A Monthly-Paying REIT for Rockefeller
A Monthly-Paying REIT For Rockefeller
In my monthly newsletter (Forbes Real Estate Investor) I hand-pick a few REITs that pay monthly.
Remember that not all REITs pay monthly, most pay quarterly; however, regardless of frequency, the one metric that provides me with the most intelligence is consistency. As I analyze the numerous flavors and sizes of REITs (in the US), the most important piece of the news that I’m looking for is the commitment by the company to its shareholders - that speaks plainly that management is strongly committed to increasing the dividend that shareholders are counting on.
Whether monthly, quarterly, or annually, the dividend increase sends a message that the company's earnings stream can be relied upon and that the underlying business model is sustainable. In theUltimate Dividend Playbook, the author, Josh Peters, sums up the signal inherent with a stock that increases its dividend over time:
“Durability implies that the firm can take a financial punch in one year and come back swinging the next.”
But oftentimes investors overlook the frequency of the dividend payment.
On one hand, I understand the oversight. After all, if a security pays an annual dividend of $2.00 per share, what difference does it make it it pays $2.00 per share once a year or $0.1667 per share 12 times a year? All else being equal, however, a more frequent dividend payer is better than a less frequent dividend payer. This is especially true if you reinvest dividends.
I’m not retired and accordingly, most all of my dividend income is reinvested; however, many income investors are looking for monthly dividend payments to support their income during retirement.
By investing in REITs that pay monthly you're able to better match fund your living expenses and create a more disciplined approach to saving and investing. Many retirees (and even some college students) like receiving monthly rewards (in the form of dividends) as they provide flexibility of paying a household bills, enjoying rounds of golf (for me its golf balls), or eating out at a favorite restaurant (Cheesecake Factory).
Also, it’s possible that a monthly dividend payment can bridge the gap when an emergency arises. What if my wife tells me that we have to shell out $5,000 for the kid’s braces (that actually happened last week) and all I have are stocks that pay annually. I may have to sell out of a good stock before its payoff and that could cost me precious earnings power.
The point is, the more frequent the dividend, the less an impact dividends have on buy and sell decisions.
My classic reason to own monthly dividend stocks is for the power of compounding.
In other words, I simply enjoy putting the money back to work -- like owning a free share machine. Many pre-retirement investors want monthly dividend stocks for their IRAs for faster compounding. The longer you hold your shares, the higher the yield you will receive on your original investment and the greater the impact of the "cumulative dividend effect".
That "cumulative dividend effect" means that the longer you own your shares, the less remaining original principal you have invested in the company. These combined benefits are only available with companies that pay reliable dividends that are regularly increased over time. John D. Rockefeller once said,
“Do you know the only thing that gives me pleasure? It's to see my dividends coming in.”
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Unlocking ThePower of LTC
Most of you know that my REIT picks aren’t meant to generate extraordinary returns. I am most focused on principal preservation and modest price appreciation. Over time, I have found that owning shares in reliable dividend growers produces the most favorable returns without taking excessive risk.
In early January, I decided that it was time for me to become more tactical within my REIT portfolio, especially the Healthcare REITs.
As I surveyed the list of companies, I decided to maintain exposure in LTC and look to increase my stake when the time was right. Iexplainedthat I “believe that LTC has the potential to deliver outsized returns by continuing to maintain disciplined capital management and by partnering with best-in-class operators.”
Everything was clicking just fine for LTC until August 8thwhen the company announced Q2-17 earnings.
On the Q2-17 earnings call, Wendy Simpson (LTC’s CEO)explained,
“I now want to provide an update on our Anthem properties which resulted in our issuance of a monitory default notice on our master lease with them covering 11 memory care communities, nine of which are operational and two of which are currently under development.
When we began helping Anthem grow their business approximately six year ago, they had a very aggressive growth plan and unlike many of great startups, they have suffered growing pains.
Anthem's communities are in deferred locations, many are doing well and generating positive cash flow and we believe that over time all will become fully established. However, three communities in particular, Tinley Park, Burr Ridge and Westminster are dealing with some short-term problems that are currently being addressed.
Staffing challenges including at the executive director level at three of the communities resulting in distractions that we believe have impacted lease ups in these buildings.”
Anthem is LTC’s 6thlargest tenant/operator (6.2% of portfolio) that generates around $10 million annually. Anthem is privately owned with 10 locations (9 owned by LTC). Here’s what LTC’s CEO, Wendy Simpson, said on the recent Q3-17 earnings call,
“First and foremost, the properties are making good progress. The community level staffing challenges, we told you about have abated.
Corporate overhead is being reduced and occupancy at the three communities we detailed on our last call Tinley Park, Burr Ridge and Westminster continues to improve. At October 31, occupancy at Tinley Park was 42%. Burr Ridge was 64% and Westminster was 97%, up from 29%, 47% and 88% respectively during the month of July.
Regarding the two Kansas communities we have previously discussed, we are negotiating the transition of both from Anthem to another existing operating partner where we will be adding to an existed master lease. We hope to complete our negotiations by the end of November and with the process of securing licensor we expect to complete the transition in January or February of 2018.
Of the properties currently under development with Anthem, we expect the Glenview, Illinois Memory Care community to open by early December. Construction of the 66th unit property is substantially complete and Anthem is moving toward licensor inspection and pre-leasing. The other construction projects located in Oak Lawn, Illinois is expected to open early in the second quarter of 2018.”
Simpson said that LTC had “recently signed a forbearance agreement with Anthem under which we it agreed not to pursue enforcement related to their defaults through the end of this year, with the stipulation that Anthem among other conditions, pay minimum rent of $4,000 per month through December 31, 2017. This was slightly higher than the $1 million per quarter estimated earlier”.
Given the progress Anthem has made and after reviewing a variety of options for the portfolio, LTC said that it decided to continue with Anthem as the operating partner for now. Simpson adds,
“As we continue to monitor and assess their operational improvements, corporate overhead reduction and ability to bring the two new development projects online in a timely and successful manner.We still need a few more months of operating history for Anthem before we can provide a cogent forecast for 2018 rent from them. But as I mentioned, in the few months since their default Anthem has made good progress.”
Still a More Diversified Platform
LTC is a healthcare REIT that has been around for over 25 years. The company was incorporated on May 12, 1992, in the state of Maryland, and commenced operations on August 25, 1992. LTC invests primarily in senior housing and long-term healthcare property types, including skilled nursing properties (50.8%), assisted living properties (46.9%), independent living properties, and combinations thereof.
LTC owns a portfolio with 201 properties, 3 development projects, and 4 land parcels (in 29 states). LTC is based in Westlake Village, CA, and, as you can see below, the company has a nationwide footprint:
LTC has a well-balanced geographic footprint. Texas has the highest concentration (17.1%), followed by Michigan (14.1%), and Wisconsin (8.0%).Michigan is the second largest state for LTC, and that is due to the company's loan portfolio. In Michigan, most healthcare REIT deals are done as loans due to the state Medicaid reimbursement regulations, and that's also why you see (below) Prestige Healthcare as the second largest tenant (for LTC). As you can see below, LTC has over 66% of its portfolio in Top 100 MSAs:
Here's a snapshot of LTC’s Top Operators (including Anthem):
LTC's Master Leased Portfolio
The vast majority of LTC's portfolio (94%) is tied together in various master leases, such that an operator can't cherry-pick the properties it chooses to keep without the risk of losing all of the assets embedded in the lease structure.
Senior housing operator Senior Lifestyle, and skilled nursing operator Prestige Healthcare, account for 12%% and 16.1% of annual income, respectively. Genesis (NYSE:GEN) accounts for 5.0%. The majority of other operators are regional companies that provide granular diversification, protection against one tenant failure.
LTC's initial lease terms are between 10 and 15 years, and the weighted average remaining lease term for the portfolio is 8.9 years. All of the leases are triple net, such that the lessee is required to pay additional charges including taxes, insurance, assessments, maintenance, and repair.
Most of the leases provide for a fixed minimum base rent, annual rent increases, and renewal options. There is just one lease maturity in 2017 (GAAP rent of $.4 million) andALL leases are TRIPLE NET.
This means that there is absolutely no operator risk and the total portfolio is 54.9% private pay. The government pay model is riskier (than private pay) but LTC's net lease model provides added protection since the leases are cross-defaulted.
A Highly Disciplined Balance Sheet
LTC has well-laddered long-term debt maturities that are matched to projected free cash flow, there are no amounts currently outstanding under the line of credit, and the company doesn’t have any significant debt maturities over the next five years.
Subsequent to Q3-17 LTC borrowed $15 million under its line of credit for the acquisition of a newly constructed Assisted Living and Memory Care community for $16.6 million.
In keeping with LTC’s philosophy of maintaining a strong and flexible balance sheet, the company’s long-term debt maturity remains sensibly spaced and matched to projected free cash flow, which helps to moderate future refinancing risk.
There are no major debt maturities over the next five years and LTC maintains significant liquidity not only to meet obligations, but to fund future growth.
Currently $530 million of availability remains under the line of credit, $52 million under the shelf agreement with Prudential and $185 million under the ATM program giving total availability of $767 million.
LTC continues allocating capital strategically and conservatively to provide maximum value for the portfolio partners and shareholders and to help ensure profitable long-term growth.
At the end of Q3-17 LTC’s credit metrics continue to compare well to the healthcare REIT industry average with debt to annualized normalize EBITDA of 4.2x and normalized annualized fixed charge coverage ratio of 4.8x and a debt to enterprise value of 25.6%.
The Latest Earnings Results
As I explained above, the Anthem operator performance sparked a selloff in early August; however, I did not see any other news related to fundamentals. The company’scommitment to working with strong regional operators (both current and future) to meet their needs by offering creative solutions and financing structures to help them grow remains unwavering.
LTC’s Q3-17 FFO was $0.76 per diluted share, the same in Q3-16. There were three primary factors that impacted results:
First, rental revenue was reduced related to Anthem and properties sold during past 12 months.Additionally, mortgage interest income declined related to loans that were paid off. These are partially offset by increases in revenue from acquisitions, development and capital improvement.
Second, interest and other income increased $1.2 million, $425,000 of this increase resulted from investments in Mezzanine loans and the remaining $842,000 resulted from a write-off of an earn out liability and related lease incentive that LTC no longer anticipate paying.
The write-off was due to a strategic change in operations at the property whereby the operator converted Memory Care units to Assisted Living units to better meet market demand. After a review of the revised pro forma, LTC determined that it was unlikely that the operating metrics required to trigger the earn out payment will be met within the timeframe required by the agreement.
Third, interest expense increase related to the sale of senior unsecured notes in the latter half of 2016 and the beginning of 2017. Investments in Q3-17 included $6.4 million for development and capital improvement projects. LTC borrowed $10 million under the line of credit, repaid $15 million of senior unsecured notes and funded $0.19 per share monthly common dividend.
Finishing off with guidance, LTC slightly increased 2017 forecast, assuming no additional investment activity, financing or equity issuances for the remainder of the year. The company is forecasting FFO between $3.07 and $3.09 per share for 2017 and plans to provide 2018 guidance during the Q4-17 conference call.
Here’s my AFFO/share forecast (powered by FAST Graphs):
As you can see, LTC ranks #7 (out of 15) relative to the AFFO/share forecaster. Now let’s take a look at LTC’s historical AFFO/share growth:
As you see, LTC is generating approximately 5% per year of AFFO growth. Now let’s examine LTC’s dividend history:
As you can see, LTC is generating around 6.5% per year in dividend growth, and the consensus estimate for 2019 is a whopping 14%. Since LTC invests in Net Leased properties, it’s much easier to forecast the future earnings and dividend growth. Now let’s examine the Payout Ratio:
The Icing On The Cake
As referenced above, LTC has built an attractive profile that includes low leverage and a diversified pool of assets.
In addition to the company's fundamentals, investors often lose sight of the fact that LTC generates nice profits with its development business. Over the years, the company has maintained a consistent supply of development projects, weighted mainly towards private pay seniors housing. As you can see below, LTC has 3 properties (around $54.6 million) and these transactions generate outsized returns of around 8.78% (on average).
Development projects and the pipeline are with existing relationships and will be added to LTC's master leases. To mitigate development, LTC continues to exercise discipline in its investment underwriting, and the company exercises patience in deploying capital on an appropriate risk-adjusted basis.
Assuming average development returns of 8.75%, you begin to see that LTC generates strong investment spreads close to 250 basis points. I don't know of any other REIT that generates wider profits today (except maybe CyrusOne (NASDAQ:CONE) in the Data sector).
A Monthly-Paying REIT For Rockefeller
As I referenced above, dividends are critical to the investing thesis, and I like to see REITs that can consistently generate steady and reliable growth. Let’ take a look at LTC’s dividend yield compared with the health care REIT peers:
Now let’s examine LTC’s P/FFO multiple compared with the peers:
LTC’s fundamentals are sound, and the August pullback has created a margin of safety, as illustrated below:
Here’s how LTC has performed (Total Return) compared with the peers:
The Bottom Line: LTC has under-performed YTD due to its exposure to Anthem. I am encouraged by the remarks on the latest earnings call from the CEO, Wendy Simpson,
“…they (Anthem) have taken the steps to reduce their overhead as we counsel them to do. They have made the changes in their executive teams as the facilities that were having more difficulty leasing up. And we are seeing that they are getting back on track to their underwritten performance. They are probably few months behind, but they are leasing up and they are I think that they are back on track.”
Clint Main, CIO at LTC, added,
“we want to participate and get back ultimately where we originally underwrote these investments, again we invest in these at cost, we didn’t buy them at an elevated purchase price, they are all invested at cost. So our basis, comparatively speaking to an acquisition is, I think a very risk adjusted investment on a per property basis.”
Again, since LTC is a developer, it knows the portfolio, literally-speaking, “from the ground up”. It’s that nimble approach to value creation that helps me “sleep well at night”.
Furthermore, I am maintaining my BUY recommendation on LTC, and as soon as the Anthem overhang dissipates, I suspect to see shares trading closer to a 16x handle. Of course, I am reminded MONTHLY that LTC is working hard to protect my principal and generate solid returns, “Do you know the only thing that gives me pleasure? It's to see my dividends coming in.”