Updated on February 27th, 2023 by Samuel Smith
The demographics of the United States are undergoing a seismic shift as Baby Boomers age. The Baby Boomers are a very large generational group, meaning the aging U.S. population is expected to result in higher demand for healthcare.
Many investors have expressed concern about how this will affect the economy. While some areas of the economy may feel pressure from this trend, one sector is almost certain to grow as a result: healthcare spending, and healthcare Real Estate Investment Trusts (REITs for short).
LTC Properties (LTC) is poised to take advantage of this trend. As a premier owner-operator of healthcare properties, LTC is seeing the demand for its properties increase.
We believe LTC is an attractive investment for income investors. The stock has a high dividend yield of 6.2% and pays these dividends monthly. There are currently ~84 monthly dividend stocks.
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While LTC Properties is poised to benefit from the aging population, 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 Properties is a healthcare Real Estate Investment Trust that owns and operates skilled nursing facilities, assisted living facilities, and other healthcare properties. Its portfolio consists of approximately 51.8% assisted living and 46.9% skilled nursing properties. The REIT owns 216 investments in 29 states with 32 operating partners.
Source: Investor Presentation
Just like other healthcare REITs, LTC benefits from a strong secular trend, namely the high growth of the population that is above 80 years old. This growth results from the aging of the baby boomers’ generation and the steady rise of life expectancy thanks to sustained progress in medical sciences.
LTC is currently facing a significant challenge, the bankruptcy of Senior Care Centers, which is the largest skilled nursing operator in Texas. Senior Care filed for Chapter 11 bankruptcy in December–2018. Until 2018, it was generating 9.7% of the annual revenues of LTC and was the fifth-largest customer of LTC.
In the middle of February 2023 (2/16/23), LTC released its financial results for the fourth quarter of fiscal 2022. The company reported a 29% increase in funds from operations (FFO) per share over the prior year’s quarter, from $0.56 to $0.72, which surpassed the consensus estimate by $0.02. The growth in FFO per share was primarily due to higher rental income from transitioned properties, rent hikes, and property acquisitions. However, LTC has encountered a headwind due to the pandemic, resulting in deferred payments from some tenants. Consequently, the company has not provided any guidance for 2023. Nonetheless, LTC has begun to recover over the past two quarters as the pandemic has eased. We anticipate that this recovery will persist throughout the year, with an expected FFO per share of $2.70.
As mentioned, LTC Properties will benefit from the secular tailwind of the aging population in the United States. 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.
Second, 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 the probability of 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 ~$1.5 billion to work in new real estate investments.
Thanks to the aforementioned favorable underlying fundamentals of the healthcare sector, LTC has grown its funds from operations at a mid-single digit CAGR in the last decade. Moreover, the REIT has most of its assets in the states with the highest projected increases in the 80+ population cohort over the next decade. On the other hand, growth has stalled in the last four years, partly due to the bankruptcy of Senior Care.
In addition, the REIT has been affected by the pandemic. We continue to expect 4.0% growth in funds from operations over the next five years.
Source: Investor Presentation
The company pays a very attractive dividend yield of 6.2%. The dividend is paid monthly at a rate of $0.19 per share. This dividend rate has not been changed since October 2016. Thus, we do not see the company increasing its dividend in the near future. This stock is for investors who are looking for income right now.
We expect the company to earn an FFO of $2.70 per share for 2023. This will represent an FFO dividend payout ratio of ~84%. This would be high if the company was a normal corporation. However, since the company is a REIT, it is required by law to pay out a large percentage of its earnings. It’s therefore not unusual for REITs to have elevated FFO payout ratios.
Since the company is expected to increase FFO by about 4% on an annualized basis for the next five years, we think a dividend raise can come if this FFO growth plays out. Before 2017, the company was increasing its dividend at an annual compound rate of 15.8% over 14 years. Since 2017, however, FFO has been flat and decreasing, but we do expect that to change.
LTC has many of the characteristics of a solid dividend investment. The company has a strong 6.2% dividend yield (more than three times 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. While FFO growth has been hard to come by in recent years, the stock appears undervalued, with a high dividend yield to further boost shareholder returns.
With all this in mind, LTC Properties looks to be attractive for income investors looking for exposure to the healthcare REIT space.
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