We haven’t discussed this one for awhile. It has had a nice pop lately to $25. Yet based on a reverse discounted cash flow model, free cash flow would have to grow only 5% per year to justify the current price. Analysts are expecting 7% per year growth, which pegs the stock at about $28.50 per share. Thoughts?
Vince
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Vince,
So CTRE is trading around 17x 2024 FAD – seemingly fully valued. The payout ratio is high-ish, so forward growth there is really capped by FFO/FAD growth. They’re signing deals with cap rates (10-11%), so that’s not bad and of course they have access to public market money. They did a relatively significant equity offering this year around $23, not so large that it’s necessarily indicative of the stock being overpriced. As a result, they have plenty of capital for the near term and a very low debt ratio. So they do have some room to grow there. Plus, if interest rates come down, the valuations on their assets will tend to go up, providing some upside there. I’d guess some of that is priced in, given that the stock stock is now at what looks like 52-week and all-time highs.
I don’t necessarily want to be a buyer here, but I’ll continue to hold my shares for now.
Jim
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Thanks, Jim! I hadn’t factored in dilution.
Vince
I would suggest look at BRX, slightly better dividend yield, and dividend payout ratio is 50% FFO. They will keep raising dividend at the least at 5% rate; in 5 years the share count went up by 1% or 3 million on 301 million base; in other words they don’t need to issue additional shares and can fund the development from the FFO.
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This baby keeps rolling along. Now over $29!
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CTRE has limited debt, and could raise its leverage a fair bit to fund deals without having to tap equity, though with the current price, even equity funding doesn’t look too bad. In the latest quarterly report, the CEO suggests that they could do accretive deals with equity only, given its price.
Of course, part of what’s going on is that money is returning to the REIT sector with the anticipation of the Fed beginning to lower rates. So CTRE has been on a nice run this year. With a pretty generous valuation today, who knows how long it will last?
Jim
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More evidence of high valuation:
The investments were funded using cash on hand. Subsequent to the quarter ended June 30, 2024, the company raised $190.2 million at an average price of $27.02 per share under its ATM program bringing its outstanding share count to 161.3 million shares. The company currently has approximately $221 million of cash on hand. Also today, the company initiated a new $750 million ATM program under its shelf registration statement on Form S-3 filed with the SEC.
So multiple data points. Recent not-large acquisitions were made with cash on hand, not even some mix of cash and debt. So they’ve been sitting on unneeded cash for a bit.
They raised a ton of new capital without tying it to a specific acquisition (that we know of). In the fullness of time we may hear that they have some big acquisition that they need this much cash for, but not yet. They’re selling when it’s a good time to sell.
Moreover, they’ve set up the ability to save an absolutely massive amount of stock in the future. And again, it’s not obviously tied to an acquisition, though that will become clearer in the fullness of time.
However, I will note that the PR says: “Mr. Callister also announced a replenished investment pipeline of approximately $230 million of near-term, actionable real estate acquisition opportunities, not including larger portfolio opportunities the company is reviewing.”
So maybe they have some elephant they want to bag and having their financing lined up ahead of time while stock prices are high makes sense. Again, we will see what happens.
FWIW, I closed out my position in CTRE this week.
Jim
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Jus to spell it, typically REIT’s fund 40% to 50% with equity and the remaining with debt. When a REIT is funding 100% cash means either because they sold some other property and sitting on cash or they raised cash and are desperate to invest. Also, if they have some existing mortgage pool, they can always add these properties to that and draw more from that pool.
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And also since it was not mentioned upthread (that I saw), their net debt to EBITDA was around 0.4x, well below their (reasonable) target of 4-5x, (IIRC). So they’re well underlevered and they’re raising equity financing. It’s a reasonable course of action when your stock is highly valued. Further contextual evidence.
Jim
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Jim,
Reading between the lines, given this change in capital strategy, they are telling you that they believe their stock is overvalued, hence your decision to exit?
Vince
Any ideas on what to consider with the proceeds?
Vince–
I combined what management is suggesting with some valuation work on my own.
TFSL seems reasonably priced to me, and it has that large yield with some potential for upside as rates fall.
Jim
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Do you know what is their commercial RE estate exposure? Are there any known issues?
Ahhh, the stock I love to hate. I have never timed my purchases of TFSL particularly well save for the last chunk I bought at around 12. Any tailwinds from a cut will put me back in the green but given the dividend, I’m already there. I’m not sure I want to jinx the rest of you by buying more.
Vince
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