By Tyler R. Martin
I have maintained for quite a while that a rising interest rate environment is an appropriate time to commit to accumulating shares of high quality REITs (real estate investment trusts). Despite the counterintuitive nature of this (given that historically REITs underperform in high interest rate environments), it actually makes quite a bit of sense, when you consider it. REITs, on average far outperform the paltry yield of the bond or money markets with, dare I say, almost the same level security. Assuming you selected a trust that has a manageable level of debt, high assets, steady cash flow and an a solid business strategy, then regardless of the ups and downs of the fickle market, these trusts will continue to pay high dividends (if you can bare the tax disadvantages associated with REIT dividends), and maintain normal day-to-day operations despite the higher rates on mortgages and fleeing myopic investors. Interest rates are cyclic, regardless of the very widespread connotation that they aren’t, and, down the road, when rates once again retreat, you will have amassed shares of a solid company at severe discount.
Consider LTC Properties Inc. (NYSE: LTC). A monthly dividend payer with a market cap of 1.7 billion which has been beaten down to the point that it is currently trading 11 dollars shy of its 52 week high. This senior housing/healthcare REIT has an attractively low PE ratio of 11.6x earnings, while the REIT sector currently averages just north of 46x earnings. Additionally, LTC shows of its sizable assets with a comfortable Price to Book of 2.33x, while the sector average currently rests at 6.1x. LTC’s dividend, the real gem of this value investor’s sweetest dream, is a mouthwatering 2.28 dollars a year (19 cents a month/5.60%) which puts it just below a 60% payout ratio. However, fear not, it’s still far lower than the majority of REITs in the industry; for example, Realty Income Corporation (NYSE: O) boasts a payout ratio of over 200%, and although Realty Income Corporation does not specialize in senior care, it does give perspective as to the current norm of the REIT sector. Additionally, this payout is extremely sustainable with predictably increasing earnings, a Total Debt/Capital 10% lower than the industry average, and a small dry-powder reserve (meaning cash on hand to employ in a pinch).
Even if an investor will disregard the superior stats, an investor can also consider the fact that LTC is a best-of-breed company which lies in a growing niche industry (on account of the baby boomers) and can sleep well at night given the firm stability of the senior housing/senior healthcare industry. It is for these reasons that I believe LTC is must for every value investor’s portfolio.
The fluctuation of interest rates will be the ultimate catalyst in the ups and downs of this security. Both of which, if patience and good research are employed, can be very profitable for owners of LTC.
Full disclosure I personally own shares of LTC and plan to continue accumulating shares