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
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 nursinghome sector. Five large nursing home operators wentinto bankruptcy in 1999 and 2000, driven by debt and reductionsin Medicare reimbursement rates. But the situation is improving: Two of thefive have now emerged from bankruptcy because ofincreases in Medicare rates implemented in 2000 and2001, and because they have been recapitalized.
In the past two years, assisted-living operators began having financial trouble as well. Too manybeds were built for too few elderly clients. But inrecent quarters, new construction has ground to ahalt, and demand is slowly and inexorably catching upwith supply. Many assisted-living providers still needto be recapitalized, however.
The recovery of these sectors should increase cashflow for companies like LTC. The healthcare industry is also somewhat insulated from the vagariesof the economy, so it should be better able to resumeits footing regardless of the broader economicpicture.
In the meantime, LTC has been hunkering down andselling off properties to raise cash. That cash isbeing used to pay down debt, and also for a heftyshare repurchase program. In fact, in late October,the company completed a tender offer to repurchaseabout 6.1 million shares at current prices. That tookthe share count from about 24 million to 18 million.
With cash flow looking more stable on a much lowershare 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 sectorrationalizes.
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 additionsrepresent an averaging up of purchases made over thepast year.
I like this type of insider buying. Itindicates 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 pershare cash flow, even if the industry doesn't turn upin 2002.
But investors should only look to enter LTC ifthey believe its tenants' sectors will continue toheal. Tenants that are of particular importance toLTC's near-term prospects include:
Assisted Living Concepts
( ALFCQ) and
Legg Mason is one of the only brokerage firms stillcovering LTC through its travails, rating it only amarket perform with "speculative risk." But analystJerry Doctrow does believe LTC "has done a good jobtaking care of their balance sheet," even while thelingering issue of troubled tenants keeps him fromchanging his firm's rating.
If and when LTC's tenants do show signs of recovery,as the company's insiders seem to be expecting, theanalyst upgrades that will probably follow should act asan added boost to LTC.
There are three ways to play LTC: it has commonstock as well as A and B preferred shares. The commonshares do not have a yield, but have nearly doubled inprice from their 52-week lows. The preferred sharesboth have indicated yields of around 10% but are muchless liquid. Still, they have risen over 60% fromtheir 52-week lows.
I have placed the common stock on InsiderInsights'Recommended List, but leave the decision of which toplay to readers. If you limit your risk by setting astop loss at no more than 15% below your purchaseprice, the risk/reward profile of this investmentmakes it an excellent addition to your portfolio.
Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights and founder of the Web site InsiderInsights.com. At the time of publication, Moreland did not have a position in any or the companies mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland invites you to send comments on his column to
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