Published by Nicholas McCullum on May 18th, 2017
The United States demographic is currently undergoing a seismic shift as the baby boomers grow old and the age of the domestic population increases.
Many investors have expressed concern about how this will effect the economy. While some areas of the economy may feel pressure from this trend, one sector is certain to grow as a result: healthcare, and healthcare REITs.
LTC Properties (LTC) is well-poised to take advantage of this trend. As a premier owner-operator of healthcare properties, LTC is seeing the demand for its properties increase exponentially.
LTC is an attractive investment for income investors. The stock has an above-average dividend yield (4.8%) and pays these dividends monthly. There are currently just 41 monthly dividend stocks, which you can access below:
While LTC Properties is poised to benefit from our aging demographic, that does not guarantee that the stock will be a strong performer moving forward. Fundamental analysis is still required.
This article will analyze the investment prospects of LTC Properties in detail.
LTC was incorporated in 1992 and has grown to own more than 200 properties across 30 states. LTC has a market capitalization of $1.9 billion, making it much smaller than other healthcare REITs like Omega Healthcare Investors (OHI), HCP, Inc. (HCP), or Welltower (HCN).
More details about LTC Properties’ business model and recent financial performance can be seen below.
Source: LTC Properties Investor Presentation, slide 3
LTC’s property portfolio is divided into two main groups: skilled nursing properties and assisted living properties.
LTC Properties owns 97 skilled nursing properties that compose 52.2% of the market value of its portfolio and 57.6% of its revenues.
Similarly, LTC owns 105 assisted living properties that compose 46.0% of the market value of its portfolio and 41.8% of its total portfolio revenue.
More details of the REIT’s property portfolio can be seen in the following diagram.
Source: LTC Properties Investor Presentation, slide 5
Moving on, the next section will discuss the growth prospects of LTC Properties.
As mentioned in the introduction, LTC Properties will benefit from the secular tailwind of the aging domestic population.
As the Baby Boomers age, the demand for skilled nursing and assisted living properties will increase materially. This benefits LTC Properties in two main ways.
First, more demand for its properties means that LTC can purchase more properties and expand its asset base. If this can be done conservatively – without diluting the REIT’s unitholders – this will boost the trust’s per-share funds from operations.
Secondly, LTC Properties will have a tangential benefit since its tenants (healthcare operators) will be experiencing a higher demand for their services. Since their services are in high demand, this reduces their probability that they default on their leases and also reduces the tenant vacancy of LTC Properties.
This REIT has been investing heavily to take advantage of this trend. Since 2010, LTC has put $1.2 billion to work in new real estate investments.
Source: LTC Properties Investor Presentation, slide 4
For context, LTC currently has a market capitalization of $1.9 billion – so this $1.2 billion of capital deployed over the past seven years is significant relative to the size of the company.
As the domestic population continues to age, LTC’s past investments will continue to pay dividends for years to come.
Competitive Advantage & Recession Resiliency
LTC Properties has a cost-based competitive advantage from being a triple net REIT.
This means that LTC’s tenant occupying the properties under triple net leases, implying that the tenants must absorb the three main costs associated with occupying real estate:
- Insurance expense
- Property tax expense
- Maintenance expense
By operating as a triple net REIT, LTC Properties has reduced its operator risk to essentially zero – which should be seen as a huge plus for LTC’s investors.
In addition, LTC Properties has a competitive advantage that comes from being both an owner and a developer of healthcare real estate.
The company has a side business of real estate development that generates nice profits. With that said, the development business is small in comparison to the ownership business.
LTC Properties currently has three properties under development. Their locations can be seen in the following diagram.
Source: LTC Properties Investor Presentation, slide 6
LTC has an additional competitive advantage based on the geographic diversification displayed on the map above.
Texas is LTC’s largest state by gross investment, composing 17.6% of the total property portfolio. All said, LTC’s top 5 states by exposure (Texas, Michigan, Wisconsin, Colorado, and Ohio) composed ~54% of the overall property portfolio.
LTC’s properties are highly concentrated in urban areas, which drives demand for their tenants’ healthcare services. ~67% of LTC’s properties are in the top 100 metropolitan statistical areas.
Source: LTC Properties Investor Presentation, slide 7
As a healthcare REIT, LTC Properties would be expected to perform well (compared to non-healthcare REITs) during an economic downturn. This is because healthcare is a necessity – consumers are highly unlike to cut spending on skilled nursing or assisted living when their disposable income becomes tight.
LTC also has a well-laddered lease structure, which isolates the REIT from the risk of tenant default. About three-quarters (73.4%) of the company’s leases expire after 2023, and the largest maturity year before then contributes just 8.8% to the trust’s current income.
Source: LTC Properties Investor Presentation, slide 16
The company has been equally wise with its debt maturity ladder.
Nearly two-third of the company’s debt expires after 2022, and the company’s debt structure is concentrated entirely in senior unsecured notes – which would have lower interest rates than the alternative option of an unsecured line of credit.
Source: LTC Properties Investor Presentation, slide 19
LTC Properties will also benefit from its conservative capital structure.
The trust’s balance sheet is composed of 76.0% common stock and 24.0% debt. The company has relatively conservative debt ratios. LTC Properties’ debt to annualized normalized EBITDA ratio sat at 3.9x at the end of the last quarter.
For context, the same ratio for Omega Healthcare Investors (another well-capitalized REIT that actually has a higher credit rating than LTC) sat at 4.7x at the end of the last quarter.
More details about LTC’s current balance sheet structure can be seen below.
Source: LTC Properties Investor Presentation, slide 18
Valuation & Expected Total Returns
Total returns for the shareholders of LTC Properties will be composed of valuation changes, dividend yield, and growth in the company’s earnings power as measured by funds from operations (FFO) per unit.
As a REIT, LTC Properties cannot be meaningfully analyzed using the price-to-earnings ratio. REITs are owners and operators of long-lived real estate assets and are continuously accounting for large depreciation and amortization charges. These accounting charges reduce GAAP earnings and artificially increase the price-to-earnings ratio.
Instead of using the price-to-earnings ratio to assess the valuation of a REIT, we can determine the trust’s relative pricing by comparing its current dividend yield to its historical dividend yield.
LTC Properties currently pays a $0.19 per share monthly dividend. This payment yields 4.8% on the trust’s current unit price of $47.35.
The following diagram compares the company’s current dividend yield to its historical dividend yield.
Although LTC Properties traded with a higher dividend yield prior to 2012, the stock’s current dividend yield is roughly in-line with its average over the past 5 years.
Thus, it is unlikely that valuation changes will have a meaningful effect on the future total returns of LTC Properties.
The remainder of the trust’s total returns will come from growth in the company’s earnings power. Over the past four years, LTC Properties has compounded its per-share funds from operations at a rate of roughly 10%.
I expect that this rapid rate of growth will moderate over time. Investors can conservatively expect LTC Properties to boost its funds from operations per share at a rate of 4%-6% per year (on average) over full economic cycle.
So LTC’s total returns will be composed of:
- 4.8% dividend yield
For expected total returns of 8.8%-10.8% before the effect of valuation changes.
LTC has many of the characteristics of a solid dividend investment.
The company has a solid 4.8% dividend yield (more than twice the average dividend yield of the S&P 500) and is very shareholder-friendly, paying these dividends monthly.
The trust will also benefit immensely from the secular trend of aging domestic populations.
With all this in mind, LTC Properties looks to be attractive for investors needing some exposure to the healthcare REIT space.