Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
LTC Properties, Inc. is a US$1.9b 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. I’ll take you through some of the key metrics you should use in order to properly assess LTC.
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of LTC’s daily operations. For LTC, its FFO of US$116m makes up 69% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether LTC has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take LTC to pay off its debt using its income from its main business activities, and gives us an insight into LTC’s ability to service its borrowings. With a ratio of 18%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take LTC 5.58 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 3.83x, it’s safe to say LTC is generating an appropriate amount of cash from its borrowings.
In terms of valuing LTC, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In LTC’s case its P/FFO is 16.17x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.