Updated on April 23rd, 2022 by Felix Martinez
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 6.3% and pays these dividends monthly. There are currently ~50 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 46.8% senior housing and 30.7% skilled nursing properties. The REIT owns 153 investments in 28 states with 35 operating partners and has a market capitalization of $1.5 billion.
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.
On February 17, 2022, LTC reported financial results for the fourth quarter of fiscal 2021. Funds from operations (FFO) per share decreased by 28% over last year’s quarter, from $0.78 to $0.56, and missed the analysts’ consensus by $0.01. The poor performance resulted primarily from lower rental income as a result of nonpayment of lease obligations of Senior Care Centers and Abri Health Services.
LTC is facing another headwind in the form of the coronavirus pandemic, which has resulted in deferred payments from some tenants. As a result, LTC has not provided any guidance for 2022. However, we estimate that the company will make FFO of $2.50 per share for 2022. This will be an increase of 6.3% compared to 2021.
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 over $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 4.5% average annual rate 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 5.0% growth in funds from operations over the next five years.
Source: Investor Presentation
The company pays a very attractive dividend yield of 6.3%. 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 $2.50 per share for 2022. This will represent a dividend payout ratio of ~91%. This would be high if the company was a normal corporation. However, since the company is a REIT, it is required by law to payout 90% of its profit. It’s therefore not unusual for REITs to have elevated payout ratios.
Since the company is expected to increase FFO by about 5% 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. But since 2017, FFO has been flat and decreasing, but we do expect that to change.
Source: Investor Presentation
LTC has many of the characteristics of a solid dividend investment. The company has a strong 6.3% 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.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 40 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
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- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
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- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: