LTC Properties Inc is a US$1.63B small-cap real estate investment trust (REIT) based in Westlake Village, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of LTC is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess LTC.View our latest analysis for LTC Properties
Funds from Operations (FFO) is a higher quality measure of LTC’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For LTC, its FFO of US$105.31M makes up 63.20% 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 15.78%, 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.
Next, interest coverage ratio shows how many times LTC’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. 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. In LTC’s case its P/FFO is 15.52x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
Next Steps:In this article, I’ve taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. LTC Properties can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
- 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.