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.
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.
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