Building Steady Returns

We are introducing 2013 FFO (funds from operations) and FAD (funds available for distribution) per share estimates of $2.43 and $2.42, respectively, for LTC Properties (LTC), indicating 6.1 percent FFO per share growth and 6.1 percent FAD per share growth. Very modest annual rent increases and accretive acquisitions funded 50 percent by debt, effectively increasing LTC’s leverage, drive earnings growth.

Key 2013 assumptions: $120 million of net investments at a 10.5 percent GAAP yield with only $60 million of equity issuance between $32 and $34 per share and average debt cost of 5.3 percent. We assume incremental debt costs increase 25 basis points in 2013 from 2012 with minimal impact on estimates.

Maintain Buy rating: LTC shares have run through our prior $30 target price but continue to trade at a valuation discount to the health-care REIT sector at 13.5 times 2012 FAD per share vs. a 14.1 times median for the group. Given LTC’s very low debt levels and ability to accretively invest, we believe it should trade at or above the health-care REIT median, and we are increasing our target price to $32 per share.

We view W. P. Carey & Co. LLC as well positioned to increase its dividend payout in coming years as the LLC supplements net operating income from its wholly owned properties with investment management revenue. Acquisition volume in the CPA REITs [a series of income-generating, non-traded managed REIT funds] ramped in 2010-2011 (over $2 billion combined through 3Q11) following relatively slow years in 2008-2009 ($960 million combined), meaning Carey’s deferred fee stream, the portion of acquisition fees in CPA 17 paid over 3 years, has been building at a higher rate than in prior years.

The LLC also owns over $450 million in CPA shares, receiving annual cash flow through dividends equating to $0.80/share. Longer term, CPA 15 is nearing the end of its expected lifespan, and its board has formed a committee to explore liquidation options (a multi-year process), which will likely generate additional revenue to the LLC in the form of disposition fees. With an outlook for further dividend growth in a low-yield environment, we reiterate our Buy rating with a $45 fair value.

Our model suggests total 2012 dividends could be 4.9 percent above 2011’s payout, assuming just $600 million in CPA 17 acquisitions and no changes to the wholly-owned portfolio; higher investment levels may drive greater increases. Our outlook does assume a 75 basis points increase in borrowing costs on the line of credit, which is up for renewal in June 2012.

We raise our 2011E (estimate) to $4.63 from $4.48 and increase 2012E and 2013E to $3.31 and $3.42, respectively, from $2.93 and $3.05. Increases are primarily due to a model adjustment to more accurately reflect the dividend income received by the LLC from its ownership in the CPA REITs. We assume $150 million in quarterly CPA acquisitions through 2013. Our estimates do not include the dilutive effect of eventual long-term financing for Carey’s line of credit balance.

Nathan Isbee
Stifel Nicolaus
443-224-1346
[email protected]

Cedar Shopping Center’s (CDR) new management team is doing an effective job, in our view, of focusing its attention on a core portfolio of stable shopping centers, improving its balance sheet. The post-asset sales portfolio will consist of 92 properties in their core Mid-Atlantic and Northeast markets with 93 percent or higher same store occupancy over the last five years with stable same-store net operating income (NOI). The majority of the properties, 77 percent, are supermarket anchored.

Management is focused on preserving capital and is not pursuing acquisitions or undertaking new developments until its balance sheet improves. Occupancy including redevelopments is 91.4 percent, up 90 basis points year over year and down 60 basis points sequentially. Same-space occupancy is 93.9 percent, up 70 basis points year over year.