Senior Debt

LTC Properties Inc. may have a low profile but it’s not shy about making some relatively big moves. Just last month, the Westlake Village real estate investment trust announced plans to spend almost $20 million to build two memory-care communities in the Denver area. And in September, the company purchased a $14.4 million, 120-bed skilled nursing property in Florida, which followed the June opening of a 120-bed nursing home in Texas. “We’re always looking at where the next need is in terms of health care,” said Chief Executive Wendy Simpson. “If you’re going to be publicly held, you need a broad portfolio and it’s important to grow.” LTC has investments in 84 skilled-nursing properties, 105 assisted living facilities, nine range-of-care properties, two schools and six parcels of land under development. And it may be in one of the best industries in the country as baby boomers head into their retirement years and old age – even though on a short term basis, concerns over rising interest rates have hurt healthcare REITs, which tend to borrow heavily to finance expansion. Not that rising rates have hurt LTC in particular. Shares have risen nine percent this year to close at $38.35 on Nov. 20. Michael Carroll, an LTC analyst with the Cleveland office of RBC Capital Markets of Toronto, noted that health-care REIT stocks are down 3.2 percent this year as of last week as the interest rates on 10 year Treasury bills have risen nearly 100 basis points to 2.71 percent. However, this has affected smaller REITs such as LTC less, since it tends to acquire individuals properties instead of large portfolios. “To remain relevant in the sector, they need to continue to grow their portfolio and keep doing what they’re doing. I think there’s a lot of opportunity for them to grow right now,” said Carroll, who rates the stock the equivalent of a “buy” and has a $45 price target. Industry experience LTC was founded in 1992 by health care executive Andre C. Dimitriadis, the firm’s chief executive and chairman until 2007 and executive chairman until his death in August at 72. Simpson met Dimitriadis in 1984, when they both worked at American Medical International in Beverly Hills, a subsidiary of the predecessor company to Tenet Healthcare Corp. Dimitriadis went on to become chief financial officer at Beverly Enterprises Inc., a firm that ran hundreds of nursing homes around the country, before leaving to start LTC. His idea for the company was to build a portfolio by buying up assisted-living properties run by smaller operators. “He realized that there just wasn’t a lot of capital available to smaller operators,” said Simpson, who joined LTC years later in 2000 as vice chair, became chief financial officer and chief executive, before being named chairwoman when Dimitriadis died. LTC continues to follow the same business principles. It will buy smaller operators and lease facilities back on a triple-net basis. That means LTC receives a fixed lease payment it and investors can count on, while the lessee absorbs maintenance, utilities and other variable costs outside the rent. And if an operator wants out of the business completely, LTC will bring in another outfit to manage the property. Health care REITs are prohibited by law from operating health care facilities. The company expanded beyond assisted living more than a decade ago and now acquires and develops skilled nursing and other specialty properties, such as memory care. Most recently, it announced the building of the Denver properties, one with 60 beds and the other with 56 beds. Those followed the October opening of a 77-unit assisted living and memory care facility in Wichita, Kan. And in July, LTC completed the construction of a 60-bed memory care facility in Littleton, Colo. “We see the memory care-Alzheimer’s need and have started working on that,” Simpson said. “Health care is always evolving.” Because REITs are required to pay out 90 percent of taxable income to investors, LTC has paid for its expansion primarily through stock offerings and debt. In May, LTC sold about 4 million shares of its common stock at $44.50 a share, resulting in net proceeds of about $171 million. The company also has about $185 million in senior unsecured debt notes outstanding. LTC plans to sell $70 million worth of senior notes at an annual fixed rate of 3.99 percent to pay down its credit line later this month. The notes will mature in eight years. “Fundamentally, the ability to grow the companies and the earnings is positive,” Carroll said. “The one issue is that the stock is very sensitive to interest rates.” The company has generally been able to meet analysts’ expectations. In the third quarter, it reported a 14 percent increase to $20 million in its funds from operations, a key REIT metric that adds amortization and depreciation back into net income to get a clearer picture of financial performance. That amounted to 57 cents a share, hitting Wall Street’s target on the mark, though its $25.8 million in revenue was a slight miss. The company attributes the rise in income specifically to the sale of six skilled-nursing facilities as well as revenue from new acquisitions and its recently completed developments. The performance allowed the company in October to announce it was bumping up its monthly dividend 10 percent to 17 cents a share for the fourth quarter. Simpson said one of the biggest challenges is competing with publicly registered non-traded real estate investment trusts, which aren’t beholden to investors on a daily basis and lack some of the overhead costs of operating a public company. One such entity, she said, is a fund operated by Griffin Capital Corp. of El Segundo. The firm’s Griffin-American Healthcare REIT II launched in 2009 and has swelled its portfolio to more than 35 properties. It raised has $2.8 billion in investor equity as of early last month. The company has bought up a wide-range of health care-related properties, including medical office buildings, senior housing, hospitals and skilled nursing facilities. The fund is backed by Griffin and American Healthcare Investors, a real estate investment firm in Irvine. “We’re finding that they’re paying higher dollar because they have less overhead,” Simpson said. “The proliferation of these non-public REITs are making it more competitive.” Also, LTC shares the market with some very large publicly traded health care REITs. One of the largest is HCP Inc. of Long Beach, which has a market capitalization of about $18 billion and has more than 1,100 properties and 10,000 beds under its umbrella. Ventas Inc. of Chicago has a market cap of about $18 billion and more than 1,400 senior housing and health care properties in 46 states. “LTC doesn’t really compete with them. And those guys are so large, it’s not even in the same sector really,” said Carroll, noting LTC’s market cap of less than $1.4 billion. He said the company is more on par with small-cap public REITs such as Omega Healthcare Investors Inc. of Hunt Valley, Md., which has a market cap of about $4 billion and about 477 health care properties totaling about 50,000 beds in 33 states; and Senior Housing Properties Trust of Scottsdale, Ariz., which has a market cap of about $4.4 billion and almost 400 properties in 40 states.