Updated on May 20th, 2021 by Bob Ciura
The demographics of the United States are undergoing a seismic shift as the 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 or 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 5.8%, and pays these dividends monthly. There are currently fewer than 60 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 50% senior housing and 50% skilled nursing properties. The REIT owns 180 investments in 27 states with 30 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.
In late April, LTC reported (4/29/21) financial results for the first quarter of fiscal 2021. Funds from operations (FFO) per share decreased –16% over last year’s quarter, from $0.74 to $0.62, due to asset sale losses and lower rental income as a result of nonpayment of lease obligations of Senior Lifestyle and some rent deferrals.
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 2021. Due to the pandemic, the turnaround is on hold right now but we believe that the worse is behind LTC.
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, but we expect this crisis to attenuate in the second half of this year thanks to the vaccination program underway. We continue to expect 3.0% growth in funds from operations over the next five years.
Competitive Advantages & Recession Performance
LTC Properties has a cost-based competitive advantage from being a triple net REIT. This means that LTC’s tenants 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 sizable profits. With that said, the development business is small in comparison to the ownership business.
The trust’s geographic diversification is outstanding, as its properties are spread across 27 states. This helps diversify the trust’s risk against shocks in local economies, and gives the trust a foothold in a wide variety of markets it can use for future expansion.
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.
Regarding the dividend safety, the payout ratio is a healthy 76% expected for 2021 and the balance sheet is in decent shape, with a debt to adjusted EBITDAre ratio of 4.3x and an interest coverage ratio of 2.9x.
Source: Investor Presentation
As a result, the dividend can be sustained if the pandemic recovery continues. The REIT has a smooth debt maturity schedule this year but it may be somewhat pressured in 2022, when 21% of its debt ($138 million out of $665 million) matures, particularly if the prevailing business conditions are not favorable next year.
Valuation & Expected Returns
Based on expected FFO-per-share of $3.00 for 2021, shares of LTC currently trade for a P/FFO ratio of 13.1. This is below our fair value estimate of 14.9, which is the average valuation multiple of the stock over the past decade. If the P/FFO multiple expands from 13.1 to 14.9 over the next five years, this would boost annual returns by 2.6% over this period.
The trust’s growth rate is likely to be fairly low in the coming years. We believe investors can expect LTC Properties to boost its funds from operations per share at a low-single digit rate per year of 3% (on average) over full economic cycles.
Lastly, returns will be fueled by the high dividend yield of 5.8%.
Overall, we expect total returns of 11.4% per year for LTC over the next five years. This is a strong rate of return that makes LTC stock a buy for income investors.
LTC has many of the characteristics of a solid dividend investment. The company has a strong 5.8% 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.