| LTC PROPERTIES INC Item 1A RISK FACTORS Certain information contained in this annual report includes statements that are not purely historical and are "e forward looking statements "e within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions or strategies regarding the future |
| All statements other than historical facts contained in this annual report are forward looking statements |
| These forward looking statements involve a number of risks and uncertainties |
| All forward looking statements included in this annual report are based on information available to us on the date hereof, and we assume no obligation to update such forward looking statements |
| Although we believe that the assumptions and expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct |
| The actual results achieved by us may differ materially from any forward looking statements due to the risks and uncertainties of such statements |
| We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise |
| Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports |
| Such risks and uncertainties include, among other things, the following risks including those described in more detail below: • the status of the economy; • the status of capital markets, including prevailing interest rates; • compliance with and changes to regulations and payment policies within the health care industry; • changes in financing terms; • competition within the health care and senior housing industries; and • changes in federal, state and local legislation |
| Recently Enacted Tax Legislation Could have an Adverse Effect on the Market Price of our Equity Securities |
| On May 28, 2003, President Bush signed into law legislation that, for individual taxpayers, will generally reduce the tax rate on corporate dividends to a maximum of 15prca for tax years 2003 to 2008 |
| REIT dividends generally will not qualify for this reduced tax rate because a REITapstas income generally is not subject to corporate level tax |
| This new law could cause stock in non-REIT corporations to be a more attractive investment to individual investors than stock in REITs and could have an adverse effect on the market price or our equity securities |
| A Failure to Maintain or Increase our Dividend Could Reduce the Market Price of Our Stock |
| In December 2005, we declared a dlra0dtta12 per share monthly dividend for the first quarter of calendar 2006 |
| During calendar 2005, we paid a dlra0dtta30 dividend in the first quarter and a dlra0dtta11 monthly dividend in each of the second, third and fourth quarters on our common stock |
| During calendar 2004, we paid a 15 _________________________________________________________________ dlra0dtta25 dividend in the first quarter, a dlra0dtta275 dividend in the second quarter and a dlra0dtta30 dividend in each of the third and fourth quarters on our common stock |
| The ability to maintain or raise our common dividend is dependent, to a large part, on growth of funds from operations |
| This growth in turn depends upon increased revenues from additional investments and loans, rental increases and mortgage rate increases |
| A REIT is required to make dividend distributions and retains little capital for growth |
| As a result, growth for a REIT is generally through the steady investment of new capital in real estate assets |
| Presently, we believe capital is readily available to us |
| However, there will be times when we will have limited access to capital from the equity and/or debt markets |
| During such periods, virtually all of our available capital will be required to meet existing commitments and to reduce existing debt |
| We may not be able to obtain additional equity or debt capital or dispose of assets on favorable terms, if at all, at the time we require additional capital to acquire health care properties on a competitive basis or meet our obligations |
| Income and Returns from Health Care Facilities Can be Volatile |
| The possibility that the health care properties in which we invest 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 and government payment), 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 hurricanes, earthquakes and floods) or similar factors |
| Since a substantial portion of our income is derived from mortgage payments and lease income from real property, our income would be adversely affected if a significant number of our borrowers or lessees were unable to meet their obligations to us or if we were unable to lease our 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, we could lease the property to others on favorable terms |
| We Rely on a Few Major Operators |
| (or EHSI), a wholly owned subsidiary of Extendicare Inc, leases 37 assisted living properties with a total of 1cmam427 units owned by us representing approximately 11dtta6prca, or dlra68dtta1 million, of our total assets at December 31, 2005 |
| Alterra Healthcare Corporation (or Alterra), a wholly owned subsidiary of Brookdale Senior Living, Inc, leases 35 assisted living properties with a total of 1cmam416 units owned by us representing approximately 11dtta5prca, or dlra67dtta2 million, of our total assets at December 31, 2005 |
| (or CLC) operates 26 skilled health care properties with a total of 3cmam014 beds that we own or on which we hold mortgages secured by first trust deeds |
| This represents approximately 9dtta5prca or dlra55dtta6 million of our total assets at December 31, 2005 |
| Sunwest Management, Inc |
| (or Sunwest) operates eight assisted living properties with a total of 958 units that we own or on which we hold mortgages secured by first trust deeds |
| Subsequent to December 31, 2005, we sold four assisted living properties operated by Sunwest with a total of 431 units to an entity formed by the principals of Sunwest for dlra58dtta5 million |
| We received dlra54dtta6 million in 16 _________________________________________________________________ proceeds after paying dlra3dtta8 million of 8dtta75prca State of Oregon bond obligations related to one of the properties sold |
| Our financial position and ability to make distributions may be adversely affected by financial difficulties experienced by any of our other lessees and borrowers, including bankruptcies, inability to emerge from 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 us or our borrowers when it expires |
| The long-term care industry is highly competitive and we expect that it may become more competitive in the future |
| Our borrowers and lessees are competing with numerous other companies providing similar long-term care services or alternatives such as home health agencies, hospices, life care at home, community-based service programs, retirement communities and convalescent centers |
| There can be no assurance that our borrowers and lessees will not encounter increased competition in the future which could limit their ability to attract residents or expand their businesses and therefore affect their ability to make their debt or lease payments to us |
| Our borrowers and lessees who operate health care facilities are subject to extensive regulation by federal, state and local governments |
| These laws and regulations are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law |
| These changes may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by both government and other third-party payors |
| These changes may be applied retroactively |
| The ultimate timing or effect of these changes cannot be predicted |
| The failure of any borrower of funds from us or lessee of any of our properties to comply with such laws, requirements and regulations could affect its ability to operate its facility or facilities and could adversely affect such borrowerapstas or lesseeapstas ability to make debt or lease payments to us |
| The ability of our borrowers and lessees to generate revenue and profit determines the underlying value of that property to us |
| Revenues of our borrowers and lessees are generally derived from payments for patient care |
| Sources of such payments include the federal Medicare program, state Medicaid programs, private insurance carriers, health care service plans, health maintenance organizations, preferred provider arrangements, self-insured employers, as well as the patients themselves |
| A significant portion of the revenue of our borrowers and lessees is derived from governmentally-funded reimbursement programs, such as Medicare and Medicaid |
| Because of substantial health care costs paid by such government programs, both federal and state governments have adopted and continue to consider various health care reform proposals to control health care costs |
| There have been fundamental changes in the Medicare program that resulted in reduced levels of payment for a substantial portion of health care services |
| In many instances, revenues from Medicaid programs are already insufficient to cover the actual costs incurred in providing care to those patients |
| According to a report issued by the Kaiser Commission on Medicaid and the Uninsured in October 2005, nursing home rates were cut or frozen in 10 states in fiscal year 2005 and in 15 states in fiscal year 2006 (although nursing homes were the provider group most likely to be granted a rate increase in both years, with increases in 41 states in fiscal year 2005 and in 36 states in fiscal year 2006) |
| Moreover, health care facilities have experienced increasing pressures from private payors attempting to control health care costs, and reimbursement from private payors has in many cases effectively been reduced to levels approaching those of government payors |
| 17 _________________________________________________________________ Governmental and public 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 payors 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 our borrowers and lessees and thereby adversely affect those borrowers &apos and lessees &apos abilities to make their debt or lease payments to us |
| Failure of the borrowers or lessees to make their debt or lease payments would have a direct and material adverse impact on us |
| On August 4, 2005, the Centers for Medicare & Medicaid Services, commonly known as CMS, published a final rule updating skilled nursing facility prospective payment rates for fiscal year 2006, which began October 1, 2005 |
| This update implements refinements to the patient classification system and triggers the expiration of a temporary payment add-on for certain high-acuity patients, effective January 1, 2006 |
| The final rule also adopts a 3dtta1 percent market basket increase for fiscal year 2006 |
| CMS estimates that the final rule will have no net financial impact on skilled nursing facilities in fiscal year 2006 because the dlra1dtta02 billion reduction due to the expiration of temporary add-on payments will be more than offset by a dlra510 million increase from the refined classification system and a dlra530 million increase from the payment rate update |
| While the fiscal year 2006 skilled nursing facility rates will not decrease payments to skilled nursing facilities, the loss of revenues associated with future changes in skilled nursing facility payment rates could, in the future, have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us |
| The health care industry continues to face various challenges, including increased government and private payor pressure on health care providers to control costs |
| For instance, the Balanced Budget Act of 1997 enacted significant changes to the Medicare and Medicaid programs designed to modernize payment and health care delivery systems while achieving substantial budgetary savings |
| In seeking to limit Medicare reimbursement for long-term care services, Congress established the prospective payment system for skilled nursing facility services to replace the cost-based reimbursement system |
| Skilled nursing facilities needed to restructure their operations to accommodate the new Medicare prospective payment system reimbursement |
| Since the skilled nursing facility prospective payment system was enacted, several then publicly held operators of long-term care facilities and at least two then publicly held operators of assisted living facilities have filed for reorganization under Chapter 11 of the federal bankruptcy laws |
| While certain long-term care operators and both assisted living operators have emerged from bankruptcy, during their reorganizations and in some instances subsequent thereto, they reduced their operations by rejecting leases and/or defaulting on loans resulting in properties being returned to lessors or lenders |
| There can be no assurances given that there will not be additional bankruptcies of skilled nursing and assisted living operators in the future |
| In recent years, Congress has adopted legislation to somewhat mitigate the impact of the Balanced Budget Act on providers, including skilled nursing facilities |
| Most recently, on December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (PL 108-173) |
| In addition to providing expanded Medicare prescription drug coverage, the new act modifies Medicare payments to a variety of health care providers |
| With respect to skilled nursing facilities, the act provides a temporary 128prca increase in the Medicare payment for skilled nursing facility residents with acquired immune deficiency syndrome, applicable to services furnished on or after October 1, 2004 |
| On the other hand, in February 2006 Congress gave final approval to the Deficit Reduction Act (or DRA), which will reduce net Medicare and Medicaid spending by approximately dlra11 billion over five years |
| Among other things, the legislation reduces Medicare skilled nursing facility bad debt payments by 30 percent for those individuals who are not dually eligible for Medicare and Medicaid, 18 _________________________________________________________________ and strengthens Medicaid asset transfer restrictions for persons seeking to qualify for Medicaid long-term care coverage |
| Congress may consider legislation in the future that would further restrict Medicare and Medicaid funding |
| No assurances can be given that any additional Medicare or Medicaid legislation enacted by Congress would not reduce Medicare or Medicaid reimbursement to skilled nursing facilities or result in additional costs for operators of skilled nursing facilities |
| On February 6, 2006, the Bush Administration released its fiscal year (FY) 2007 budget proposal, which would reduce Medicare spending by dlra2dtta5 billion in FY 2007 and dlra35dtta9 billion over 5 years |
| In particular, the budget would freeze payments in fiscal year 2007 for skilled nursing facilities, among other providers |
| In 2008 and 2009, the payment update would be market basket minus 0dtta4 percent |
| To enhance the long-term financing of the Medicare program, the budget also proposes automatic reductions in provider updates if general revenues are projected to exceed 45 percent of total Medicare financing |
| The budget also includes a series of proposals impacting Medicaid, including administrative changes to the financing structure of Medicaid that would save more than dlra12 billion over five years |
| These changes include proposed reforms to Medicaid provider taxes, which some states use to finance Medicaid long term care services |
| In addition, comprehensive reforms affecting the payment for and availability of health care services have been proposed at the federal and state levels and major reform proposals have been adopted by certain states |
| Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies |
| Changes in the law, new interpretations of existing laws, or changes in payment methodology may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third party payors |
| Moreover, many states are facing significant budget shortfalls, and all states have taken steps in recent years to implement cost controls within their Medicaid programs, including freezes or reductions in nursing home reimbursement in some states |
| According to a report issued by the Kaiser Commission on Medicaid and the Uninsured in October 2005, nursing home rates were cut or frozen in 10 states in fiscal year 2005 and in 15 states in fiscal year 2006 (although nursing homes were the provider group most likely to be granted a rate increase in both years, with increases in 41 states in fiscal year 2005 and in 36 states in fiscal year 2006) |
| The DRA also gives states greater flexibility to expand access to home and community based services by allowing states to provide these services as an optional benefit without undergoing the waiver approval process |
| Moreover, the DRA includes a new demonstration to encourage states to provide long-term care services in a community setting to individuals who currently receive Medicaid services in nursing homes |
| Together the provisions could increase state funding for home and community based services, while prompting states to cut funding for nursing facilities and homes for persons with disabilities |
| In light of continuing state Medicaid program reforms, budget cuts, and regulatory initiatives, no assurance can be given that the implementation of such regulations and reforms will not have a material adverse effect on the financial condition or results of operations of our lessees and/or borrowers which, in turn, could effect their ability to meet their contractual obligations to us |
| We Could Incur More Debt |
| We operate with a policy of incurring debt when, in the opinion of our Directors, it is advisable |
| We may incur additional debt by issuing debt securities in a public offering or in a private transaction |
| Accordingly, we could become more highly leveraged |
| The degree of leverage could have important consequences to stockholders, including affecting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes and making us more vulnerable to a downturn in business or the economy generally |
| Straight-line accounting requires us to calculate the total fixed rent we will receive over the life of the lease and 19 _________________________________________________________________ recognize that revenue evenly over that life |
| In a situation where a lease calls for fixed rental increases during the life of the lease rental income recorded in the early years of a lease is higher than the actual cash rent received, which creates an asset on the balance sheet called deferred rent receivable |
| At some point during the lease, depending on the rent levels and terms, this reverses and the cash rent payments received during the later years of the lease are higher than the rental income recognized, which reduces the deferred rent receivable balance to zero by the end of the lease |
| We periodically assess the collectibility of the deferred rent receivable |
| If during our assessment we determined that we were unlikely to collect a portion or all of the deferred rent receivable balance, we may record an impairment charge in current period earnings for the portion, up to its full value, that we estimate will not be recovered |
| Our Assets May be Subject to Impairment Charges |
| We periodically but not less than quarterly evaluate our real estate investments and other assets for impairment indicators |
| The judgment regarding the existence of impairment indicators is based on factors such as market conditions, operator performance and legal structure |
| If we determine that a significant impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset, which could have a material adverse affect on our results of operations and a non-cash impact on funds from operations in the period in which the write-off occurs |
| From time to time, we will have cash available from (1) proceeds of sales of shares of securities, (2) proceeds from new debt issuances, (3) principal payments on our mortgages and other investments, (4) sale of properties, and (5) funds from operations |
| We may reinvest this cash in health care investments in accordance with our investment policies, repay outstanding debt or invest in qualified short-term or long-term investments |
| We compete for real estate investments with a broad variety of potential investors |
| The competition for attractive investments negatively affects our ability to make timely investments on acceptable terms |
| Delays in acquiring properties or making loans will negatively impact revenues and perhaps our ability to increase distributions to our stockholders |
| We intend to operate so as to qualify as a REIT under the Internal Revenue Code (the Code) |
| We believe that we have been organized and have operated in a manner which would allow us to qualify as a REIT under the Code beginning with our taxable year ended December 31, 1992 |
| However, it is possible that we have been organized or have operated in a manner which would not allow us to qualify as a REIT, or that our future operations could cause us to fail to qualify |
| Qualification as a REIT requires us to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control |
| For example, in order to qualify as a REIT, at least 95prca of our gross income in any year must be derived from qualifying sources, and we must pay dividends to stockholders aggregating annually at least 90prca (95prca for taxable years ending prior to January 1, 2001) of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) |
| Legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification |
| However, we are not aware of any pending tax legislation that would adversely affect our ability to operate as a REIT If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates |
| Unless we are entitled to relief under statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year during which we lost qualification |
| If we lose our 20 _________________________________________________________________ REIT status, our net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved |
| In addition, we would no longer be required to make distributions to stockholders |
| Our real estate investments are relatively illiquid |
| Real estate investments are relatively illiquid and, therefore, tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions |
| Health care facilities that participate in Medicare or Medicaid must meet extensive program requirements, including physical plant and operational requirements, which are revised from time to time |
| Such requirements may include a duty to admit Medicare and Medicaid patients, limiting the ability of the facility to increase its private pay census beyond certain limits |
| Medicare and Medicaid facilities are regularly inspected to determine compliance, and may be excluded from the programs—in some cases without a prior hearing—for failure to meet program requirements |
| Transfers of operations of nursing homes and other healthcare-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 our properties becomes unprofitable due to competition, age of improvements or other factors such that our lessee or mortgagor becomes unable to meet its obligations on the lease or mortgage loan, the liquidation value of the property may be substantially less, particularly relative to the amount owing on any related mortgage loan, than would be the case if the property were readily adaptable to other uses |
| The receipt of liquidation proceeds or the replacement of an operator that has defaulted on its lease or loan could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the property or the replacement of the operator with a new operator licensed to manage the facility |
| 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, our income and cash flows from operations would be adversely affected |
| To the extent we invest in mortgage loans, such mortgage loans may or may not be recourse obligations of the borrower and generally will not be insured or guaranteed by governmental agencies or otherwise |
| In the event of a default under such obligations, we may have to foreclose on the property underlying the mortgage or protect our interest by acquiring title to a property and thereafter make substantial improvements or repairs in order to maximize the propertyapstas investment potential |
| Borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against such enforcement and/or bring claims for lender liability in response to actions to enforce mortgage obligations |
| If a borrower seeks bankruptcy protection, the Bankruptcy Court may impose an automatic stay that would preclude us from enforcing foreclosure or other remedies against the borrower |
| Relatively high "e loan to value "e ratios and declines in the value of the property may prevent us from realizing an amount equal to our mortgage loan upon foreclosure |
| We are Subject to Risks and Liabilities in Connection with Properties Owned Through Limited Liability Companies and Partnerships |
| We have ownership interests in limited liability companies and/or partnerships |
| We may make additional investments through these ventures in the future |
| Partnership or limited liability company investments may involve risks such as the following: • our partners or co-members might become bankrupt (in which event we and any other remaining general partners or members would generally remain liable for the liabilities of the partnership or limited liability company); • our partners or co-members might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals; 21 _________________________________________________________________ • our partners or co-members may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT; and • agreements governing limited liability companies and partnerships often contain restrictions on the transfer of a memberapstas or partnerapstas interest or "e buy-sell "e or other provisions which may result in a purchase or sale of the interest at a disadvantageous time or on disadvantageous terms |
| We will, however, generally seek to maintain sufficient control of our partnerships and limited liability companies to permit us to achieve our business objectives |
| Our organizational documents do not limit the amount of available funds that we may invest in partnerships or limited liability companies |
| The occurrence of one or more of the events described above could have a direct and adverse impact on us |