LTC Properties Could Be a Healthy Addition to Your Portfolio

Real estate companies can be a challenge to analyze, because a property portfolio's health can be hard to gauge. If key tenants are struggling, they may not be able to meet rent obligations. That makes for sinking cash flow that brings a new set of problems, especially for heavily-leveraged REITs that have debt obligations of their own.

Just such a scenario hit shares of LTC Properties (LTC) hard at the end of the '90s. After trading as high as $22 in 1997, the stock plunged to $3.55 in 2000 as many tenants ran into financial difficulties. Shares have since rebounded back above $7, but remain well below their historical trading range.

LTC was a victim of overexpansion in the assisted-living sector and bankruptcies in the nursing home sector. Five large nursing home operators went into bankruptcy in 1999 and 2000, driven by debt and reductions in Medicare reimbursement rates. But the situation is improving: Two of the five have now emerged from bankruptcy because of increases in Medicare rates implemented in 2000 and 2001, and because they have been recapitalized.

In the past two years, assisted-living operators began having financial trouble as well. Too many beds were built for too few elderly clients. But in recent quarters, new construction has ground to a halt, and demand is slowly and inexorably catching up with supply. Many assisted-living providers still need to be recapitalized, however.

The recovery of these sectors should increase cash flow for companies like LTC. The health care industry is also somewhat insulated from the vagaries of the economy, so it should be better able to resume its footing regardless of the broader economic picture.

In the meantime, LTC has been hunkering down and selling off properties to raise cash. That cash is being used to pay down debt, and also for a hefty share repurchase program. In fact, in late October, the company completed a tender offer to repurchase about 6.1 million shares at current prices. That took the share count from about 24 million to 18 million.

With cash flow looking more stable on a much lower share count, per share metrics are quite attractive. Funds from operations should hit $1 a share this year, which makes LTC's stock look cheap. Admittedly, cash flow is not growing again yet, but should do so as the nursing/assisted-living sector rationalizes.

Insider Buying

Insiders are taking the long view. LTC's Chairman, CFO and two other officers bought 41,100 shares recently for between $5.85 and $6.50 each. For a few of the buyers, their additions represent an averaging up of purchases made over the past year.

I like this type of insider buying. It indicates that insiders feel that the stock's rise will continue. Insider optimism is also consistent with public comments that continuing share repurchases, combined with further debt reduction, should boost per share cash flow, even if the industry doesn't turn up in 2002.

But investors should only look to enter LTC if they believe its tenants' sectors will continue to heal. Tenants that are of particular importance to LTC's near-term prospects include: Sun Healthcare Group (SHGE), Assisted Living Concepts(ALFCQ) and Alterra Healthcare(ALI).

Legg Mason is one of the only brokerage firms still covering LTC through its travails, rating it only a market perform with "speculative risk." But analyst Jerry Doctrow does believe LTC "has done a good job taking care of their balance sheet," even while the lingering issue of troubled tenants keeps him from changing his firm's rating.

If and when LTC's tenants do show signs of recovery, as the company's insiders seem to be expecting, the analyst upgrades that will probably follow should act as an added boost to LTC.

There are three ways to play LTC: it has common stock as well as A and B preferred shares. The common shares do not have a yield, but have nearly doubled in price from their 52-week lows. The preferred shares both have indicated yields of around 10% but are much less liquid. Still, they have risen over 60% from their 52-week lows.

I have placed the common stock on InsiderInsights' Recommended List, but leave the decision of which to play to readers. If you limit your risk by setting a stop loss at no more than 15% below your purchase price, the risk/reward profile of this investment makes it an excellent addition to your portfolio.

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