LTC Properties Inc is a US$1.8b small-cap, real estate investment trust (REIT) based in Westlake Village, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how LTC’s business operates and also how we should analyse its stock. Below, I’ll look at a few important metrics to keep in mind as part of your research on LTC.
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A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much LTC actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For LTC, its FFO of US$105m makes up 63% of its gross profit, which means the majority of its earnings are high-quality and recurring.
LTC’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky LTC is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 16%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take LTC 6.34 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
I also look at LTC’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 3.52x, it’s safe to say LTC is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at LTC’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. LTC’s price-to-FFO is 17x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
Next Steps:
As a REIT, LTC Properties offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in LTC, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for LTC’s future growth? Take a look at our free research report of analyst consensus for LTC’s outlook.
- Valuation: What is LTC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LTC is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.