Oxnard’s LTC Properties Among Healthiest of Resurgent REITS : Real estate: The investment trust puts its money in nursing homes, which aren’t overbuilt. Due to demographics, demand keeps on growing.
Real estate investment trusts took a pounding in the late 1980s, but now they’re coming back. And leading the Wall Street rally are health-care REITs such as LTC Properties of Oxnard.
Last year LTC shareholders got a hefty 39% return in the form of dividends and higher stock prices--double the average return for the entire REIT industry, according to the National Assn. of Real Estate Investment Trusts, a Washington, D.C.-based trade group. Even among health-care REITs, LTC, with assets of about $205 million, is ahead of the pack.
Why? Because LTC has been putting all its money in nursing homes, which unlike other real estate, weren’t overbuilt during the 1980s, thanks to state regulatory restrictions. So unlike hospitals, which are struggling with too many vacant beds, nursing homes have an overall occupancy rate above 90%, says Peter Sidoti, a health-care analyst at Natwest Securities Corp. in New York. And demand for long-term elderly care continues to grow as the population ages.
“We think LTC is the most attractive of the health-care REITs,” Sidoti said.
A real estate investment trust is effectively a real estate mutual fund. REITs pool investors’ cash and invest directly in properties or make mortgage loans on them. Because REITs pass most of their earnings through to shareholders, theoretically at least, they provide more income to investors compared with most other stocks.
But REITs tend to have boom and bust cycles. They fell out of favor in the mid-1970s, and again in the 1980s when the real estate market performed poorly, but in the last couple of years, investors have flocked back to REITs for their relatively high dividends.
The flurry of REIT trading has created a boom of new REIT market offerings on Wall Street, which is likely to spawn more competition for LTC.
Also, traditional banks that had once shied away from financing health-care facilities are now starting to step back into the arena. Another risk for LTC is the uncertainty of national health-care reform, which is driving sweeping changes in the medical industry.
But for now, LTC is one of only a few REITs that specialize in nursing homes, and analysts like LTC even more because of its experienced management.
LTC’s Chairman and Chief Executive Andre Dimitriadis and President William McBride used to be senior executives at Beverly Enterprises, the nation’s largest operator of nursing homes, based in Fort Smith, Ark. In the late 1980s, the pair helped restructure Beverly Enterprise, and their experience in the field has paid off so far by finding good nursing-home operators and properties to invest in.
Last winter, for example, Dimitriadis and McBride picked up a 200-bed nursing home in Tucson at an auction held by the federal government, which foreclosed on the property after the owner defaulted on a $6-million mortgage.
The nursing home was badly managed and had only a 50% occupancy rate, said McBride. But the property was relatively new, had a large therapy center and was near a major hospital center. So LTC bought the nursing home for $4.25 million and leased it to a stronger nursing-home operator, who has since filled 80% of the beds.
“That’s value-added,” said Dimitriadis, 53, who left Beverly Enterprises as its chief financial officer in 1992 to form LTC. McBride, 34, was a vice president and controller at Beverly.
“Clearly, they know what they’re doing,” Andrew Turner said of LTC management. Turner is chief executive of Sun Healthcare, a large nursing home chain based in Albuquerque, N.M., and one of LTC’s borrowers.
LTC--short for Long Term Care--started out in August, 1992, with a $142-million public offering of stock, at $10 per share, and convertible debt. Last March, LTC followed with a secondary offering of 4.8 million shares of common stock at $13.25 each, raising $60 million.
LTC’s stock closed Friday at $14 a share on the New York Stock Exchange.
While LTC buys nursing homes, most of the $280 million of investments it’s made so far have been mortgage loans to partnerships that own or lease nursing homes in more than a dozen states, mainly in the Sun Belt. Last summer, LTC sold off about $75 million worth of these mortgages to institutional investors, so it could pick up more cash for other investments.
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LTC earned $6.9 million last year on revenue of $15.8 million. In the first quarter of this year, LTC’s profit more than doubled to $2.5 million.
LTC currently pays a quarterly dividend of 27 per share, so its annual yield would be 7.7% at the present stock price of $14 a share. It’s that yield, coupled with the rise in the stock price, that gave LTC a 5% return to shareholders in the first quarter of this year. That compared with a first-quarter average return of 2.2% for the entire REIT industry and 4.2% for all of the 13 publicly traded health-care REITs, according to the REIT trade group.
Despite these results, some investors appear to be betting against LTC. Short interest in LTC’s stock surged sixfold in May from April, to 364,651 shares. In a short sale, investors sell borrowed stock--in effect betting the stock price will drop--after which they can buy back the stock at a lower price, return the shares to the lender and pocket the difference.
LTC officials think the short interest surge reflects some investors engaging in arbitrage, rather than a broader sentiment that the stock is overpriced and headed downward. John Lutzius, an analyst at Green Street Advisors, a Newport Beach firm that analyzes REITs for institutional investors, agrees. At the current price of $14 a share, he said, “we’d be a buyer.”
Lutzius likes LTC’s prospects because “they’ve been aggressive in booking new deals and seeking out a relatively underserved portion of the market.” He said LTC also takes a conservative approach to lending, “demanding and receiving a low loan-to-value ratio and a high cash flow coverage of the interest.”
McBride also says LTC doesn’t allow the borrower to take out too much equity in a refinancing deal, nor does LTC invest in very big nursing homes because quality is hard to control.
“We don’t just rely on an appraiser,” Dimitriadis added, noting that he and McBride inspect every property before an investment is made. “Because of our experience in the industry, at the end of the day, we know what the value is.”
