Brad Thomas, The Intelligent REIT Investor (7,042 clicks ... · I would build a REIT that offered...

I would build a REIT that offered the most powerful sources of income – a revenue stream that deliversthe most predictable source of rent with limited supply.If I built this REIT from scratch, I would like Omega’s dividend growth rate, Ventas’ management team,and LTC’s balance sheet.Mr. Market has priced LTC’s dividend yield sub 5% and the current price of $42.36 makes the valuationappear fairly valued.

When I look across the broad spectrum of REIT opportunities today I often ponder the concept of starting aREIT. No, don't worry. I wouldn't pack up my computer today - I love writing more than that. However, I'malways thinking about ways to build the best mousetrap and what it would take to orchestrate and construct adurable dividend machine.

To start with, I would look for the best overall real estate sector - one based on powerful supply and demandcharacteristics. That means I would likely not start up a REIT with stores leased to Dillard's (NYSE:DDS) (seemy article HERE) or restaurants leased to Bob Evans (NASDAQ:BOBE) (see my article HERE) or even abillboard REIT (see my article HERE). All concepts appear profitable but the business models don't appeal tomy long-term view of value creation.

Instead, I would build a REIT that offered the most powerful sources of differentiation - a revenue stream thatdelivers the most predictable source of rent with limited supply.

Here's an idea: What about demand driven by the aging population where that sector (75 and older) is expectedto increase by 89% by 2030 (compared to 2012) and is expected to increase 6% of the total US population toapproximately 10%. In addition, over the projected period of 2010 to 2020, average annual healthcare spendinggrowth of 5.8% is anticipated to outpace average annual growth in the overall economy of 4.7% by 1.1% pts.

(click to enlarge)

Brad Thomas, The Intelligent REIT Investor (7,042 clicks)Dividend growth investing, REITs, newsletter provider, valueProfile| Send Message|Follow (12,609 followers)

Dec. 10, 2014 7:00 AM ET | 18 comments | About: LTC Properties Inc. (LTC) by: Brad Thomas

Disclosure: The author is long O, DLR, VTR, HTA, STAG, CSG, GPT, ROIC, HCN, OHI, LXP, KIM, WPC,DOC, UDF, EXR, MYCC, BX, TCO. (More...)

If I Built This REIT From Scratch, Would It Be This One? - LTC Properti... http://seekingalpha.com/article/2744735-if-i-built-this-reit-from-scratch...

2 of 24 12/10/2014 10:51 AM

With limited additional new supply for senior living, I believe that healthcare offers one of the best opportunitiesin the REIT sector. Of course to capitalize on the concept, a REIT must have adequate capital to fund theventure. Let's take a look at the spectrum of healthcare REITs and their percentage of secured debt:

(click to enlarge)

As you can see (above), LTC Properties, Inc. (NYSE:LTC) has the lowest percentage of secured debt and whilethat's an important metric, it doesn't necessarily mean the company can survive any downturn. However, nowlet's examine the universe of healthcare REITs and compare the total debt to total capitalization:

(click to enlarge)

Again, LTC scores well. The company has considerably modest debt (17.9% total debt to total cap) and the


3 of 24 12/10/2014 10:51 AM

leverage ratios are extremely sound:

(click to enlarge)

LTC's overall capital stack is in excellent shape, the small-cap REIT's debt to normal EBITDA is 2.9x (Note:LTC has a 2% allocation preferred securities).

These leverage ratios and pie chart below illustrate an ideal capital model with a remarkably conservativebalance sheet.


4 of 24 12/10/2014 10:51 AM

LTC has a market cap of $1.47 billion and the Westlake Village-based (California) REIT invests primarily in thelong-term care sector of health care through the origination of first mortgage loans and acquisition of propertiesthat are leased to numerous long-term care providers. While LTC needs size (closer to $2 billion) to receiveinvestment grade agency rating, the company is big enough to provide sound diversification.

(click to enlarge)

LTC was incorporated on May 12, 1992 in the State of Maryland, and commenced operations on August 25,1992. The company invests primarily in senior housing and long-term healthcare property types, includingskilled nursing properties (or SNF), assisted living properties (or ALF), independent living properties (or ILF),and combinations thereof. As of the latest quarter (Q2-14), LTC owned 217 properties - with a majority ofskilled nursing (54.1%) and assisted living (37.7%).


5 of 24 12/10/2014 10:51 AM

As of the latest quarter (Q2-14), LTC owned assets of approximately $1.139 billion, comprising of 84.8% inproperty and 15.2% in loans.

LTC has a diverse portfolio of assets scattered across 29 States. Texas has the highest concentration (21%),followed by Michigan (11%), Ohio (8.7%), and Colorado (8.3%).

(click to enlarge)


6 of 24 12/10/2014 10:51 AM

Here's a geographical representation of LTC's portfolio:

(click to enlarge)

Unlike Omega Healthcare Investors (NYSE:OHI), an assisted living REIT dependent on a majority ofgovernment reimbursement exposure, LTC is better prepared for reimbursement risks as the company hasaggregate government reimbursement exposure of around 41%. Here is a snapshot of the portfolio payor sourcemix:

(click to enlarge)

Here's a snapshot of LTC's top tenant operators. As you can see, Prestige Healthcare (11.1%) and Brookdale(NYSE:BKD) (10.2%) are the largest operators:

(click to enlarge)


7 of 24 12/10/2014 10:51 AM

Here's a snapshot of some of LTC's top Skilled Nursing operators:

Here's a snapshot of some of LTC's top Assisted Living operators:


8 of 24 12/10/2014 10:51 AM

Recently LTC reached a resolution on its portfolio 37 assisted-living properties co-leased to Enlivant an affiliateof Extendicare (OTCPK:EXETF). The REIT said it plans to release 20 of the properties and sell 16 (LTC isexploring options for the other facility that is subject to a ground lease).

Relating to the releasing of the 20 properties LTC plans to lease 13 to an existing relationship, Senior Lifestyle,and lease the other 7 properties to Veritas. The initial cash yield on the 20 properties re-leased to Senior Lifestyleand Veritas is comparable to the cash yield in 2014 under the expiring master leases with Extendicare andEnlivant.

LTC has entered into an agreement with an affiliate of Enlivant to sell 16 properties, consisting of 615 units,which includes two properties in Arizona for a sales price of $26,465,000 equating to $43,000 per unit. LTCexpects to record a gain on the sale of approximately $3.9 million with closing expected to occur in December ofthis year.

LTC has maintained a consistent supply of development projects. During the third quarter Anthem Memory Careopened its second development project with them in the Denver Metro area. Highline Place, LTC's initialdevelopment project with Anthem also in the Denver Metro area remains at 100% occupancy.

LTC continues to expand its relationship with Anthem and as a result has entered the Chicago market with themvia land acquisition in Burr Ridge, Illinois. Anthem anticipates opening a third project located in Aurora,Colorado in mid-December, followed by the opening of the fourth project in Q1-2015. LTC's developmentproject in Wichita, Kansas with Oxford Senior Living, enjoys 95% occupancy.

LTC's pipeline is strong at approximately $800 million, which includes sale leaseback and developmentopportunities as well as expansion and replacement projects in our portfolio.

(click to enlarge)


9 of 24 12/10/2014 10:51 AM

The steady growth has resulted in consistent earnings. In the third quarter Normalized FFO increased 13% to$22.5 million from $20 million in the second quarter of last year. Normalized fully diluted FFO per share was$0.64 in Q3-14 compared to $0.57 a year ago.

LTC's occupancy has remained consistent across all property types. Occupancy for the trailing 12-month periodended first quarter 2014 as follows: Assisted living (excluding the Extendicare and Enlivants portfolio) is89.5%. Skilled nursing is 79.9% and memory care is 83.4%.

(click to enlarge)

LTC has not modified its 2014 guidance and the company expects the year-end numbers to pencil in at the lowend of the range or around $2.56 of normalized FFO. Here's a snapshot of historical AFFO - indicative of adurable income-producing mousetrap:

(click to enlarge)


10 of 24 12/10/2014 10:51 AM

Of course, the ideal blueprint for a durable REIT would also include dividends. Here's a snapshot of LTC'sdividend record since 2003:

The dividend appears safe as evidenced by the historic payout ratio below:

(click to enlarge)

It's important to recognize that LTC did cut its dividend in 2000:

(click to enlarge)


11 of 24 12/10/2014 10:51 AM

Also, note that LTC would be included in David Fish's "CCC" list had the company not stalled on an increase in2009 (the company maintained its $1.56 per share payout in 2008 and 2009).

(click to enlarge)


12 of 24 12/10/2014 10:51 AM

As noted above, LTC has all of the ingredients of a terrific REIT: strong fundamentals, durable income drivers,diversification, conservative balance sheet, and steady dividend history.

So instead of building my own REIT, can I buy this one?

First let's examine the dividend yield:

(click to enlarge)

Given the strong fundamentals described, I would expect to see a REIT like LTC generating a yield of around5%. I would compare the balance sheet and overall quality rating comparable to National Retail Properties(NYSE:NNN) - another fine REIT with less than 1% of secured debt.

However, Mr. Market has priced LTC's dividend yield sub 5% and the current price of $42.36 makes thevaluation appear fairly valued at 16.6x Price-to- Funds-from-Operations.

(click to enlarge)

One thing missing from the LTC blueprint is dividend growth. Don't get me wrong. I like the consistent earningsand the more recent pattern of predictability; however, when I compare LTC's dividend growth to the stalwart's -Omega Healthcare and Ventas, Inc. (NYSE:VTR) - we see a "super-sized" plan unfolding.


13 of 24 12/10/2014 10:51 AM

So if I built this REIT from scratch, I would like Omega's dividend growth rate, Ventas' management team, andLTC's balance sheet. To me, that's the perfect blueprint. Meanwhile, I'll wait on a pullback for LTC. Mr. Markethas priced in the opportunity and I can't buy anything without a discount. I'll include an entry price in mynewsletter this month.

(click to enlarge)

In my REIT newsletter, I provide high-level analysis so that investors can attempt to find an adequate margin ofsafety. Remember the number one rule of investing: Protect Your Principal at ALL Costs. Subscribe here.

Sources: SNL Financial, FAST Graphs, and LTC Investor Presentation.

REITs mentioned: (NYSE:NHI), (NASDAQ:SBRA), (NYSE:HR), (NYSE:HTA), (NYSE:HCP), (NYSE:HCN),(NYSE:UHT), (NYSE:AVIV), (NYSE:MPW), (NYSE:DOC), and (NYSE:SNH).


14 of 24 12/10/2014 10:51 AM

Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge ofindividual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expectedto complete their own due diligence before purchasing any stocks mentioned or recommended.

Does this stock really matter to you?Consider PRO Alerts on LTCLEARN MORE

LATEST ARTICLES ON YOUR INTERESTS:

Omega Healthcare Investors: Don't Miss Out On An Exciting Buy In Financials And Health CareOHI • Today, 8:43 AM • Eryn Johnson • 4 Comments

Time To Add Growth To Your Dividend Growth PortfolioBDX • Yesterday, 7:32 PM • Doug Meeks • 16 Comments

Retirement Portfolio For Dummies - The Health Care REIT ComponentsHCN • Yesterday, 6:08 PM • Factoids • 24 Comments

Realty Income Corp. Dividend Stock AnalysisO • Mon, Dec. 8, 5:05 PM • Dividends4Life • 15 Comments

The New Nifty Fifty: A Comparative Performance AnalysisAAPL • Mon, Dec. 8, 7:28 AM • Minutemen • 128 Comments

More Latest Articles »

Author Alerts Followers

Brad Thomas,

+Add AuthorsImpressed by Brad Thomas?

Add this author to see more of their analysis.

X

Symbol Alerts Price Chg % Chg

HR 26.97 +0.03 +0.11

LTC 42.31 -0.05 -0.12

MPW 13.61 -0.05 -0.37

NHI 66.75 +0.23 +0.35

O 45.86 +0.31 +0.68


15 of 24 12/10/2014 10:51 AM

Brad Thomas, The Intelligent REIT Investor (7,042 clicks ... · I would build a REIT that offered...

Documents

Transcript of Brad Thomas, The Intelligent REIT Investor (7,042 clicks ... · I would build a REIT that offered...