It is no secret that the cost of rent has been accelerating quickly over the last 20-30 years. According to information from the Bureau of Labor Statistics, the Consumer Price Index for the Rent of Primary Residence has kept up pretty well with the rate of inflation, and in the last ten years has grown much faster than the rate of inflation.
So, when I am thinking about how to make money off of rising primary residence rental rates the obvious way would be to invest in a REIT that specializes in multifamily properties. The problem I see with a multifamily REIT is that during times of economic chaos, rents stagnate. In the chart above I see a clear pattern in 2008 where rent growth clearly is on pause.
So how can I invest in rental rates without as much of the macroeconomic risks? I think the way to do it is to invest in something that I know will be in high demand in the long run: some type of senior care/memory care/assisted living property portfolio. I think it is quite clear that as the baby boomers retire and as the Alzheimer's crisis approaches these types of properties will be in high demand, regardless of macroeconomic cycles.
I think LTC Properties (LTC) fits my investment criteria. LTC has 99 assisted living properties, 79 classified as "healthcare: unclassified" (I assume this is memory care and other health related property types), and 2 "specialty unclassified" properties. The portfolio can be found here on their website.
One of the things that really catches my interest is that LTC is actively engaged in expanding their portfolio and developing their own properties. In July LTC finished construction on a new 60-unit memory care property in Colorado and in June they finished and opened a 120-bed licensed skilled nursing facility in Texas.
LTC appears to have healthy annual growth in revenue as well as operating income.
I also like the trends I see in LTC's assets and debts. It looks like over the last 5 years that LTC has grown their asset base, but they have also began to leverage up in order to expand more rapidly. Looking at the below graph we can see that LTC appears to have targeted somewhere around 40% debt/assets.
LTC has their earnings report coming up soon and I am very curious to see how exactly their debt has changed between Q1 and Q2 of 2013, I think it will give some clues of the management style of the company and their long term goals.
Looking at the history of the price per share of LTC, I really like how it performed during the 2007 & 2008 financial crisis. Looking at the chart below I see that LTC hit its pre-crisis peak in September 2008, hit its crisis low on November 21st 2008, and recovered to the pre-crisis high in December 2011. If you would have purchased at the pre-crisis peak and held through the crisis, you would have continued to be paid consistent dividends and you also would have fully recovered share price in about 3 years. That doesn't sound so bad to me.
Comparing LTC Properties to some REITs that specialize in multifamily communities helps confirm my suspicion that LTC will perform better during times of meltdown. The chart below indicates that LTC Properties performed a lot better than some of the multifamily REITs leading up to the 2008 crisis. After the crisis, LTC recovers at a fairly quick pace.
Maybe LTC Properties looks like a solid portfolio of properties, but isn't it the wrong time to buy into a REIT? Isn't there too much interest rate risk? That is one of the benefits of LTC, of their total liabilities ($325,853,000 as of Q1 2013) 36% of that debt is bank borrowings on a floating LIBOR based spread, and 57% ($185,800,000) are fixed rate senior unsecured notes.
The bank borrowings are on LIBOR + 150 basis points - a current rate of 1.68% (assuming 30-day LIBOR, although I don't see it stated in the 10-Q which LIBOR it is based on). Regardless of the LIBOR base, LIBOR rates haven't had the same jump that long term rates have had from the taper tantrum. So the majority of LTC Properties debt is fairly immune to long term rate spikes, which is what will happen when the Fed starts tapering back asset purchases.
The combination of all of the things I have mentioned gives me some confidence that LTC Properties has solid fundamentals, minimal macroeconomic risks (although not immune from financial markets), solid dividend history, and comfortable debt structure.
Let me know what your thoughts are in the comments.