaries and to the limited partnerships totaling $31,525,000,
and were secured by 55 skilled nursing facilities in 17 states. The mortgage
loans in the REMIC pool had an initial weighted average mortgage interest rate
of 10.69% and a weighted average remaining term to stated maturity of
approximately 107 months. Concurrently with the closing of the REMIC
transaction, the Company's interest rate swap agreement entered into in May 1995
was terminated at a cost of approximately $1,500,000 and was included as a
component of the transactions cost in the determination of the fair value of the
assets received in the transaction.

During 1993 and 1994, the Company securitized approximately $242,340,000 of
loans by creating REMICs which, in turn, issued mortgage pass-through
certificates for the same amount in the form of various classes of certificates
(the 1993-1 and 1994-1 Pools, respectively). As part of these securitizations,
the Company sold approximately $158,664,000 of certificates to third parties
(the "Senior certificates") and retained $83,676,000 face amount of the
Certificates.

REMIC Certificates

As of December 31, 1996 the outstanding certificate principal balance and
the weighted average pass-through rate for the Senior certificates (all held by
outside third parties) in the 1993-1, 1994-1 and 1996-1 REMIC pools were
$59,223,000, $47,649,000, and $85,338,000, and 7.5%, 9.2% and 7.2%,
respectively. As of December 31, 1996, the estimated fair value of the
Subordinated Certificates held by the Company in the 1993-1, 1994-1 and 1996-1
REMIC pools were $29,461,000, $37,236,000 and $32,237,000, respectively.

As of December 31, 1995 the outstanding certificate principal balance and
the weighted average pass-through rate for the Senior certificates (all held by
outside third parties) in the 1993-1 and 1994-1

45

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

REMIC pools were $70,128,000 and $72,858,000, and 7.5% and 9.1%, respectively.
As of December 31, 1995, the estimated fair value of the Subordinated
Certificates held by the Company in the 1993-1 and 1994-1 REMIC pools were
$31,251,000 and $36,349,000, respectively.

For the years ended December 31, 1996, 1995 and 1994, income recorded by
the Company under the effective interest method for its investments in the
Subordinated REMIC Certificates for the 1993-1, 1994-1 and 1996-1 REMIC pools
was $5,603,000, $5,118,000 and $3,662,000 in 1996, $5,628,000, $5,275,000 and $0
in 1995, and $6,767,000, $1,156,000and $0 in 1994, respectively.

As part of the REMIC transaction discussed above, the Company serves as the
sub-servicer and, in such capacity, is responsible for performing substantially
all of the servicing duties relating to the mortgage loans represented by the
certificates. The Company receives monthly fees equal to a fixed percentage of
the then outstanding mortgage loans in the REMIC which, in management's opinion,
represent currently prevailing terms for similar transactions. In addition, the
Company will act as the special servicer to restructure any mortgage loans in
the REMIC that are in default. At December 31, 1996, all of the payments
currently due on its REMIC Certificates were received.

INTEREST RATE SWAP AGREEMENTS

In November 1996, the Company entered into a one-year forward ten-year
interest rate swap agreement (the "November 1996 Agreement") to hedge a
$50,180,000 firm commitment to purchase assisted living facilities. The terms
of the commitment provide for an initial lease term of twelve years and an lease
rate of 9.90% on each facility acquired. The Company will finance this
commitment with fixed rate financing, and as such, has utilized an interest rate
swap to "lock-in" the rate at which such financing will be obtained. Interest
rate swaps are contractual agreements between the Company and third parties to
exchange fixed and floating interest payments periodically without the exchange
of the underlying principal amounts (notional amounts). Under the November 1996
Agreement, the Company will be credited with interest at the three-month LIBOR
and will incur interest at a fixed rate of 6.835% on a $40,000,000 notional
amount beginning on November 7, 1997. The November 1996 Agreement will be
terminated on or before November 7, 1998 which is the latest date on which the
Company expects to fully fund the commitment and have long-term financing in
place. At December 31, 1996, the Company had an unrealized gain of $251,000
under the November 1996 Agreement. (See Note 9).

In September 1995, the Company entered into a seven-year forward interest
rate swap agreement (the "September 1995 Agreement") to hedge a securitization
which is expected to be completed by the end of 1997. As of December 31, 1996,
the Company believes that it is probable that the securitization transaction
will occur as scheduled. Under the September 1995 Agreement, beginning on March
31, 1997 and continuing semi-annually thereafter, the Company is to be credited
interest at the six month LIBOR and incur interest at a fixed rate of 6.64% on a
notional amount of $60,000,000 which is being accounted for as a hedge. This
effectively "locked-in" the net interest margin on $60,000,000 principal amount
of senior certificates the Company anticipates will be sold in the
securitization transaction. Concurrent with the closing of the hedged
transaction, any gains and losses associated with the interest rate swap will be
included as a component of the proceeds of the transaction. The September 1995
Agreement will be terminated at the earlier of (i) an anticipated securitization
transaction to be completed during the second half of 1997 or (ii) November 17,
1997. At December 31, 1996, the Company had an unrealized loss of $253,000 under
the September 1995 Agreement.

46



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At December 31, 1996, the total notional amount of the interest rate swap
agreements with off-balance sheet risk was $100,000,000.

REAL ESTATE PROPERTIES AND LEASE COMMITMENTS

During 1996, the Company acquired for approximately $45,345,000 22 assisted
living facilities ("ALFs") in Alabama, Idaho, Oklahoma, Oregon, Texas and
Washington with a total of 820 units. Eighteen of these ALFs were purchased for
a total of $38,495,000 and have been leased to Assisted Living Concepts, Inc.
("ALC") for a total annual rent of approximately $3,758,000 (subject to annual
increases) pursuant to long-term non-cancelable agreements. Included in the
leases to ALC were five ALFs in Washington which were purchased for $11,280,000
and had been financed by the Company through the issuance of $8,300,000 of
multi-family tax-exempt revenue bonds in December 1995 that have a total cost of
funds of approximately 5.9%. As of December 31, 1996, the Company had acquired
all five of the Washington ALFs and had leased them to ALC generating an initial
annual rent of approximately $948,000. The Company also acquired for
$14,450,000 four skilled nursing facilities in Alabama, Georgia and Tennessee
with a total of 472 beds. See Note 5- Other Long-term obligations.

During the twelve months ended December 31, 1996, six newly formed limited
partnerships, of which the Company, through certain of its subsidiaries, is the
general partner, acquired 16 skilled nursing facilities in Alabama, Arizona,
Iowa and Texas for a total of approximately $54,063,000. These facilities were
purchased subject to mortgage loans of approximately $9,641,000. Under the
partnership agreements, the Company has guaranteed payment of a 10% preferred
return to the holders of the $8,932,000 in limited partnership interests. Under
certain circumstances, the limited partnership interests can be exchanged, at
the option of the holders, into 628,511 shares of the Company's common stock at
exercise prices ranging from $13.00 to $15.00 commencing in January and July
1997. The mortgage loans of $9,641,000 assumed by the Company have an initial
average interest rate of 11.64%, are due in 2002-2005 and are currently owned by
REMICs formed by the Company in 1993 and 1994. In conjunction with these
REMICs, the Company sold senior certificates to third parties in 1993 and 1994
at a blended interest rate of approximately 7.1% and 8.9%, respectively, and
retained the remaining certificates. See Note 5- Other Long-term obligations.

The Company leases its owned long-term facilities under operating leases
generally with an initial term of ten to twelve years. Many of the leases
contain renewal options and some contain options that permit the operators to
purchase the facilities. The leases provide for a fixed minimum base rent
during the initial and renewal periods. Most of the leases provide for annual
fixed rent increases or increases based on increases in consumer price indices
over the term of the lease. Certain of the Company's leases provide for
additional rent through participation in incremental revenues generated by the
facilities, over a defined base period, effective at various times during the
term of the lease. Each lease is a triple net lease which requires the lessee
to provide for the payment of all taxes, insurance, maintenance and other costs
of the facilities by the lessee. Contingent rent income for the years ended
December 31, 1996, 1995 and 1994 was immaterial.

47

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Future minimum base rents receivable under the remaining non-cancelable
terms of operating leases are as follows (dollars in thousands):




YEAR ENDING DECEMBER 31,
------------------------

1997 $ 24,520
1998 24,083
1999 24,503
2000 23,553
2001 22,893
Thereafter 100,103


5. DEBT OBLIGATIONS

SHORT TERM BORROWINGS

The Company has a repurchase agreement with an institution (the "Repurchase
Agreement") whereby it may borrow up to $84,000,000 for general corporate and
real estate investment purposes at LIBOR plus 2.0% subject to annual renewal.
Under the Repurchase Agreement, the Company may borrow an amount based on the
Company's existing mortgage loans with no additional commitment or unused fees.
At December 31, 1996, there were $38,000,000 outstanding borrowings under the
Repurchase Agreement. Under the terms of the agreement, borrowings are secured
by the mortgage loans of the Company and mature on or before November 15, 1997.
However, the Company has historically been able to renew the Repurchase
Agreement annually.

The Company entered into a $25,000,000 unsecured revolving credit agreement
(the "Credit Agreement" as amended) with certain banks to provide the Company
with short term borrowings. In May 1996, the terms of the Credit Agreement were
amended, including certain financial covenants, to increase the amount of the
line to $45,000,000 and to extend the expiration date from December 31, 1996 to
May 31, 1998. Revolving credit borrowings, at the option of the Company,
accrued interest at the agent bank's base rate or LIBOR plus 1.50%. Under the
Credit Agreement, the Company pays a commitment fee equal to .25% per annum of
the average unused commitment, an annual agency fee of $25,000 plus a one-time
commitment fee. Borrowings under the Credit Agreement must be repaid annually
with a 30-day "zero-balance period." The Credit Agreement contains, among other
things, certain financial covenants including an interest coverage ratio, ratio
of total liabilities to net worth, and ratio of funded debt to total net worth.
At December 31, 1996, the Company had $41,400,000 outstanding under the Credit
Agreement bearing an interest rate of approximately 7.2%.

48

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


CONVERTIBLE SUBORDINATED DEBENTURES

The following is a summary of Convertible Subordinated Debentures
outstanding at December 31, 1996 and 1995:




Conversion
Issue Date Interest Rate Maturity Price per share 1996 1995
- ------------- ----------------- ----------------- --------------- ------------------ ---------------

1992 9.75% June 2004 $10.00 $ 843,000 $ 3,141,000
1994 8.50% January 2000 $15.00 22,023,000 30,000,000
1995 8.50% January 2001 $15.50 45,157,000 51,500,000
1995 8.25% January 1999 $15.50 10,000,000 10,000,000
1996 7.75% January 2002 $16.50 27,840,000 -
1996 8.25% July 2001 $17.25 29,965,000 -
------------ -----------
$135,828,000 $94,641,000
============ ===========


The 9.75% debentures due 2004 are redeemable by the Company at any time at
100% of the principal plus accrued interest. During the year ended December 31,
1996 and 1995, $2,298,000 and $19,357,000 in principal amount of such debentures
converted into 229,800 and 1,935,700 shares of common stock, respectively.

The 8.5% debentures due 2000 are not redeemable by the Company prior to
January 1, 1998. During the year ended December 31, 1996, $7,977,000 of
debentures converted into 531,794 shares of common stock. No debentures were
converted in 1995.

The 8.5% debentures due 2001 and the 8.25% debentures due 1999 are not
redeemable by the Company. During the year ended December 31, 1996, $6,343,000
of debentures converted into 409,224 shares of common stock. No debentures were
converted in 1995.

On February 5, 1996, the Company sold, through a public offering, $30,000,000
aggregate principal amount of 7.75% Convertible Subordinated Debentures due
January 1, 2002. The debentures are convertible at any time prior to maturity
into shares of the Company's common stock at a conversion price of $16.50 per
share, subject to adjustments under certain circumstances. The debentures are
not redeemable by the Company prior to January 1, 2001. The net proceeds were
used to repay borrowings outstanding under the Company's lines of credit.
During the year ended December 31, 1996, $2,160,000 of debentures converted into
130,908 shares of common stock.

On March 15, 1996, the Company filed a shelf-registration statement with the
Securities and Exchange Commission covering up to $125,000,000 of debt and
equity securities to be sold from time to time in the future. The registration
statement was declared effective on April 4, 1996. Pursuant to the shelf
registration, the Company, in August 1996, completed the sale of $30,000,000 of
8.25% Convertible Subordinated Debentures due 2001. The debentures are
convertible into shares of the Company's common stock at a price of $17.25 and
are not redeemable by the Company. Net proceeds from the offering were used to
repay short-term borrowings. During the year ended December 31, 1996, $35,000
of debentures converted into 2,028 shares of common stock.

49

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OTHER LONG-TERM OBLIGATIONS

The following information relates to other long-term obligations as of December
31:



1996 1995
---------------- ---------------

Mortgage loans payable, interest rates from 9.25%
to 12.00%, maturing 2002 to 2006 $54,205,000 $16,707,000
Multi-family tax-exempt revenue bonds, variable interest (4.35%
at 12/31/96), maturing at various dates to 2015 8,300,000 8,300,000

Obligations under capital leases, effective interest rates
---------------- -----------
from 7.49% to 7.92%, maturing at various dates to 2013 5,739,000 5,965,000
----------- -----------

Totals $68,244,000 $30,972,000
=========== ===========


In 1996, the Company provided non-recourse mortgage loans to three of its
wholly owned subsidiaries and to certain newly formed limited partnerships in
which the Company is a general partner totaling $31,525,000. During 1996, the
Company acquired, through the newly formed limited partnerships, 16 skilled
nursing facilities. These facilities were purchased subject to mortgage loans
of approximately $9,641,000. Also during 1996, the Company paid off one of its
outstanding mortgage loans totaling $3,331,000.

Aggregate maturities of other long-term obligations, including capitalized
leases, are as follows: $630,000 in 1997, $931,000 in 1998, $1,009,000 in 1999,
$1,098,000 in 2000, $1,197,000 in 2001 and $63,379,000 thereafter. These
obligations are secured by 31 long-term care facilities with a total net book
value of $81,915,000. Five of the mortgage loans provide for annual increases
in the interest rate in an amount equal to 10 basis points with the interest
rates capped at 12%.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair value amounts have been determined using
available market information and other valuation methods. However, considerable
judgment is required to interpret market data and, therefore, the estimates
presented below are not necessarily indicative of the amounts the Company could
realize in a current market.

Mortgage loans receivable are estimated by discounting future cash flow using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. At December 31, 1996 and
1995, the fair value of real estate mortgages amounted to approximately
$189,483,000 and $166,758,000, respectively. The fair value of the Company's
REMIC Certificates as of December 31, 1996 and 1995 was estimated at
approximately $98,934,000 and $67,600,000, respectively, based upon expected
cash flows discounted at a market interest rate, adjusted to reflect the
inherent risk of prepayment and credit losses on an investment with similar
duration. At December 31, 1996 and 1995, the September 1995 interest rate swap
had an unrealized loss of $253,000 and an unrealized gain of $2,424,000,
respectively. The November 1996 interest rate swap had an unrealized gain of
$251,000, based on valuations from an investment bank. Based on the quoted
market price of the Company's common stock and the conversion price of the
convertible debentures, the fair value of the debentures was estimated at
$159,365,000 at December 31, 1996 and $97,584,000 as of December 31, 1995.

50

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. STOCKHOLDERS' EQUITY

REPURCHASE OF COMMON STOCK

During 1996, the Company repurchased and retired 120,000 shares of common
stock for an aggregate price of approximately $1,831,000.

OPTION PLAN

The Company has a Stock Option Plan (the "Plan") in which options may be
granted as either incentive or nonqualified options. Incentive options may be
granted only to officers and employees of the Company, while nonqualified
options may be granted to directors, officers, consultants, and other key
persons who provide services to the Company. In 1995, the Plan was amended
("Amended and Restated Option Plan) to provide for issuance of restricted shares
to officers, employees, directors and other key persons. Under the Amended and
Restated Plan, options vest over two to five years and are exercisable within
seven years from the date of vesting. In general, each option shall expire on
the date specified in the option agreement, but not later than the tenth
anniversary of the date on which the option was granted.

The following summarizes transactions regarding the nonqualified options for
the years ended December 31, 1994, 1995 and 1996:


Shares Option Price Per Share ($)
---------------- ------------------------------

Outstanding at December 31, 1993 624,000 10.000 to 12.250
Granted 215,500 12.200 to 13.250
Exercised -
Canceled - -
-------
Outstanding at December 31, 1994 839,500 10.000 to 13.250
Granted 27,000 12.000 to 12.250
Exercised (2,000) 12.250
Canceled (3,000) 12.250
-------
Outstanding at December 31, 1995 861,500 10.000 to 13.250
Granted 18,000 15.125
Exercised (3,200) 12.000 to 12.250
Canceled (3,000) 12.250
-------
Outstanding at December 31, 1996 873,300 10.000 to 15.125
=======

Exercisable at December 31, 1994 170,500 10.000 to 12.250
Exercisable at December 31, 1995 272,333 10.000 to 13.250
Exercisable at December 31, 1996 436,466 10.000 to 13.250
Available for grant at December 31, 1994 557,000
Available for grant at December 31, 1995 533,000
Available for grant at December 31, 1996 358,000


In 1996, the Company's Board of Directors approved the issuance of 160,000
shares of restricted stock to certain employees and non-employee directors
pursuant to the Company's Amended and Restated Option Plan. The restricted
shares will vest over five years, beginning January 1998.

51

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

In 1996, the Company adopted the disclosure requirement provision of SFAS 123
in accounting for stock-based compensation issued to employees. As of December
31, 1996 and 1995, there were 44,000 and 27,000 options outstanding,
respectively, that are subject to SFAS 123 disclosure requirements. The fair
value of these options was estimated utilizing the Black-Scholes valuation model
using the applicable assumptions as of each respective grant date. The
significant assumptions used in the Black-Scholes model include the expected
life and volatility of the options and the risk-free interest rate at the grant
date. In determining the estimated fair values for the options granted in 1996
and 1995, the weighted average expected life assumption was seven years,
respectively, the weighted average volatility assumptions used were 0.15 and
0.16, respectively, and weighted average risk-free interest rate assumption was
6.6%, respectively. Based on the results of the estimates, the weighted-average
fair value of the options granted was estimated to be $0.63 in 1996 and $0.62 in
1995. Management determined that there was no material effect on pro forma net
income or earnings per share for the years ended December 31, 1996 and 1995.
The weighted average exercise price of the options were $13.55 and $12.45 and
the weighted average remaining contractual lives were 7.7 and 8.3 years as of
December 31, 1996 and 1995, respectively.

FOUNDERS' STOCK

In May 1992, prior to the completion of the initial public offering, the
Company issued 300,000 shares of common stock, subject to certain restrictions
or forfeitures, to the Founders of the Company. The market value of shares
awarded (estimated at $5.00 per share) has been recorded as unearned stock grant
compensation and has been recorded as a reduction in capital in excess of par
value. The unearned compensation is being charged to expense over a vesting
period ranging from two to five years.

For the years ended December 31, 1996, 1995 and 1994, the Company recorded an
expense totaling $114,000, $221,000, and $372,000, respectively.

8. DISTRIBUTIONS

The Company must distribute at least 95% of its taxable income in order to
continue to qualify as a real estate investment trust. Distributions in a given
year may exceed the Company's earnings and profits due to non-cash expenses such
as depreciation and amortization. Under special tax rules for real estate
investment trusts, dividends declared in the last quarter of the calendar year
and paid by January 31 of the following year are treated as paid on December 31
of the year declared. Distributions per share are broken down according to the
following categories for income tax purposes:



1996 1995 1994
------------ ------------ ------------

Ordinary income $1.228 $1.05 $1.10
Non-taxable distribution 0.107 .16 -
------ ----- -----
Total $1.335 $1.21 $1.10
====== ===== =====


52


LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. Transactions with Assisted Living Concepts, Inc.

In 1996, the Company's Board of Directors authorized an increase in the
Company's investment in assisted living facilities ("ALFs") from 10% to 20% of
its adjusted gross real estate investment portfolio (adjusted to include the
mortgage loans to third parties underlying the investment in REMIC
Certificates). In addition, the Board of Directors also authorized an increase
in the Company's investment in properties operated by Assisted Living Concepts,
Inc. ("ALC"), an owner, operator and developer of ALFs whose securities are
listed on the American Stock Exchange, from 5% to 10% of its adjusted gross real
estate investment portfolio (which was approximately $626,516,000 as of December
31, 1996). Currently, two of the Company's executive officers serve as members
of the Board of Directors of ALC. As of December 31, 1996, three executive
officers of the Company own approximately 5.5% of ALC's common stock. The
Company has discussed with its Board of Directors and anticipates increasing the
percentage of its adjusted gross real estate investment portfolio that can be
invested in ALFs and properties operated by ALC to 30% and 15%, respectively,
during 1997. At December 31, 1996, the Company had investments in ALFs and
properties operated by ALC of approximately 10.64% and 6.48%, respectively of
the Company's total adjusted gross real estate investment portfolio.

In July 1996, in connection with obtaining a $50,180,000 firm commitment to
purchase assisted living facilities through sale leaseback transactions with
ALC, the Company agreed to sell back four ALFs it acquired during 1996 in Texas
to ALC for approximately $7,589,000. There was no gain or loss recognized on
the sale, however, the Company received an administration fee of approximately
$214,000 in conjunction with the sale of the four ALF facilities. In connection
with the commitment, the Company entered into a one-year forward ten-year
interest rate swap agreement in November 1996 to hedge the firm commitment to
purchase the assisted living facilities. The terms of the commitment provide
for an initial lease term of twelve years and an lease rate of 9.90% on each
facility acquired. The Company will finance this commitment with fixed rate
financing, and as such, has utilized an interest rate swap to "lock-in" the rate
at which such financing will be obtained. Interest rate swaps are contractual
agreements between the Company and third parties to exchange fixed and floating
interest payments periodically without the exchange of the underlying principal
amounts (notional amounts). Under the November 1996 Agreement, the Company will
be credited with interest at the three-month LIBOR and will incur interest at a
fixed rate of 6.835% on a $40,000,000 notional amount beginning on November 7,
1997. The November 1996 Agreement will be terminated on or before November 7,
1998 which is the latest date on which the Company expects to fully fund the
commitment and have long-term financing in place. At December 31, 1996, the
Company had an unrealized gain of $251,000 under the November 1996 Agreement.

10. SUBSEQUENT EVENTS

On January 15, 1997, the Company sold, through a public offering, 1,000,000
shares of common stock at $17.75 per share. Of the total net proceeds,
$17,300,000 was used to pay borrowings under the Company's unsecured line of
credit.

During January 1997, the Company provided mortgage loans totaling
approximately $18,530,000 and acquired one skilled nursing facility for
$2,556,000. As of February 1, 1997, the Company had outstanding investment
commitments totaling $82,790,000, consisting of approximately $22,650,000 in
commitments to make mortgage loans and commitments for the acquisition of one
nursing and 25

53

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

assisted living facilities for an aggregate purchase price of approximately
$60,140,000, including the remaining $35,330,000 commitment to Assisted Living
Concepts, Inc. discussed in Note 8. The Company expects to fund substantially
all of these commitments by the end of 1997.

During January 1997, an additional $26,358,000 in principal amount of
debentures converted into 1,614,153 shares of the Company's common stock.

11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following quarterly financial data summarizes the unaudited quarterly
results for the years ended December 31, 1996 and 1995:



QUARTER ENDED (RESTATED)
---------------------------------------------------------------------------------
March 31 June 30 September 30 DECEMBER 31
--------------- -------------- -------------------- --------------------
1996 (In thousands, except per share amounts)
- ----

Revenues $12,363 $12,920 $14,292 $15,355
Net income 11,831 4,906 5,636 6,337
Net income per share 0.63 0.26 0.29 0.32
Dividends per share 0.315 0.34 0.34 0.34




QUARTER ENDED (1)
---------------------------------------------------------------------------------
1995 March 31 June 30 September 30 DECEMBER 31
- ---- -------------------- ------------ -------------------- --------------------

(In thousands, except per share amounts)
Revenues $7,505 $8,560 $9,232 $10,272
Net income 4,718 5,199 4,971 5,152
Net income per share 0.26 0.29 0.27 0.28
Dividends per share 0.29 0.29 0.315 0.315


(1) The Company has restated its results of operations for the year ended
December 31, 1995 (See Note 1) which reflects a revision in reported net
income to $18,384,000 from the previously reported amount of $20,040,000.
Earnings per share has been revised to $1.01 per share from $1.10 per share.
The quarterly information presented above for 1995 has not been revised to
reflect the restatement because the quarterly data necessary to reflect the
restatement is not available.

54


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 19, 1997, to be filed
pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 19, 1997, to be filed
pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 19, 1997, to be filed
pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 19, 1997, to be filed
pursuant to Regulation 14A.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.

(a) 1 and 2. Consolidated Financial Statements and Consolidated Financial
Statement Schedules

The consolidated financial statements and consolidated financial statement
schedules listed in the accompanying index to consolidated financial statements
and consolidated financial statement schedules are filed as part of this annual
report.

3. Exhibits

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

(b) Reports on Form 8-K

A report on Form 8-K was filed on January 30, 1996 reporting the Company's
financial results for the year ended December 31, 1995.

55

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(ITEM 14(a))



Page
----------
1. Financial Statements:
--------------------

Report of Independent Auditors.................................................... 31
Consolidated Balance Sheets at December 31, 1996 and 1995......................... 32
Consolidated Statements of Income for the years ended December 31, 1996, 33
1995 and 1994...............................................................
Consolidated Statements of Stockholders' Equity for the years ended 34
December 31, 1996, 1995 and 1994............................................
Consolidated Statements of Cash Flows for the years ended December 31, 35
1996, 1995 and 1994..............................................................
Notes to Consolidated Financial Statements........................................ 36

2. Financial Statement Schedules:
VIII. Valuation and Qualifying Accounts........................................ 58
XI. Real Estate and Accumulated Depreciation.................................... 59
XII. Mortgage Loans on Real Estate............................................... 62


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

56




LTC PROPERTIES, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
December 31, 1996

(In thousands)



Additions
Balance ---------------------------------- Balance
at Beginning Charged to Charged to at end
Description of period Operations other accounts Deductions of period
--------------------------------------------------------------------------------------------------------------

1994
Allowance for doubtful
accounts $447 550 - - $997
======== ======== ======== ======== ========
1995
Allowance for doubtful
accounts $997 - - - $997
======== ======== ======== ======== ========
1996
Allowance for doubtful
accounts $997 3 - - $1,000
======== ======== ======== ======== ========



57

LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996



Initial Cost to Gross Amount at which Carried
Company At Close of period
---------------------------- Cost Capitalized -----------------------------------------
Building and Subsequent to Building and
Description Encumbrances Land Improvements Acquisition Land Improvements Total (1)
- ------------- -------------------- ----------------------------------------------- -----------------------------------------

Long-term care nursing facilities:
Nursing Homes:
Demopolis, AL $ 10,668,066.99 (3) $ 70,786 $ 2,141,276 $ - $ 70,786 $ 2,141,276 $ 2,212,062
Fort Payne, AL (3) 37,178 3,587,724 - 37,178 3,587,724 3,624,903
Jackson, AL (3) 63,641 2,620,000 - 63,641 2,620,000 2,683,640
Madison, AL (3) 30,083 2,327,808 - 30,083 2,327,808 2,357,891
Phoenix, AL (3) 59,089 2,122,670 - 59,089 2,122,670 2,181,760
Phoenix, AZ 7,797,583.12 431,750 6,764,084 - 431,750 6,764,084 7,195,834
Tucson, AZ 6,592,231.54 145,614 3,931,592 - 145,614 3,931,592 4,077,206
East Whittier, CA - 169,929 1,741,775 - 169,929 1,741,775 1,911,704
West Whittier, CA - 726,448 1,185,257 - 726,448 1,185,257 1,911,705
Yuba City, CA - 521,083 3,033,975 - 521,083 3,033,975 3,555,058
Bradenton, FL - 330,498 2,720,250 - 330,498 2,720,250 3,050,748
Clearwater, FL - 454,114 2,902,381 - 454,114 2,902,381 3,356,495
Crestview, FL - 140,000 2,305,979 - 140,000 2,305,979 2,445,979
San Destin, FL - 175,155 3,874,653 - 175,155 3,874,653 4,049,808
Gulf Breeze, FL - 600,000 6,020,146 - 600,000 6,020,146 6,620,146
Lecanto, FL - 350,795 2,664,455 2,251,990 350,795 4,916,445 5,267,240
Pensacola, FL - 190,000 4,295,297 - 190,000 4,295,297 4,485,297
Pensacola, FL 230,000 4,663,032 - 230,000 4,663,032 4,893,032
Starke, FL - 113,000 4,782,546 - 113,000 4,782,546 4,895,546
Chicago Heights, IL - 220,905 6,406,254 - 220,905 6,406,254 6,627,159
Alamagordo, NM - 314,215 3,567,268 - 314,215 3,567,268 3,881,483
Roswell, NM - 85,000 2,932,213 - 85,000 2,932,213 3,017,213
Great Falls, MT 4,335,297.45 397,217 3,433,391 397,217 3,433,391 3,830,608
Rusk, TX - 34,174 2,399,045 - 34,174 2,399,045 2,433,219
Chesapeake, VA - 372,667 3,298,218 372,667 3,298,218 3,670,885
Richmond, VA - 372,667 3,298,218 - 372,667 3,298,218 3,670,885
Tappahannock, VA - 372,667 3,298,218 - 372,667 3,298,218 3,670,885
Toppanish, WA 2,628,853 (4) 132,152 2,653,758 - 132,152 2,653,758 2,785,910
Vancouver, WA (4) 60,000 3,032,720 - 60,000 3,032,720 3,092,720
Jefferson, IA 10,554,832 (5) 36,272 1,932,778 - 36,272 1,932,778 1,969,050
Houston, TX 201,744 4,457,951 - 201,744 4,457,951 4,659,695
Houston, TX 361,655 3,771,839 - 361,655 3,771,839 4,133,493
Montgomery, AL 3,939,977 (6) 143,724 5,425,566 - 143,724 5,425,566 5,569,290
Carroll, IA (5) 60,016 1,020,271 - 60,016 1,020,271 1,080,287
Houston, TX 201,744 4,457,951 - 201,744 4,457,951 4,659,695
Woodbury, TN 100,000 2,900,000 - 100,000 2,900,000 3,000,000
Whiteright, TX 1,126,791 100,000 2,922,653 - 100,000 2,922,653 3,022,653
Granger, IA (5) 92,725 1,325,421 - 92,725 1,325,421 1,418,146
Bedford, TX (5) 344,683 3,195,303 - 344,683 3,195,303 3,539,985
Midland, TX 2,041,265 32,446 2,285,110 - 32,446 2,285,110 2,317,556
Tiptonville, TN 100,000 2,450,000 - 100,000 2,450,000 2,550,000
Gardendale, AL 83,660 6,316,340 - 83,660 6,316,340 6,400,000
Polk City, IA (5) 88,238 1,351,428 - 88,238 1,351,428 1,439,666





Accum. Orig. Construc-
Deprec tion/renovation Date
Description (2) (3) Date Acquired
- ------------- ---------- ------------- ----------

Long-term care nursing facilities:
Nursing Homes:
Demopolis, AL $112,246 1972 Jun. 1995
Fort Payne, AL 202,835 1967/1973 Jun. 1995
Jackson, AL 133,842 1964 Jun. 1995
Madison, AL 127,640 1964/1974 Jun. 1995
Phoenix, AL 119,802 1969 Jun. 1995
Phoenix, AZ 655,290 1985/1992 May 1994
Tucson, AZ 504,450 1985 Mar. 1993
East Whittier, CA 161,433 1964 Sep. 1994
West Whittier, CA 124,898 1964 Sep. 1994
Yuba City, CA 555,383 1970 Jan. 1993
Bradenton, FL 305,559 1989 Sep. 1993
Clearwater, FL 387,360 1965/1993 Sep. 1993
Crestview, FL 198,998 1988 Jun. 1994
San Destin, FL 262,305 1986 Feb. 1995
Gulf Breeze, FL 518,010 1984 Jun. 1994
Lecanto, FL 445,201 1988 Sep. 1993
Pensacola, FL 375,378 1972 Jun. 1994
Pensacola, FL 401,645 1991 Jun. 1994
Starke, FL 410,182 1989 Jun. 1994
Chicago Heights, IL 524,818 1988 Sep. 1994
Alamagordo, NM 485,440 1985 Mar. 1993
Roswell, NM 511,603 1979 Nov. 1992
Great Falls, MT 604,046 1960/1990 Dec. 1992
Rusk, TX 279,030 1969 Mar. 1994
Accum. Orig. Construc-
Deprec tion/renovation Date
Description (2) (3) Date Acquired
- ------------- ---------- ------------- ----------

Chesapeake, VA 173,090 1977 Oct. 1995
Richmond, VA 173,090 1970/1975/1980 Oct. 1995
Tappahannock, VA 173,090 1977/1978 Oct. 1995
Toppanish, WA 146,429 1960/1970 Jun. 1995
Vancouver, WA 172,831 1952/1994 Jun. 1995
Jefferson, IA 64,105 1968/1972 Jan. 1996
Houston, TX 90,254 1961 Jun. 1996
Houston, TX 75,971 1964/1968 Jun. 1996
Montgomery, AL 183,761 1967/1974 Jan. 1996
Carroll, IA 35,324 1969 Jan. 1996
Houston, TX 79,880 1967 Jun. 1996
Woodbury, TN 62,200 1972/75/90 May 1996
Whiteright, TX 106,990 1962/64/65 Jan. 1996
Granger, IA 45,973 1979 Jan. 1996
Bedford, TX 114,291 1960 Jan. 1996
Midland, TX 82,770 1973 Feb. 1996
Tiptonville, TN 56,833 1975 May 1996
Gardendale, AL 121,781 1976/1984 May 1996
Polk City, IA 44,981 1976 Jan. 1996



58

LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996




Initial Cost to
Company
---------------------------------------- Cost Capitalized
Building and Subsequent to
Description Encumbrances Land Improvments Acquisition
- ----------------------------- --------------- -----------------------------------------------------------

Atmore, AL (6) 23,142 2,985,308 -
Mesa, AZ 4,519,902 304,707 6,908,762 -
Houston, TX 571,889 5,964,457 -
Roberta, GA 100,000 2,400,000 -
Norwalk, IA (5) 45,486 1,034,802 -
Altoona, IA (5) 102,152 2,312,354 -
----------- ----------- ------------ ----------
Sub-total 54,204,799 10,295,110 163,422,497 2,251,990
----------- ----------- ------------ ----------

Assisted-living facilities:
Dodge City, KS 1,678,763 87,500 1,662,500 -
Great Bend, KS 1,415,908 86,842 1,563,159 -
McPherson, KS 1,231,666 75,000 1,575,000 -
Salina, KS 1,413,023 71,739 1,578,261 -
Longview, TX - 38,256 1,568,492 -
Marshall, TX - 38,256 1,568,492 -
Walla Walla, WA 8,300,000 (7) 100,000 1,940,000 -
Greenville, TX 42,098 1,565,286 -
Camas, WA (7) 100,000 2,175,000 -
Grandview, WA (7) 100,000 1,940,000 -
Vancouver, WA (7) 100,000 2,785,000 -
Athens, TX 95,678 1,511,707 -
Lufkin, TX 100,000 1,950,000 -
Kennewick. WA (7) 100,000 1,940,000 -
Gardendale, AL 16,340 1,233,660 -
Jacksonville, TX 100,000 1,900,000 -
Kelso, WA 100,000 2,500,000 -
Battleground, WA 100,000 2,500,000 -
Hayden, ID 100,000 2,450,000 -
Klamath Falls, OR 100,000 2,300,000 -
Newport, OR 100,000 2,050,000 -
Tyler, TX 100,000 1,800,000 -
Wichita Falls, TX 100,000 1,850,000 -
Ada, OK 100,000 1,650,000 -
----------- ----------- ------------ ----------
Subtotal 14,039,359 2,051,709 45,556,557 -
----------- ----------- ------------ ----------
Grand total $68,244,158 $12,346,818 $208,979,053 $2,251,990
=========== =========== ============ ==========
Gross Amount at which Carried
At Close of Period
-------------------------------------------- Accum. Orig. Construc-
Building and Deprec tion/renovation Date
Description Land Improvments Total (1) (2)(3) Date Acquired
- ---------------------------- -------------------------------------------- ---------- --------------- ----------


Atmore, AL 23,142 2,985,308 3,008,450 98,518 1967/1974 Jan. 1996
Mesa, AZ 304,707 6,908,762 7,213,468 110,103 1975/1996 Jun. 1996
Houston, TX 571,889 5,964,457 6,536,346 131,548 1967 Jun. 1996
Roberta, GA 100,000 2,400,000 2,500,000 53,333 1964 May 1996
Norwalk, IA 45,486 1,034,802 1,080,287 35,548 1975 Jan. 1996
Altoona, IA 102,152 2,312,354 2,414,509 75,619 1973 Jan. 1996
----------- ------------ ------------ -----------
Sub-total 10,295,110 165,674,487 175,969,597 10,915,707
----------- ------------ ------------ -----------

Assisted-living facilities:
Dodge City, KS 87,500 1,662,500 1,750,000 49,896 1995 Dec. 1995
Great Bend, KS 86,842 1,563,158 1,650,000 46,921 1995 Dec. 1995
McPherson, KS 75,000 1,575,000 1,650,000 47,259 1994 Dec. 1995
Salina, KS 71,739 1,578,261 1,650,000 47,352 1994 Dec. 1995
Longview, TX 38,256 1,568,492 1,606,749 50,482 1995 Oct. 1995
Marshall, TX 38,256 1,568,492 1,606,748 50,482 1995 Oct. 1995
Walla Walla, WA 100,000 1,940,000 2,040,000 39,981 1996 Apr. 1996
Greenville, TX 42,098 1,565,286 1,607,384 43,192 1995 Jan. 1996
Camas, WA 100,000 2,175,000 2,275,000 34,524 1996 May 1996
Grandview, WA 100,000 1,940,000 2,040,000 44,424 1996 Mar. 1996
Vancouver, WA 100,000 2,785,000 2,885,000 44,043 1996 Jun. 1996
Athens, TX 95,678 1,511,707 1,607,384 41,435 1995 Jan. 1996
Lufkin, TX 100,000 1,950,000 2,050,000 40,169 1996 Apr. 1996
Kennewick. WA 100,000 1,940,000 2,040,000 48,866 1996 Feb. 1996
Gardendale, AL 16,340 1,233,660 1,250,000 23,786 1988 May 1996
Jacksonville, TX 100,000 1,900,000 2,000,000 44,003 1996 Mar. 1996
Kelso, WA 100,000 2,500,000 2,600,000 11,218 1996 Nov. 1996
Battleground, WA 100,000 2,500,000 2,600,000 5,609 1996 Nov. 1996
Hayden, ID 100,000 2,450,000 2,550,000 5,505 1996 Dec. 1996
Klamath Falls, OR 100,000 2,300,000 2,400,000 5,192 1996 Dec. 1996
Gross Amount at which Carried
At Close of Period
-------------------------------------------- Accum. Orig. Construc-
Building and Deprec tion/renovation Date
Description Land Improvments Total (1) (2)(3) Date Acquired
- ---------------------------- -------------------------------------------- ---------- --------------- ----------

Newport, OR 100,000 2,050,000 2,150,000 0 1996 Dec. 1996
Tyler, TX 100,000 1,800,000 1,900,000 0 1996 Dec. 1996
Wichita Falls, TX 100,000 1,850,000 1,950,000 0 1996 Dec. 1996
Ada, OK 100,000 1,650,000 1,750,000 0 1996 Dec. 1996
----------- ------------ ------------ -----------
Subtotal 2,051,709 45,556,557 47,608,266 724,339
----------- ------------ ------------ -----------
Grand total $12,346,818 $211,231,043 $223,577,863 $11,640,046
=========== ============ ============ ===========


59

LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996



(1) The aggregate cost for federal income tax purposes.
(2) Depreciation for building is calculated using a 35 year depreciation life
for nursing facilities and 40 year life for assisted living facilities and
additions to facilities (Lecanto, Florida). Depreciation for furniture and
fixtures is calculated based on a 7- year life for all facilities.
(3) This is a single note backed by five facilities in Alabama.
(4) This is a single note backed by two facilities in Washington.
(5) This is a single note backed by a total of seven facilities: Six in Iowa
and one in Texas
(6) This is a single note backed by two facilities in Alabama.
(7) This is a single note backed by five facilities in Washington.
(8) The activities for the years ended December 31, 1994, 1995 and 1996 are as
follows:


Real Estate Accumulated
& Equipment Depreciation
------------ ------------

Beginning balance $ 28,560,689 $ 768,213
Additions during period -
Additions 44,557,538 1,722,148
Deductions during period -
Cost of real estate sold - -
------------ -----------
Balance at December 31, 1994 73,118,227 2,490,361
Additions during period -
Additions 44,150,274 2,996,167
Deductions during period -
Cost of real estate sold - -
------------ -----------
Balance at December 31, 1995 117,268,501 5,486,528
Additions during period -
Additions 113,959,361 6,214,190
Deductions during period -
Cost of real estate sold (7,650,000) (60,672)
------------ -----------
Balance at December 31, 1996 $223,577,862 $11,640,046
============ ===========


60

LTC PROPERTIES, INC.
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996



Final
Number of Number of Interest Maturity Balloon
STATE Facilities Beds Rate (A) Date Amount (B)
- --------- ---------- --------- ------------- -------- ------------

Long-term care facilities:
FL 2 251 10.750% Mar. 2006 $ 7,326,841
FL 1 180 9.158% Dec. 2006 6,212,944
MS 3 400 10.320% Oct. 2006 10,656,431
SC 5 509 11.700% Feb. 2003 11,118,772
Various (2) 73 7,920 9.75%-13.2% Jun. 1997 - 134,891,128
Oct. 2017
-------- -------- ----------- --------- ------------
84 9,260 $170,206,116
======== ======== ============


Loan Subject
Carrying Amount to Delinquent Current
Face Amount of Mortgages at Principal Monthly
STATE of Mortgages December 31, 1995 or Interest Debt Service
- -------- ------------ ----------------- ------------- ------------

Long-term care facilities:
FL $ 8,200,000 $ 8,154,021 $ - 78,891.60
FL 7,200,000 7,200,000 - 61,203.05
MS 11,250,000 11,240,003 - 101,397.29
SC 11,250,000 11,229,957 - 113,127.66
Various (2) 141,790,842 140,437,709 1,666,420 1,379,781.10
------------ --------------- ------------ ------------
$179,690,842 $ 178,261,690 (1)(3)(4) $ 1,666,420 1,734,401.00
============ =============== ============ ============


(A) Represents current stated interest rate. Generally, the loans have 25-year
amortization with principal and interest payable at varying amounts over the
life to maturity with annual interest adjustments through specified fixed rate
increases effective either on the first anniversary or calendar year of the
loan.

(B) Balloon payment is due upon maturity, principally on the 10th year of the
loan, wtih various prepayment penalties (as defined in the loan agreement).


(1) The aggregate cost for federal income tax purposes.
(2) Includes 63 first-lien mortgage loans secured by skilled nursing facilities
and assisted living facilities as follows:



No. of loans Original loan amounts:

37 $ 305,000 - $2,000,000
12 $2,000,001 - $3,000,000
5 $3,000,001 - $4,000,000
5 $4,000,001 - $5,000,000
4 $5,000,001 - $5,861,000


61

LTC PROPERTIES, INC.
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996


The loans (each of which is less than 3% of the total carrying amount) are
secured by properties located in Alabama, Arizona, Arkansas, California,
Colorado, Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Missouri,
Nebraska, Nevada, North Carolina, Ohio, Oklahoma, Oregon, Tennessee,Texas and
Washington.



(3) Mortgage loans on real estate reconciliation:


Balance at December 31, 1993 $ 78,499,874
Additions during period:
New Mortgage loans 120,472,000
Deletions during period:
Sales of notes to REMIC (127,639,788)
Collections of principal (8,549,726)
-------------
Balance at December 31, 1994 62,782,360
Additions during period:
New Mortgage loans 101,907,720
Deletions during period:
Collections of principal (2,633,765)
-------------
Balance at December 31, 1995 $ 162,056,315
Additions during period:
New Mortgage loans 130,964,857
Deletions during period:
Sales of notes to REMIC (112,487,255)
Collections of principal $ (2,272,227)
-------------
Balance at December 31, 1996 178,261,690
=============


4) None of the Company's mortgage loans have any prior liens. One mortgage loan
with a principal amount of $1,666,420 is subject to delinquent principal of
$11,095 and interest of $221,984 as of December 31, 1995. No loan has been
renewed or extended.
5) The Company has established a general reserve totaling $1,000,000. No loan
has been written off against this reserve.

62

INDEX TO EXHIBITS

(ITEM 12(A))


Exhibit
NUMBER DESCRIPTION
-----------

3.1 Amended and Restated Articles of Incorporation of LTC Properties, Inc. (incorporated by
reference to Exhibit 3.1 to Pre-Effective Amendment No. 4 to LTC Properties, Inc.'s
Registration Statement on Form S-11 filed on August 7, 1992 (File No. 33-48085)
3.2 By-Laws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties,
Inc.'s initial Registration Statement on Form S-11 filed on May 22, 1992 (File No. 33-48085)
3.3 Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.1 to LTC
Properties, Inc.'s form 10-Q for the quarter ended June 30, 1996)
4.1 Indenture dated August 25, 1992 between LTC Properties, Inc. and Harris Trust and Savings Bank,
as trustee with respect to 9.75% Convertible Subordinated Debentures due 2004 (incorporated by
reference to Exhibit 4.1 to LTC Properties, Inc.'s Form 10-K for the year ended December 31,
1992)
4.2 Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings
Bank, as trustee (incorporated by reference to Exhibit 4.2 to LTC Properties, Inc.'s Form 10-K
for the year ended December 31, 1994)
4.3 First Supplemental Indenture dated as of September 23, 1994 to Indenture dated September 23,
1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to
$30,000,000 in principal amount of 8.5% Convertible Subordinated Debentures due 2000
(incorporated by reference to Exhibit 4.3 to LTC Properties, Inc.'s Form 10-K for the year
ended December 31, 1994)
4.4 Second Supplemental Indenture dated as of September 21, 1995 to Indenture dated September 23,
1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to
$51,500,000 in principal amount of 8.5% Convertible Subordinated Debentures due 2001
(incorporated by reference to Exhibit 10.17 to LTC Properties, Inc.'s Form 10-Q for the quarter
ended September 30, 1995)
4.5 Third Supplemental Indenture dated as of September 26, 1995 to Indenture dated September 23,
1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to
$10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999
(incorporated by reference to Exhibit 10.19 to LTC Properties, Inc.'s Form 10-Q for the quarter
ended September 30, 1995)
4.6 Fourth Supplemental Indenture dated as of February 5, 1996 to Indenture dated September 23,
1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to
$30,000,000 in principal amount of 7.75% Convertible Subordinated Debentures due 2002
(incorporated by reference to Exhibit 4.6 to LTC Properties, Inc.'s Form 10-K for the year
ended December 31, 1995)
10.1 Employment contract with Andre C. Dimitriadis (incorporated by reference to Exhibit 10.2 to
Pre-Effective Amendment No. 4 to LTC Properties, Inc.'s Registration Statement on Form S-11
filed on August 7, 1992 (File No. 33-48085)
10.2 Employment contract with William McBride III (incorporated by reference to Exhibit 10.3 to
Pre-Effective Amendment No. 4 to LTC Properties, Inc.'s Registration Statement on Form S-11
filed on August 7, 1992 (File No. 33-48085)
10.3 1992 Stock Option Plan (incorporated by reference to Exhibit 10.4 to Post-Effective Amendment
No. 4 to LTC Properties, Inc.'s Registration Statement on Form S-11 filed on August 7, 1992
(File No. 33-48085)


63

INDEX TO EXHIBITS (CONTINUED)




EXHIBIT
NUMBER DESCRIPTION
-----------

10.4 Master Repurchase Agreement dated May 14, 1993 between LTC Properties, Inc. and Goldman Sachs
Mortgage Company (incorporated by reference to Exhibit 10.5 to LTC Properties, Inc.'s Form 10-Q
for the quarter ended June 30, 1993)
10.5 Purchase Agreement dated July 28, 1993 between LTC Properties, Inc., LTC REMIC Corporation and
Goldman Sachs Mortgage Company (incorporated by reference to Exhibit 10.6 to LTC Properties,
Inc.'s Form 10-Q for the quarter ended June 30, 1993)
10.6 Master Repurchase Agreement dated December 15, 1993 between LTC Properties, Inc. and Goldman
Sachs Mortgage Company (incorporated by reference to Exhibit 10.7 to LTC Properties, Inc.'s
Form 10-K for the year ended December 31, 1994)
10.7 Amended and Restated 1992 Stock Option Plan (incorporated by reference to Exhibit 10.8 to LTC
Properties, Inc.'s Form 10-K for the year ended December 31, 1994)
10.8 Revolving Credit Agreement dated as of January 18, 1995 among LTC Properties, Inc., the lenders
named therein and Sanwa Bank California, as agent for such lenders (incorporated by reference
to Exhibit 10.9 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994)
10.9 Transfer and Repurchase Agreement, dated as of July 20, 1993, between LTC Properties, Inc. and
LTC REMIC Corporation (incorporated by reference to Exhibit 10.10 to LTC Properties, Inc.'s
Form 10-K for the year ended December 31, 1994)
10.10 Pooling and Servicing Agreement, dated as of July 20, 1993, among LTC REMIC Corporation, as
depositor, Bankers Trust Company, as master servicer, LTC Properties, Inc., as special servicer
and originator and Union Bank, as trustee (incorporated by reference to Exhibit 10.11 to LTC
Properties, Inc.'s Form 10-K for the year ended December 31, 1994)
10.11 Transfer and Repurchase Agreement, dated as of November 1, 1994, between LTC Properties, Inc.
and LTC REMIC Corporation (incorporated by reference to Exhibit 10.12 to LTC Properties, Inc.'s
Form 10-K for the year ended December 31, 1994)
10.12 Pooling and Servicing Agreement, dated as of November 1, 1994, among LTC REMIC Corporation, as
depositor, Bankers Trust Company, as master servicer, LTC Properties, Inc., as special servicer
and originator and Marine Midland Bank, as trustee (incorporated by reference to Exhibit 10.13
to LTC Properties, Inc.'s Form 10-K dated December 31, 1994)
10.13 Deferred Compensation Plan of LTC Properties, Inc. (incorporated by reference to Exhibit 10.14
to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1995)
10.14 Swap Agreement by and between Goldman Sachs Capital Markets, L.P., Goldman Sachs Group, L.P.
and LTC Properties, Inc. dated May 23, 1995 (incorporated by reference to Exhibit 10.15 to LTC
Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1995)
10.15 Swap Agreement by and between Goldman Sachs Capital Markets, L.P., Goldman Sachs Group, L.P.
and LTC Properties, Inc. dated September 12, 1995 (incorporated by reference to Exhibit 10.16
to LTC Properties, Inc.'s Form 10-Q for the quarter ended September 30, 1995)
10.16 Amended and Restated Revolving Credit Agreement dated as of October 17, 1995 among LTC
Properties, Inc., the lenders named therein and Sanwa Bank California, as agent for such
lenders (incorporated by reference to Exhibit 10.19 to LTC Properties, Inc.'s Form 10-Q for the
quarter ended September 30, 1995)
10.17 Amended Deferred Compensation Plan (incorporated by reference to Exhibit 10.17 to LTC
Properties, Inc.'s Form 10-K for the year ended December 31, 1995)


64

INDEX TO EXHIBITS (CONTINUED)




EXHIBIT
NUMBER DESCRIPTION
-----------

10.18 Pooling and Servicing Agreement dated as of March 1, 1996, among LTC REMIC Corporation, as
depositor, GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc., as
Special Servicer and Originator, LaSalle National Bank, as Trustee and ABN AMRO Bank, N.V., as
fiscal agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Form 10-Q for
the quarter ended March 31, 1996)
10.19 Transfer and Repurchase Agreement by and between LTC Properties, Inc. and LTC REMIC Corporation
dated as of March 1, 1996 (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.'s
Form 10-Q for the quarter ended March 31, 1996)
10.20 Second Amended and Restated Revolving Credit Agreement between LTC Properties, Inc. and Sanwa
Bank California, as agent, dated as of May 21, 1996 (incorporated by reference to Exhibit 10.1
to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1996)
10.21 Guarantee Agreement between Kansas-LTC Corporation, L-Tex GP, Inc., and L-Tex LP, Inc.,
Rusk-Tex, LP, Inc., Texas-LTC Limited Partnership, as guarantors, and Sanwa Bank California, as
the agent, dated as of May 21, 1996 (incorporated by reference to LTC Properties, Inc.'s Form
10-Q for the quarter ended June 30, 1996)
10.22 Amended and Restated 1992 Stock Option Plan (incorporated by reference to Exhibit 10.22 to LTC
Properties, Inc.'s Form 10-K for the year ended December 31, 1996)
10.23 Swap Agreement by and between Goldman Sachs Capital Markets, L.P., Goldman Sachs Group, L.P. and
LTC Properties, Inc. dated November 15, 1996 (incorporated by reference to Exhibit 10.23 to LTC
Properties, Inc.'s Form 10-K for the year ended December 31, 1996)
10.24 Swap Agreement by and between Goldman Sachs Capital Markets, L.P., Goldman Sachs Group, L.P. and
LTC Properties, Inc. dated February 11, 1997 (incorporated by reference to Exhibit 10.24 to LTC
Properties, Inc.'s Form 10-K for the year ended December 31, 1996)
10.25 Subservicing Agreement dated as July 20, 1993 by and between Bankers Trust Company, as Master
Servicer and LTC Properties, Inc., as Special Servicer as filed herewith
10.26 Custodial Agreement dated as of July 20, 1993 by and among Union Bank, as Trustee, LTC REMIC
Corporation, as Depositor, and Bankers Trust Company as Master Servicer and Custodian as filed herewith
10.27 Form of Certificates as Exhibit as filed herewith to the Pooling and Servicing Agreement dated as of July 20,
1993 among LTC REMIC Corporation, as Depositor, Bankers Trust Company, as Master Servicer,
LTC Properties, Inc. as Special Servicer and Originator and Union Bank as Trustee
(incorporated by reference to Exhibit 10.11 to LTC Properties, Inc.'s Form 10-K for the year
ended December 31, 1994)
10.28 Purchase Agreement dated November 16, 1994 between LTC REMIC Corporation, LTC Properties, Inc. and
Goldman Sachs & Co. as filed herewith
10.29 Form of Certificates, Form of Custodial Agreement and Form of Subservicing Agreement as
Exhibits as filed herewith to the Pooling and Servicing Agreement dated as of November 1, 1994 among LTC
REMIC Corporation, as Depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc.
as Special Servicer and Originator and Marine Midland Bank as Trustee (incorporated by reference
to Exhibit 10.13 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994)
10.30 Purchase Agreement dated March 27, 1996 between LTC REMIC Corporation, LTC Properties, Inc.
and Goldman Sachs & Co. as filed herewith
10.31 Form of Certificates, Form of Custodial Agreement and Form of Subservicing Agreement as Exhibits as filed
herewith to the Pooling and Servicing Agreement dated as of March 1, 1996 among LTC REMIC Corporation, as
Depositor, GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc. as Special
Servicer and Originator and LaSalle National Bank as Trustee and ABN AMRO Bank N.V., as Fiscal Agent
(incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Form 10-Q for the quarter ended
March 31, 1996)
11.1 Computation of Net Income Per Share for the years ended December 31, 1996, 1995 and 1994 as
filed herewith
21.1 List of Subsidiaries as filed herewith
23.1 Consent of Ernst & Young LLP with respect to the financial information of the Company as filed
herewith
27 Financial Schedules as filed herewith


65

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.

LTC Properties, Inc.
Registrant



Dated: December 6, 1997 By: /s/ JAMES J. PIECZYNSKI
---------------------------
JAMES J. PIECZYNSKI
President and Chief Financial Officer





/s/ ANDRE C. DIMITRIADIS Chairman of the Board, Chief Executive December 6, 1997
- ---------------------------------------- Officer and Director
ANDRE C. DIMITRIADIS

/s/ NEAL M. ELLIOTT Director December 6, 1997
- ----------------------------------------
NEAL M. ELLIOTT

/s/ EDMUND C. KING
- ----------------------------------------
EDMUND C. KING Director December 6, 1997

/s/ WENDY L. SIMPSON
- ----------------------------------------
WENDY L. SIMPSON Director December 6, 1997

/s/ SAM YELLEN
- ----------------------------------------
SAM YELLEN Director December 6, 1997


66